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.


Another morning update

 4:01 pm update. We close in red but bulls showed a lot of strength on the afternoon. This is a tough market to trade. I'll come later with details.

11:20 update

Up-down-Up-down pattern is about to be broken. This is going to be the second straight down day but I don't think we are going to close outside the 1177-1200 range.

The dollar is continuing it's rally and it looks like the buy signal generated by EMA15 crossing EMA30  on daily chart is real.

Friday, November 26, 2010

Trading in range

A bearish trading day on a light volume. I don't want to read too much into this drop since we are trading now in a very tight range, 1175-1200 and until we get out of this range market is rather neutral. The range is too tight to resist for a long time. It may get larger something like 1,165 to 1,205. I hate this type of market since the chance to get whip-sawed with my EMAs crossing is very high but what can I do? I may reduce the number of shares a little bit and stay in cash until I see further clarification.

What is pretty clear to me now is that the dollar has generated a BUY signal since EMA15 is clearly above EMA30 on daily chart. Price has also climbed above SMA70, the moving average that functioned as support on the way up. This is especially important for those trading commodities.

Thursday, November 25, 2010

Discrepancies in index ETFs

Index ETFs are supposed to track the major indexes, Dow, S&P500, Nasdaq, Russell. Some of them are doing a good job, others are performing not so well. I use index ETFs all the time, they are less volatile than individual stocks are they are trending nicely most of the time. However, as a buy and hold strategy they may not be a very good idea and here is why.

S&P500 for example is 30% bellow 2007 high. SPY, the index ETF is also 30% down. SSO, which is 2xSPY is down 65%. Here we have a very good correlation. 

However, looking at other index ETFs I found huge discrepancies. Nasdaq is probably the worst from this point of view. Compared with 2007 high, Nasdaq is 12% down. However, QQQQ is only 2% bellow 2007 high. QLD, the 2x QQQQ is 45% down!

Wednesday, November 24, 2010

Bulls erase yesterday's losses

It looks like yesterday market overreacted to the Korean news and today probably overreacted to yesterday's overreaction :) Sounds confusing? Well it is! This one of those moments when is hard to make a call. This kind of day to day volatility usually happens before big movements in the stock market. Last time we had something similar was in April. After that once market moved above or bellow SMA 120 it didn't look back.

I still have my bets on bears since today is the fourth unsuccessful attempt to climb above SMA 120 and daily DMI remains a little bit bearish but as you can imagine we are on very thin ice. The only good news today for the bear camp is that the volume was pretty low.

The really bad news for the bear camp is that NASDAQ had a bullish EMAs crossing today! It's not a great crossing but it's there. Nasdaq usually gives a little bit more false buy and sell signals than SPX and that's why I stick with SPX. For example on October 4th Nasdaq gave a false sell signal, but not SPX. 

Small caps are also looking bullish, we have a clear EMAs crossing on Russell 2000 and they are barely touching on Russell 3000 but price is a little bit above SMA120.

I wish the picture was much clearer than this but once again we need to wait a little bit longer to see what market decides to. Up or down? 

Happy Thanksgiving to those living in US a nice evening for everybody else!


Tuesday, November 23, 2010

Bears are back

For the third time in a row we had a very bearish morning  but unlike Friday and Monday bulls were not able to push market higher in the afternoon. This must be a relief for bears who saw the bearish momentum seriously challenged in the last three trading days. Once again SPX is bellow both EMAs that are now pointing down as they should do during a downtrend. SMA 120 also started to climb down but it may need a few more bearish days to be obvious on the chart. Price tends to stay very close to EMAs both on uptrend and in a downtrend. Right now has moved 7 points bellow EMA25 so there is a little bit of room to move on the upside without disturbing the downtrend. What I want to see is price touching EMAs but at a safe distance from SMA120.

On daily chart the most noticeable event is DMI turning slightly negative today. DMI remains bullish on weekly chart so this is a bearish leg inside a larger bullish one. There are a few good levels of support, first is the November 17 low around 1177, not a very important one but we need to see market making a lower low bellow 1177 for this leg to continue to move down. Since November 5th SPX made two lower highs and two lower lows. Another lower low on daily chart is going to be very good for bears. Other levels of support are represented by 1172 (SMA50/EMA50) and the best of all 1132 (SMA200). The major resistance level remains SMA 120 on hourly chart.

