Registered User
Joined: 12/19/2004
Posts: 457
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Since the end to a couple of rough months in Sept. and Oct., the market has acted well. I'm able to listen to Bloomberg at work, and I contstantly hear from the talking heads: "Stocks are undervalued relative to earnings. I'm very bullish on the market."
I'd like to point out to these talking heads that things always look rosy before the fall.
There have been multiple buybacks for some large cap tech stocks, but there were some companies who did the SAME thing near a market peak.
Example: EDS. Go back to Sept 2002, where the company announced a 50% drop in earnings related to financing stock buybacks. EDS needed to finance its options and retirement plans with EDS stock. Essentially, it sold a covered straddle through the OTC options market.
A covered straddle involves buying stock, selling calls (actually granted to employees) AND selling puts. The calls are hedged if the stock rises. The puts were sold to "reduce the costs" of financing the plan. These positions were implemented in 1999/2000--the top of the market.
Selling puts is a very close relative of buying stock. Buying stock and selling puts essentially doubles the amount of capital tied up in a stock.
Next bearish factor: inverted yield curve. This is something that gets talked about quite a bit. But what I haven't heard mentioned is the performance between Govt. debt and Corporate debt.
You can do this same comparison on TC2005. First, plot the ETF for corporate debt LQD. Plot a relative strength vs. IEF--the index for 10 year treasuries. Note that Govt. bonds have outperformed corporate debt since April. That tells me that the bond market isn't all that impressed with the prospects for business in the not to distant future.
Last, do a headline search for PBGC--pension benefits guarantee corporation. This is the govt. plan that is supposed to protect the retirements of workers who have employer sponsored pensions.
You will see that they are severely underfunded, and are asking for Congress to pass new laws to force employers to more fully fund their pensions. They also explain that corporate bankrupcies are on the rise.
If the trend had been down, these may have been discounted in the marekt. But the market has been in an uptrend, so this suggests to me that these factors have yet to be accounted for.
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Registered User
Joined: 5/17/2005
Posts: 221
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nice article ...well presented.
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Registered User
Joined: 12/19/2004
Posts: 457
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Today was a very strong day for the SP-500.
But volume told another story. There was less volume today than yesterday.
Plot the following custom indicator:
((v-avgV55)/avgV55)*100
Then, plot a 21 day simple moving average. Finally, plot 2 different sets of Bollinger bands based on a 21 day moving average, 20 and 10. Make sure they are different colors.
This is essentially a 1 day volume MACD. It compares daily volume to the 55 day average, and converts that number to a percentage. Using the percentages, you can figure out how many standard deviations today's volume is above or below the moving average.
What you will see when you plot this on the daily is a steady decrease in volume as the SP has rallied. Today, we are 1 SD below the average.
Not too long ago, we were 2 SD below the average, with the SP rallying.
Perhaps it is a seasonal volume pattern. Perhaps not. It makes me skeptical of the long term outlook.
Keep tight stops. When in doubt, sell out.
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Registered User
Joined: 10/25/2004
Posts: 15
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Can TC2000 tell me what the advance/decline information(Hi, Lo,Net,Tot.Vol,Up Vol,Dn. Vol,Trin)for the NYSE and Nasdque on any specific date?
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Registered User
Joined: 12/19/2004
Posts: 457
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Check out the Worden Market Indicators. There is lots of breadth data available in TC2005.
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Registered User
Joined: 12/2/2004
Posts: 15
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Hi rmr1976. Could you clarify a few things. Which window do you plot your volume formula regarding SP500? Is the 21day sma applied to this formula? If I understand correctly then you plot the BB's onto the 21sma? If this is correct I am not seeing how on Nov. 17 the SP500 was 1SD below the average (which line/indicator is below the average)? On a standalone volume window the volume was greater for the SP500 on Nov. 17 compared to the day before or am I missing something here? Which specific day not too long ago were we 2SD below the average? Thanks for your help.
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Registered User
Joined: 12/19/2004
Posts: 457
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QUOTE (spiker) Hi rmr1976. Could you clarify a few things. Which window do you plot your volume formula regarding SP500?
You should plot it underneath the chart. It doesn't matter which window, though. You can also plot volume bars and the same moving average below, to check the relationship.
QUOTEIs the 21day sma applied to this formula? If I understand correctly then you plot the BB's onto the 21sma?
