Friday, October 22, 2004
Technical Update: Oversold Rally has unfolded
dated Oct 22
The outside down day delivered by the S&P on Tuesday was indeed a Real Distribution Day. To recap, a Real Distribution Day occurs when two things occur:
(a) the percentage DROP by the index is greater than the 50-day exponential moving average of the Reif AVX, which is defined to be the absolute range of the trading day (taking into account any gaps up or down from the previous day's close) divided by the previous day's close;
(b) the volume is greater than the 50-day exponential moving average of volume.
Hence, Tuesday was the third RDD since Oct 6 when the waterfall decline began. On Wednesday, the S&P turned its monthly chart down on trade below 1099.20, rapidly found a low at around 1094, and then rebounded to close the day with an inverted graveyard doji. Usually such a doji coming at this time is interpreted as bullish. Will it be really bullish?
The slippery slope created by the false breakout over the 3-point declining trendline on the S&P weekly chart (when the S&P captured 1142 but reversed sharply thereafter), as well as the three RDDs in close proximity, the two outside down days on good volume, and a possible three lower highs on the weekly chart suggested that a plunge and a downturn of the monthly chart was in order. Indeed that took place. Now, it is the subsequent behaviour of the S&P after the downturn of its monthly chart as well as its ability to hold the pivotal 1089/1090 level that will be crucial.
The ability of the index to regain 1099/1100 on Wednesday was impressive at first glance. However, a one-day wonder does not a reversal make. Indeed, these have a chance of losing traction quickly especially in the midst of a persistent decline. The key is that there MUST be follow-through here in order for the rebound to stick.
Trade below 1094 is now likely to lead to accelerated downside momentum and the filling of the gap left at S&P 1077 on the daily chart. Moreover, seasonality indicates the possiblity of more downside going into the first week of November.
For now however, the short-term indicators are oversold and are rebounding after Thursday's positive action. If you want to buy into weakness, today (Friday) is the last day to do so. The oversold rally is likely to fizzle out quickly because intermediate-term indicators are still heading down, although they are not as stretched and overbought as before.
Considering that the Investor's Intelligence weekly survey readings are now at excessive bullish (hence technically bearish) levels (58.9% bulls, 22.1% bears), the next overbought reading on the short-term indicators would be a nice shorting opportunity. It would be even better if it is confirmed by a low (hence bearish) reading on the 10-day moving average of the CBOE put/call ratio.
Intermediate-term indicators are expected to be oversold after the election.
dated Oct 22
The outside down day delivered by the S&P on Tuesday was indeed a Real Distribution Day. To recap, a Real Distribution Day occurs when two things occur:
(a) the percentage DROP by the index is greater than the 50-day exponential moving average of the Reif AVX, which is defined to be the absolute range of the trading day (taking into account any gaps up or down from the previous day's close) divided by the previous day's close;
(b) the volume is greater than the 50-day exponential moving average of volume.
Hence, Tuesday was the third RDD since Oct 6 when the waterfall decline began. On Wednesday, the S&P turned its monthly chart down on trade below 1099.20, rapidly found a low at around 1094, and then rebounded to close the day with an inverted graveyard doji. Usually such a doji coming at this time is interpreted as bullish. Will it be really bullish?
The slippery slope created by the false breakout over the 3-point declining trendline on the S&P weekly chart (when the S&P captured 1142 but reversed sharply thereafter), as well as the three RDDs in close proximity, the two outside down days on good volume, and a possible three lower highs on the weekly chart suggested that a plunge and a downturn of the monthly chart was in order. Indeed that took place. Now, it is the subsequent behaviour of the S&P after the downturn of its monthly chart as well as its ability to hold the pivotal 1089/1090 level that will be crucial.
The ability of the index to regain 1099/1100 on Wednesday was impressive at first glance. However, a one-day wonder does not a reversal make. Indeed, these have a chance of losing traction quickly especially in the midst of a persistent decline. The key is that there MUST be follow-through here in order for the rebound to stick.
Trade below 1094 is now likely to lead to accelerated downside momentum and the filling of the gap left at S&P 1077 on the daily chart. Moreover, seasonality indicates the possiblity of more downside going into the first week of November.
For now however, the short-term indicators are oversold and are rebounding after Thursday's positive action. If you want to buy into weakness, today (Friday) is the last day to do so. The oversold rally is likely to fizzle out quickly because intermediate-term indicators are still heading down, although they are not as stretched and overbought as before.
Considering that the Investor's Intelligence weekly survey readings are now at excessive bullish (hence technically bearish) levels (58.9% bulls, 22.1% bears), the next overbought reading on the short-term indicators would be a nice shorting opportunity. It would be even better if it is confirmed by a low (hence bearish) reading on the 10-day moving average of the CBOE put/call ratio.
Intermediate-term indicators are expected to be oversold after the election.
Wednesday, October 20, 2004
Technical Update: No Suping Sell Signal
dated Oct 20
The price action on Tuesday for the US markets were horrendous, to say the least. The S&P closed at 1103.23, which is just about the lows for the day, after touching an intraday high of 1118.03. And the decline was on pretty good volume as well.
After a rally into 1118 resistance, the S&P backed off and staged an opening-range breakdown, taking out in the process our old friend 1111. This was the signal that a trend day to the downside was likely to play out --- and it did. As such, my long position on the S&P is now is the red.
However, Tuesday does not qualify as a Suping Sell Signal even though it was an outside down day. A two-day move into S&P 1118 does not an uptrend make. Rather, my take is that an outside down day at this stage resembles capitulation and culmination rather than the start of a new multi-day down move, the 4-day bearish engulfing candlestick pattern notwithstanding.
