Stock Market Analysis

Monday, May 31, 2010

Welcome Back From Long Weekend!

Welcome back from the Memorial Day Long Weekend! Hope you guys enjoyed your holiday!

The Dow bounced off last week's dragon tail formation and is now once again up against its 200 days moving average line, closing down 122 points against it last Friday.

Markets around the world lapsed into uncertainty as the situation in Europe worsen as the domino effect starts to swing to other European nations. Yes, if Europe does not unwind from this crisis properly, it is sure to affect the rest of the world as well. In fact, the US market is in such a strong intermediate bear trend now that I am inclined to think of any pull ups right now as bull traps. Indeed, the market truly have went way too far ahead of the recovery in the real economy and investors would certainly be tempted to take profit and invest in the real economy instead.

This week is going to be a heavy weight week with the traditional giant economic data such as the ISM index and job reports releasing this first week of June 2010 (See Stock Market Calendar). With most economic numbers already in pre-recession levels, I would not be surprised to see more volatility in the numbers and hence more volatility in the market. In fact, from the way the RSI is leading lower strongly over the past few months, I would see the market being range bound between 11,000 and 10,000 before the market decides which way to move. All in all, the world market is in a state of uncertainty with a few important and potentially destructive financial and political hot spots brewing up. This is a market for the nimble.

For now, the Dow remains in a short term bear trend, intermediate bear trend and a primary bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Tuesday, May 25, 2010

Dragon Tail Formation...

The Dow formed a huge dragon tail formation today with strong participation, closing down marginally by 22 points today.

Worries on the Korean front caused markets across Asia to plummet, resulting in a deep low opening for the US market. This is certainly the most turbulent economic recovery phase that we have ever seen. The media's always full of good news during each of the last time the world walked out of an economic crisis but this time, it seemed like there are bad news sprouting out from all over the world. The European crisis as more European nations get into economic problems and the mounting tension between now possibly-nuclear-armed-North-Korea and South Korea. All of these macro geo-political and economic problems are certainly casting a shadow on the world economic recovery scenario.

Yes, this is going to be a "recovery" we have never seen before and could possibly put a ceiling over the primary bull trend in the US market. However, as trend followers, our job is to read the trend and action according to it without making any biased predictions.

So, what's a dragon tail formation?

Well, its my way of calling long hammer candlesticks formed at the end of a significant and strong downtrend which comes with strong volume, like what we see in the Dow today. Such a formation usually spells the end of a short term or intermediate term downtrend and it forming on the weekly 50MA intermediate support level does give it a lot more credibility. This means that it is certainly not time to consider being newly short. The situation now is such that it goes beyond mere technical analysis. If war breaks out in Asia, nothing can save the world market as nations in Asia take sides with and against the US. As such, we need to be nimble and pay attention to how this issue is developing as well.

For now, the Dow remains in a short term bear trend, intermediate bull trend and a primary bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Thursday, May 20, 2010

Market Turning Around?

The Dow retreated 66 points today as the dollar continued to move stronger against the euro and the market continues its post flash crash turbulence.

No doubt, the intraday volatility today continues to exceed the Dow's normal average true range, suggesting that the turbulence caused by the 6 May flash crash has yet to settle. Of course there are other macro economic factors contributing to the largely pessimistic trading mood today. Even though we are no longer in a market where the market needs to go upwards in order to produce a profit, it is still interesting to see if the market is going to turn around.

I certainly think that the weekly 30MA is going to hold up as support and that the market could end up higher over the next few days due to a huge surge in total equities put call ratio today (See Put Call Ratio Daily Chart. Put call ratio today surged over 20 basis points to end up above 1.4, suggesting a rush into put options. However, as a contrarian indicator, whenever the put call ratio should make a significant move in one direction like it did today, it is usually a sign that the market is going to turn around. In fact, the last time the total equities put call ratio hit such a high was back in late 2008 just days before the market bottomed out and started turning around. I don't see why with such a strong support level and storng intermediate as well as primary bull trend in place, it shouldn't be the case this time round.

For now, the Dow remains in a short term neutral trend (within an extremely wide and volatile price channel), intermediate bull trend and a primary bull trend.

Monday, May 17, 2010

These Two Weeks... Normal?

