Tuesday, June 15, 2010

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.


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.


  1. I agree with you on the volume. Anyone betting against this rally from March of 2009 has been complaining about low volume on up days. It probably takes even less capital to advance a thinly traded market than a widely traded one. On the other hand, we see the fragility of price advances not confirmed by volume on days like the flash crash, where we basically had a bid collapse.

  2. Good point. As I said volume should be used as confirmation. If the confirmation doesn't come one should get a little bit suspicious but not paranoid. Let's see how real yesterday's move above SMA200 was. Right now SPX is exactly at 1,108


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