SPX hammered

Two powerful down days made SPX lose more than 40 points. Important technical levels were crushed in the process. Not only SPX moved outside the trading range but also bellow the previous daily low around 1050. These are not good signs if you are on bulls' bandwagon. Price is now way bellow five days moving average and even worse five days SMA is declining.

Also bearish is the intra-day price action, bargain hunters are pushing the market up in the morning but at the end of the day fund managers (I guess) are selling more and more since is very hard for them to unwind their position in one day.

Since emotions are running high at times like this it is better to establish an exit strategy way ahead, with a cool head. Trust me you can always find reasons to go either long or short that's why is better to have some emotionless strategies in place, like to EMAs crossing I keep mentioning every single day. Even if this strategy is not perfect, as you already noticed, it can save your portfolio from disaster and on long term you WILL make money. There are many other strategies out there, pick one and stay with it.

babaro

No change

A second straight non-moving day that doesn't help either bulls or bears. I thinks bulls should be glad that bears didn't feel like pushing SPX further down and more important that the lower edge of the trading range survived an extra-day. The intermediate term trend is bearish to neutral, price is bellow 5 days SMA (bearish), EMA50 crossing EMA100 (bearish), flat five days moving average (neutral). Of course this assumes that the market is trending either up or down that I don't think is correct anymore, more likely market is trading in range and the above information should probably be discarded. One of the reasons I am out of the market!

As I mentioned last week when market is trading in range one could use Williams %R to find "overbought/oversold" levels, an oscillator pretty much useless when market is trending up or down (which doesn't stop people using it then complain that market is acting irrational). Right now Williams is reading -72, that is pretty close to "oversold" level (over -80). Why I don't like to trade when market is trading in range? After all this seems to be the easiest way to make money, buy when market hits the lower edge of the trading range, sell when it does hit the upper edge. In theory sounds fine, in practice it's not that easy since it takes time for a trading range to be formed and by the time one realizes market is trading in range market is probably about to trend up or down again. For example if market is going to move down tomorrow Williams will go bellow -80 signaling an "oversold" condition but if market continues to go further down for another month Williams %R will wrongly show "oversold" and make one "catch a falling knife". The reverse happens in an uptrend, Williams can show "overbought" for a long period of time while market rallying.

At least in the last three years market rarely traded in range. One of the time it did trade was in November-December last year when it stayed in a very tight range, 1090-1110 for 6 weeks. On two occasions SPX moved a little bit out of the range but both attempts to escape did fail. The question is how can you know if the move outside the trading range is going to be for real or not? The answer is you can't tell. However, there are some "signs" that can give you a clue. For example if market brakes out on the upside, you may see a retracement towards the upper edge of the trading range. If this level holds and the market pushes up and makes a higher high then the chance that the market resumes its uptrend is very high. If if doesn't hold (red arrow) then that was a false break out and the sideways movement continues. A second sign that the market starts trending again is when it doesn't go all the way up or down (ellipse) then immediately goes out of the range.

 There is a big difference between November-December and today. Back then the market was in a powerful uptrend, it was way above SMA200, even above SMA50 and EMA50. Now we are trading bellow SMA200 and everybody is very nervous and this is reflected in a wider trading range, 1067-1105 with two "escapes", 1050 and 1120.

babaro

Finaly an up day ...

A devastating week for the bulls with SPX losing no less than 42 points in four straight down day. Monday was a bearish reversal day when SPX spiked to 1132 then closed 3 points down. That set the tone for the rest of the week and only today bulls managed to control the damage a little bit. SPX touched the lower edge of the trading range (1067), went up to 1083 then gave away 6 points at the close.

EMA50 crossed EMA100 on both 30 and 60 minutes charts giving a sell signal. This is a clear indication that the market is trading in range since the buy signal was generated just a week ago. When market is in an uptrend or in a downtrend the buy and the sell signals are 3-8 weeks apart or maybe more. The real question now is for how long is the market going to trade in this range? That remains an open question since neither bulls nor bears seam to be in control on either intermediate or long term time frames. With market bellow SMA200 the odds are a little bit in the favor of the bears.