As I mentioned earlier today the dollar has generated a weak buy signal. It needs to move a few good days on the upside for the crossing to become obvious. Please pay attention that I optimized these EMAs on the daily chart. If dollar is going to start a decent multi-month uptrend this may help bears since a strong dollar in general is bearish for stocks but once again I must warn you that the correlation between the strength of the dollar and the stock market is not perfect. Much better correlation is between commodities and the dollar. Even there we can find a strange behaving day like today when dollar went up but gold went up as well. However, other commodities like oil, silver and platinum went down today.

All the best!


P.S. Once again many thanks to those of you who clicked on the AdSense ads today.

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!


P.S. Thank you very much to those of you who clicked on the ads today.

Morning update

It's 11 am, SPX moved a few points bellow a slightly rising 5 days SMA. The intermediate time frame downtrend is still intact but I would like to see SPX a little bit further away from the 5 days SMA than it is now. EMAs on the other hand look like they are at a safe distance of each other.

Let's keep an eye on 5 days SMA (around 1,201 this morning) and on EMA s crossing. I would like to see both EMAs pointing down again.


Friday, November 19, 2010

Flat week overall but a lot of action

All indexes gave a "sell' signal on Monday, followed by a good confirmation on Tuesday but bulls decided to rain on bears' parade by the end of the week. Picture is mixed at this time, we have an EMA crossing but price is above both EMAs and is touching 5 days SMA. Daily DMI is also neutral so we need to wait for the next week for the final verdict. 

The ball is still in bears' court but not as much as it was on Tuesday when SPX went down to 1177. As you noticed from chart bellow the 5 days moving average is a pretty good support level when in an uptrend and good resistance level when market is plunging. It worked actually better than EMAs crossing that gave me too small whipsaws but on the other hand EMAs gave me a better entry-exit points. Please notice this is a 4 hours chart so I adjusted SMA 120 to SMA 30. 

I don't worry about market changing the trend again, I am going to take a small loss and change sides, I worry about a trendless market like we had last year exactly at this time between November and December. This is only time my timing system is losing money. The good news is I am way ahead of the game and even with some small whipsaws I am going to end this year deeply on green. Let's hope is not going to be the case. We are still good with our shorts and odds are slightly in our favor since we have a bearish EMA crossing and SPX made two unsuccessful attempts to climb above 5 days SMA. Dow and Nasdaq look a little bit more bearish than SPX, neither of them are touching 5 days SMA.

Have a nice weekend!


Bears doing fine so far

It's 11:30 am. SPX moved bellow EMA50 and slightly bellow EMA25. Five days SMA is around 1199 today. Bears are on the safe side if market closes bellow 1199.

2 PM UPDATE: Bulls are challenging 5 days SMA.

Thursday, November 18, 2010

Bulls win the day but...

... the intermediate time frame trend remains bearish. I took the trouble to keep you updated every couple of hours today since I thought some of you already short may panic and cover on a day that most likely is going to be proven as a bull trap. SPX remains bellow 5 days SMA but just a little bit. Dow and Nasdaq didn't even touch the 5 days SMA today. Tomorrow we need a down day or at least a flat one to feel comfortable with our short positions. Another big move on the upside is going to spell trouble so we need to be carefully here.

Volume was not great for most of the day, it picked up in the last hour but it was dominated by bears. Look at hourly chart for SPY.

Overall I think we are safe so far despite this big scare we had today. Let's see how is the market going to digest the Irish bailout and the GM IPO tomorrow. This kind of events usually trigger emotionally actions from market participants and today was not an exception. On daily chart the most significant event is DMI turning neutral from bearish.

All the best!


Whipsaw or another chance to short the market?

It's just 11.15 am, way too early to anticipate how market is going to close but an important technical level was touched this morning and I thought I need to warn you. I am talking about 5 days SMA! SPX had a huge jump today due to GM IPO and a possible bailout for Ireland. We need to be carefully here and watch to see if SPX is going to able or not to climb above 5 days SMA. My guess is that this a big bull trap but we should never underestimate "the enemy", our beloved bulls in this case. If SPX close bellow 5 days SMA (around 1198) I think this is a perfect opportunity for reluctant bears to short the market.

2:30 pm update. It looks like bulls are failing  to push SPX above 5 days SMA. Volume on SPY is low. If ends like this you should go short if you already didn't do it.