The 21 period moving average is the average % that daily volume is above or below the 55 day moving average.
If your 55 day moving average is 100 shares, and your daily volumes for 3 days are 101, 120, 150, then the average is this:
[((101 - 100)/100) + ((120 - 100)/100) + ((150 - 100)/100)] /3
(0.01 + 0.20 + 0.50) = 0.71
0.71/3 = 0.2366
Simplified, it is 23.66%. For the past 3 days, volume was, on average, 23.66% greater than the 55 day moving average.
Now, the indicator itself will be fluctuating around that average. In the first day, volume wasn't much different than the average. But for the last 2 days, they were high volume days, and they will push the average up.
You plot the BB around the indicator itself. But to specify which BB to use, you need to base the bands around the 21 day simple moving average. I pick 21 days for the simple reason that Bollinger himself says 20 periods (more or less) is a good period to use.
If you want to make it even simpler, you don't need to plot a 21 day moving average of the indicator. Just plot the Bollinger Bands.
QUOTEOn a standalone volume window the volume was greater for the SP500 on Nov. 17 compared to the day before or am I missing something here?
The indicator is slightly different than comparing individual volume bars to the moving average.
The logic of the indicator is that the percentage differencebetween the daily volume and average should increase as the trend gains strength. Peaks in volume and peaks in price should happen on the same day.
If volume is increasing, it is also going to eventually make the moving average trend up. So, volume needs to continue to keep getting stronger, on a percentage basis, in order to keep this indicator moving up.
Suffice it to say that volume cannot keep expanding at an infinite rate. It points out divergences between price and volume much more efficiently. If a stock makes a new high, and volume tags the upper bollinger band, that is healthy, although it may be overbought at that point. If the stock makes a higher high, but volume is, on a percentage basis, not even near the 1 SD band, that is a divergence in my book, even if volume is technically above average. Even worse is when the stock makes a new high, but volume is at the 1 SD below the average. That is something to pay attention to.
To make this even simpler, look at a 21 day linear regression of price, and a 21 day linear regression of volume on the SP-500. You will see that price is moving up, but volume is sloping down.
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Registered User
Joined: 1/1/2005
Posts: 35
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Blah blah!
OPINIONS ARE OFTEN WRONG in the market!
Don't trade on opinions. Treade on what you see...not what you think. I see the market going up. I see the market in a rally...thus I am making money. Some are saying...this is a sucker rally. The outlook isn't good. I don't believe this. I don't believe that. My opinion is this. My opinion is that. Blah Blah Blahh!
Trade what you see....not what you think. Opinions are often wrong!..but the market never is.
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Registered User
Joined: 1/6/2005
Posts: 4
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thanks alot;thats why i like technical analysis
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Registered User
Joined: 12/19/2004
Posts: 457
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Shatterd,
You are making money, but the question is, will you keep it?
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Registered User
Joined: 12/2/2004
Posts: 15
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Shatterd sounds like a grinch at Christmas. Don't be so crtical. Of course one would not trade opinions ... unless they want to lose their money or they've got a very reliable opinion. Would you listen to Warren Buffet? The market does what it is going to do regardless of opinion, but don't rain on rmr1976's desire to try to help others. The forum is for each of us to help decide what to use. The only way to increase certainty is to decrease time frame and even then the market doesn't care if your reason for entering a trade was correct. I doubt if you currently ever enter a trade without "thinking" about an entry, exit, stop loss points! Be constructive if you're going to make sarcastic remarks.
By the way rmr1976 when I apply the 21 period (daily chart) linear regression to volume and price for the SP500 I don't see what you see. My chart shows the regression going down on price and up on volume. Any comment as to why you see something different.
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Registered User
Joined: 12/19/2004
Posts: 457
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Spiker,
Sorry. I looked at my settings, and it was a 13 day regression on price as well as volume.
The angle was steeper a few days ago. But it is still sloping down slightly, while price is sloping up.
Do you have the indicator I described set up properly?
Here are the template settings. I'm putting it in outline form, so you can tell which are parent, and which are child indicators.
Middle window:
1. ((v-avgV55)/avgV55)*100 1 period
A. Bollinger Band: 21 Bar 20 SD
B. Bollinger Band: 21 Bar 10 SD
C. Moving Average: 21 bar Simple
Bottom Window:
1. Volume Bars
A. Moving Average: 55 Bars
B. Linear Regression: 13 bars
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Registered User
Joined: 12/2/2004
Posts: 15
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Now we are seeing the same thing. Thank you for your help.
