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...

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.

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