Wednesday, November 17, 2010

Flat day

Bulls had a small attempt to do something in the morning but market closed virtually unchanged. Price is far away from both EMAs and 5 days SMA. This is a normal behavior when trends change but we should expect price to come closer to EMAs in the following days. Later on price is going to cross both EMAs and we will see a few attempts to climb above (by then) decreasing 5 days SMA but this moving average should provide a good resistance level. As long as price is going to stay bellow 5 days SMA the downtrend is going to be intact.

Daily DMI is even more bearish than yesterday and we should keep a close eye on weekly DMI that is still green. Somehow I don't expect this downtrend to last too long but this is just a speculation. I say this because bulls fought a lot to push SPX above SMA200 and to turn the long term momentum in their favor (as evidenced by the weekly DMI) and I don't see giving up their long term position so easily. 1130 is a level where we should expect a big fight. There we can find SMA200. Also, if you look at yesterday's post 1130 is a price where we saw a lot of volume in the past 6 months. Where is the market going to find support remains to be seen, we can speculate ad nauseam. Meantime we should keep an eye on our timing indicators, EMAs crossing and 5 days SMA.

All the best!


Tuesday, November 16, 2010

Bearish trend

I have no doubt that the intermediate time frame trend has turned bearish. EMAs crossing did a good job, one more time! How long is this trend going to continue? I don't have any idea and I don't care. Of course I hope it's going to continue for a while so we can make some money on the short side but if it's going to turn bullish again we are going to cover and switch sides.

As a confirmation of the change in trend daily DMI has turned red for all indexes today.

Dollar continues to get more strength which also helps our short ETFs. Why is going up? I don't have any idea. Probably market already priced in QEII and now has no room to go but up. Daily DMI has turned positive and price managed to climb above the downtrend line. But if you look in the recent past the key signal was given by EMA15 crossing EMA30. They are very close but not there yet.

"Volume at price" indicator gives us some ideas where we can find some good support levels. Keep in mind that these levels depend on what time frame you are looking for. The one I chose is April-November. This indicator shows at what price we had the highest volume, also it tells us who were in control at a given price, bulls or bears. For April-November period the best volumes occurred at 1180, 1115-1130, 1090 and the highest of all at 1070. In my opinion 1130 is the most important level since there we can also find SMA200. Again, at what level is the market going to stop plunging  is not my biggest concern, nobody knows for sure where and when the trend is going to change, we are just speculating here.

Have a nice evening!


P.S. Bears were generous with me today, they clicked on my adds so I bought not only a coffee but a couple of beers too. Now I can have friends over :)

Let's short the market!

It's just 10 am but market shows clear signs that is going south for good. Daily DMI has turned red for all indexes, we have a bearish EMAs crossing from yesterday and price has slipped bellow 5 days SMA. Only a miracle can save bulls now.

I just loaded SQQQ. Let's hope we are not going to get whip-saw.

Monday, November 15, 2010

Sell signal

I sold everything today cashing a nice 120 points profit on SPX. EMAs did cross and price is now slightly bellow rising 5 days SMA. There is a 5-6 days downtrend line that acts as resistance, another bearish sign. SPX may have another attempt to climb above this line before going down.

I am not going short yet since I am not 100% convinced the intermediate trend has turned south for good. Daily DMI is still positive for SPX and hourly EMAs are barely descending, a sign that some bulls are still hopeful. If tomorrow I see market continuing to go down I am probably going to jump on some short ETFs, SDS, QID or the relatively new guy in town, SQQQQ, a 3x Nasdaq short ETF. I don't like FAS-FAZ pair and any Direxion ETFs as a matter of fact, except, maybe TNA-TZA.

You must understand that EMA25-EMA50 pair on hourly chart is not a magic pair, it had a very good degree of accuracy lately but you can get whip-saw here and there. Last year, from November to December, it was a terrible time for me, market traded in a tight range (1090-1115) and I've got whip-saw 3-4 times before I decided to stay away from the market until I saw a big jump above the resistance line. Please notice this is a daily chart so don't pay attention to EMAs. Bellow I posted a 4 hours chart. There you can look at EMAs crossing (adjusted to 6 vs. 12) and 5 days SMA (adjusted to 30). Sorry for the confusion.

As a confirmation of the potential downtrend we should keep an eye on daily DMI that is slightly positive for SPX but is practical neutral for DOW and Nasdaq.

A 10 points drop on SPX tomorrow is going to convince me to go short.

All the best!


P.S. Many thanks to those of you that clicked on my adds or bought anything from Amazon through this blog