Tuesday, June 29, 2010

No change

A second straight non-moving day that doesn't help either bulls or bears. I thinks bulls should be glad that bears didn't feel like pushing SPX further down and more important that the lower edge of the trading range survived an extra-day. The intermediate term trend is bearish to neutral, price is bellow 5 days SMA (bearish), EMA50 crossing EMA100 (bearish), flat five days moving average (neutral). Of course this assumes that the market is trending either up or down that I don't think is correct anymore, more likely market is trading in range and the above information should probably be discarded. One of the reasons I am out of the market!

As I mentioned last week when market is trading in range one could use Williams %R to find "overbought/oversold" levels, an oscillator pretty much useless when market is trending up or down (which doesn't stop people using it then complain that market is acting irrational). Right now Williams is reading -72, that is pretty close to "oversold" level (over -80). Why I don't like to trade when market is trading in range? After all this seems to be the easiest way to make money, buy when market hits the lower edge of the trading range, sell when it does hit the upper edge. In theory sounds fine, in practice it's not that easy since it takes time for a trading range to be formed and by the time one realizes market is trading in range market is probably about to trend up or down again. For example if market is going to move down tomorrow Williams will go bellow -80 signaling an "oversold" condition but if market continues to go further down for another month Williams %R will wrongly show "oversold" and make one "catch a falling knife". The reverse happens in an uptrend, Williams can show "overbought" for a long period of time while market rallying.

At least in the last three years market rarely traded in range. One of the time it did trade was in November-December last year when it stayed in a very tight range, 1090-1110 for 6 weeks. On two occasions SPX moved a little bit out of the range but both attempts to escape did fail. The question is how can you know if the move outside the trading range is going to be for real or not? The answer is you can't tell. However, there are some "signs" that can give you a clue. For example if market brakes out on the upside, you may see a retracement towards the upper edge of the trading range. If this level holds and the market pushes up and makes a higher high then the chance that the market resumes its uptrend is very high. If if doesn't hold (red arrow) then that was a false break out and the sideways movement continues. A second sign that the market starts trending again is when it doesn't go all the way up or down (ellipse) then immediately goes out of the range.

 There is a big difference between November-December and today. Back then the market was in a powerful uptrend, it was way above SMA200, even above SMA50 and EMA50. Now we are trading bellow SMA200 and everybody is very nervous and this is reflected in a wider trading range, 1067-1105 with two "escapes", 1050 and 1120.



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