Wednesday, January 12, 2011

Bullish on all time frames

A fresh two year high today after an 11 points rally. DMI is now bullish on all time frames and it's really hard to argue with bulls here. How long is this leg going to go up? Who knows! We can only guess.

As I mentioned many times in the last few weeks "volume at price" indicator over the last 5 years, when SPX was exactly at this level, shows a huge volume in the 1220-1320 area with the highest value around 1280. It doesn't mean SPX is going to going to stop here, it means the resistance is higher around this level that it was until now. This is in theory but from the market action in the last few weeks I can't say I saw any resistance from 1220 to 1285 despite the high volume at this price in the past.

What bulls should worry a little bit is that VIX is very low, it's actually as low as it was in April 2010. It can go lower than this (in October 2007 was around 10) but this low value indicates than bulls are getting a little bit too enthusiastic.

A potential bearish warning is a huge negative divergence in MACD. The negative divergence is also present on weekly chart but is not as obvious as on daily chart.

I used many indicators and oscillators over the years, I looked at trend lines, different patterns (head and shoulder, wedges, symmetrical triangles), at candlesticks, negative or positive divergences... you name it. They all have their merit but in terms of reliability none of them are coming even close to EMAs crossing and to the confirmation I am getting from daily DMI. I hope this year I am going to be more disciplined than last year and listen carefully to my EMAs. Saying this, I am not going to go short until I see EMA 25 slipping bellow EMA 50. IF I am going to gamble a little bit and go short before EMA crossing I am going to go very "light" with some SDS shares but I am going to buy some "puts" to hedge my position. Since VIX is so low options are cheap. Since it's the earning season I am also speculating a little bit on "straddles (buy a "put" and a "call" at the same time and gain if the underlying security has a strong move either up or down). With straddles the risk is low since you are long and short at the same time but from the same reason the gains are not spectacular.

Have a nice evening and a profitable trading day tomorrow!


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