Market Summary

With light trading as demonstrated by low volume days during this shortened week it was not a good one for the markets overall. Again, only gold managed to hold on to some gains while for the year it is about flat. That however is far better than the broad market which is down nearly 40% year to date. With next week a shortened week also it is not likely that the 40% number will be reduced by very much. The worst year on record for the S&P 500 was 1931 where the market was down 43.34%. The next worst year was 1937 where the market was down 35.03%. If the market is to close out the year at it current level that will make it the second worst year on record. Historic Calendar Year Returns for the S&P500 can be found here.
Next to gold, the Russell 2000 index performed the second best last week down only 0.50%. That is a somewhat bullish sign but what the future has in store we will just have to wait and see. Click on table to enlarge.

Happy Holidays

Wishing you the best this holiday season and in the new year!

Market Summary

Looking at the table below it can be seen the 4W (four week) column is nearly completely green. The only ETFs that are red are oil and gas and we know from the pump that the price of gas and oil have declined recently. This table displays price performance over time with the best performers at the top sorted by the YTD (year to date) column. Comparing this market summary with last weeks and the ones before that shows that the green column is moving to the right. This indicates that a bottom was put in and we are seeing prices going up over time. What is interesting here is that the EEM (Emerging Markets ETF iShares) is up over 39% and the Russell 2000 ETF is up over 26% in the last four weeks! This indicates riskier assets are rising faster which is what you expect at a bottom.

As a side note please be aware that there may be a bubble forming in bonds as the Fed is buying them up to drive the interest rates down to stabilize the housing market. The 30 day T-Bill is paying just a penny and the 90 day T-Bill is paying a nickle. The 10 year Treasury is paying just about 2% while the 30 year Treasury is paying 2.7%. In the FOMC meeting this week the Fed announced it would reduce the Feds Funds rate to 0 to 0.25% range to stimulate the economy. I will be posting a bond performance table sometime soon and more information to follow.

While the market is rising I still consider this a short or intermediate term rally that will allow many investors a time to get out. Many of the markets are bouncing up against the 50 day moving average. Currently the S&P500 50 day moving average is 898. We should break above that level with the current Santa Claus rally. The volatility index has been falling and when markets move higher in the face of bad news it is always a good sign and we have had plenty of bad news lately. Click on table to enlarge.

Market Summary

Have we made a bottom yet? As I stated before as long as the monthly closing price is below the 12 moving average we are in a bear market. This is the long term (monthly) view. The market fluctuates from extremes of oversold to overbought and back and forth again and again. In a bear market (long term view) when we are oversold we can have intermediate term (weekly) rallies and these are called bear market rallies. They are often violent rallies that retrace the downward trend of the market in a short period of time reclaiming 40, 50, or 60 percent. The volatility of the current market has been a great place for day traders who look at the short term (daily) moves in the market trading off the one hour and five minute charts. This market has not made a V shaped move but has made an L shape so far going sideways for the most part since the October low. Although November made a lower low we have come back off of that low to be about the same place we were at during the October low. There is a chart pattern called a head-and-shoulders formation and it would appear that we have made an inverted head-and-shoulders formation which is bullish. The weekly chart for last week has made a doji candlestick pattern which often appear at tops or bottoms and is a sign of change as neither the bulls nor the bears are dominant. What will the future hold? We will just have to wait and see. Click on table below to enlarge.

Market Summary

While last week as a whole was in the red it did make a stunning comeback on Friday to make a Key Reversal Day to the upside. Also, we had the breakout of a long term downtrend line to the upside in many of the markets. What does this mean? If we get follow through to the upside next week we could have a trend reversal pattern and start to make higher highs. If we gap open to the upside on Monday we will have created an Island bottom formation which is extremely bullish. In any event I expect some form of rally to occur, possibly as a result of the auto industry bailout, in which case we will see more green columns on the left side of the table below (recent past) and that will extend to the right side (longer term past). As can be seen in the table below the EEM, which is down over 50% YTD, has made a whopping 23.44% in the last two weeks. And the $RUT Russell 2000 index is up nearly 20% over the same period. Click on table to enlarge.

