Tuesday, July 20, 2010

Bounce up from the downtrend line

Some interesting development this week. The downtrend line seems to hold well, not only that but we saw a bounce up today. Daily DMI still negative but is clearly losing momentum so even a modest climb up may "convince" the DMI to turn green. I put a lot of weight on daily DMI more than on any other indicator. The number of false positive or false negative signals is pretty low. Once DMI changes direction most likely will stay like that for a while. We may find some false signals especially after powerful bull or bear rallies. Then DMI may change direction for a couple of daysjust to move back in line afterwards. However, if DMI changes again direction against the main trend that is most likely going to be for real. Translating this information to the current market IF daily DMI turns positive again most likely is going to be for real. Most of the time daily DMI  changes direction for good. Some times, after a powerful run in one direction DMI briefly changes direction, giving a warning that the main trend may change. DMI turns in the direction of the main trend just to give up in the next few days this time for good.

For this momentum to go up it is necessary that for SPX to make a higher high, above the 1098 high established on Thursday

On 60 minutes chart we can see the hourly DMI turning negative before switching to positive again. This is the 4th signal in less than 5 days. In all fairness, that's how hourly DMI is supposed to behave, a good buy/sell signal after the market experienced a powerful trend up or down, then a lot of "whip-saws". It worked better than anything else in the last 60 days but this may come to an end. It is not supposed work as a timing indicator but as a confirmation signal for other indicators.

Have a look at some bad stock that are kicking right now pretty well: AKS, X, HOG, JCP,
 GNK.  I am preparing to buy AMLN "straddle" that has it's volatility shrinking. Look at both SVI and the Bollinger Bands that are shrinking, the calm before the storm. SVI stands for Shaffer's Volatility Index, it is designed to spot diferences in volatility of a certain stock. It's an invaluable tool for option players. 


P.S. Good luck with your trading. I am playing "straddles" during earnings season. I am making money risk free since the I am both long and short on the same stock (via options) and just wait to see a big move either up or down after earnings announcement.

1 comment:

  1. I agree.Ballinger is very tight.
    Next long leg (a leg made of more legs ) will be very bearish.It's the calm before the storm.


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