Luna $ Ticks

August 30, 2008

Cross-eyed Bull

Filed under: Trading SPX SPY — moontrader @ 2:43 pm

In the last couple of weeks the market has been choppy to say the least, bouncing between extremes, frustrating bears and bulls. Rallies would last two to three days and then the gains would be lost in just one session, in what would start as a simple and healthy correction and turn into a nightmare for the bulls. Although there’s still no clear sign of a short-term trend reversal, action in the last days suggest that this short-term uptrend is reaching a critical point of exhaustion.

Last Friday’s drop is concerning, but cannot be considered totally threatening to our scenario of SPY climbing up to 132.55 until Tuesday or Wednesday, at the latest. From Friday’s close at 128.79, that would mean a rally of almost 3% in two trading sessions. Absolutely not impossible however, in my view, time is running out and the inability to reach the 132.55 level by Tuesday or Wednesday would considerably increase the chances of another leg down without new highs.

In the chart above you can see that SPY closed above the three DMA’s and MACD is still positive with a buy signal (positive delta). Stochastics %K (black line) is also in positive territory and well above %D (red line). I’m showing both Stochastics and MACD today because sometimes, when the market is trading sideways, MACD loses efficiency, which might lead to erroneous readings. Stochastics is more reliable in anticipating breakouts in sideways markets. That said, notice that Friday’s drop didn’t do much to Stochastics: it’s pointing well up.

Notice also another important thing: SPY’s low today was right on the trendline (dotted). In fact, my stoploss for the small position I got two days ago was right below this trendline, at 128.40. Everybody is talking about SPY 126.40 being an important support, but for me, the important support now is 127.70: this is where both DMA 25×5 and 3×3 will be during Tuesday. DMA 7×5 will be at 128.20 (I’m getting these values from ToS charts, since Prophet charts don’t show values ahead of time – even when I’m displacing the moving averages forward in time). For those familiar with Pivot Points, next week Pivot will be at 128.60, while the First Resistance Level will be 130.56 and the Second one 132.33 – which is, by the way, more or less my target of 132.55.

Since Friday was also the last day of the month, I thought it would be interesting to talk about the medium and long term trends. And that doesn’t look so good for the bulls at all.

The weekly chart:

Although MACD is giving a buy signal, both lines are well below zero. Stochastics is giving mixed signals though. However, most important to notice is that SPX closed on top of DMA 7×5, well below DMA 25×5, and still above DMA 3×3. Therefore, the trend is still down until proven otherwise.

If you have some doubts about the medium term trend, just check the monthly chart:

The chart speaks for itself: there’s a huge potential for a major plunge ahead. Just everything is pointing down. MACD has just entered full negative territory, just like it happened in the beginning of 2001.

In my last post, I called a Full Swing Uptrend, but I’m afraid I’ll bite my tongue. This is more like a cross-eyed bull, who doesn’t really know where he’s heading. I believe we have the potential for a rally Tuesday and maybe Wednesday, but I’ll remind you that, for me, the important resistance level is 1325. Let’s watch closely how prices behave as they near this level – if they ever do.

August 28, 2008

Uptrend in Full Swing Mode

Filed under: Trading SPX SPY — moontrader @ 3:29 pm

The title says it all. It seems that the scenario of a short term rally for the next couple of trading sessions – or, at least, until September 2nd – is absolutely valid.

SPY closed well above the 3 DMA’s, while MACD and Stochastics not only are in positive territory, but they’re also giving buy signals. SPY also broke the dotted trendline, pierced through last Friday’s roof. VIX fell a bit but it’s not yet in the range between 18.63 and 17.56. Volume today was incredibly low, but this whole week has been such due to vacations, so it’s useless to take that into consideration for now.

Just to remind you of the criteria I’m using to consider the uptrend:

  • SPY closing above Daily DMA 25×5
  • Daily MACD in positive territory

Caution if one of these two criteria is negated. In case both are negated, there’s a good chance the trend has turned down. I would also like to remind you that SPY 132.55 is an important resistance, and the way prices react around that level will tell us a lot about the trend.

August 27, 2008

Cloning

Filed under: Trading SPX SPY — moontrader @ 3:31 pm

Because of its fractal structure, the market is constantly cloning itself on different levels: the same patterns you see on intraday charts are valid for broader time frames like daily or weekly charts. Most of charting techniques are based on these patterns: Elliott Waves, Candlesticks, Figures (Head and Shoulders, Rising Wedges, Flags, Channels, etc…). However, most of these techniques take into consideration mainly the price element – even if, for instance, a well formed Head and Shoulders implies symmetry in time. I’ve mentioned before how difficult is to find a study based on time, so one of this blog’s main objectives is to delve into the field of time.