Market Summary

As can be seen from the table below all markets are in the green when viewing the one week column. In fact, I have heard that this was the best one week gain since 1932. What does all this mean? We are and have been in a bear market which according to my analysis began at the end of 2007. Except for gold, which is showing nearly flat for the past 12 months, all markets are down significantly. This up week then could be called a bear market rally. Bear market rallies generally retrace a certain percent of the recent down move before turning south and retesting the lows. This can be an opportunity to get out of the market before it continues lower. What is interesting here is that the lows which we just recently hit were multi-year lows and if we break those lows on a retest the drop is significantly lower and would indicate an economic depression. Will that happen? We will just have to wait and see.

When sorting the gainers on the table below by the 1W column it is seen that the EEM (Emerging Markets ETF) made the biggest gain up 25.68%. However, on a YTD basis it is still down over 50% and is the most down except for the gasoline ETF and has the greatest percentage to make up to get back to even. The next best gainer over the past week is Russell 2000 ETF which is a measure of the risk appetite in the market. This bullish move on the part of the Russell 2000 is bullish for all markets in general as it shows the sentiment to take on risk in the markets. Finally, the SPY made 3rd place on % Change for the 1W column indicating participation of the broader market in this rally off the recent lows. Click on table to enlarge.



Finally, I want to keep a watch on the three best gainer for the past week as if the market turns these may be the ones to watch as they have been the fastest to move up. Below is the 240 min. 20 day chart of EEM, IWM, and SPY. Lets watch these as the ones to move up the fastest may also lead to the downside. I also want to follow the GLD chart and include that one as well. Click on charts to enlarge.

Emerging Market EEM ETF

Russell 2000 IWM ETF

S&P500 SPY ETF

Gold GLD ETF

Market Summary

The table below is last weeks performance of selected markets. Gold had a good week up 7.5% and is best overall for all the periods listed. The best performers will be at the top of the table, the worst at the bottom when sorted by YTD. And while last week was red for the most part it would have been worse except for the final hours of Friday when the market began to rally. As of today, Tuesday, the market has continued to rally giving the first 3 day rally in some time. With this week being a shortened week we may get a trend reversal and a rally up to the 50 day moving average on the SPY which is at 98 or another 15%. We will just have to wait and see. Click on table to enlarge.

Market Summary

Just a miserable week in the markets. Only gold managed to make a gain of 1.10 %. Everything else was down by a large percent. Octobers low was taken out on Thursday and then the markets put in a huge rally to make an outside key reversal day. This is normally followed by a continuation of the rally but it just fizzled out and Friday was another down day. The overall market trend, while still to the downside, has made significant bounces at our current level as if to be putting in some kind of bottom. However, I would view any rallies as selling opportunities for the foreseeable future due to the weakness in the economy. Click on table to enlarge.

Market Summary

I had a dream last night in which I went into a chart of the S&P500. I actually went into a price candle and found myself on a city street. As I moved towards the right side of the chart, towards the current candle, the activity on the street picked up and was populated with more people. The city was actually one from my past, Santa Cruz, CA, and like the candlesticks on a price chart some of the characters were historical and I knew I could never go back there. And yet as I woke up I wanted to get back to the dream, moving towards the current candle, the now.
This weeks Market Summary shows more green in the columns moving to the right side of the table compared with the past several weeks. We have green in the 4W column for the first time in more than a month. What happens with massive sell offs is that the good and bad are sold at the same time but it is the good that is bought back first. Here we see the $OIX, the CBOE Oil Index, is making the biggest rise. Click on table to enlarge.

Market Summary

Wow! What a month and what a week. The month of October was the worst month in the market since 1987 and this last week was the best week since 1974! Look at the table below and see that the left half of the table, the half with the day, week, and 2 week data is mostly green while the longer term right side of the table is all red. For those who can trade the shorter time frames there was a tremendous amount of green to be made. Lets hope at least a short term bottom is in place and we can extend the gains of this last week. Click on table to enlarge.