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Registered User
Joined: 12/19/2004
Posts: 457
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Update:
Back on October 24, I wrote the following:
Today likely marked a significant bottom...
So far, I can count 4 waves that compose the wedge. I suspect this is wave e of the wedge/ending diagonal.
Wave e of this diagonal triangle (wedge) is likely to lead the market up toward the highs for the year, and may permit the SP to make a slightly higher high. I do not anticipate 1300 to be taken out, but the final wave of a diagonal may overshoot. I do believe 1250 (+/- 10 points) is a reasonable target and would be very cautious with long positions at that time.
Keep in mind that the implications of an upward slanting wedge are bearish, but only upon the breakdown. Short term traders may be able to profit from the coming swings by playing the long side of the market, and using previous support/resistance levels as targets.
Intermediate term trend followers could maintain any long positions and use a rather short to intermediate term moving average as a stop.
Longer term investors are likely to find stocks to be a high risk/low reward proposition at this time.
Look out for signs of exhaustion (ie. candle reversals) at key resistance levels. The market action is likely to be very deceptive for the next few months.
I'd be especially cautious around March. If this analysis is correct, the breakdown from the wedge pattern could rival the initial decline from the 2000 high."
Well, I'd call today a candle reversal day. My price targets for the move from the October low were fairly close. I my range of 1240-1260 was less than 9 points from the ultimate intraday high. I've been scaling out of long call spreads, and bought some bear put spreads last week, just before the holiday.
In my view, today completed what candlestick chartists call an bearish engulfing pattern, which is a reversal. It was especially severe, because it engulfed the bodies of the prior 2 candles, and even penetrated the midpoint of the candle for 3 trading days ago. Today also closed below the 5 day moving average for the first time in 20 days.
Various indicators tell me we are likely to be at a significant top--Price patterns, volume, momentum, breadth, cycle analysis, contrarian opinion, etc.
For the adventurous, initiating shorts or bearish trades appears to me to be the lower risk play at this time. A close stop for intermediate traders (ie. 1280), provides a low risk point to initiate shorts. If held significant longs, I'd be getting out of the market asap. At the very least, be hedged.
Good luck.
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Registered User
Joined: 12/19/2004
Posts: 457
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Update:
I thought I'd revisit my bearish analysis to see if anything has changed.
Since my note on 11/28/05, the SP-500 has experienced strong resistance at the 1275 level. My prior post suggested 1280 would be a good stop point if you initiated shorts. It seems that this analysis still holds.
A look at all indicators and indices still suggest to me that we are at a significant turning point in the market, and that the path of least resistance is down.
Reason 1: Bearish activity in Russell 2000
Consistent with the negative divergence in breadth, the Russell 2000 has performed poorly over the last 3 sessions. Today's debacle took this index down 1.6%. It is down 2.64% from the peak on 12/14/04.
From an Elliott perspective, it would appear that the wedge (ending diagonal) starting at the 8/2004 low is complete. In addition, there is a small wedge (ending diagonal in Elliott terms) on the daily time frame, that also completed with a breakdown on 12/15/05.
The completion of these patterns suggest a strong trend in the opposite direction.
Reason 2: Breakdown in the Nasdaq composite.
There looks to be a completed Head and Shoulder pattern on the COMPQX. Today's decline was in excess of 1.3%.
The volume pattern isn't perfect, as the left shoulder occured during Thanksgiving week with low volume. But there was unimpressive volume at the head, and an increase in volume on the past 2 down days. The longer term pattern suggests this is a fake breakout from an ascending triangle, as I expected from an Elliott count.
Reason 3: Increasing volume in SP-500 on down days
The strongest index so far has been the SP-500. It has not formally broken down, but the failure to maintain the highs suggests a bull trap. Volume increased on Friday (quadruple witching), and anyone looking at intraday data shows weakness in the afternoon going into the close.
Reason 3: Negative readings in volume, breadth, and momentum. Momentum, volume, and breadth remain bearish, even more bearish now than on my previous post.
The key point remains 1250 on the SP-500. If that fails to hold, especially before the Christmas holiday, that will be a strong sign of bearish things to come.
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