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!

babaro

How do I chose the best pair of EMAs

Jim Smith, probably one of the new readers of this blog, asked me a very good question, how I decide what pair of EMAs to use in order to get buy/sell signals and why I am using different EMAs for SPX and for UUP (the dollar index)?

I touched this subject a few times in the past but I am going to give more details today. There is no other way to select a certain pair of EMAs than looking in the past and see what worked then and making the big assumption that is going to work again. Most of the time it does work, market somehow "remembers" its own behavior. EMA25 crossing EMA50 on hourly chart has worked for me for a few good years, this year the system was exceptionally good but the other years were not bad either. This pair of EMAs works for indexes, it doesn't work as well for individual stocks since they are much more volatile and a sharp move up or down it's enough to onset a false buy or sell signal. For an index ETF a move up or down above 2% it's a rare event, for an individual stock this is rather the rule than the exception.

Now let's look at UUP the dollar ETF launched only three years ago so we don't have two much data. This a perfect example for how to chose the best pair of EMAs for a certain ETF. Let's look on daily chart which give us data back to the beginning of 2009. The shorter the EMAs the sooner they are going to give you a buy signal and the sooner is going to give you a sell signal on the way down. For example a EMA10-EMA20 is going to make you more money than EMA25-EMA50 (better entry point, better exit point), but at the same time EMA10-EMA20 is going to give you more false buy/sell signals than EMA25-EMA50. What I want is the shortest pair of EMA that doesn't give a false buy or sell signal over a decent period of time, during a decent uptrend or downtrend. I know it sounds confusing so let's go back to UUP. At the beginning of March UUP reached a higher high then by the end of the month it went down no less than 7%. Was that a correction or the long term trend had changed for real? At that time I couldn't tell (well, the daily and weekly DMI turned red but let's say I couldn't have a clue). By the end of April UUP made a substantial move up but it couldn't go above the March high. In May UUP moved bellow the April's low so now we had a lower high and a fresh lower low a clear sign that UUP was in a downtrend. Looking back at the data I realized the obvious thing, that the April rally was a huge bull trap. My question now was "what was the pair of EMAs that almost gave a "buy" signal, what EMAs touched each other but without crossing because that pair of EMAs was going to give me the best entry point on the next rally? I tried different pairs and realized that EMA15-EMA30 was the one that fulfilled my conditions.

What I had to do now was to watch this pair and see if the buy and sell signals were going to be for real or not. In between "buy" and "sell" signals I was supposed to see the two EMAs touching each other but without crossing. And indeed the buy signal in December 2009 and the sell signal in July 2010 were for real. Since May 2009 when I came out with EMA15-EMA30 pair until now, the timing system was confirmed 7 times, 5 times the EMAs touched without crossing, offering and excellent support level and the buy and sell signal were also for real. So if you want to trade UUP, next time EMA15 is going to cross EMA30 on daily chart you can buy since the uptrend is most likely going to be for real. It's not 100% guaranteed but the chance to be on the right side of the market it's huge.

Different ETFs have slightly different pair of EMAs that works for them. Also you need to decide what time frame are you interested in, long term, short term, intermediate  term (my favorite) or are you interested only when market switches from bear market to bull market or the other way around (for this I am using EMA100 crossing EMA200 on daily chart).

This is how I came up with EMA25 crossing EMA50 on 60 minutes chart for SPX, this is how I came up with 19 days SMA as a confirmation of the EMAs crossing, by testing and testing and testing different indicators. You are not going to find this timing system in any book, you will hardly see DMI mentioned in any book, this is my baby, I came up with this system so you should take the trading advices on this page with a grain of salt. I don't have a background in economics, but at least one person, my kid, thinks that I am the smartest person in the World :) Of course when I am giving him as much candies as he wants. Otherwise...

Good follow up...

... but not enough to change anything significantly at the technical level. SPX managed to climb a bit above the downtrend line and above the declining 5 days moving average. This is the first for SPX since April so the bullish intermediate term momentum is improving.

I want make it clear one more time that the buy/sell signals generated by EMA50 crossing EMA100 on 30 minutes chart are on intermediate time frames (usually I am getting a buy or a sell signal every 3-6 weeks, depending on the market conditions). This is the time frame I am comfortable with. This way I can sleep better at night knowing that day-to-day volatility doesn't affect me. I am still watching my charts every day but only to update my view on the intermediate time frame trend.Mixed picture on NASDAQ as well. We do have a declining 5 day SMA (bearish) and a price above this MA (slightly bullish). On daily chart we can see the price a little bit above SMA200 (neutral, long term), a negative DMI (bearish) and we may see another attempt to climb above the second downtrend line. Long term, NASDAQ has the best looking chart. DOW and S&P500 are slightly bellow SMA200, while Chinese and European markets are the worst, bellow a declining SMA200. Brazilian and Russian market fell somewhere in between. However, on short/intermediary time frames US indexes are lagging so try to figure out what is your time frame.



Looking at FXI, I must say this looks like a "buy" to me. Remember a week or so ago I mentioned a buy signal on FXI. Unfortunately, the buy signal was not confirmed immediately on 60 minutes chart and as expected it gave a sell signal making a potential buyer losing a little bit. When I am getting whip-sawed like this I am going more conservative and look at 60 minutes charts. If I am getting whip-sawed again I am taking my loss and stay in cash because in this case market is trading in range and my timing system doesn't work in this situation. So don't be afraid to take losses here and there. That's OK, it's part of the game. I do accept to be whipsawed on 30 minutes chart, this happened from time to time but if I get whipsawed on 60 minutes chart I am getting out right away and calmly wait for the stock to get out of the trading range.

