10/10/2008 Market Recap: Close near high of the day is needed

The market action on Friday looks pretty good, but it may not mean anything because the quick rally at the end of day seems like a short covering.  Because of the G7 meeting in the weekend, many bears would rather not to carry short positions to Monday.  Therefore, we need a follow-through on Monday.  Recently the market is very panic and many TA signals on my daily watch list have been extremely oversold, while the market has not shown any sign of recovery.  Again, if you insist to catch the bottom, don't open heavy positions and don't judge the bottom simply by a few indicators.  At least the first step should be a close near height of the day, unlike the last week every time the bell was to ring then the market started to sold off, which indicated that people were unconfident to hold long positions overnight.  If you catch the "bottom" a few days ago, this is not the time to stop loss, but don't average down either, just be patient and wait for the confirmation of the reversal.

0.0.1 Market Top/Bottomed Watch.  Look at the chart again, it is still like a bottom.  However it is prudent to wait for the follow-through on Monday.  The best confirmation is gap up and close near high of the day, so a Bullish Morning Star pattern is formed, then the likelihood of reversal will be high.

2.3.3 NYSE Total Volume.  It looks like a bottom.  Again, follow-through is the key.

2.4.2 NYSE - Issues Advancing.  NYADV is still high lows.  Although the market kept dropping everyday, advancing issues didn't decrease so much, which is a good sign.

2.0.0 Volatility Index (Daily).  The pattern looks like a Bearish Rising Wedge, which rallied too quickly to be sustainable.  2.0.1 Volatility Index (Weekly), on the weekly chart, this is the seventhly up week, which is the historical record.

1.1.4 PowerShares QQQ Trust (QQQQ 60 min).  QQQQ seems encouraging.  Bullish falling wedge, and MACD and RSI show positive divergence as well.  Note the RSI indicator at the top of the chart, the trend reversal won't be possible before RSI breaks above 50.

10/09/2008 Market Recap: Is this time different?

The market dropped almost like a free fall, which is totally out of my expectation.  Today I nearly believed that this time might be indeed different until I checked the monthly chart of major indices and calculated the declining in the worst months in 2001 and 2002.  I hope the following chart could let you feel better.  What I want to say is that the history will repeat and it is ultimately important to be patient no matter you hold any position or not.

Here is an excerpt from a blog(http://www.thekirkreport.com/2008/10/the-stock-marke.html), which is helpful in my opinion:

They say you have to listen to the message of the market and that message today is to run for your life. Every business in America is going bankrupt and taking you, your financial future, job, savings, and everything you know with it. If you believe that, you should have been selling everything today. I don't, which is why I'm going to the mattresses and fighting the good fight every single day. Sure, the battle scars are starting to get numerous and even I am having a difficult time staying opportunistic, but everything I've worked for and learned over the past twenty years has prepared me for what we're seeing now. My only hope is that I stay up to the challenge and hold true to my strategy even though like everyone else, I'd very much like to run for my life and sell & short everything in sight.

2.4.2 NYSE - Issues Advancing.  NYADV is still a higher low today.  Therefore the hope isn't gone.

1.0.5 Major Accumulation/Distribution Days.  Today is the third Major Distribution Day.  According to the history there will be a decent rally after three major distribution days.  However note that last time the rally came after four major distribution days.  So it is not the time to be optimistic yet.

1.1.4 PowerShares QQQ Trust (QQQQ 60 min).  Among all major indices only QQQQ shows a piece of hope.  It is still in a bullish falling wedge, and MACD and RSI show positive divergence as well.

2.0.0 Volatility Index (Daily).  The chart says today is not the bottom, but STO has reached a level where a reversal happened several times in the past.

 

5.0.2 S&P Sector Bullish Percent Index.  Maybe "overbought" doesn't mean anything at the time being.  But let's take a look at major sectors anyway.  Bullish Percent Index has reached a 10-year low now.

10/08/2008 Market Recap: Almost a reversal day

Today is a bit discouraging because a reversal day was almost there but eventually faded in the selling off.  Under this situation, one should keep calm and be patient.  However I would like to remind you again that the capital preservation is important.  Today is unlikely a bottom according to 2.0.0 Volatility Index (Daily) because the market rarely reaches bottom while VIX is still a big white candle.

What about tomorrow?  Now I feel hesitate to say the market is due for a rebound because of being oversold.  But there is no straight down market, and I believe a reversal could happen at any time.  In most cases the bottom is formed as an intraday reversal, but not always.  It is also possible that the reversal day is formed on today and tomorrow.  On July 14th there was also a selling off after an intraday reversal, and the market soared up on the next day.  Therefore, the history might repeat.

1.0.4 S&P 500 SPDRs (SPY 15 min), 1.1.5 PowerShares QQQ Trust (QQQQ 15 min).  Today's selling off can also be considered as the kiss back after the breakout of bullish falling wedge, which supports the possibility of tomorrow's rally.

