November 20, 2008
What a day. Let’s take the DIA (Dow Jones ETF) trading structure on the 5-minute and 30-minute charts to see what insights we might can learn from any pattern recognition examples that might emerge on such a historic day.
DIA 5-min chart:
The first pattern that jumps off the chart at you is what I call the “Measured Move” pattern, or more technically the “A to B equals C to D” structure - keep in mind these are not Elliott or any other special kind of chart notation.
A Measured Move pattern is very similar to a ‘flag’ pattern but the measured move does not take prior trend as much into consideration. It’s based on the principle of ‘equality’ or equal-impulse moves and this basic figure is used in many complex strategies, including some work in Gann.
That being said notice the A to B move was roughly $3.00 from bottom to peak and we had a slanted movement upwards. Price retraced beyond the standard Fibonacci zones before finding support and swinging higher into the afternoon highs just above $82.00, which was a near exact $3.00 impulse swing off the $79.00 zone, completing a ‘measured move’ in the C to D swing. The B to C ‘connector’ swing would be similar to the ‘flag’ portion of a bull or bear flag, though the rules are more stringent for actual flags.
Once price broke above the down-sloping trendline in the B to C swing, you could have placed a stop beneath the perceived “C” and played for an equal or measured move near $82 off the new momentum high.
Other than that, we had a gap fill that will go down as a complete “gap fill day” but closer inspection shows that virtually any sort of ‘gap fill with a stop-loss’ strategy would have been triggered, creating a ’stop-loss’ situation taking you out of the eventual fade.
Price really didn’t ‘respect’ either the 20 or 50 period EMA all that much throughout the day as the averages converged around the $80.50 level which represented yesterday’s close. Keep in mind that during the 10:00am EST swing, the S&P 500 broke the 2002 lows which triggered a few major headlines but resulted in a (puzzling to many) successful bounce off these levels.
Ultimately, selling pressure overcame buying pressure, confusing the confused (I guess - is that possible?) as price broke to new lows on the day. The afternoon selling was - to many - unexpected, sudden, and unrelenting (there really wasn’t a clean pull-back retracement to enter cleanly). It was a rough day that will go down in history as the day the S&P 500 officially broke to fresh 12-year lows, having broken beneath the 2002 intraday bear market low near 768.
DIA 30-min chart:
The 30-minute chart reveals an interesting pattern I wanted to show. Notice that as the noon hour and intraday highs approached (on the 5-minute chart), price actually formed a strong, long-tail tombstone doji candle at the 20 period EMA resistance - a major short-sell signal.
Ever since the negative divergence that set-up at the 200 period SMA, price has been steadily down-trending, forming lower lows and lower highs while the EMA orientation has been in the most ‘bearish’ position possible. I placed small, red arrows at each point the 50 (or 20) period EMA served as key resistance, or a good opportunity to establish a new short-sell position. Also, the momentum oscillator registered a fresh new momentum low into the close.
Hale Stewart of the Bonddad Blog did probably the best job I’ve seen so far on explaining the significance of the day in his post simply titled “Today’s Market.” I really couldn’t have said it better myself: “There [is] nothing good on these charts; all the technical signals are bad.”
The “Chart Swing Trader” also posted a good summary from a broader basis than the charts in the “State of the Market - 11/20/08″ post. He writes, “Trying to catch a bottom here is likely going to prove very difficult. [T]hese declines can last much longer and be much more severe than anyone expects. [D]ays like today are the worst. The morning bounce probably rose some hopes, but then those hopes were slowly dashed. And the type of selling that occured - the slow, deliberate selling - is very frustrating to watch….
In a conference I attended with her, Linda Raschke called conditions that occurred in today’s close as the “Slow Oozing Trend” or “Insidious Creeping Trend” - the type that dashes both sides of the market. In the case of a down-move like today, longs are saying “Well, I’ll hold just a little longer until we get a counter-swing up and then I’ll sell” while shorts are saying “I’ll stay out just until we get a good up-swing then I’ll get short.” The problem is, the upswing never comes and the downtrend is continued by the “slow ooze” of buyers throwing in the towel with shorts standing aside or saying “Gosh, I can’t take it any longer - I have to get short now.” We’re conditioned to wait for retracements to enter or exit and just can’t justify pulling the trading trigger on a new low. It beats everyone up.
Don’t beat yourself up if you lost money today. I keep saying it but it continues to be true: Capital Preservation is Your #1 Goal!
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November 20, 2008
With the US Equity market breaking to fresh 2008 lows, challenging and breaking support levels formed in 2002, let’s take a look at how the actual bottoming process formed in the 2000 - 2003 bear market.