Meantime if you want to trade this market you can either use Williams %R oscillator I mentioned yesterday or even MACD and DMI on 60 minutes charts. I had some success with these indicators in the past. The problem with using them on 60 or even 30 minutes charts is that you may need to be very quick, you may need to go in and out even 1-3 days apart and you will definitely need to be glued to the computer.  This is not my favorite style of trading but some people find this appealing.

Have a nice weekend!

babaro

P.S. Just in case you are too excited by the 3 points gained by SPX today (LOL) look at widget bellow, updated in real time, that shows the number of crimes, US debt, how many HIV infected people are around the World and so on.

Trading range

Another slaughter on the Wall Street today with SPX losing no less than 18 points. Bears are pushing the index very close to the lower edge of the trading range, 1067-1070. Those who want to speculate can buy here hoping that the index will move back and forth between the lower and the higher edge of the trading range. This is not my favorite kind of trading so I am ready to step out of the market soon. I don't need to be in the market all the time. Alternatively I can switch to shorter time frames and ready to go in and out very fast but this is time consuming and nerve racking, not to mention the transaction costs I am going to pay.

EMA50 did cross EMA100 on 30 minutes chart and is very close to do it on 60 minutes charts as well! Price is now bellow a slightly declining five days moving average. It's unbelievable how fast the momentum has changed in only four trading days. If one insists to be in this market I would suggest very few shares and some hedging since volatility is extremely high and market can move very fast in either direction. Even RSI, a pretty conservative indicator I am using as a confirmation of a certain trend direction gave mixed signals these days, it went above 50 (buy signal) on Monday just to slip bellow 50 once again. MACD is about to give a sell signal as well after giving a buy signal around 1065-1070 so people using this indicator are also not making any money right now.


The only people that are making money are those using Williams %R, that gives you overbought (above -20) or oversold (bellow -80) levels. As you can see it stands now at -64 so is still not at the oversold level. This indicator should not be used in a powerful uptrend or downtrend since it can stay at oversold or overbought levels for a long time. Look at the February-April rally and see that Williams indicated overbought level since the day one of the rally!

Once again, let's keep an eye on 1067-1070 level to see if it holds.

babaro

P.S. Be carefully, the cat bellow can terrorize your mouse!

More pain...

...for bulls, of course, SPX lost another 3 points and is now going further away from SMA200. It looks to me that we are going to trade in range for longer than I thought. EMA50 is almost crossing EMA100 on 30 minutes chart and it may do it tomorrow if bulls are not going to push SPX substantially up.  As I mentioned before, my eyes are mostly set on 60 minutes charts since the volatility is high and I don't want to get a buy or a sell signal every other day. On 60 minutes charts EMAs are not going to cross this week unless another big move down is going to happen in the next two days. Even though price is bellow both EMAs and they are both pointing down now. Some hope arise from the fact that, despite today's bad news, 5 days SMA did hold by the end of the day.

I am going to repeat myself here, if SPX is going to give a sell signal on 60 minutes chart only a few days after generating a buy signal there isn't going to be any momentum, either up or down, this market is going to move sideways. But let's not anticipate.

Meanwhile either if you are long or short right now don't forget to hedge yourself.  Since I do have some "longs" into my portfolio I have shorted a couple of stocks with a very bearish momentum, so bearish that even if market is going to move up from here they are most likely to go further down.

babaro

Bellow 1,100

Bad housing data and the bears managed to push SPX bellow very important technical levels, SMA200 (1,111), previous highs (1,105) and 1,100 the price where most of the volume occurred since March 2009. Bears didn't seem too confident in the morning when the housing data emerged but by the end of the day they were in total control. We are trading now, again, in the 1070-1105 range. Looking at the daily chart you can see that we traded in 1070-1105 range for over a month with two briefly escapes, one at 1045 and the other at 1117.  Let's see if 1070 holds now!

