Friday, October 15, 2004
Technical Update: Maintain Bearish Bias
dated Oct 14, 2300hrs
Trading day Wednesday delivered an outside down day on the S&P, which is a bearish candlestick. However, the NASDAQ did not record an outside down day. Commodity and energy stocks tanked on Wednesday but tech stocks were held up somewhat by good reports from Intel and Yahoo.
The 30-day MA of the A/D line peaked on the Sept 21 Real Accumulation Day and has been falling ever since. The earliest this intermediate-term indicator will become oversold is early November, coinciding with election day. So we might get our post-election rally after all. The McClellan Summation Indices on either breadth or volume have stalled somewhat but they are not as bearish as the 30-day.
On the shorter term indicators, the 10-day MA of the A/D line (our oscillator) will be oversold next Tue-Thur. However any oversold rally next week will be short lived, because the intermediate-term indicators are still overbought and tilting down. For now, I will maintain a bearish bias and will be looking to short strength for this week only.
The Investor Intelligence readings are now bordering on excessive bullishness (54.1% bulls and 22.4% bears). However, the 10-day MA of the CBOE put/call ratio is still stalling at a neutral level. Putting all these facts together, we get a market that cannot seem to make up its mind. I will keep all trades on a very short-term basis at the moment, assuming I do make any at all.
The market looks like it will spend the rest of October consolidating. I am still hoping that the S&P will turn its monthly chart down on trade below 1099 and find a low quickly in price and time. If this coincides with maximum oversold readings on the indicators, it will set up a solid trade to the upside.
Let me re-introduce another trading signal I have mentioned before. A Suping Buy Signal occurs when you have downtrend punctuated suddenly by an outside up day. It is a reversal signal that indicates a turn from down to up. For example, look how the Suping buy signal registered by the S&P on 28 Sept led to a 30 point advance within six trading days --- not a bad trade. On the other hand, the Suping sell signal registered by the NASDAQ on 26 April led to a waterfall decline of over 100 points within five trading days.
dated Oct 14, 2300hrs
Trading day Wednesday delivered an outside down day on the S&P, which is a bearish candlestick. However, the NASDAQ did not record an outside down day. Commodity and energy stocks tanked on Wednesday but tech stocks were held up somewhat by good reports from Intel and Yahoo.
The 30-day MA of the A/D line peaked on the Sept 21 Real Accumulation Day and has been falling ever since. The earliest this intermediate-term indicator will become oversold is early November, coinciding with election day. So we might get our post-election rally after all. The McClellan Summation Indices on either breadth or volume have stalled somewhat but they are not as bearish as the 30-day.
On the shorter term indicators, the 10-day MA of the A/D line (our oscillator) will be oversold next Tue-Thur. However any oversold rally next week will be short lived, because the intermediate-term indicators are still overbought and tilting down. For now, I will maintain a bearish bias and will be looking to short strength for this week only.
The Investor Intelligence readings are now bordering on excessive bullishness (54.1% bulls and 22.4% bears). However, the 10-day MA of the CBOE put/call ratio is still stalling at a neutral level. Putting all these facts together, we get a market that cannot seem to make up its mind. I will keep all trades on a very short-term basis at the moment, assuming I do make any at all.
The market looks like it will spend the rest of October consolidating. I am still hoping that the S&P will turn its monthly chart down on trade below 1099 and find a low quickly in price and time. If this coincides with maximum oversold readings on the indicators, it will set up a solid trade to the upside.
Let me re-introduce another trading signal I have mentioned before. A Suping Buy Signal occurs when you have downtrend punctuated suddenly by an outside up day. It is a reversal signal that indicates a turn from down to up. For example, look how the Suping buy signal registered by the S&P on 28 Sept led to a 30 point advance within six trading days --- not a bad trade. On the other hand, the Suping sell signal registered by the NASDAQ on 26 April led to a waterfall decline of over 100 points within five trading days.