S&P 500 Bear Market from 2000 to 2003 (Weekly):
The bull market peak occurred at 1,530 just before October 2000 before the S&P 500 lost a full 50% to bottom in October 2002, almost exactly two years later.
This chart captures the entirety of the bear market during the “technology bubble burst” (the same time at which the NASDAQ market lost 80%). You can see that the bottom was not a magical, one time event, and clearly no one ‘rang a bell’ or anything at the bottom.
I would argue the best point for re-entering the market came around 950 when price broke the 20 and 50 period EMAs to the upside after forming a triple-bottom style pattern about the 780 index level. I would suggest you do the same in the current environment - wait for positive price movement above key averages before re-entering.
Notice also that the bottom was formed on a large-scale and small-scale positive momentum divergence. The large-swing divergence occurred as price made the “September 11th” low at 944 with a new momentum low (remember, ‘momentum precedes price’) and then as price formed the 775 low in July ‘02, the momentum oscillator registered a marginal higher low. As price breached the 775 low to form the 768 low in October, it was clear that a positive momentum divergence had formed, which was the ultimate bear market bottom.
As price came back to stop at the 788 index level - only slightly higher than the previous low - the momentum oscillator registered a clear higher low, completing a multi-swing positive divergence that took over a year to build into the price structure.
Let’s see the actual bottom a little closer.
S&P 500 Bear Market zoomed in (Weekly):
StockCharts.com registers the actual low at 768 while I just heard on CNBC that the commentators were proclaiming the actual low to be at 775 so there’s a slight discrepancy there.
That aside, notice the obvious positive momentum divergence going into the 768 price low. Price then returned to test the 20 week EMA before failing at this level and swinging back down to find support at the 788 level. Until we formed this higher low at 768, there was absolutely no reason to get bullish - the positive momentum divergence by itself is never enough to confirm a market turn.
Price then formed its first “higher low” and then swung back up to break the 20 and 50 week EMA while forming a “higher high” which confirmed as a market re-entry signal (having formed a triple bottom, multi-swing positive momentum divergence, breaking above key EMAs, and completing a ‘pure price’ trend reversal).
One notable yet significant difference in the previous bear market and the current bear market is that it took roughly 3 years for the S&P 500 to fall from 1,530 to a bottom near 770 for a 50% drop. We peaked in October 2007 above 1,550 and have already tested 775 for a 50% decline in 1 year and one month. I cannot underscore how significant that fact is. More insidiously, there are no major technical signs (like we saw in 2002/2003) that we’re at a bottom yet.
Take a moment to pull up these charts and apply your own analysis and indicators to see how they reacted during the 2000 - 2003 market and see if you can draw possible parallels to the current environment.
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November 19, 2008
Now that today’s close is firmly in place, we have a potential game-changer in terms of the technical structure. The monthly chart also shows a major bearish development Let’s look at the current S&P 500 chart closely to see what this means.
S&P 500 Daily:
Not a whole lot has changed on the daily structure, provided you note that today’s price marked a fresh 2008 intraday and closing low at 805 which takes us back to levels not seen at all since 2003.
Price etched out a ‘trend day down’ today which took the form of one of the most bearish ‘candle’ structures possible (open at one extreme, form a long range, close at the opposite extreme).
I don’t want to get too caught up in the bearishness, but note that the new price low is occurring on a multi-swing positive momentum divergence. Still, that doesn’t change the picture drawn by the trend structure and moving average orientations.
I did want to highlight (at least) two major developments on the monthly chart, one of which changes the game completely that you might miss otherwise.
S&P 500 Weekly:
First, let me note that the intra-month low is currently 805, which takes us beneath the closing low of the entirety of the 2000-2003 bear market. That monthly closing low was 815. Now, the month of November is not over yet (though we’re down 16% already - a ghastly figure) and we could still hold that closing low, but if we don’t, you need to pay close attention to what that means. Look to see if we end November above or below 815. Also, look to see if we breach the absolute price low of the prior bear market at 775. Keep in mind that value IS a price target eventually so let’s see how price reacts to those levels.
Second, the momentum oscillator - the difference in a 3 and 10 month EMA - (a standard MACD) is registering a significant new momentum low at -200. That means that there is a -200 point spread between the 3 and 10 monthly EMAs - that’s huge and sets a record price (indicator) low.