Cash Is King

While we are experiencing massive deflation in the price of commodities and the stock market the dollar has been showing strength. The US Dollar Index values the dollar against a basket of other currencies. What the chart below is telling us is that the value of other counties currencies have declined when compared to the dollar. What it also tells us is that there is a flight to safety out of other currencies. Iceland recently went bankrupt. Other countries may go bankrupt as well. The IMF in an effort to combat a spreading global financial crisis will be supporting the Ukraine and Hungary with emergency loans. The strength in the dollar has led to a drop in the price of oil. Since Russia receives about half of its tax revenue from taxes on oil decreased revenues are impacting the Russian economy. Markets go up and down. The key to wealth building is to know which are going where and why. Click on chart to enlarge.

Market Summary

The melt down continued with all sellers and no buyers. When will we see the bottom? I believe we will see a bear market rally in near future to retrace approximately 50% of the current downtrend that began with the September high. That would bring the S&P500 back to about 1050 or 105 on the SPY based on Fridays low. If we go down further next week that value will be lower.

I have little commentary to add to the table below. It is completely red on a year to date basis. Gold is down the least and emerging markets down the most. Because of margin calls and hedge fund redemptions there has been massive selling which has caused this meltdown. Money managers who are sitting on a mountain of cash are just waiting for buy triggers to put that money back to work. While I believe that will happen before this months end we will just have to wait and see. Click on table to enlarge.

Opportunity In Oil

Looking at the table in the prior post it can be seen that the $OIX index had the best performance last week gaining 7.44%. So if last week was the bottom in the market and if the $OIX had the best performance it has the best relative strength. The $OIX is composed of 10 large oil industry stocks and the table below shows their performance sorted by performance for one week. Click on table to enlarge.

As can be seen APC, Anadarko Petroleum Corp., had the best performance coming in at a very impressive 21.82% gain for the week. With earnings of 2.24 per share it is trading at about 15 times earnings. Yahoo Finance has a one year target estimate of 78.45 per share. This is an example of Buy Low. Click on chart to enlarge.

Market Summary

There is a bright spot in the sea of red ink in the table below. While the performance data in the table below is sorted by YTD (Year To Date) from top to bottom, the weekly column stands out as an island of green in its midst. And what is really interesting is that in that weekly column the $OIX index is the most up while the USO ETF is the most down. I thought these two traveled in the same direction at the same time. Apparently not. Lets hope from the lone week of green good performance we can have an encore with more to follow. Click on table to enlarge.

Market Summary

As can be seen on table below, the year to date (YTD) column is completely red with no category in positive territory. The S&P500 is down nearly 40% which means it needs to go up 80% just to break even for the year. We are extremely oversold and due for a bounce sometime soon. When it comes it could be fast and hard. We will just have to wait and see. Click on table to enlarge.

Market Summary

As can be seen in the table below looking at the YTD (year to date) column all markets are in the red. That is bad. Let’s hope we put in a bottom soon. Click on table to enlarge.

TED spread and LIBOR

Markets are a discounting mechanism that take all available information into account. Prices will rise or fall in anticipation of news, and prices can react in a variety of ways to the news. The current financial crisis talked about so much in the news has created an extreme in volatility. Panic leads to selling. Hope of a bailout leads to buying. These two, panic and hope, are swinging the market violently. This is good for day traders but unsettling to say the least for most investors.

The TED spread is the difference between the interest rates on inter-bank loans and T-Bills. TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract. The TED spread is calculated as the difference between the three-month T-bill interest rate and the three month Eurodollars contract as represented by the London Inter Bank Offered Rate (LIBOR). The TED spread is a measure of liquidity. As such, the TED spread is an indicator of perceived credit risk in the general economy. The TED spread and LIBOR rates can be viewed as indicators quantifying the confidence banks have in lending to each other and the financial system as a whole. In calm markets the LIBOR is about 1/2% above the yield on the US debt.

The chart below shows how since August when the TED spread was at 1% it has spiked up to 3%. This is associated with the recent credit crisis and bank failures and a massive effort by the government to inject liquidity into the system. It shows that the confidence banks once had in lending to each other has dried up and that now banks are hording cash. The $700B financial rescue plan expected to be voted on tomorrow should show a significant change in the chart below should it be passed. We will just have to wait and see. Click on chart to enlarge.