Thursday, October 14, 2004
Technical Update: Short Into Strength But With Tight Stops
dated 13 Oct 2004
First of all, please allow me to clarify the trading signals I discussed in the previous post. A Kaiser Soze Buy Signal happens when you have an outside down day (which is typically a bearish candlestick) which is subsequently followed by an outside up day. It is the reversal of a reversal. Conversely for Kaiser Soze Sell Signals. Take the DJIA for instance. Oct 6 was an outside up day. Normally that would be interpreted as being a bullish candlestick. However Oct 7 was an outside down day (which engulfed the outside up day). Hence a Kaiser Soze Sell Signal was issued on the DJIA. As of now, the downtrend continues unabated, insignificant intervening oversold rallies notwithstanding.
If you refer to the weekly chart of the S&P 500, the week ending Sept 20 was an outside down week, but the week ending Sept 27 was an upside up week (that engulfed the outside down week). Hence it was a Kaiser Soze Buy Signal. Subsequently the S&P zoomed up to grab the bear's coats at 1142. But alas, it turned out to be a false breakout, although it sure was good while it lasted (for those who were long, that is). The overbought condition on the intermediate term indicators weighed on the market sufficiently to suffocate it, despite the fact that bullish sentiment was not yet an at excessive level. The market indeed loves to frustrate. But in defending the year-long trading range and preventing its resolution to the upside, the market did its talking, and we would be wise to listen carefully.
Currently, the market still remains overbought although short-term indicators like the McClellan Oscillators based on either breadth or volume are neutral and appear to be moving down to oversold. Still, the weight is on the downside and I would be looking to short into strength. On the market open, I tried to enter a sell position on the NDX futures at 1459. Unfortunately, the futures market only traded to 1457.5 at the opening bell before reversing down sharply. If sell positions are entered, I will keep the stops tight. For now, I believe that the next down swing has already started. Short term support for the S&P may be found at the 200-day moving average at 1120.04, followed by 1115.95 which is the low of Oct 1's Real Accumulation Day, and further down, at the 50-day moving average at 1107.67.
Back to the topic of buy/sell signals, take a look at our local stock Datacraft(US$) which was pointed out by my remisier in an email some days ago. I cannot remember exactly what my remisier wrote, but on looking at the chart, I realized that on Oct 4, Datacraft issued an Expansion Pivot buy signal --- defined to be an up day whose range is the largest amongst the previous 9 trading days (an NR9 day), which breaks the stock out of the 9-day trading range, and which also break up above the 50-day simple moving average. Three things to remember --- largest range in 9 days, break out of 9 day range, and break above 50-day MA. Not only did Datacraft issue an Expansion Pivot buy signal, but it also did so on volume that was above the 50-day MA of volume. The stock subsequently rose to 0.875 for a 9.5 cent gain within two trading days. Not bad.
Subsequently however, the weakness of the overseas NASDAQ weighed in and dragged the stock lower to test the 20-day MA --- this probably flushed out some stops. For now, the stocks appears to be trying to break out of a steep downtrend which can be seen on the weekly chart. Note how 5 waves down has been carved out on the weekly chart. I would guess that the stock will now try to back-and-fill in order to gain momentum and build a solid base for a breakout. Stiff resistance is going to be encountered at 0.93. Trade below 0.7 would be a warning flag of more downside to come.
dated 13 Oct 2004
First of all, please allow me to clarify the trading signals I discussed in the previous post. A Kaiser Soze Buy Signal happens when you have an outside down day (which is typically a bearish candlestick) which is subsequently followed by an outside up day. It is the reversal of a reversal. Conversely for Kaiser Soze Sell Signals. Take the DJIA for instance. Oct 6 was an outside up day. Normally that would be interpreted as being a bullish candlestick. However Oct 7 was an outside down day (which engulfed the outside up day). Hence a Kaiser Soze Sell Signal was issued on the DJIA. As of now, the downtrend continues unabated, insignificant intervening oversold rallies notwithstanding.
