Thursday, August 12, 2010

Worst day in 6 weeks

Unfortunately, I was right about the rising wedge. Today we had a violent move down and many technical parameters have been changed. The most important is EMA25 crossing EMA50 on 60 minutes chart that virtually gave a sell signal for the first time since July 9th. DMI turned negative, SMA200 did not hold and even worst 1100 level did not hold either. Once again we slipped into the 1045-1105 trading range.

What should we expect next? Let's see what are the potential support levels. A good support area is around 1070. We do have a support line there but also, looking at "volume at price", I notice that 1070 was the level where most of the volume happen since the top on April 26 (I mentioned this before). The good news for bulls is that at 1070 bears were a little bit more in control than the bulls. Why is this good news for the bulls? At any given moment a number of bulls or bears are getting trapped. Imagine going short at 1070 then see the market going to 1129. You are losing money and when this happen the last thing in your mind is to make a profit. What you want is to get even. When a significant number of people get trapped at the same level that level is going to become support or  resistance. Conventionally, if the price is coming down we say "X" level will probably act as support, if price is going up we are saying that "X" level is going to act as resistance. "Volume at price" indicator adds a new dimension, it can tell us if a certain level is more likely to act as support rather than resistance (or more as a resistance than a support). In our case since bears were a little bit more in control at 1070 we should expect this level to act more as a support than a resistance. In other words if price is coming down (like right now) we should expect 1070 to act as support but if the price is bellow 1070 and rising we should not expect 1070 to put too much resistance. Exactly the opposite is 1100 level. There, bulls were more in control than bears, most of the volume was due to bulls going long. Consequently, 1100 is more a resistance than a support area and I am sure you already noticed that SPX stumbled every time rose towards 1100 but on the way down it didn't act as a support.

What other levels of support we can talk about. 1040-1050 is the most obvious one,  in that area most of the volume was due to the the bears.

Looking at weekly chart I want to remind you that the 2003-2007 bull market  found support at SMA75. When this level was broken market switched to the bear market. Right now EMA75 (75 weeks) is around 1040, very close! In terms of EMAs crossing the bull market started in 2003 when EMA20 crossed EMA40 from bellow and ended when EMA20 crossed EMA40 from above (again, this is on weekly chart, on daily chart this corresponds to EMA100 crossing EMA200).  EMAs did not cross yet so we should not prematurely celebrate the death of the bull market that began in 2009. This was on 2003-2007, it doesn't mean is going to happen exactly at this values but we need a starting point. Please note that while EMA20 crossing EMA40 gave the correct beginning and the end of the bull market on all indexes, Dow and Nasdaq did not found support at SMA75. This is the main reason I trust more two EMAs crossing than a single moving average. Russel 3000 also found support at SMA75.

All the best!


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