Dark Horse Hedge: Market Musings
by Chart School - July 8th, 2010 2:11 pm
Dark Horse Hedge: Market Musings
Courtesy of Scott Brown at Sabrient, co-author with me of The Dark Horse Hedge
The SPX continues to trade below both the 50 and 200 day moving average (MA) but yesterday rallied to close above the once solid support level of 1040. The market bounce off the lows of July 2 also correlated with the Dark Cross formation which occurs when the 50 Day MA crosses the 200 Day MA downward. As we discussed in the Dark Horse Hedge, this has not traditionally held up as a good foreshadower of bearish activity. Nonetheless, it is worth noting that it took place.
With a low volume rally on Wednesday, and the lack of any follow through midway through Thursday, combined with the rally lacking any real quantifiable economic basis, the charts lead us to believe that Wednesday’s action was a relief rally so far. To begin even a modest short-term uptrend, the SPX will need to hold above the July 2 close of 1023 on any downward close and then break the close of Wednesday at 1060 or close today, whichever is higher. The 14 day RSI is slightly bearish at 41.68 and would need to cross 50 to become a bullish technical signal. As one other confirmation of the weak technical chart, I have added the 12-26-9 MACD which is currently -17 with the bullish signal line being a break of 0.
So in conclusion, the SPX had a earnings foreshadow or relief rally on Wednesday, with Volume below the 50-day MA. The index itself is remains securely below both the 50 and 200 day MA which have crossed. The confirmation by RSI and MACD lead us to believe that based on our reading of the current chart, the rally of Wednesday will have to retest 1040 and more importantly 1022 before it can move higher. If the next down move breaks 1022 and seeks what should be technical support from Sept 2009 of 995, we are technically in a downtrend.
The DDH started with a 67% SHORT tilt last Thursday which is confirmed through this chart analysis. On Tuesday, both LONG positions were up and the 4 SHORT positions were down creating the “Perfect Storm” for that day. DDH attempts to build a L/S portfolio with the best fundamental companies held as LONG positions and the worst fundamental companies held…
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DiggThe Stock Market’s Scary Day and Almost Magical Close
by ilene - June 30th, 2010 12:31 pm
The Stock Market’s Scary Day and Almost Magical Close
Courtesy of John Nyaradi
Midweek commentary from Wall Street Sector Selector
No doubt today was scary as the markets opened down sharply and traded mostly lower all day in one of the most volatile of recent sessions. The reason given for the sell off was an economic slowdown in China and worse than expected consumer sentiment.
So it was a scary drop but the most interesting part of the day came at the close when the S&P 500 almost magically closed above the all important 1040 level. For technical traders, 1040 is something of a magical number because it represents significant support and a level that is now being tested for the fourth time this year.
Chart courtesy of StockCharts.com
In the chart we can see how 1040 on the S&P represents the February, flash crash and June lows and so this is the fourth retest of that all important level. Everyone “knows” that if the index breaks decisively through this level that lower prices are likely ahead and so one can only marvel at how, after trading as low as 1035 in the late going, the index made a last minute move back above this all important psychological level.
Also on the top display, you’ll notice that RSI is approaching “30” which is widely considered to be “oversold” and the technical sentiment measurements I follow point to extreme pessimism (after today’s action, who isn’t pessimistic?) which as a contrarian indicator could indicate higher prices ahead for the short term.
So we stand at a most interesting crossroads. From here, if the market recovers and holds the 1040 lows, it’s quite likely we could see a rebound rally as we’ve seen three times so far at this level this year. A break below could lead to further deterioration and significantly lower prices ahead.
I don’t have a crystal ball, just as no one does, and I can’t foretell the future, but we can make an estimation of probabilities; if 1040 on the S&P holds, the most likely probability based on technical indicators is for higher prices over the short term.
There’s the bearish side of the market and the bullish side of the market, but as the old saying goes, “the only side that matters is the right side.”
Visit Wall Street Sector Selector
John’s disclosure: EWW,TUR, FXI, IYR, SPY Call Option
DJIA’s 200-Day Moving Average: Will the Dow stay above or below this demarcation line?
by Chart School - June 23rd, 2010 3:00 pm
DJIA’s 200-Day Moving Average: Will the Dow stay above or below this demarcation line?