Third and perhaps most importantly, look at the orientation of the 20 and 50 month exponential moving averages - they have formed a bear (some say “death”) cross. I want to make two sub-points here. First, that is a sign of major bearishness, as price has moved a great distance to have the shorter 20 month EMA cross beneath the longer 50 month EMA. Interestingly enough, moving average systems are triggering fresh ’short-sell’ positions, but moving average systems far lag the price and I find little to no value using them on long-term charts - that’s my opinion though.
Second, if you look closely - I’ll try to sprinkle a bit of bullish news despite everything to the contrary - the last time the 20 month EMA crossed beneath the 50 month EMA was roughly mid-2002, about 6 or so months prior to the absolute bottom in the market. If you absolutely want to find bullish news in all this, there it is. Moving averages lag price - sometimes by a good deal - and the last time this structure set-up, we were near a bottom. Of course, price moved from 1,050 to 800 before the bottom was found (after the bear or ‘death’ cross) but eventually the bottom formed.
Keep managing your risk, preserving capital, and staying on top of any new information as it comes in.
The Market Club does a great job of providing daily commentary, charts, videos, signals and the like - be sure to check them out if you have not done so already.
Stay safe and don’t be disheartened.
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November 19, 2008
As we near the halfway point in Wednesday’s trading, let’s look at the current Dow Jones Index structure on the daily chart to assess the current technical picture.
Dow Jones Daily:
The 8,100 level has held key support five times since October with only two instances of price ‘nipping’ beneath that level. Mid-October brought us the 2008 price low of 7,750 which has currently held, and the lowest closing low has been in late October as well just beneath 8,200. These would no doubt be key levels to watch. Were they to break on a closing basis, there would be no logical support zones near where price is currently.
Price appears to be forming a descending triangle as evident from the steadily declining upper trendline since early November. The height of the triangle is roughly 1,250 points, so a break above 8,500 or beneath 8,100 would set-up respective simple price projection targets as price breaks forth from this current consolidation pattern - that’s not to say we get there immediately however.
The structure of the daily moving averages is in the ‘most bearish orientation possible,’ and notice that the 200 day SMA is steadily declining - that’s not a good sign for buyers.
One good sign is that the momentum oscillator is ‘diverging’ with price and is showing positive momentum as price languishes at the current levels. Note that the last two days (and today’s action so far) have been low-range days which is an interesting contrast to the large, triple-point swings in the Dow we’ve now been accustomed to experiencing. It’s odd when you can call a 100 point Dow day “low-range” relative to the recent past but that’s what it has become.
What’s the take? Odds of holding short might be slightly higher risk than holding long, but during a consolidation pattern, it’s best to wait until a clean break up or down occurs rather than trying to predict the direction of the break. Join in once price breaks its currently narrowing boundaries for a potential expansion move. If you do decide to bet directionally prior to the break, pay close attention to your stop-loss placement just beyond the range - if you’re correct, you’ll likely achieve a low-risk (tight stop) and high-reward (upwards of perhaps 1,000 points or more) move.
Still, the number 1 goal in this environment should be capital preservation.
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November 19, 2008
In April, we reported on the robust adoption of Bank of America’s online personal finance manager, My Portfolio (see note 1), used by 10% of the bank’s 25 million online bankers. The results are especially impressive given that it’s a full-featured module accessible via online banking, but not particularly well integrated.
In comparison, Wells Fargo offers a completely integrated PFM tool, My Spending Report, that’s extremely simple to use, but offers limited functionality. On Oct. 29, the bank made an important improvement, adding a basic budgeting tool, Budget Watch, to what had been essentially a list of transactions divided by category.
The bank told me last week they have 1 million monthly users, making it the second online PFM provider to break the 1-million mark (after BofA). Wells has about 15% of its online banking base (note 2) using the tool, a slightly higher penetration than BofA. Again, not surprising considering how well it is integrated. The budget tools should boost penetration.
Who’ll be the next one to join the 1-million club? Mint, with about 500,000 users in its first 15 months in business, is headed that way, possibly as early as late next year. Chase/WaMu could get there in a few weeks, if they added online personal finance to their feature set. Quicken Online, now that it’s free, should get there relatively quickly as well.
Note:
1. BofA’s My Portfolio is powered by Yodlee.
2. Excluding Wachovia accounts.
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November 18, 2008
Sears Holdings (SHLD) is a large retail stock I tend to follow from time to time, but today I noticed just how far the stock has fallen this year and since 2007. Let’s take a look at the devastation long-term SHLD investors have endured recently.
SHLD Weekly Chart:
Price reached an all-time high at $190 in April, 2007 before breaking weekly EMAs and switching its trend officially from up to down (lower lows and lower highs) which has not changed as we step into the present new lows beneath $30.00 per share.