Market Summary

This weeks market summary will serve as a good reference point which to look back upon as we are in the middle of the current financial crisis. Compared with the last market summary right off the bat I can see that gold has gone from flat for the year to being up 2.10% and has traded places with the Russell 2000 index which was slightly up for the year last time to being down 6.47% now. In fact gold and the Russell seem to go in opposite directions as seen by their respective moves over the last 4 weeks: gold is up and the Russell down both by 5%. Perhaps these two could be used to create an indicator for the direction of the markets. Click on table to enlarge.

Filling The Gap

Following the low on the chart below there are two large white candles with a gap in between them that occurred between September 18th and 19th. Markets abhor a gap and we have filled that gap yesterday and today. Not only that, the chart pattern that has formed is known as a Cup and Handle formation. That is very bullish and I expect the market to rally soon. With the bailout package expected to be passed before the congressional recess I anticipate a rally to take out the 1260 high. That is how I see it. We will just have to wait and see. Click on chart to enlarge.

Market Summary

As can be seen from the table below, which is sorted by Year To Date, the only indexes in this list that are in the green are oil, gas, and the Russell 2000 index. What is interesting about the Russell is that it is the riskier of the major market indexes and can be a proxy for risk appetite. The more conservative index, the S&P500, is down 13-14% for the year. And gold is flat. And what was the darlings last year, the international and emerging market indexes, are the worst now down over 20%. Click on table to enlarge.
Also note that while this may not be the bottom of this bear market we did call a bottom as can be seen from the chart below. How much rally is left remains to be seen. 1140 in the $SPX index is the same as 114 in the SPY ETF. Just to give some perspective, the rally off the lows to the close as seen in the last 4 bars of the chart must be in the billions of dollars. Click on chart to enlarge.

Buy Low Sell High

This is the key to making money on Wall St., or on Main St., or on any street for that matter. It is, however, easier said than done and particularly on Wall St. There are two factors that are needed to make use of this key: liquidity and volatility. I made reference to these factors in my prior post on capitulation. Capitulation is determined by a spike up in volume (liquidity) and volatility. It can be reduced to a number and therefore determined. I will briefly give one method here.

In order to buy low you have to be a contrarian and have the discipline to buy when everyone else wants to sell. When there are massive sell offs in the market is exactly the time to buy. I am not referring to a particular company which may be going bankrupt but rather an index fund that represents the whole of the market. When the volatility is high it means that there is a panic. Panic is fear and fear will cause people to sell at exactly the wrong time. That is what happen today. When they sell the price is cheap and a good time to buy.

Market bottoms come when the volatility index is over 30 and the volume spikes high. One way to reduce this to a single number is to multiply the two numbers and keep track of the product of the two. On the day of capitulation the number will be the highest compared to the number on the days before and after. For example, one would multiply the $VIX index times the volume as follows: 33.10 x 10715096 = 354669677.6

I am including the same charts as I posted in the prior post to give a before and after view. I believe that today was capitulation. We will just have to wait and see.

NYSE TOTAL VOLUME


VOLATILITY INDEX


SPY daily chart

As can be seen from the charts above there is a correlation between the price of the SPY which I use here as a proxy for the market, Volume, and Volatility. While this pattern does not show up often, it does mark bottoms in the market. The market does however have many bottoms and will no doubt have many more.

Capitulation

Capitulation is a term that means surrender. As such it is a military term were one side gives up to another. In fact, the root of the word is “head” and in this context refers to the heading of an agreement for surrender. When applied to markets it generally refers to the end of a downtrend where the bulls give up and sell. It is in fact the best time to buy. It is accompanied by high volume as everyone is rushing to the exit at the same time and high volatility. This can be seen by a spike in volume and in the volatility index. Notice in the charts below how in the middle of July when the market reached a bottom the charts for volume is at a high and the chart for volatility is also at a high. Click on charts to enlarge.
NYSE TOTAL VOLUME

VOLATILITY INDEX

SPY daily chart

As can be seen from price action of the SPY daily chart above the market has entered a new downturn. Will the Fed bailout of Fannie and Freddie save the market? It may give a bounce but we will just have to wait and see if it brings capitulation.