3.2.0 CurrencyShares Japanese Yen Trust (FXY Daily).  Japanese Yen is overbought, and the candle looks like a reversal.  The retreat of Japanese Yen helps carry trade and is in turn bullish to the stock market.  Although it is said that the influence of carry trade is almost gone, my observation shows that the trend of Yen is nearly an inverse of the stock market.  You may refer to the relationship between the intraday trend of Yen and SPY on 2.1.0 S&P 500 SPDRs (SPY 5 min).

3.2.4 Yen RSI and the Market Top/Bottom.  When Yen enters into the overbought region, the green curve denotes the stock market is very likely bottomed, isn't it?  Today Yen is finally there, which is a good sign.

1.3.7 Russell 3000 Dominant Price-Volume Relationships, 1540 stocks price down volume up.  Among recent six days, four days the dominant price-volume relationship is price down volume up, which indicates the market is extremely oversold.

2.4.2 NYSE - Issues Advancing.  This is the most encouraging signal today.  NYADV is still higher low.  As long as no lower low shows up, we have a piece of hope.

10/07/2008 Market Recap: Very Close

Today is the fourth day I gave the wrong prediction. Many people have been talking about that TA seems useless at the moment because the economy is in such a bad shape. However, I still believe that a bottom is pretty close. Of course, I have kept saying that bottom fishing is against the trend, and one should be cautious and always keep some cash no matter how sure you are. Hopefully you still have some bullets left now. I believe that, the current situation is like a pressed spring, once the market bounces back up, the probability of seeing a major accumulation day is very high. Keep in mind that a major accumulation day has shown up before, opening long positions after two major accumulation days is proven to be safe and profitable according to the past data.

The market might go up tomorrow, in my opinion. The reason is still oversold.

0.0.0 Signal Watch and Daily Highlights. The last signal on my watch list is oversold too, so there is no signal which is not in an oversold status -- except for no mid-term buy signal.

2.4.2 NYSE - Issues Advancing. This is the only good news today. As I mentioned yesterday, no matter what, NYADV should not form a lower low, otherwise SPX may have a lower close which is lower than today's close. So far no lower low happens. I don't know if or not it will form a lower low tomorrow. But the market may bounce back while NYADV gets oversold. Look at the following chart, every time the blue curve reaches the green horizontal green lines (denoted by green dashed line), the market always bounces back. In this year this pattern is always right. Hopefully this time is no exception, and TA still works.

1.0.5 Major Accumulation/Distribution Days. Today is another major distribution day. According to the patterns on the chart (note the places marked by green circles and blue dashed lines), the market will have a nice rally after 2-3 major distribution days. However, we should be cautious because there are only two major accumulation days so far, and the third one could come. Take notice that prior to the big rally on Sep 18th/19th there were 4 major distribution days.

1.0.4 S&P 500 SPDRs (SPY 15 min), 1.1.5 PowerShares QQQ Trust (QQQQ 15 min), 1.2.4 Diamonds (DIA 15 min), MACD and RSI show positive divergence, which is an early sign of rally.

About $LIBOR in StockCharts.com

I got a feedback about the using of $LIBOR:$UST1M to check the current credit risk, which appears that I was totally wrong. Since the feedback is in the comment area of this blog, I assume that most of you might not notice it so as granted by the original author, I put the commentary here, further feedbacks are welcome.

Your idea of LIBOR and UST3M Spread (also known as TED Spread) is conceptually correct. However, you may not be aware that the $LIBOR in StockCharts is NOT the LIBOR yield itself! It has the opposite correlation with the rate, just like the relationship between IEF and $TNX. So your $LIBOR:$UST1M ratio is misleading. Stockcharts has almost no chart to represent 3 months Treasury Bill. So I use BIL (an ETF) as a replacement. The ratio should be BIL:$LIBOR. Note that the ratio has been inversed in order to offset the bond price/yield relationship!

10/06/2008 Market Recap: Market Bottomed?

Has the market bottomed?  0.0.1 Market Top/Bottomed Watch, it seems so, at least very close.  I say close because the rally near the end of trading hours was a bit over rush, and the typical reversal usually closes in green.  So today may not mean anything, and we have to see if tomorrow the market will follow through.

Will there be a follow through tomorrow?  Maybe, the main reason is that the market is  very very oversold.  Note that my prediction about the next day market direction has been wrong for three days, which is rare in the past.  Therefore I am not sure if the oversold market could be even more oversold tomorrow.  0.0.0 Signal Watch and Daily Highlights has all the signals, and all short-term signals as well as breadth are oversold except that there is no mid-term buy signal.  You may refer to my chart book to see how over sold the market is at the time being.

1.3.7 Russell 3000 Dominant Price-Volume Relationships.  This is the main reason why I think the market will go up tomorrow.  During the past three days, the dominant price-volume relationships are price down volume up, and it seems highly capitulation.  Therefore the probability of short-term rally is high.

2.4.4 NYSE McClellan Oscillator,  it is oversold.  As far as I know, the market will have a good chance to bounce back up once NYMO is oversold.  Also note that it is still positive divergence, which is very encouraging.

