Daily DMI slightly green

Very bullish week. DMI turned positive for the second time and it is possible that we are going to get out of the 1050-1105 trading range for good. Still I want to see SPX above 1105 before thinking about a possible long term leg up from here. Remember, money can be made either long or short so the least biased in any direction the better. Let's see SPX above 1105 and above SMA200 first!

Notice two support areas, around 1065 and 1050 and the resistance line at 1105. We do have an incipient uptrend line. Of course we need more points to build a nice uptrend line but it looks promising so far with too lows at 1022 and 1064 (or better 1072) and two higher highs, 1098 and 1102.

Price moved above both SMA50 (the "orwellian" 1984) and EMA50 (1092), still bellow SMA200 but above EMA200. What's the difference between Simple Moving Average (SMA) and Exponential Moving Average (EMA)? A simple moving average, say SMA50,  adds all the closing day values then divides the sum by 50. There is a potential big problem with computing data in this manner, every day of the last 50 has an equal weight (importance). However, if in the last, say 10 days, market made a big move the move is not going to be that obvious by looking at SMA. This abnormality is corrected by EMA that gives the recent data more weight. The majority of the people, especially older traders, still stick with what they learn first, SMA, that's why you will rarely hear anything about EMAs. Personally, I find EMAs more meaningful, especially when I am looking at moving averages crossing each other.

This is the most bullish momentum since the beginning of the plunge, in April as evidenced by the daily DMI. Most of the time, once DMI changes direction is stays that way for a long period of time. Sometimes, it gives first a warning, moves back to the old direction then gives the real signal. The warning and the actual signal are spaced only a few days apart. The only time this is not true is when market is trading in range (look at November-December 2009 trading range). If this market is going to slip again in the 1050-1105 trading range you will see DMI turning negative one more time but if you see DMI consolidating its bullish position and no turn to red in the next few days we are finally going to go see a decent leg up. DMI is not perfect but for me at least is the best indicator. When the signal is fake it only last a few days. I found this indicator by testing 50+ indicators and oscillators. You will hardly see people even mentioning DMI on their book or their website but everybody who tried it at my suggestion said is has improved their trading by a lot.

This is a turning point, whoever wins the daily DMI wins the the next leg.

"Volume at price" indicator shows that most of the volume happened around 1100 so this is a very important support/resistance level.

Have a happy trading week!

babaro

OK bulls, you've got my attention!

Very good action today on bulls part with SPX going over SMA200 for the first time since the beginning of the correction! This come on top of EMA50 crossing EMA100 on 30 minutes chart and the climbing above the downtrend line seen on Friday. Even more encouraging is that all indexes look at least as good as SPX, especially NASDAQ the only US index that was above SMA200 until today. Also notice EMA50 on daily chart that is not going down anymore and looks pretty flat to me.

The big question now is: "is it going to hold above SMA200 (1,108)"? Going above or bellow a moving average is one thing and staying there is another matter. I would still want to see a nice confirmation from EMAs crossing on 60 minutes chart and also want to see DMI turning positive on daily chart.

Bears are now talking about a "head and shoulders" with a left shoulder at 1150, a head at 1220 and another shoulder at 1150 before a plunge bellow 1050. While this may be possible I wont' venture into such a scenario because I don't like to anticipate markets' moves, especially on long term time frames. What I want to see is a change in momentum on intermediate time frames then to ride the wave as much as possible. I already have the buy signal on all 3 indexes (4 actually, RUSSELL has also turned bullish) but I would like to take an extra step, EMAs crossing on daily chart both because I've got a false buy signal on NASDAQ 10-12 days ago and because SPX is too close to SMA200 to be too adventurous. When SPX is either a lot above or bellow SMA200 it's much easier to take a decision.

What about the volume today? I must admit I rarely consider the volume! I know I am going to be "axed" by the majority of those who read this blog but I don't weight this indicator as much as other people do. Not even close! I hear people saying volume is more important than the price. I completely disagree, nothing is more important than the price, everything else (volume included) only confirm a certain move. As somebody said to me a while ago "only price pays" but this not the only reason I avoid reading too much into the volume. Fist of all, moves on the downside are always much more violent than those on the upside (no matter what some people believe fear is more powerful than greed). That is the reason most of the people dismissing a market move because of a poor volume are bears. What bears don't take into account during the rallies is that a 1-2 days plunge takes place on a large volume, indeed, but if this is followed by 10 days on the upside on lower volume than any of the two days, the move on the upside is still relevant. Just try to add those relatively smaller volumes to see what you get. What I find relevant is "volume at price" indicator, that gives me the volume occurred at a certain price over a defined period of time. Not only that but it tells me if at a certain price the bulls or the bears were in control. Using this indicator I can find decent levels of support of resistance that sometimes may not be as easy to identify with the naked eye. For example 1,100 is the level where most of the buying occurred since the beginning of the big rally 14 months ago but also since the 2007 top.

The only exception I make regarding volume is when the index breaks obvious levels of resistance, support or moving averages. Then I would like to see a nice confirmation coming from the volume. Today was one of those days, SPX overcame both the resistance level at 1,100 and SMA200. The volume was not great, not only for S&P but also for NASDAQ and DOW. It was barely above yesterday's volume and bellow the 50 day moving average. What does this mean? It means we have one more reason to be cautions about today's rally. We need to see a nice consolidation above these levels. Should we dismiss then the rally today? No, we shouldn't. Looking just a little bit back, in February when the last leg of the rally started, we can see that the move above the downtrend line, that pretty put bulls in control, was not accompanied by a great volume. That didn't stop SPX moving another 150 points up.

babaro

I found this on the Bloomberg's site:

“No one disregards technical analysis now,” said Sorrentino. “If they do so, they do so at their own peril. Technical analysis has become increasingly important because of so much money chasing around. The momentum of money has become more important than the fundamentals beneath it.”

Yet so many people ignore Technical Analysis.