If you refer to the weekly chart of the S&P 500, the week ending Sept 20 was an outside down week, but the week ending Sept 27 was an upside up week (that engulfed the outside down week). Hence it was a Kaiser Soze Buy Signal. Subsequently the S&P zoomed up to grab the bear's coats at 1142. But alas, it turned out to be a false breakout, although it sure was good while it lasted (for those who were long, that is). The overbought condition on the intermediate term indicators weighed on the market sufficiently to suffocate it, despite the fact that bullish sentiment was not yet an at excessive level. The market indeed loves to frustrate. But in defending the year-long trading range and preventing its resolution to the upside, the market did its talking, and we would be wise to listen carefully.
Currently, the market still remains overbought although short-term indicators like the McClellan Oscillators based on either breadth or volume are neutral and appear to be moving down to oversold. Still, the weight is on the downside and I would be looking to short into strength. On the market open, I tried to enter a sell position on the NDX futures at 1459. Unfortunately, the futures market only traded to 1457.5 at the opening bell before reversing down sharply. If sell positions are entered, I will keep the stops tight. For now, I believe that the next down swing has already started. Short term support for the S&P may be found at the 200-day moving average at 1120.04, followed by 1115.95 which is the low of Oct 1's Real Accumulation Day, and further down, at the 50-day moving average at 1107.67.
Back to the topic of buy/sell signals, take a look at our local stock Datacraft(US$) which was pointed out by my remisier in an email some days ago. I cannot remember exactly what my remisier wrote, but on looking at the chart, I realized that on Oct 4, Datacraft issued an Expansion Pivot buy signal --- defined to be an up day whose range is the largest amongst the previous 9 trading days (an NR9 day), which breaks the stock out of the 9-day trading range, and which also break up above the 50-day simple moving average. Three things to remember --- largest range in 9 days, break out of 9 day range, and break above 50-day MA. Not only did Datacraft issue an Expansion Pivot buy signal, but it also did so on volume that was above the 50-day MA of volume. The stock subsequently rose to 0.875 for a 9.5 cent gain within two trading days. Not bad.
Subsequently however, the weakness of the overseas NASDAQ weighed in and dragged the stock lower to test the 20-day MA --- this probably flushed out some stops. For now, the stocks appears to be trying to break out of a steep downtrend which can be seen on the weekly chart. Note how 5 waves down has been carved out on the weekly chart. I would guess that the stock will now try to back-and-fill in order to gain momentum and build a solid base for a breakout. Stiff resistance is going to be encountered at 0.93. Trade below 0.7 would be a warning flag of more downside to come.
Tuesday, October 12, 2004
Technical update
dated 12 October
Last week, the S&P gave a weekly close below the pivotal 1123 level, signifying that a defensive posture must now be taken. It is likely that upon turning its quarterly chart up on Wednesday trade above 1140.85, the S&P has decided that its agenda for this swing has been fulfilled and that it is game over now (read: high noon).
It is not unusual for the index to pull back and genuflect upon making such a major move as turning its quarterly chart up. However, the Real Distribution Day scored by the S&P on Thursday and by the NASDAQ on Friday, as well as the weekly close below such a key level as S&P 1123 means that the bears have once again defended the year-long trading range and successfully prevented its resolution to the upside.
The first week of October is usually the last week for a bearish pivot in this timeframe. It is therefore likely that S&P 1142 has defined a swing high.
Intermediate-term indicators are overbought (though not overly so) and are cutting down in a more decisive fashion now after the negative price action last Thursday and Friday. This puts further weight on the notion that a swing high has already been achieved.
On a short-term basis, the oscillator (10-day MA of A/D) is overbought but the McClellan oscillator on both breadth and volume suggests that we are moving in the direction of oversold although we are definitely not there yet. Bearishly however, the short-term indicators have made a negative divergence against the 01 Oct high, in that the market rallied to a higher high last Wednesday but the oscillators moved to a lower high last Wednesday as compared to 01 Oct.
