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.