Look at the UNG chart to see how you can get whipsawed. It traded in a very wide range for two months and finally managed to get out of the trading range a week ago. It is possible that this crappy ETF finally found a bottom?



So let's look again at FXI on 60 minutes chart. As you can see EMA50 just crossed EMA100. This is great, this is what I want to see on SPX. The price is now above a rising 5 day moving average, another positive sign. I want to be clear here, overall, on long term time frame, FXI looks worse than SPX, we have a slightly rising SMA200 for SPX and a slightly declining SMA200 for FXI just a name a major difference between the two. But I don't care about the long term since I am trading on intermediary time frame. Normally I wouldn't think twice about going into an ETF that technically looks like FXI. What makes me a little bit nervous is that the Chinese market reacts too much to the US market. If it's a sell off on Wall Street you will see a sell off in China, if it's a rally in US there is going to be one in China too. So I want to see the US market giving a shot at a rebound. A temporary rebound it's OK for me. I don't like to anticipate breakouts, it's worth waiting for SPX to get above 1,100 and above SMA200.

babaro

P.S. Use the comment form to let me know if you have a stock or an ETF you want to have a look at.

I've seen this movie before

Very good action bullish today but not too much has changed at the technical level. SPX has managed to overcome the resistance around 1075 and closed exactly at the major downtrend trend line. We need to see SPX above 1,107 (where the SMA200 stands now) to give bulls a chance on intermediary or long term time frames. On 30 minutes chart we have conflicting results, price is as close as ever to the 5 day moving average (bullish) but the MA is declining so be very cautions out there.



NASDAQ it's one more time a little bit above SMA200 but we need to see both DOW and SPX doing the same thing. Briefly climbing above SMA200 doesn't mean anything, staying above SMA200, that's the challenge. Again I am not overly excited about today. I need to see more bullish action to make me go long again. What bulls need to do now, more than thinking about going above SMA200 is to defend the lows seen this week. Keep an eye on 1055 and 1045, the most obvious potential support level also on 1,100-1,110 where there is a huge resistance.



All the best!

babaro

Nasdaq looks pretty good but...

Not too much action today, bulls continue to consolidate their position but they still have to overcome some very important resistance levels ahead, particularly SMA200 (1,105) and a nasty downtrend line around 1110 right now. These levels should not to be taken literally (why SMA200 is important and not SMA205?) so I would say let's see S&P above 1,120 before going long.
Once again the Qs look better than both DOW and S&P. They managed to go above the downtrend line, 5 day SMA is flat now and EMA50 crossed EMA100 for the first time since they gave the sell signal on May 4th. This is pretty bullish to me. I need to see 5 day MA pointing up and a confirmation from daily DMA to confirm the uptrend. If this happens I am sure DOW and S&P will follow.


Please notice that SPX chart is on daily and QQQQ is on 30 minutes.

Gold had a nice run since April but starts showing signs of fatigue. As you notice there both an uptrend support line and a downtrend resistance line. I don't particularly like to see this pattern in a stock I own since the break out from the pattern is usually violent. It can break either on the upside or the downside but from my experience, most of the time breaks out against the current trend. You can better see the loss of momentum in the Directional Movement Index (DMI) on the lower panel. DMI turned green on April (cyan arrow) had a nice ride and reached a maximum value on May 12 but now DI+ is almost about to slip bellow DI-. It turned a little bit negative on May21 but it managed to recover and went positive again. I don't see this as a sell signal but as a warning signal. I do expect gold to go a little bit lower, towards the support line at 116.5 then possible another jump towards the resistance line before getting out of the triangle.


All the best!

babaro

Stock Market Update, May 27, 2010

Market rebounded today with a 35 points gain after hitting a lower low yesterday at 1,067. We are just bellow SMA200 on S&P and DOW, while NASDAQ managed to climbed above SMA200.

EMA50 still has to cross EMA100 on 30 minutes chart to give a buy signal but a few individual stocks already gave the buy signal. I am talking here about WLT, AKS, CLF, LVS, TIF, COH, IPG, LXK, ILMN, THC, PNRA, TWC and many others.


EMA50 crossing EMA100 on 30 minutes chart (which roughly corresponds to EMA1 crossing EMA2 on daily chart) is a very powerful timing method for spotting intermediary term trend changes. By using this timing method you can be on the right side of the market during all this corrections and the rallies that follow them. It gives you very few false buy and sell signals (e.g. it didn't gave a buy signal when market rebounded from 1115 to 1170, red arrow). As usual you are not going to buy exactly at the bottom and sell exactly at the top but in between these two you can make a lot of money.

As you notice on WLT chart, the sell signal was around 90 when EMA50 crossed EMA100 from above and the buy signal was generated yesterday around 75. Also notice that priced climbed above SMA240 (5 days), labeled "Avg240" on the chart. I would also want to see this moving average climbing up in the next few days to be comfortable with my bet on WLT.

The same thing needs to happen to S&P to be sure that the correction is over, first EMA50 needs to cross above EMA100 then the price needs to stay above a rising 5 day moving average.

Babaro