Looking at 30 minutes charts you can see that price went bellow both EMA50 and EMA100 but it's still above a rising five days moving. So, the intermediary time frame it's still OK. It's very tempting to take a small loss here but I am still holding my few longs until I would eventually get a sell signal (EMA50  crossing EMA100 from above). If I am going to get another sell signal I am out of the market and go fishing since the market most likely will trade in range and the number of false buy/sell signal are going to increase. Keep an eye on 5 days SMA, sometimes this level acts as a support.

Bulls may still have a chance here to push SPX above 1100. It all depends on how this bad housing data is going to be "re-digested" tomorrow and what other European market is going to be downgraded from crappy to junk by Moody. I wonder when is Moody going to downgrade itself since its tracking record prior the 2007 plunge was pretty bad --))

babaro

SMA200, morning update

Pretty bad housing data but bears lack confidence to push SPX bellow SMA200,  around 1111-1112 right this minute. Let's see if they are going to get more aggressive by the end of the day.



Yesterday's reversal, what does it mean?  Here is an interesting point of view.


 2:15 update, SPX moves bellow SMA20!

Reversal day

Closing 3 points bellow Friday is not a big deal but this is not the whole story today. We did have a fake rally in the morning, touching 1131, then SPX ended almost 20 points down at 1113. The good news is that SMA200 did hold. The bad news is that price slipped bellow EMA50 on 30 minutes chart for the first time since June 10 at 1070.

This doesn't change the intermediate time frame trend that is still bullish, with SPX above a rising 5 days SMA and EMA50 crossing EMA100 on both 30 and 60 minutes charts. Daily DMI is still negative a little bit. When EMA50 does cross EMA100 on 30 minutes or even better on 60 minutes charts I use this kind of pullbacks as a buying opportunity. The problem here is that SPX doesn't have room to fell too much, SMA200 is around 1110 and a huge support/resistance level, 1100, not too far away.

I hope you are well hedged (see the article bellow for some hedging ideas).

babaro

"Time is a great teacher, but unfortunately it kills all its pupils ... - Louis Hector Berlioz"

Hedging your account

Hedging it's a clever way to prevent seeing your portfolio value plunging beyond recognition. Here there are my favorite three ways to hedge a portfolio.

1) Using inverse ETFs.

Assume you are bullish on a certain stock or ETF but you want to prevent a bad surprise. What can you do? Buying an inverse ETF it's a good idea to get some protection if market decides to go down. If you are bullish you need to allocate only a small percentage of your portfolio to inverse ETFs so you still leave room for growth on the upside. I do not trust 3xETFs, but this is me, I suggest you to use anything else.

2) Shorting stocks in a serious downtrend.

This is a very good strategy but you need a margin account. You need to short more than one stock since moves up or down in individual stocks can be wild. If market goes up, your winners will rally and the stocks you have shorted are still going to go down or at worst they may stay flat or go up a little bit. If market goes down a weak stock will most likely plunge making you more money (percentage wise) than you lose with your "longs". With these strategy you can increase the percentage of your short bets compare with the first strategy.

3) Using options

You can buy 100 long shares then buy an out of the money "put".  Say ABC stock trades at 50. You buy 100 shares then you can protect them with an OTM put, say at strike 35 or 40. If market goes down your OTM put will increase in value and you are going to recover some of the losses.

Of course you can use the 4th method, placing a STOP-LOSS. There are two problems with a stop-loss. First, if your stock touch the stop even for a split second your stock is going to be sold. Think about the "flash-crash" when DOW plunged 1,000 points in only a few minutes. Every single stop-loss was activated! Think about your stock being sold at 9,900 then seeing DOW at 10,900 just a few days later. Second, if you have a stop at, say, 45 and the stock gaps down to 40 overnight you are not going to sell your stock at 45 since there isn't going to be any buyers at that price, you need to settle for 40. If you use any of the 3 hedging strategies above you can afford to trade without stops. If you don't use them, then at least go for the 4th, the stop-loss, it's better than using nothing at all.

