Friday, May 28, 2010

Stock Market Update, May 28

No follow up from yesterday's 35 points rebound. S&P bounced into SMA200 (cyan arrow) then gave up 14 points by the end of the day. However, technically speaking, there were no big changes since yesterday. Usually, 14 point is a pretty big drop but not in situations like this with a huge volatility. As my friend Paul noticed the other day such volatility usually accompanies changes into market direction either in favor of the bulls or in favor of the bears. I think there is a pretty decent chance that we are going to see another rally towards the previous peak, 1,220 or even above but we need to be very, very cautions since this is for the first time since the start of the one year rally when we are bellow SMA200, meaning the long term trend is rather bearish than bullish at this time. As I mentioned yesterday we still have an rising SMA200 so we don't really need to panic that S&P is going to slip back into the bear market. Plus other filters I am using such as EMA50 crossing EMA100 on daily chart didn't not happen yet (ellipse).

The above analysis is only for the sake of the argument because the truth is I am a momentum trader and I don't really care what the long term trend is, I am just trying to capitalize on any decent move up or down. The key of making money in the market is to never be a perma-bull or a perma-bear. Money can be made on any direction if one knows how to read the charts. My goal here is to help you do the same thing, capitalize on medium term trends, either up or down. Saying that let's see how S&P looks on 30 minutes charts. We still don't have a buy signal because EMA50 did not cross EMA100 from bellow. Plus the price is still bellow a descending 5 days moving average (SMA240) so is too early to call an official end of this correction. Compare this with WLT chart from yesterday's post to notice the difference.

I've been asked why am I using these EMAs, why not EMA25 and EMA50? The answer to this is that ... I am a scientist and what a scientist do is to have a starting point, a starting set of conditions then try to optimize these conditions. From practice I found these values to work the best. These EMAs make me go long or short soon enough to capitalize on most of the big moves but they also don't make me jump in too soon or make me sell too soon. If I use EMA25 and EMA50 cross this will make me buying at a better price than EMA50 crossing EMA100 but there will be more false buying/selling signals. For example EMA25 already crossed EMA50 on S&P yesterday but this also happened when market jumped from 1115 to 1170 which was a false buying signal. Using EMA100 crossing EMA200 as a buy/sell signal it's even safer but you are ending buying a little bit too late and also selling a little bit too late. Again, from experience, I don't think it's worth going for the last pair of EMAs since once EMA50 does cross EMA100 pretty much is a done deal, market goes in that direction for a good amount of time. I must admit I am watching all three pair of EMAs. When EMA25 crosses EMA50 I am getting ready to buy or to sell, when EMA 50 crosses EMA100 I do buy or sell then I use EMA100 crossing EMA200 as a confirmation that the trend is for real. I added SMA240 as an additional filter after watching many of Brian Shanon's videos, a professional trader from which I learned a lot.

P.S. 1) One of the adds on the right side of the blog says that a huge market crash will start on May 31st, 2010. Now that's how you know things are going really bad, when market is going to crash on a day Wall Street is closed. LOL!

P.S. 2) I've been informed that people can't leave a message unless they are logged into their Gmail, AIM, OpenID accounts. This is annoying but there is nothing I can do about. I would suggest to get a Gmail account, it's free and is the best, better than yahoo or hotmail in my opinion. If you can't post a comment send me an e-mail and let me know your opinion.



  1. This comment has been removed by the author.

  2. A good analysis... the 50 day has turned into resistance... I'd be weary of a breakout if it isn't accompanied by significant volume.

  3. Good observation, Dr. Stock, volume should always confirm a breakout.


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