I will update you on whether Tuesday was a Real Distribution Day (I don't know now as I do not have the Reif AVX with me).
Even if it does, the short-term indicators are reaching maximum oversold and the McClellan Osciallators based on either breadth or volume are now showing some positive divergence against the previous intra-swing lows recorded a couple of days ago. The stochastic oscillator (based on price --- not our A/D line) is also maximum oversold. In addition, the CBOE put/call ratio shot up to 0.95 on Tuesday, up from 0.77 on Monday. Folks clearly were frightened by Tuesday's decline. In my book, this qualifies as culmination.
As such my recommendation is to buy weakness this week (in fact, today) if S&P 1100 manages to hold.
dated Oct 20
The price action on Tuesday for the US markets were horrendous, to say the least. The S&P closed at 1103.23, which is just about the lows for the day, after touching an intraday high of 1118.03. And the decline was on pretty good volume as well.
After a rally into 1118 resistance, the S&P backed off and staged an opening-range breakdown, taking out in the process our old friend 1111. This was the signal that a trend day to the downside was likely to play out --- and it did. As such, my long position on the S&P is now is the red.
However, Tuesday does not qualify as a Suping Sell Signal even though it was an outside down day. A two-day move into S&P 1118 does not an uptrend make. Rather, my take is that an outside down day at this stage resembles capitulation and culmination rather than the start of a new multi-day down move, the 4-day bearish engulfing candlestick pattern notwithstanding.
I will update you on whether Tuesday was a Real Distribution Day (I don't know now as I do not have the Reif AVX with me).
Even if it does, the short-term indicators are reaching maximum oversold and the McClellan Osciallators based on either breadth or volume are now showing some positive divergence against the previous intra-swing lows recorded a couple of days ago. The stochastic oscillator (based on price --- not our A/D line) is also maximum oversold. In addition, the CBOE put/call ratio shot up to 0.95 on Tuesday, up from 0.77 on Monday. Folks clearly were frightened by Tuesday's decline. In my book, this qualifies as culmination.
As such my recommendation is to buy weakness this week (in fact, today) if S&P 1100 manages to hold.
Tuesday, October 19, 2004
Technical Update: Neutral
dated Oct 18, 10.20pm
Last week, the S&P issued a Real Distribution Day on Thursday, thus leaving two RDDs in close proximity (Oct 7, Oct 14). The occurrence of "Piggback" RDDs along with a successful break of the 50 and 200-day moving averages indicates that for the intermediate term at least, the line of least resistance is lower. The notion of a late October/early November plunge and washout will be confirmed on break (and preferably daily close) below 1099/1101. This level is around the midpoint of the Aug 13-Oct 6 upswing, is around the low of the failed Kaiser Soze buy signal on the weekly chart, and is also the place where the monthly chart will turn down. If the monthly chart turns down on trade below S&P 1099.20, this will likely carve out an outside down month, which along with the Piggyback RDDs as well as three lower highs on the weekly chart, suggest a test --- and likely break --- of the Aug 13 low of S&P 1060. A break of 1099/1101 will leave the only near-term support at 1089/1090 which is a corner number on the Square-of-Nine Chart, while a break of S&P 1060 will then project immediately to S&P 1025, which is 360 degrees in price from the March highs (which also happen to be this year's highs) and is also another corner number.
While Swing and Gann-Angle Analysis paint a truly bleak picture, do note that short-term indicators are reaching oversold and some will hit maximum oversold midweek. Coupled with extreme readings on the short term moving averages of the TRIN (Arms Index), I suggest that a near-term bounce may take place. However such an oversold rally will lose momentum quickly because of the seasonal bearishness of October and also because the intermediate-term indicators have already turned from up to down. A possible trade might be to buy into weakness this week, but in my opinion, a more solid trade setup would be to short strength next week. Timing is everything. Remember that time is more important than price.
dated Oct 18, 10.20pm
Last week, the S&P issued a Real Distribution Day on Thursday, thus leaving two RDDs in close proximity (Oct 7, Oct 14). The occurrence of "Piggback" RDDs along with a successful break of the 50 and 200-day moving averages indicates that for the intermediate term at least, the line of least resistance is lower. The notion of a late October/early November plunge and washout will be confirmed on break (and preferably daily close) below 1099/1101. This level is around the midpoint of the Aug 13-Oct 6 upswing, is around the low of the failed Kaiser Soze buy signal on the weekly chart, and is also the place where the monthly chart will turn down. If the monthly chart turns down on trade below S&P 1099.20, this will likely carve out an outside down month, which along with the Piggyback RDDs as well as three lower highs on the weekly chart, suggest a test --- and likely break --- of the Aug 13 low of S&P 1060. A break of 1099/1101 will leave the only near-term support at 1089/1090 which is a corner number on the Square-of-Nine Chart, while a break of S&P 1060 will then project immediately to S&P 1025, which is 360 degrees in price from the March highs (which also happen to be this year's highs) and is also another corner number.
While Swing and Gann-Angle Analysis paint a truly bleak picture, do note that short-term indicators are reaching oversold and some will hit maximum oversold midweek. Coupled with extreme readings on the short term moving averages of the TRIN (Arms Index), I suggest that a near-term bounce may take place. However such an oversold rally will lose momentum quickly because of the seasonal bearishness of October and also because the intermediate-term indicators have already turned from up to down. A possible trade might be to buy into weakness this week, but in my opinion, a more solid trade setup would be to short strength next week. Timing is everything. Remember that time is more important than price.