By Elliott Wave International
Moving averages are one of the most widely followed indicator in technical analysis. Simply put, when the price of an index or stock stays above a particular price moving average line on a chart, that price level serves as support -- a level where buyers reside. If the price falls below a moving average line and "can’t" break through from the underside, this price level is a line of resistance -- a price level where sellers hover. That’s an easy explanation of moving averages for you.
A commonly watched line is the 200-day moving average.
After the DJIA fell below its 200-day moving average in May, prices remained mainly below the line until June 15, when the market rose 213 points. But, as this chart from Elliott Wave International’s June 16 Short Term Update shows, the NYSE volume has remained muted:
"There was no follow-through today. More stocks closed down than up on the day on the NYSE, within the S&P 500 and also for the DJ Composite. Today’s Big Board volume was similarly slow relative to yesterday. …" -- Steven Hochberg, Short Term Update, June 16, 2010
With a lack of buying conviction, how long will the stock indexes remain above the 200-day moving average?
For the answer, you need to look at the DJIA’s Elliott wave structure. It strongly suggests the market will move in a definite direction in a matter of days or weeks.
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Learn to integrate Elliott wave analysis with other technical disciplines. Read the FREE Ultimate Technical Analysis eBook to discover some of the favorite technical analysis methods used by the analysts at Elliott Wave International. Learn more and download your free, 50-page technical analysis ebook here.
Now’s The Time To Buy Leading Stocks At Low Risk Entry Points
by Chart School - May 23rd, 2010 12:52 pm
Now’s The Time To Buy Leading Stocks At Low Risk Entry Points
Courtesy of David at All About Trends
There is a good possibility we are done with the first leg down. We see tagging some support levels on the charts. The reaction off of those support levels was exactly what we wanted to see. Powerful and with conviction.
Notice in the chart above the 50 day average is at 1100? That’s going to serve and a point of initial resistance.
The blue circle is actually about 5 days worth of market action in a range of 1070-1090 with a spike down to 1050 ish thrown in for good nellie action.
In the first chart we talked about 1100 being the 50 day average. It’s also a 38.2% Fibonacci level as shown in yellow. Note the confluence of the blue 38.2% Fibonacci retracement level and the 50% yellow Fibonacci level. See how close they are? That’s confluence and what is commonly called a Fibonacci cluster. Watch those levels next week or the week after for resistance and stalling.
This doesn’t mean we are out of the woods but we liked the action we saw Friday. So IF we now enter into a period of a Wave 2 (upward bias, or the alt count) then it ought to look like an ABC up. We may see some morning weakness on Monday. The chart below is the S&P 500 in a 1 minute time frequency.
As you can see, we stopped cold on a down trendline. We could
…
High-Reliability Reversal Signals
by Chart School - May 9th, 2010 5:52 pm
High-Reliability Reversal Signals
Courtesy of Pharmboy
Chp. 9 of Pharmboy’s TA eBook (scroll down for links to Chp. 1 through 8)
Figure 63 shows four of the most highly-reliable reversal signals that every long should know charts: evening star, shooting star, bearish engulfing and bearish gap up.
Figure 63. Signals for reversals.
Evening Stars are one of the most reliable reversal patterns available as the failure rate is low. Evening stars suggest the rally is slowing because the open-close range decreases. The doji at the top signals an end to the rally and a struggle ensues between bulls and bears. This doji day is a critical candlestick. There is a very high chance that the stock price will drop the next day. Should that occur, the evening star pattern is confirmed, as a long white candle, the doji in the middle (or a large tail above a green, followed by a down red candle.)
Figure 64 shows two evening star examples…
VXX – Buy signal update
by Chart School - May 5th, 2010 9:41 am
VXX – Buy signal update
Courtesy of Allan
Below a follow-up of the April 28 VXX Buy signal:
All of my stock index models that recently went Short in their Daily Models are now knocking on the Exit door of their respective Weekly Models. Should those models flip to Short (with VXX flipping Long on its Weekly Model), I will be all-in on the short side.