It would seem that a counter-trend move up may be likely, but that doesn’t change the pervasive down-trend structure.
A casual look at the weekly chart shows key EMA resistance holding at mostly the 20 week EMA, with the most recent counterswing up taking us to EMA resistance via the falling 50 week average.
One thing I wanted to highlight was the multi-swing positive momentum divergence that continued for almost a year as price continued its journey lower. The divergence was only good enough to give us a move from $70 to $100 per share before the downtrend took over and became the dominant structure.
Price has now made a new momentum low and the divergence pattern has worked its way through price and no longer has any effect at the moment.
One note of possible bullishness is that the volume pattern has declined as if volume is not confirming these new price lows - or at least volume is setting up a potential non-confirmation. Keep an eye on that.
Let’s zoom in to the daily chart.
SHLD Daily Chart:
The daily chart shows a few momentum divergence examples along with key EMA tests in terms of how price reacted to these technical ‘nodes.’
The most recent cuonterswing formed on a positive divergence which took price only to the falling 20 EMA before reversing and resuming the dominant downtrend in price. Watch to see if price can form a positive momentum divergence off these levels and if so, it would indicate more risk remains on the short-selling side than the long side - at least in the near time frame.
Sears Holdings (SHLD) helps remind us not to bet against prevailing downtrends and privides a few lessons for us in terms of basic chart analysis.
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November 18, 2008
As we head into the ‘lunch’ period, I wanted to show a fascinating price structure occurrence that led to a couple of high-probability, low risk trading opportunies this morning. It includes a Daily R1 Pivot Point, a negative momentum Divergence, and a possible complete Elliott Wave minor count. Let’s see them in action.
DIA 5-min chart:
The market actually opened without a gap this morning - fancy that.
Price initially surged to meet confluence resistance via the falling 20 period EMA and the “Daily Pivot” (blue dotted line - autogenerated). Price failed to overcome these levels and then fell but did not make a new low on the day. Notice that had it done so, it would have likely made a major positive momentum divergence. As such, price formed a doji just above support from yesterday’s low (a retest) and headed higher, breaking the two key EMAs only to fail at the upper Bollinger Band before swinging back down.
Price then found support at the 61.8% Fibonacci retracement of the prior Wave 3 before forming a mini-Elliott 5-wave impulse higher which completed the 5th Wave in my chart. Keep in mind that Wave 4 gently entered the price territory of the previous wave 1 so keep that in mind.
Price made new highs on the day on a precarious note - price tested the daily R1 (First Resistance) Pivot (again, auto-generated using yesterday’s price data via TradeStation) on a clear negative momentum divergence. That was a sufficient signal to exit any long position and set-up an aggressive ’scalp’ short which targeted the EMAs.
Price ultimately failed at EMA support and plunged now to new lows on the day. Of interest, the day’s S1 (First Support) pivot - not shown - is near $81.80. We could see a move down temporarily pause there or reverse if a positive momentum divergence develops.
This represents a quick example of how to combine multiple methods into trading decisions throughout the day.
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November 18, 2008
CNN News just reported that current Yahoo! CEO Jerry Yang will be stepping down and his replacement will be named soon. Let’s review this news and look at the current and past charts of Yahoo stock.
From the CNN article, Yang stated, “”I will continue to focus on global strategy and to do everything I can to help Yahoo realize its full potential and enhance its leading culture of technology and product excellence and innovation,”
After the replacement is named, he will then be known as “Chief Yahoo”. Yang founded Yahoo in 1994 and has grown into the #2 most popular search engine, eclipsed only by rival Google (GOOG).
This transition is not unexpected, and the news was greeted with cheers by some. Technology analyst Rob Enderle declared “The shareholders were ready to pick up pitchforks and torches. If Jerry wasn’t a founder, he already would have been gone months ago.”
Only a few months ago, Microsoft (MSFT) CEO Steve Ballmer offered to buy Yahoo for $33.00 per share, an offer CEO Yang declared as “too cheap” for Yahoo - he demanded at least $37.00 per share, a figure Microsoft was unwilling to pay. Many shareholders were stunned as Yang refused the offer, seeing Yahoo (YHOO) shares surge then plunge… and now shares currently (as of this writing) trade just above $10.00 per share (which will change as we face Tuesday’s market open certainly).
The CNN report hints that Yang’s “tenure as CEO is unlikely to be remembered fondly by shareholders….” Perhaps that is an understatement.
Let’s view the weekly and then daily charts to see the roller coaster ride Yahoo (YHOO) investors have endured recently.