Market Summary

Information overload is a chief reason for making bad trading decisions in the markets today. This is well realized by the brokerage firms who freely give out a plethora of trading tools to the public. Conflicting opinions by so called experts and gurus adds to the confusion. And coupled with the lack of the right information it is no wonder why so many lose at this game of trading the markets.

Trying to keep it all in perspective is what I am trying to do here. Hopefully I am well informed yet not easily swayed by news stories. I bring a heavy reliance on technical analysis to tell me what “is” and I try to root out my own biases one way or the other to what I think things should be. I must be willing to change my mind when conditions indicate that my position was not correct. To do this quickly is how to succeed.

There are several reasons why I now see and believe that the market will go higher. Chief among these is the relative strength of the S&P500 compared to the other world markets. The S&P500 index is currently doing better than all other major market indices save the Canadian TSE index. And all the world’s indices are in negative territory over the last few months. The US dollar has broken out to the upside and is a chief reason why the price of commodities have fallen. Should oil get below $100 per barrel the stock market could really take off to the upside.

I have added a couple more ETFs to the table below to follow. One is the EEM, the iShares Emerging Markets. The other is the US Gasoline Fund ETF. While we can follow the price of gas at the pump this will also help give us get some perspective. Click on table to enlarge.The US dollar is another one to follow as it has broken out to the upside. This will mean lower commodity prices as the dollar increases in value. Click on charts to enlarge.Finally, I want to show a weekly chart of the S&P500 which shows a candlestick formation called a “Hanging Man.” It is the last candle on the right in the chart below. The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long red candlestick on heavy volume.
I placed a bet on the market going lower by buying a put option on the SPY before I changed my mind about the direction of the market. Because of this I have created a checklist to be sure and do my due diligence before I take a position in the future. The checklist can be found HERE. Should the market gap lower on the open on Monday I will keep this position otherwise I will close it soon.

Anatomy Of A Trend Change

It is easier to swim downstream than upstream where you are fighting against the current. Likewise, a friend of mine told me she does not go out to swim in the ocean when the tide is high least the tide retreat and pull her out. But rather, she swims when the tide is low and it is easy to get out.

Proverbs tells us that there is a time for all things. A time to buy and a time to sell. And I would add, a time to stay out of the market. Being able to time the market is the great passion of many people. And I like it too. Here is my take on timing the market: Watch for trend changes.

A trend is a series of higher highs and higher lows. Once that pattern is broken the trend may be over, but not necessarily. The market has gotten so big that we watch pieces of it now. While the S&P500 has broken the uptrend pattern, as has the Dow, the Nasdaq and Russell 2000 have not. The chart below is a 20 day chart of the S&P500 with 4 hour candlesticks, showing a potential trend change. Whether the S&P500 and Dow pull the Nasdaq and Russell 2000 down or the Nasdaq and Russell 2000 pull the S&P500 and Dow up we will just have to wait and see. Click on chart to enlarge.

Fibonacci Retracement Levels

In a prior post, Bear Market Rally, I stated that I believe the market will rally to somewhere between 40 and 60 percent of the previous move to the downside. This corresponds to between 129 and 134.5. In fact, the current rally may have peaked on 8/11 at 131.51 when it kissed the 50% retracement level. The chart below illustrates my thinking. Using an indicator called Fibonacci Retracements lines are drawn to indicate these levels. Most bear market rallies will come to somewhere in this range and make a reversal in trend and move in the opposite direction to continue the major trend which is down. Should this rally go above the 61.8% retracement level it has a better chance of continuing in rally mode and taking out the previous high of 144 (1440 on S&P500). Though I am looking for a retest of the July low it may not happen and we could have a continued rally here. We will just have to wait and see. Click on chart to enlarge.

Market Summary

What I find of note in this weeks market summary and also the previous one is that the Russell 2000 small cap index is so high on the list. It is nearly even for the year and doing better than all the other indexes year to date save oil. This tells me that the Russell 2000 small cap index, which is “riskier” than the other larger cap index, is indicating bullishness in the markets. This is a positive sign for the markets. Click on table to enlarge.
Also of note is the strengthening US dollar which has broken out above its six month high level. A strong dollar is bearish on oil and gold and will tend to drive them down. In the sense that high oil leads to high gas prices a strong dollar should bring some relief at the gas pump. Click on chart to enlarge.