The Dow ended another turbulent week last week as experts and academics continue to argue over the real reason for the flash crash (as it has come to be known) of 6 May. Well, as a trader, the reason is not important to me at all neither am I interested in wasting time finding out and debating over this issue. My only and real concern is how to trade and profit from what has happened and what will happen. Why it happens is the job of academics, not traders.

I looked at the weekly chart for the Dow and saw an interesting pattern. As crazy as the market condition seemed the past 2 weeks, a look at the weekly charts revealed that the Dow did nothing more than the regular pullback down to the weekly 30MA which it does all the time in a healthy bull trend. The only difference is that while it took a couple of weeks to hit bottom before like back in February, it took only one day this time. Efficient market hypothesis? Well, it would be scary if markets no longer trend but jump instantly from point to point!

Looking at the weekly chart of the Dow reveals that it reached a short term ceiling at the weekly 200MA line, which is historically a strong resistance level, and then retreated back to the weekly 30MA for support, which looks totally normal. So far, the 30MA support seems to be holding up well but the 200MA does quite go down lightly. Historically, it took weeks to break it everytime. Now, what if the Dow breaks the 30MA support downwards? If it does, the next support level would be at the weekly 50MA level along which we could nimbly make a quick profit downwards before reassessing if it is going to go down further.

For now, the Dow turns a short term neutral trend (within an extremely wide and volatile price channel), intermediate bull trend and a primary bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Thursday, May 13, 2010

The Unwinding...

What a turbulent week it has been in the US market in what was traditionally a quieter week as the market attempts to unwind itself from all the mess created by last week's freak incident.

So far, its still not clear what caused last Thursday's drop neither it is that important anymore to know. As traders we focus on what we should do under such circumstances instead of wasting time digging for reasons. Let those who are supposed to do the digging do the digging while we wait for the "final verdict" and trade our way out of this or stay out altogether.

So far, the Dow have taken back most of the lost ground but seems to be having some difficulty at the daily 50MA area. Could those automatic system trading programs be interpreting this as the start of a bear trend and is now selling into the strength? Maybe. That is why I keep saying computers should not be totally autonomous in trading. If you won't give nukes to skynet, you shouldn't give money to computers without close human scrutiny either. So far, the market direction is extremely unclear and there is no strong indication if this is turning into an intermediate bear trend or is it rebounding from a short term pullback and heading higher. In accordance with the primary bull trend, the inclination seems to be pointing upwards but as trend followers, we prefer not to make guesses and wait for the market to make a decision so we can simply follow. Remember, the market is no place for soothsayers.

For now, the Dow turns a short term bear trend, intermediate bull trend and a primary bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Sunday, May 09, 2010

Technical Error?

Interestingly, the market failed to turn around last Friday as widely expected if it was indeed just a simple technical error. Perhaps its due to the unexpected rise in unemployment rate as the Dow continued its journey downwards by 139 points.

The cause of last Thursday's historical ditch, which amazingly resembles the Black Monday ditch, is still a matter of speculation. In fact, the explanation that its just a technical error isn't convincing most retail traders as they continued to sell off last Friday despite pockets of savvy investors buying into the ditch. However, we now know how Black Monday ended, yes, HIGHER. That's how I expect the market to continue following this spectacular intermediate term pullback. However, at this point in time, there are still no confirmation on the technical front of any reversals yet. There are signs of a bottom, like the long bottom shadows and exhaustive volume near the 200MA support level, but there is no confirmation yet and so no reason for trend followers like us to jump onto the bandwagon.

This is a quiet week with no big economic data (as are all second week of the month) and a week for investors to really calm down and decide what to make of all these mess right now. Plenty of reasons to be optimistic and plenty of reasons to be pessimistic, which camp will win? Due to the duality of these "reasons", trend followers like myself prefer to numb ourselves to these noises and simply follow what the market does. Remember, there is no room for soothsayers in the market.

For now, the Dow remains in a short term bear trend, intermediate bull trend and a primary bull trend.

Thursday, May 06, 2010

We Witnessed History Today!