Yahoo (YHOO) Weekly Chart:
I’m actually going to take off the ‘technical analysis’ hat and focus on the initial Microsoft offer of $31 per share in February 2008 (later raised to $33), Yang’s refusal of this more than generous offer (the stock was trading beneath $20 per share at the time of the offer), and the subsequent (recent) share price plunge as a result of Microsoft (MSFT) withdrawing the offer, and talks with Google failing.
What might have happened had Yang and the board accepted the $33.00 per share deal? Investors and historians might look back and proclaim that to be an expensive $4.00 mistake.
The offer was withdrawn in May 2008 and Yahoo stock has never even remotely looked back from those levels near $30.00 per share.
Let’s take a brief look at the damage that has occurred since May 2008.
Yahoo (YHOO) Daily Chart:
Bear in mind, technology stocks across the board including Google (GOOG), Apple (AAPL), Baidu (BIDU), Research in Motion (RIMM) and many others have suffered greatly in the 2008 ‘bear market’ declines as the US and global economies deal with recessions. It’s absolutely unfair to attribute all losses in Yahoo stock to Mr. Yang’s decision - I’m being facetious to do so.
Nevertheless, the ‘price picture’ or chart of Yahoo on the daily timeframe is a classic text-book example of a downtrend, with key moving averages serving as overhead resistance and volume accelerating as price continues to move to new lows.
I’d expect a pop in shares as this announcement is discounted into the market on Tuesday, but one can never be certain which way shares will trade on the news. This market has shown many times that classic expetations have been off-base more than a few times as price continued to slide to new lows on various stocks and the broader indexes.
Continue to watch these stocks mentioned above and how they trade on this news - and what the effect (if any) may be on the broader market tomorrow.
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November 18, 2008
It’s quite rare to get a reading in the ADX (Average Directional Index) of less than 10, but the DIA 5-minute chart is currently showing compression such that the ADX value is 8.77. Let’s look at this and see what it might mean.
DIA 5-min chart:
In StockCharts, the ADX actually displays the + and - DMI (Directional Movement Indexes) as the green and red lines in the bottom panel indicator. Ignore those for a moment and focus on the average, or the Black Line traditionally known as the ADX.
A Low ADX represents market compression, while a high ADX represents market expansion and is based on the principle “Price alternates between range compression and expansion.”
Traditionally, when the ADX is low, we need to be looking for an expansion move to occur, and also we need to avoid using moving averages for trading decision assistance. Also, we need to eliminate usage of the 3/10 Oscillator because it is giving no discernible reading. I highlighted that to show that you receive no trading signals off the 3/10 either.
I wanted to highlight the current chart with 30 minutes left in the trading day because I wanted to show a screen cap of this action as it was happening and place up a quick comment.
Basically, in these conditions, traders want to stand aside (not trade) but wait for a breakout of consolidation to enter a trade to play for perhaps a large relative target. We don’t know which way price will expand, but we can have our guesses. You might even want to place a bracket order outside the ‘rectangle’ that has formed about the $84 and $85.50 level. Either way, it’s best not to beat yourself up trading within this narrowing range.
Watch this closely into the close. Markets can’t stay ‘balanced’ or rangebound for ever.
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November 18, 2008
What a better way to start your week than browsing around the news and blogosphere, courtesy NewsFlashr? Here, I wanted to highlight selected blog or news posts that you may find interesting that might help you in the upcoming week.
The Big Picture tries “DECONSTRUCTING THE FINANCIAL CRISIS (so far)” which is a rough timeline of key events.
KWaves.com is a site I recently came across that details the Kondratieff Long-term Wave with charts and information.
Brian Shannon of AlphaTrends.com discusses his emphatic belief that Risk Management is the #1 goal.
Bill Luby at VIX and More makes a Prediction: Direxion Triple ETFs Will Revolutionize Day Trading. He also lists the new ETFs so you can use that as a reference as well.
John Forman discusses the paradox of Improving your trading by thinking less.
Chris Perruna discusses various charts and ETFs in Health Care and Pharmaceutical Bottom?
Always providing us with information-packed posts, “Gaming the Market” shows and discusses Three Great Banking Documentaries.
StockTradingtoGo discusses brief principles in Understanding Economics, Trade Gaps and Deficits.
FundMyMutualFund writes an ambitious article discussing the potentials for the next 6-monts to a year in the future in November 2009 Thoughts/Roadmap.
Dr. Steenbarger of TraderFeed introduces new concepts regarding a novel concept in his series on creativity in trading: The Role of Creativity in Trading and Conflict and Creativity in Trading Performance.
Have a safe week as best you can - keeping your focus on risk-management in the week ahead.
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Looking for gold.