Earnings this week

Beautiful start this morning but let's see if it holds. If it does, I am going to buy more at the end of the day. I can easily see SPX moving up another 20-40 points until it meats some resistance (judging by the volume occurred in the last 4 months since the start of the last rally). Of course SMA100 and SMA50, now around 1135-1140, are also potential resistance levels. For clarity I removed EMA50 and EMA100 I am usually showing on daily charts.

Some well known companies are reporting earnings this week, ADBE, WAG, BBBY, RHT, ORCL, NKE.  Be careful if you buy them before earning announcement. Usually I buy after the earnings since I don't like bad surprises. If I buy them before earnings, I am buying "straddles", a "call" and a "put" with the same strike and the same expiration date. This way I am long and short at the same time. To make money I need the underlying stock to move substantially either up or down.

Waiting for the next week

Quote of the day:

"I told my wife that a husband is like a fine wine; he gets better with age. The next day, she locked me in the cellar."

A second straight week of gains, with SPX a little bit above SMA200 and a decent buy signal on intermediate time frame, that's how I would summarize what happened lately in the stock market. But exactly as US football team needs something more than two draws to qualify for the next stage, S&P needs more than three flat days in a row to put bulls in control for another couple of weeks! The option expiration week it's over and now the investors, traders and speculators can focus on the next step. Is it going to be up, is it going to be down? Who knows, I don't have a crystal ball but I do know is that a trend once started is most likely to continue than to reverse (one of the Newtonian laws. Don't worry if you don't know it, I didn't like Physics either)! This of course assumes that no major event is going to happen soon, an earthquake, an alien invasion or if the end of the World programed for 2012 doesn't decide to come two years earlier. Otherwise, we should have a good chance to see this incipient uptrend consolidating above SMA200.

I tried to get BIIB today, a crappy stock in an awful long term downtrend but who started to turn bullish on intermediate time frame but my "call" refused to get filled. Now I hope the stock will plunge on Monday just to congratulate myself how clever I was not to buy it today, which of course is going to be a lie since I didn't buy it because I couldn't, but my wife doesn't read this blog so I can brag in front of her as much as I want (about stocks, of course, otherwise....) Why have I decided to give this stock a chance? You already know it by now, if you look at the chart you can easily see EMA50 crossing EMA100 on 60 minutes chart, plus a nice climb above the downtrend line (on daily chart)

Have a nice week-end!

babaro

P.S. I added FSAIX (Fidelity Air Transport) to the list of bullish mutual funds one could buy in his 401(k). Let me know if you want me to have a look at Vanguard or TIA-CREFF mutual funds

Bad data today but...

... bears were not able to push SPX bellow SMA200. This is bullish, this is exactly what it's suppose to happen when the momentum has turned bullish. Intra-day, SPX has slipped bellow SMA200 but bulls regained control by the end of the day. Normally I would have jumped "all in" but the fact that there is no clear long term trend makes me a little bit cautions so I only bought a little bit. I actually don't trade stocks anymore, I do trade options but I don't want to talk about this because I may open a whole new can of worms. When playing options one need to be pretty sure what he is doing since the gains and the losses can be pretty high.

The buy signal on 60 minutes chart looks even better today, now it's easier to see EMA50 crossing EMA100. Also 5 day SMA is rising now, another bullish sign. The longer bulls manage to stay above SMA200 the better (of course!). More important than SMA200 is 1,100 level.

babaro

Bulls defend SMA200

Flat today, bears pushed SPX towards SMA200 (1,108) but the index went up immediately. Even with a flat day like this the technicals changed a little bit in the favor of the bulls. We do have now the confirmation on 60 minutes chart (EMA50 crossing EMA100) that the intermediate trend has turned bullish. The crossing is not great (yet) but is good enough for me. We are still too close to SMA200 so I didn't buy too much today.

