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