In terms of sentiment, we are tilting ever more in the bullish direction as indicated by market surveys. However the 10-day MA of the put/call ratio stubbonly remains at neutral. As such the downside will not be severe. But coupled with the overbought readings on the intermediate-term indicators and the negative divergence on the short-term indicators, I can foresee that it could be a difficult week for the market. A short into strength may be possible.
Still, I would look to purchase the S&P closer to 1110/1115 as the S&P fills the gap left open at that level (when hopefully the short-term indicators are oversold). This is on condition that sentiment stalls and does not get more bullish. Else, I would not take such a position.
Sunday, October 10, 2004
Technical Update: Whipsaws and Bear's Paws
dated 9 October, 2.00am
On Wednesday, the S&P finally moved up to grab the bears' coats at 1142, essentially closing at a new high for the swing. Then on Thursday, the S&P delivered a Real Distribution Day which not only offset Wednesday's gain, but also cancelled all the gains of the previous 3 trading days in a bearish engulfing candlestick. In particular, the DJIA delivered a SuPing sell signal (defined as an uptrend suddenly punctuated by an outside down day) --- in fact, the DJIA delivered a Kaiser Soze sell signal (defined as an outside up day followed by an even larger engulfing outside down day). Not surprisingly, the major averages are trading lower today even as I type this update. This market has played out more or less according to our script --- rally and then decline. (However, the rally was not as convincing and climatic as I had hoped. A more climatic rally that tipped sentiment to excessive bullishness would have set up a solid trade on the short side.)
Short-term indicators are currently mixed. The 10-day moving average of the A/D line on the NYSE is maximum overbought, and that of the NASDAQ might become overbought going into next Tuesday if there is a rally between now and then. However, the McClellan Oscillators based on either breadth or volume are no longer overbought, having cut down decisively after Thursday's RDD. My take on the situation is that the market is seeing some pressure in the near term, and this may allow the short-term indicators to work off whatever overbought conditions they have (if any).
The intermediate term picture is the one in which we have greater control (and hence present better risk/reward perspectives). The 30-day moving average of the A/D on both the NYSE and NASDAQ are maximum overbought and are ready to cut down in a more significant way. The McClellan Summation Indices based on either breadth or volume are also overbought and it would take only a couple of moderate down days to make them stall and possibly cut down. Friday trading just might do the trick. We are clearly very late in the rally. As such, my opinion is that any spike upwards should be rather climatic and signalling the end of the current intermediate term rally which began Aug 13 --- presenting a good shorting opportunity.
Of principal concern to us at this point in time is the issue of sentiment. We know the market is overbought on an intermediate term basis. But unless sentiment shifts decisively to excessive bullishness, any decline we get from this juncture will be only moderate. As of now, sentiment is heading gradually in the direction we want. The Investor's Intelligence percentage of bears, for instance, has dropped to 23.2%, which is considered low (and hence bearish). In addition, the American Association of Individual Investor's percentage of bulls is 56.9% and percentage of bears is 19.7% --- these readings are considered elevated and suggests we are inching closer to excessive bullishness.
If you remember, Sept 22 was the previous RDD on the S&P. That day, the CBOE put/call ratio chimed in at 1.10 --- folks were getting inclined on being bearish after seeing such a large fall. Now, on Thursday's RDD, the put/call ratio closed at 0.86 --- this time folks are less inclined to be bearish. This shows that sentiment is slowly shifting towards more and more bullishness.
It would be good if sentiment shifted to excessive bullishness just as maximum overbought readings are registered on both short and intermediate term indicators. This would set up a solid risk/reward ratio for a brilliant trade on the short side. For now however, the market appears to be already in correction mode, which is preventing the short-term indicators from getting too overbought and also avoiding a condition of excessive bullishness. If the current decline continues unabated without sentiment changing and further towards more bullishness, it must necessarily be moderate and the next maximum oversold reading on the short-term indicators could then represent a trading opportunity on the long side of timeframe a few days.