A move up is not going to be in a straight line, of course. We are going to see some pullbacks that are going to be good entry points for those still in cash but I think the bullish momentum is going to continue for a while. If bears are going to be right and the upcoming rally is only going to reach 1,150-1,160 then we are going to see SPX moving down again, I am not going to make too much money if any but I am not going to lose either. Capital preservation is my number one concern.

The reasons bears say that we are going to stop around 1160 is because they spotted a potential "head and shoulders". The rule number one with these patterns is that you need to let them form first then act. Personally, I think trying to predict big moves, tops and bottoms is a losing game. Some people may say "but you do the same, you invest today because you are predicting the market will move in a certain direction". It seems to be the same but is not. I am not predicting the market I am reacting to market moves. I let market to do whatever it wants to do then I jump on the trend because I know from practice that once a trend starts it will continue in that direction for a while.

The momentum is bullish, no question about this. Think just about the bad news we had today, 10% drop in housing data, news that would normally make the market plunge but it end it up flat. That's exactly what happens when there is a powerful momentum either up or down, the news that are supposed to move the market in the opposite direction are discarded.

 However, bulls should not have an early celebration. SPX is too close to SMA200. Six points in today's market is nothing. We need to see further consolidation above SMA200. SMA200 is raising so every single day is getting a little bit higher. We may see a move bellow SMA200 for a day or two but the market should not go bellow 1,100. That was a fantastic support level just a couple of months ago but the European story was so nasty that SPX went bellow 1,100 and as it always happens when market goes bellow a big support level, that level behaves as resistance on the way back.

babaro

Pension plans (Fidelity)

Some good mutual funds you may want to consider. Many have turned bullish on intermediate and long term time frames. Most of them are now around 200 days moving average (SMA200) meaning that there is no clear long term trend. On intermediate time frames all of them look bullish. What to look for? Look to see how far away from SMA200 (red moving average) are they, the larger the amount on the upside, the better. Look how much are they above the downtrend line. Also look for DMI (is slightly positive for all of them).

If you are not sure how to trade use SMA200 as a timing method, buy when price moves above SMA200 and sell when it goes bellow. You may lose a bit here and there due to the "whip-saw" but you are going to avoid major crashes.

Some of them worked very well for me in the last 12 months, FSAVX and FLVCX being by far the best. I also have a sizable amount of money on a bond fund. The best Fidelity fund I found is FGMNX.  I rebalance every time I am getting buy/sell signals on intermediate time frames but you can get away with rebalancing only when long term trends become bearish or bullish.

I haven't check every single mutual fund available so I may have missed a good one but this a good start.



babaro

OK bulls, you've got my attention!

Very good action today on bulls part with SPX going over SMA200 for the first time since the beginning of the correction! This come on top of EMA50 crossing EMA100 on 30 minutes chart and the climbing above the downtrend line seen on Friday. Even more encouraging is that all indexes look at least as good as SPX, especially NASDAQ the only US index that was above SMA200 until today. Also notice EMA50 on daily chart that is not going down anymore and looks pretty flat to me.

The big question now is: "is it going to hold above SMA200 (1,108)"? Going above or bellow a moving average is one thing and staying there is another matter. I would still want to see a nice confirmation from EMAs crossing on 60 minutes chart and also want to see DMI turning positive on daily chart.

Bears are now talking about a "head and shoulders" with a left shoulder at 1150, a head at 1220 and another shoulder at 1150 before a plunge bellow 1050. While this may be possible I wont' venture into such a scenario because I don't like to anticipate markets' moves, especially on long term time frames. What I want to see is a change in momentum on intermediate time frames then to ride the wave as much as possible. I already have the buy signal on all 3 indexes (4 actually, RUSSELL has also turned bullish) but I would like to take an extra step, EMAs crossing on daily chart both because I've got a false buy signal on NASDAQ 10-12 days ago and because SPX is too close to SMA200 to be too adventurous. When SPX is either a lot above or bellow SMA200 it's much easier to take a decision.

