Monday, November 29, 2010

Still in the trading range

Bears made an attempt in the morning to push SPX outside 1177-1200 trading range. SPX went down to 1174 then bulls took control and market closed almost on green. This type of reversal is significative if it happens after market establishes a new high or a new low. Here, is not that important, it just suggests that as soon as the lower edge of the trading range is touched there are enough buyers to push the market back. We saw the same thing when market was getting closer to the upper edge, 1200. I am really tempted to exit the market and stay in cash until I see further clarification. When indexes trade in range the ETFs that are tracking them are actually losing a little bit. I am going to touch this subject some other time. I did some research and I think I found the real reason why 2x and 3x ETFs are losing more than 2x or 3x the underlying index. 

On hourly chart we have a bearish EMAs crossing on SPX and price is bellow a declining SMA 120. Daily DMI is red so one can argue that bears are still in control but the damage is not that great so bulls have no chance. If you want further proof that market is undecided let's have a look at VIX. Notice the multi-months falling wedge. This is one of the most trusted patterns. Once the price moves above the upper edge the stock starts an very decent uptrend. Most of the time this is the case. However, in the last few weeks, after VIX went above the upper edge (cyan arrow) it didn't have enough gas to move up and now it's as trendless as SPX. 

Of my readers have pointed out that I am making a mistake and he/she is perfectly right. SMA120  on hourly chart is not SMA 5 on daily chart as I am always saying but SMA 18. I made the mistake to divide 120 (hours) to 24 but the market is not trading 24 hours per day, is trading only 6.5 ours. If you divide 120 to 6.5 you get approximately 18. In this case EMA25-EMA50 on hourly chart is roughly equivalent to EMA4 crossing EMA8 on daily chart. This mistake is not affecting my "buy"-"sell" signals at all. Another point my reader made was that the hourly chart is not the most accurate one because the half hour between 9:30 to 10:00 am is weighted as a full hour. I was aware of this problem and if you are one of the people that follows this blog since the beginning you remember that at that time I was using EMA50 crossing EMA100 as the buy/sell signal and SMA240 as confirmation., all on 30 minutes chart. Then I moved to hourly chart just to have the possibility to look further back in time. From my experience there is no significant difference between  EMAs crossing on hourly chart and EMMAs crossing on 30 minutes chart. These EMAs are rounded figures anyway, the idea is to capitalize the bulk of the rally or the plunge and plus or minus 5 points on SPX is not going to make any difference.


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