Allan’s newly launched newsletter, “Trend Following Trading Model,” goes with his trend-following trading system. Most trades last for weeks to months. Allan’s offering PSW readers a special 25% discount. Click here. For a more detailed introduction to the Trend Following Trading Model, read this introductory article.
Playing the Gap: Identifying and Trading Gaps
by Chart School - April 28th, 2010 9:49 pm
Playing the Gap: Identifying and Trading Gaps
Courtesy of Pharmboy
Gaps are very profitable technical indicators. A gap is an area on a chart where no trades take place and these are caused by fundamental or technical events that usually occur after the market closes and before the market opens, also known as ‘non-regular trading hours’ (NRTH’s). There are four basic gap types: area, continuation, breakaway and exhaustion.
Gaps are significant for many reasons:
- Gaps tell traders that something occurred during NRTH’s. Typical events include: earnings announcements, FDA approvals, analyst upgrades/downgrades, company press releases and other significant events that may cause investors and traders to place orders to buy or sell during NRTH’s, causing an order imbalance.
- The type of gap will help you determine the probability of the stock’s direction in the short and intermediate term.
- Gaps are profitable. Traders can take advantage of the imbalance of orders by either “catching the momentum” or “fading the gap”. When riding a gap, the traders are betting that the stock will continue in the direction it gapped. When a trader fades a gap, they are betting that the gap will “fill” and move opposite of the gap’s opening direction.
Types of Gaps
Area Gaps
Area gaps are usually small and unimportant. They are also referred to as “common gaps” because they occur so frequently. Characteristics of area gaps are that they are fill very quickly. When the word “fill” is used, traders are referring to the gap’s closure. The gaps usually occur in trading ranges and they form on very low volume. Because of the low buying volume of the stock, the gap cannot sustain itself, thus filling relatively quickly.
The easiest way to determine if a gap will fill is to watch the first 30 minutes of the day. If the candlesticks appear to be fading in the opposite direction, it’s very difficult to stop it. This is because many others see the same fade and will jump on board. Remember, a gap does not have to fill on the same day of the gap. These types of gaps are unpredictable and are hard to trade. Figure 59 an example of an area gap.
Figure 59. Area gap.
Continuation Gaps
Continuation gaps are extremely important because they “continue” a trend. They are also known as “runaway” or “measuring” gaps and they do not fill quickly. These…
Fibozachi Forecast: Week of April 26th
by Chart School - April 26th, 2010 2:53 am
Trading ideas for early next week. Courtesy of Fibozachi.
Short Trade Candidates
GME: Gamestop (Short-Term to Intermediate-Term)
Current Price: 25.22
Candlestick Patterns: None
After rallying for eight consecutive weeks, Gamestop appears due for a pullback that allows price to digest gains and consolidate before re-testing a wide band of horizontal resistance that spans 26 – 28. With price quickly approaching resistance at 26.05, the chances of registering a multi-week swing high appear well above-average. Last week’s narrow range (near doji) plotted alongside the highest weekly volume tally since the first week of January. This type of high-volume ‘churn’ is a flashing yellow light, warning of possible inflection ahead.
Entry: Immediate (with daily confirmation) or with a move below 24.77
Target (Short-Term): 22.75
Target (Long-Term): 21.11
Stop-Loss: 26.06 or higher
Potential Risk: $1.29
Potential Reward (Short-Term): $2.02
Potential Reward (Long-Term): $3.66
Reward: Risk Ratio: 1.6 & 2.8
WAT: Waters Corporation (Short-Term to Long-Term)
Current Price: 70.03
Candlestick Patterns: Doji
Last week’s high-volume doji marked an end to WAT’s eleven week non-stop rally from 56 – 72 and now is an ideal time to begin looking the other way. WAT appears primed to pullback towards 63 over the next few weeks, where even a bull flag would target 64 – 65 before inflecting. An extended move would carry price down towards the previous swing low area of 56 – 57 from the first week of February.