What about the volume today? I must admit I rarely consider the volume! I know I am going to be "axed" by the majority of those who read this blog but I don't weight this indicator as much as other people do. Not even close! I hear people saying volume is more important than the price. I completely disagree, nothing is more important than the price, everything else (volume included) only confirm a certain move. As somebody said to me a while ago "only price pays" but this not the only reason I avoid reading too much into the volume. Fist of all, moves on the downside are always much more violent than those on the upside (no matter what some people believe fear is more powerful than greed). That is the reason most of the people dismissing a market move because of a poor volume are bears. What bears don't take into account during the rallies is that a 1-2 days plunge takes place on a large volume, indeed, but if this is followed by 10 days on the upside on lower volume than any of the two days, the move on the upside is still relevant. Just try to add those relatively smaller volumes to see what you get. What I find relevant is "volume at price" indicator, that gives me the volume occurred at a certain price over a defined period of time. Not only that but it tells me if at a certain price the bulls or the bears were in control. Using this indicator I can find decent levels of support of resistance that sometimes may not be as easy to identify with the naked eye. For example 1,100 is the level where most of the buying occurred since the beginning of the big rally 14 months ago but also since the 2007 top.

The only exception I make regarding volume is when the index breaks obvious levels of resistance, support or moving averages. Then I would like to see a nice confirmation coming from the volume. Today was one of those days, SPX overcame both the resistance level at 1,100 and SMA200. The volume was not great, not only for S&P but also for NASDAQ and DOW. It was barely above yesterday's volume and bellow the 50 day moving average. What does this mean? It means we have one more reason to be cautions about today's rally. We need to see a nice consolidation above these levels. Should we dismiss then the rally today? No, we shouldn't. Looking just a little bit back, in February when the last leg of the rally started, we can see that the move above the downtrend line, that pretty put bulls in control, was not accompanied by a great volume. That didn't stop SPX moving another 150 points up.

babaro

I found this on the Bloomberg's site:

“No one disregards technical analysis now,” said Sorrentino. “If they do so, they do so at their own peril. Technical analysis has become increasingly important because of so much money chasing around. The momentum of money has become more important than the fundamentals beneath it.”

Yet so many people ignore Technical Analysis.

Tough resistance level

One more time 1,100 seem to be a tough level to conquer. Besides being roughly the level where SMA200 resides, 1,100 is the level where most of the volume occurred in the last 14 months.

I didn't want to make a big deal about this but on Friday SPX managed to climb above the downtrend line for the first time since the start of the correction. Also EMA50 did cross EMA100 on 30 minutes charts. The reason I didn't make a big deal is because we saw something similar on NASDAQ a week ago and the market still went down and made another low. So I think we should get more conservative and watch these EMAs crossing on a 60 minutes chart. Plus we still have a declining 5 day moving average.

It may also be possible that market is going to stay into 1040-1,100 range for a while until the European saga is over. In this case one should use other indicators and oscillators such as Williams %R. Usually I am out of the market when it does trade in range since I like the ride the wave either up or down.

Let's wait for tomorrow for further clarification. We should watch for 1070 and 1040 on the downside as potential support levels and of course 1,100-1,110 as the obvious resistance level.
 

Sector ETFs

Let's have a look at some sector ETFs

XLE (energy)
XLF (financial)
XLV (health care)
XLP (consumer staples)
VNQ (real estate)
XLI (industrial)
XLB (materials)

I wrote the comments directly on the charts. I am using DMI on daily charts just as a confirmation of an intermediary trend not as a buy/sell signal. Also by looking at the direction of the SMA200 (declining, rising or flat) I am getting a clue if a market/ETF has slipped into a bear or a bull market. A slip bellow SMA200 does not necessarily mean that the stock is now in a bear market, it only means that the long term has turned bearish. Some of the ETFs have mixed signals.