Bear Market Rally

Markets can go up, down, or sideways. And they will do so consistently. When I look at the markets I like to have three different time frames in mind. The time frames are: Long term, Intermediate term, and Short term. These time frames correspond to Monthly, Weekly, and Daily charts of the market. And I also like to look at the 4 hour chart as well as it can give me an indication of a trend change before any of the other time frames do.

Markets are either bull or bear. It is said that the bulls make money and the bears make money but the pigs get slaughtered. Wall Street was actually named for a wall that was put up to keep the wild pigs out, or so I have been told. At any rate for me the 12 moving average is my wall. If the closing monthly price is above the 12 moving average it is a bull market, otherwise it is a bear. The S&P 500 closed below the 12 MA in December 2007 and is still below it.

There is the trend and the bounce in a bear market. The trend is longer term and is what we refer to as the bear. The bounce is shorter term and is called a bear market rally. Just like a ball that is bounced against the floor, a bounce in the stock market does not go as high as where it came from. Typically bounces range from 40 to 60 percent of the previous move down. They are sometimes referred to as “sucker rallies” as they suck people in before turning the other way. I am looking at a high of 1320 to 1345 in the S&P 500 and then a downturn to a retest of the July lows. Since no one knows the future, myself included, this is just my best guess. We will just have to wait and see.

Market Summary

It has been awhile since my last post of a market summary. Here is a performance table of some markets followed sorted by year to date. The big rally Friday seems to suggest markets will continue an upward climb. Gold, which has been moving in the opposite direction of the stock market, took another hit moving to the downside and is below its long term 200 day moving average.Click on table to enlarge.
The market rally has in part been due to a strengthening in the dollar and a drop in the price of oil, which go hand in hand. Below is a chart of the US Dollar, symbol $USD, showing a dramatic rise last week. A strengthing dollar is bearish on oil. And as far as perceptions are concerned a drop in the price of gas gives a psychological boost to the economy. Click on chart to enlarge

Rising Wedge Pattern

Chart patterns are repeating patterns in market price action. The SPY is an ETF that tracts the price performance of the S&P 500 and trades at approximately 1/10 the S&P500 cash market. There is a pattern that seems to be developing in the SPY that could signal a further price movement to the downside. The chart pattern is known as a rising wedge formation and it is a bearish pattern in an established downtrend. In general the pattern looks like this:As can be seen from the chart of SPY below this looks like what we are seeing now. If the bottom support line is broken this could signal the beginning of a continued move to the downside and a testing of the July lows. This would then be a good entry signal to go short the SPY or buy a put option. I would also expect gold to rally.

If however, should prices break the top line of this wedge I believe the market could go on to the 50% retracement area of the May-July down trend move which would be at the $132 area on the SPY(equivalent to 1320 on the S&P500). The next resistance level above that would be $134.59which would be the 61.8% retracement. See HERE for more detailed analysis. Click on chart to enlarge.

Spyder Index Options

Continuing on the same theme as the last post on Index Options I want to give an example of trading index options. The chart below shows the 3 month daily chart of the S&P500 index. As can be seen prices were in a steady state of decline for an extended period of time hitting a low on 7/14 and due for a corrective bounce to the upside. When such price action occurs there is inevitably a pull back in the corrective uptrend. This pullback occurred on 7/28, two weeks after the initial low. Click on charts to enlarge.

Using a custom indicator I developed I was able to pick this second bottom in the market as the ideal entrance into a long option position. Since this was a counter trend trade and going against the overall downtrend of the market the price change was remarkable and able to produce a greater than 100% gain in only a matter of a few days. Please be sure to subscribe to my blog as I post other remarkable trading opportunities in index options.

Trading Index Options

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite index, or some sector or other followed market segment.

Index option are derivative financial instruments similar to options on a stock. What makes index options interesting, as opposed to a stock option, is that since the index is composed of a basket of stocks it reflects a much bigger financial entity than could an individual stock. Therefore it is less likely to be manipulated or make the sudden swings an individual stock could make. Furthermore, since an index does represent such a large financial unit its course is easier to predict in many case and trends are easier to follow.