2.4.2 NYSE - Issues Advancing.  This is very encouraging, too because it is higher low so far.  However, it's better to not see it going down tomorrow, because a lower low means SPX will have a lower close than tomorrow's close.  From the perspective of this indicator, the follow through tomorrow is very important, at least a heavy selling off is no good.

3.0.2 Credit Risk Watch.  This chart is what I am worrying about.  LIBOR spread is still very high, and the market cannot rally without solving this problem.  So the government would better stand out.  If you don't understand LIBOR, just look at the relationship between the black curve and the green curve which denotes the market, the higher is the black curve, more bearish is the market.

A simple explanation of LIBOR spread: in plain English LIBOR is the interest rate that banks borrow money from each other.  UST3M is the yield of the treasury, which can be considered as an interest rate.  Because of the credit of US government, the treasury is considered risk-free.  The spread of LIBOR and UST3M is the difference between risky and risk-free loans.  A big spread means the risk of inter-bank loan is high, and banks are reluctant to borrow money to each other, then there is no liquidity on the market.  The data of LIBOR in StockCharts is 1-month, so I use UST1M instead of UST3M.

3.0.1 Yield Curve, UST3M. On the chart there is a big discrepancy between the projected Fed rate and current target rate, which means it is highly necessary to have an emergency rate cut.

1.4.4 TSE McClellan Oscillator.  Canadian market is extremely oversold as well.  Today the market sold off for 1180 plus (equivalent to 1000 points for INDU).

Line of Gravity

Tonight, I want to share with you a chart called "Line of Gravity" invented by a WS genius (I cannot spell his name, sorry). It's basically 10% envelope of ( EMA30 + EMA72 ) / 2 for INDU only.

A very basic theory about this "Line of Gravity" chart is if the price drops out of the envelope, it will rally back and such kind of chances (of being dropped out of the envelope) are very rare and therefore it's "once in a life time chance" (sorry, I cannot think of a right English word for this. By the way, the market summary you see everyday is actually translated from my Chinese summary by my friend. I myself is too busy to do the translation.)

OK, chart says everything. Let's look at all the history charts for the "once in a life time chance". And of course YMYD. Cheers!

Oh, my daily summary was ready and my friend is now busy translating it, so stay toned.

 

 

Feedback concerning mid-term trend

Today a reader wrote to me and asked why my mid-term outlook was bullish in the past two weeks albeit the market kept selling off. He mentioned that there were many mid-term sell signals, especially MACD had been sell since Sep 4th.

Firstly I would like to clarify that, mid-term and short-term are different, a bullish mid-term outlook has nothing to do with the short-term trend whether the market goes up or down.

Indeed, The government intervention on Sep 19th did bring some trouble to my trading. On the other hand, the chart 0.0.1 did indicate a bottom (refer to the following chart which still contains false judgement), and 1.0.6 had been confirmed buy signal. Therefore, from the perspective of the technical analysis, it was right to net long from Sep 19th to Sep 26th by following TA trading signals.

On Monday the market broke out downward, and this indicates that the previous bottom is a false signal. Consequently, I did not recommend to catch the bottom from that time. In my reports, I kept saying that I was not sure if there would be a lower low, bottom-fishing is ahead of signal, be cautious to long, etc. Note that what I mentioned was referring to short-term.

Why was the mid-term outlook bullish? As I explained, the most important is 0.0.3 VIX:VXV, which indicated that 90-day projected volatility should be lower than the current value, which in turn meant that the market after 90 days might be higher than current close. In addition, 2.4.3 was extremely oversold, 2.4.2 and 2.4.4 showed typical bottoming pattern, positive divergence. Under such situation, the risk of net short was relatively high, and the best strategy should be holding cash if not day trading. In fact, this was what many professional traders were doing.

Concerning why my mid-term outlook was bullish without clear mid-term buy signals, as I mentioned in my report, the safe strategy is to wait for the mid-term buy signal, which is the mid-term trading signal instead of forecast. Forecast is conceptually different from trading. On the other hand, sometimes the mid-term signals can be whipsaw. For instance, 1.0.6 occasionally flipped to buy after Sep 16th. Previously I also explained that it is not guaranteed to be profitable by blindly following mid-term signal. By the way, many back tests show that simply following MACD is not profitable either.

My analysis is based on the market breadth, not technical indicators. The reason is as aforementioned, the back test shows that indicators are not accurate, but accuracy of breadth signals are much higher. Nevertheless, the timing of breadth could be more or less off, and this is exactly why the market has not rallied after two weeks. Anyway, there are many evidences on my daily report and these evidence should not be overlooked just because MACD is still a sell signal. Let me emphasis again, my back test shows that MACD itself doesn't work reliably, neither RSI, neither STO, nor any other simple technical indicators.

The point is that I must show the evidences that I see on the charts from time to time, and make a conclusion from these evidences. I cannot say that -- well, the mid-term signal is still sell, so these oversold signals as well as divergence are pointless, let's forget them. However I have no control to if or not these signals are valid or when they will be approved by the market. There is no 100% accurate signal, and my emphasis is on the probability over the long term. To achieve a steady long term probability, it is important to eliminate the thinking of maybe probably perhaps... this time is different.