Entry: Immediate (with daily confirmation) or with a move below 68.36
Target (Short-Term): 63.00
Target (Long-Term): 57.00
Stop-Loss: 71.62 or higher
Potential Risk: $3.26
Potential Reward (Short-Term): $5.36
Potential Reward (Long-Term): $11.36
Reward: Risk Ratio: 1.6 & 3.5
LINTA: Liberty Media Holdings (Intermediate-Term to Long-Term)
Current Price: 16.38
Candlestick Patterns: Doji (Perfect)
LINTA has now registered back-to-back dojis up at a previous swing high, which is a specific trading setup that we scan across markets for each and every day. While last week finally provided a bit of venting for Liberty’s eleven week monster rally, price popped back up at week’s end to close just a single penny lower for the week; some weekly…
SAUT: DON’T WAIT FOR MAY TO GO AWAY
by ilene - April 19th, 2010 2:38 pm
I.e., you don’t have to be the last guy out the door… – Ilene
SAUT: DON’T WAIT FOR MAY TO GO AWAY
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Courtesy of The Pragmatic Capitalist
Interesting commentary from Jeff Saut, Chief Equity Strategist at Raymond James this morning on the old investment saying “sell in May and go away.” Mr. Saut believes investors should be selling before May in anticipation of what other investors might do:
“Obviously we have modified that old axiom this morning given our statement – “Don’t wait for May to go away!” Nevertheless, despite having been too soon’ly cautious since S&P 1150 – 1160, which is tantamount to being wrong, we are “stepping up” our cautionary counsel this week.”
Saut’s cautious tone is driven by a series of technical and sentiment factors that are often followed by weaker market action:
“Our increased caution is driven by a number of metrics. To wit, preliminary data suggests last Friday was the first 90% Downside Day since February, our sentiment gauges are back to as bullish as they were in 1987 (read that bearishly), the CBOE equity put/call ratio is at 0.32, for its heaviest “call volume” relative to “put volume” since August of 2000, stocks are the most overbought since the rally began in March 2009, some of the leading stocks are not responding to good news, Thursday was session 34 in the “buying stampede” that began on February 26th (rarely do such skeins last more than 30 sessions), we’ve gotten that peak-a-boo “look” into the long envisioned target zone of 1200 – 1250, volatility is back to the complacent 2008 levels, and the list goes on.”
But that doesn’t mean Saut is turning full-blown bearish. He still sees upside in the market following a near-term correction:
“As for the ‘here and now,’ we are increasingly cautious, believing a near-term “top” in the equity markets has been registered. Longer-term, we remain bullish, thinking the profit-cycle recovery is alive and well. To that point, it’s worth considering that bottom-up operating earnings peaked in 2007 at ~$91 per share for the S&P 500 (SPX/1192.13). And, except for Japan, price-to-peak earnings power (PPE) has always made new highs, cycle after cycle. Again, as the good folks at GaveKal note, ‘Except during the bubble years of 1997 – 2001, the PPE for the SPX has fluctuated in a range of 10x to 20x (peak earnings);
…
Basic Technical Patterns: The Foundation of Common Pattern Identification
by Chart School - April 1st, 2010 2:23 pm
Pharmboy’s latest chapter in his TA eBook – Chapter 7! - Ilene
Links for previous chapters:
1. Understanding Market Cycles: The Art of Market Timing (Chp. 1),
2. Dow’s Theory of Markets (Chp. 2),
3 & 4. Fundamental vs. Technical Analysis and Types of Technical Trading (Chps. 3 & 4).
5. Stock Charting Basics: How to Read & Understand Stock Charts (Chp. 5 here.)
6. Using Moving Averages for Long and Short Trades (Chp. 6)
Basic Technical Patterns: The Foundation of Common Pattern Identification
Courtesy of Pharmboy of Phil’s Stock World
In Figure 1 below, typical up trends and down trends are shown. These zigzag patterns are seen all the time, but why do they form? Let’s say someone bought a stock at a certain point. If that stock went up, but pulled back to the original purchase price, they will often think that it’s an opportunity to buy more at their original price, thus adding to their position. This is also the same for shorts when they are able to short a stock at the same price they shorted previously. Then why do peaks form? People sell (or cover) to take profits. Obviously, any increase in selling will pull the stock back. Those who bought at a lower level may start buying again. This repeats and repeats until 1) there is no more stock left for people to buy, or 2) there is too much supply and not enough buyers. On a larger scale, this is how bull and bear markets begin and end.
Figure 1 Typical up and down trends.
The following basic chart…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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