I have developed some successful trading strategies for trading index options that are highly profitable. While it is not my intention to reveal the strategies here I will be posting the trades and you can follow my performance in them. As I do not have a track record I cannot say that I will not have any losing trades but preliminary results look very promising. Please subscribe to my blog by entering your email address in the SUBSCRIBE HERE text box for the most up to date alerts.

Nasdaq Elliott Wave Count

This blog has been dedicated mostly to following the S&P500 index however while this index is composed of 500 companies noted as large cap “blue chip” the Nasdaq Composite includes over 5000 companies. The Nasdaq does reflect what is commonly refered to as the “market” and in that regard the economy.

I am posting two charts showing the Elliott Wave count as I see it for the Nasdaq. I would say we are in a Daily 4th wave which means we most likely will see a retest of the 3rd wave lows with a 5th wave. Click on charts to enlarge.
The next chart shows a 5 wave pattern on the weekly chart. What then, according to Elliott wave theory, can we look forward to next? As I understand it the next wave pattern to follow is either an ABC correction or a new 5 wave count. With the passage of legislative bill H.R. 3221, the homeowner rescue bill now in congress, some of the drag of real estate on the economy may soften and we could see a rally to the upside. We will just have to wait and see.

Financial Sector Buy Signal ?

We all know that real estate has taken a beating with falling home prices and an increase in forclosures. This resulted in the financial sector having big write offs and being the leader to the downside in the market. The financial sector peak in the market was over a year ago and it has been going down ever since. But has it hit a bottom?

A 20-day 4 hour chart with RSI(14) of the XLF shows the market has made a change in trend, even if only for the short term. The question is: Is this a corrective bounce or a true change in trend for the long term trend? Click on charts to enlarge.

A look at the 6 month weekly chart with RSI(3) of the XLF shows that the RSI is above the 50% mark however the fast band of moving averages are below the slow band and price pressure is to the downside.
If we are to make decisions based on the long term direction of the market to avoid losses and minimize risk we need to move up to the level of the long term time frame. For this I follow Martin Pring who uses a 12 moving average on the monthly chart. A 3 year monthly chart shows we are a long way from an end to this downturn. The XLF would have to rise over 22% to even touch the 12 moving average.
In conclusion, while we have a short and intermediate term buy signal the long term trend is down in the financial sector and unless there is a change in the housing market and a sustained move to the upside it is best to avoid this sector. Bottom fishing is risky in the markets.

Relative Strength Part 2

The other type of Relative Strength is a strength relative to the stock or index itself. As a metaphor lets use a weight lifter. A weight lifter can be compared in his/her strength to the strength of all the other weight lifters as well as his/her own performance. On a good day you may be able to lift more than on some other day. So too with stocks relative to their own price performance.

The Relative Strength Index (RSI) is just such a measure and it calculates a ratio of the recent upward price movements to the absolute price movement of the stock being measured. The RSI ranges from 0 to 100. It can be put on any time frame from minute to daily to monthly and indeed will have different values based on these different time frames.

The Relative Strength Index (RSI) was developed by J. Welles Wilder and was first introduced in 1978. It is commonly used to measure if a stock is overbought or oversold and in market timing. There are many good resources on the Internet for further information about the RSI indicator. What is of note is that it is a value that can be placed inside of a spreadsheet and sorted according to its numerical value, i.e., from lower to higher or vice-versa. This type of sorting and using different time frames together with the Relative Strength comparative mentioned in the prior post is an excellent way to find stocks headed higher in price.

As an example I am including a 6 month weekly chart of Agilent Tech Inc (the first stock in the $SPX, alphabetically speaking) ticker symbol “A” and the $SPX index on a weekly chart to show buy and sell signals. I am using the RSI(3) technical indicator and strength is indicated as a value above 50% (buy signal) and weakness as a value below 50% (sell signal). These values can be published numerically in a spreadsheet and I will show this in future post. Click on charts to enlarge.

Agilent Tech Inc


S&P500