Monday, November 22, 2010

Bearish momentum challenged!

I am starting to worry a little bit about this leg down. Bears are managing to keep SPX bellow 5 days SMA but not at a safe distance. Price has moved above both EMAs and 5 days SMA is rising instead of pointing down. This is the second day in a row when we had a morning plunge followed by an afternoon rally. There is a lot of indecision in the market and SPX can go either way from here. The odds are still a little bit in bears' favor but I think the fair think to say is that the intermediate time frame momentum is pretty much neutral at this point.

To make things worse for me I decided to short Nasdaq instead of SPX this time and Nasdaq is even less bearish than SPX, price is already above 5 days SMA and EMAs are pointing up and almost touching.

The good news, for bears, is that the dollar ETF, UUP, is almost giving a "buy" signal. Remember I optimized the EMAs as EMA15-EMA30 (on daily chart) for this ETF a few weeks ago on "How do I chose the best pair of EMAs" , the most popular post since I started this blog. You can see that daily DMI is green and also that both EMAs are pointing up and touching each other. They may give a "buy" signal very soon but is not a done deal, they came very close many times in the past without actually crossing each other. If dollar is going to start a nice uptrend from here this may help the bears but I must say there isn't always a strict correlation between dollar and the stock market. There were times in the recent past when both of them went up. The only stocks that are going to be 100% affected by a rally in dollar are SLV, GLD and other commodity ETFs.

I've got a question about SMA120 on hourly chart and 5 days SMA. They are exactly the same thing, 5 days x 24 hours = 120 hours, so SMA120 on hourly chart is the "famous" 5 days SMA I am always talking about. From now on I am going to say SMA120 just to avoid confusion. Another thing I want to make you aware of is that you can't extrapolate these EMAs from hourly chart to daily chart for example. EMA25/EMA 50 and SMA120 on hourly chart equals, roughly, EMA1-EMA2, SMA5 on daily chart. If you plot these values they are meaningless on a daily chart. Both EMAs and SMAs are moving averages, you can't make a moving average using 1, 2 or even 5 bars, they are going to be almost indistinguishable from the actual chart. You can extrapolate from 60 minutes to 30 minutes chart by doubling each MA, or even from hourly to 2-4 hours chart but you can't do it from hourly to daily.

Have a nice evening and good trading day tomorrow!


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