STRATEGY: Remain neutral and watch sentiment closely. Be ready to short on excessive bullishness. If excessive bullishness does not occur, be prepared to buy when short term indicators reach maximum oversold.
dated 9 October, 2.00am
On Wednesday, the S&P finally moved up to grab the bears' coats at 1142, essentially closing at a new high for the swing. Then on Thursday, the S&P delivered a Real Distribution Day which not only offset Wednesday's gain, but also cancelled all the gains of the previous 3 trading days in a bearish engulfing candlestick. In particular, the DJIA delivered a SuPing sell signal (defined as an uptrend suddenly punctuated by an outside down day) --- in fact, the DJIA delivered a Kaiser Soze sell signal (defined as an outside up day followed by an even larger engulfing outside down day). Not surprisingly, the major averages are trading lower today even as I type this update. This market has played out more or less according to our script --- rally and then decline. (However, the rally was not as convincing and climatic as I had hoped. A more climatic rally that tipped sentiment to excessive bullishness would have set up a solid trade on the short side.)
Short-term indicators are currently mixed. The 10-day moving average of the A/D line on the NYSE is maximum overbought, and that of the NASDAQ might become overbought going into next Tuesday if there is a rally between now and then. However, the McClellan Oscillators based on either breadth or volume are no longer overbought, having cut down decisively after Thursday's RDD. My take on the situation is that the market is seeing some pressure in the near term, and this may allow the short-term indicators to work off whatever overbought conditions they have (if any).
The intermediate term picture is the one in which we have greater control (and hence present better risk/reward perspectives). The 30-day moving average of the A/D on both the NYSE and NASDAQ are maximum overbought and are ready to cut down in a more significant way. The McClellan Summation Indices based on either breadth or volume are also overbought and it would take only a couple of moderate down days to make them stall and possibly cut down. Friday trading just might do the trick. We are clearly very late in the rally. As such, my opinion is that any spike upwards should be rather climatic and signalling the end of the current intermediate term rally which began Aug 13 --- presenting a good shorting opportunity.
Of principal concern to us at this point in time is the issue of sentiment. We know the market is overbought on an intermediate term basis. But unless sentiment shifts decisively to excessive bullishness, any decline we get from this juncture will be only moderate. As of now, sentiment is heading gradually in the direction we want. The Investor's Intelligence percentage of bears, for instance, has dropped to 23.2%, which is considered low (and hence bearish). In addition, the American Association of Individual Investor's percentage of bulls is 56.9% and percentage of bears is 19.7% --- these readings are considered elevated and suggests we are inching closer to excessive bullishness.
If you remember, Sept 22 was the previous RDD on the S&P. That day, the CBOE put/call ratio chimed in at 1.10 --- folks were getting inclined on being bearish after seeing such a large fall. Now, on Thursday's RDD, the put/call ratio closed at 0.86 --- this time folks are less inclined to be bearish. This shows that sentiment is slowly shifting towards more and more bullishness.
It would be good if sentiment shifted to excessive bullishness just as maximum overbought readings are registered on both short and intermediate term indicators. This would set up a solid risk/reward ratio for a brilliant trade on the short side. For now however, the market appears to be already in correction mode, which is preventing the short-term indicators from getting too overbought and also avoiding a condition of excessive bullishness. If the current decline continues unabated without sentiment changing and further towards more bullishness, it must necessarily be moderate and the next maximum oversold reading on the short-term indicators could then represent a trading opportunity on the long side of timeframe a few days.
STRATEGY: Remain neutral and watch sentiment closely. Be ready to short on excessive bullishness. If excessive bullishness does not occur, be prepared to buy when short term indicators reach maximum oversold.