The Dow made history today (negatively though) with a historical intraday drop of 1010 points! To put perspective on how big a drop is 1010 points, it is big enough that if it happened back in any time before 1982, the market would have dropped to ZERO! However, such a huge intraday drop is definitely a clear case for quick arbitraguers to step in on and the Dow recovered a over 600 points intraday to end down by 347 points, which is still extremely ugly.

What happened today? Well, there are a lot of speculations but so far from the trading pattern and evidences, it seems like we had a "Skynet day" where computers attempted to take over the world. Yes, it was reported that most of these selling are triggered by machines doing the trading, not human. How the selling started is still a lot of speculation. Some say its an error by some fat fingered trader (what's the probability of that kind of error happening on a daily basis in a market with so many traders? Shouldn't such things be happening everyday then?) and some say its some new Hollywood conspiracy put up by wallstreet. No matter what the reason is, traders like myself should be more concerned about how to manage existing positions and move on. Good thing is my Star Trading System seemed to have picked up some dangerous undercurrents and have kept me out of directional swing trading for the past couple of weeks, so I sat out of the mess and smiled with all my profits made over the last 30 days intact.

So, what is going to happen next?

In a wierd way, I actually think this drop is badly needed. The market has been in an extremely over-extended intermediate bull trend with no significant consolidation along the way. This only make the market less and less tradable the higher it goes. We are badly in need of a strong, decisive, correction which will help this primary bull market grow further and I think this is it. No doubt savvy traders are already expecting the market to turn around from here as after market futures continue to point higher. In fact, tomorrow could see the bulls come back in a big way. So, no, this is not the start of a primary bear market. Never before has the stock market turned a primary bear trend after coming out of a recession and it won't this time round either.

For now, the Dow turns a short term bear trend, intermediate bull trend and a primary bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Sell in May and Go Away?

The Dow tested its daily 50MA today as it continues its drop today by 58.65 points on pressure from the Greece tragedy.

This week turned out to be extremely volatile as I have expected at the beginning of the week on mixed economic data and continued uncertainty surrounding the Greece problem. Even though this drop looks scary, it is totally reasonable and desirable within the framework of an intermediate term bull trend. As I have said before, this intermediate bull trend is extremely over extended and historically, the Dow does need some work to break out of its weekly 200MA resistance level as we have witnessed in the past. In fact, a few weeks of battling this level is totally normal.

Today's sell off has resulted in a huge ditch in the bond yield across the board and a huge surge in the total equities put call ratio to above 1 once again (see both charts). Such combinations always say market reversal the very next day so I would expect tomorrow to be a positive day in the market but whether or not the 50MA will hold as support level needs to be further confirmed.

So, is it time to "Sell in May and Go Away"?

Well, with today's technology and a chart of the Dow at everyone's disposal, I don't think it takes a lot of research to see that May isn't exactly a consistently negative month. In fact, it has largely been positive as well. So, lets not make rash decisions based on old adages and then give up precious gains.

For now, the Dow remains in short term neutral trend, intermediate bull trend and a primary bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Sunday, May 02, 2010

Heavy Weight Week Ahead...

The Dow ditched by 158 points last Friday as GDP turned out lower than consensus at a fair 3.2%.

In all fairness, the GDP number last Friday was well within consensus range with some pretty exciting recovery in some specific components. However, investors simply needed an excuse to sell out of the over-extended market like I mentioned last week. Once again we have bond traders rushing back into bond, depressing bond yields across the board and options traders rushing for put options, bringing the total equities put call ratio above par (see Put Call Ratio Chart).

The interesting thing is this surge in the put call ratio to 1.06 last Friday. This number shows that put options are now more heavily traded than call options, which is not a common occurance in a primary bull market. We saw a lot of it in the primary bear market back in 2008 but only a few times in January, February and March this year. Every single time put call ratio exceeds 1 this year, the market turned around on the extreme pessimism and then headed for new highs almost the very next day. Indeed, such surges against the primary trend usually depicts panic which usually reverses itself the very next day, as such, I would expect this week to be a week of struggle at the 11,000 level with the Dow recovering some lost ground on Monday.

This is going to be a heavy weight week with the ISM index on Monday and Jobs report on Friday. These numbers should produce lots of volatility in the market this week as news battle sentiment in this strong resistance zone.

For now, the Dow remains to a short term neutral trend within an intermediate and primary bull trend.