The departure point – and main source – of my research is Chistopher Carolan’s Spiral Calendar. He made a great discovery – no doubt about that – but he presented in the book what I deem to be a quite faulty technique deriving from his findings. In any case, I do recommend reading his book (which is out-of-print, but the link above points to used books on Amazon, where you can get it as cheap as $10).

Going back to the main point of this post, the market is constantly cloning itself – especially around trend reversal points – and, if you find out the originating element, sometimes you can predict what is about to happen in the near future. Once you find this important element, you have to check if that pattern fits inside the current context, in order to create an edge for a trade.

In a previous post entitled New Date Proportions, I talked about September 2nd, 2008 and a possible top on this date. We’re approaching that date and, considering today’s action, it seems that yesterday we had a short term bottom. If September 2nd will be a top corresponding to the top of May 19th, then there’s a chance that yesterday’s bottom corresponds to that of May 9th. Here’s what I’m talking about:

If that’s the case, we shouldn’t revisit yesterday’s bottom of 126.58 (SPY) before September 2nd. If we do, then this scenario is invalidated and we have to re-assess the situation.

There’s indeed a couple of other aspects in recent action calling for a rally in the next days, which would be in agreement with a new top on or around September 2nd.

First of all, today we closed above DMA 25×5 (@127.41), DMA 3×3 (@128.34) and on top of DMA 7×5 (@128.66) [It’s now 4:20PM ET and SPY is trading around 128.63]. Needless to say that Stochastics and MACD are both in positive territory. The trendline shown above was touched today, but not breached. However, we traded a good chunck of today close to it. Now, market sentiment, our friend VIX:

Notice the two bluish trendlines. They’re not exactly a wedge, but then again, VIX is not exactly a stock. Anyway, the bottom yesterday in SPY sent VIX up to kiss the upper trendline and bounced back down. We might be heading now to the lower one. When we reach it – if we do – we would be in between the levels that I mentioned before. I marked with green circles where the numbers 18.63 and 17.56 come from: the two close bottoms following May 19th. In an ideal world (and maybe we live in that world, afterall) the reversal would happen in that range. However, if we do come below 16.09, then the market would have rallied way too far and we would need to re-asses the situation. As a target, I have SPY 132.55.

Just to be in the game, at the beginning of the day I opened a tiny position, buying SPY calls, September, 130. Yesterday I said I wouldn’t do so, but I couldn’t resist. As many say:

“Trading is like shaving: if you don’t do it everyday, you’re a bum.”

August 26, 2008

Banging the head on the floor

Filed under: Trading SPX SPY — moontrader @ 3:19 pm

Market today revisited, or better, traded around SPY Daily DMA 25×5 – most of the day below it. Watching closely the Daily chart:

If you notice, there’s a floor SPY has been banging the head against in the last two weeks and that is around 126.60. That seems to be a solid concrete floor: lately, every time SPY touches it, it bounces back up. Where does that come from on a broader context?

This is something extremely important I learned from Tim Knight, which I mentioned before in a couple of posts: use different tops and bottoms with fibonacci retracements to find the one that most conforms to market action.

Above is the 126.60 in a broader context, using the 120.02 bottom (July, 15th, 2008) with the top of 150.58 (December, 11th, 2007), which is the beginning of a major fall. This makes that a significant top, and the proof is that prices snap to fib proportions perfectly in many points: just take a look at the full resolution chart (click on the chart below – I’ll not circle the points to avoid cluttering a simple and clear chart, but they are pretty obvious).

I’m also showing the 129.30 level, which seems to be an important short term roof. As soon as it’s breached, prices should rush towards 132.5.

To my satisfaction, SPY ended today’s session at 127.40, which is above Daily DMA 25×5 (127.26), around DMA 3×3 (127.46), while MACD’s fast line remained in positive territory – although today we had another flirt with disaster. Convergence between DMA 25×5 and 3×3, plus MACD in positive territory: good chance of a rally tomorrow.

For a quick and easily manageable trade, I would recommend going long and having SPY 126.40 as the stoploss. I myself won’t be doing anything. I prefer to just sit and watch, while saving some energy for an opportunity that is approaching on the short side. Bear hibernation hasn’t finished yet, but is about to in the next days.

August 25, 2008

Flirting With Disaster

Filed under: Trading SPX SPY — moontrader @ 5:07 pm

I said before that we would need a close below DMA 25×5 to negate the short-term uptrend. Here’s where SPY ended up the day:

Although SPY closed exactly at the DMA 25×5 level I mentioned in my previous post, 127.02, the fact that this line was revisited for the third time in less than a week means weakness. I’ll repeat that in the case we have a close below that line and MACD goes into negative territory, the short-term uptrend scenario will be invalidated and we might head sharply lower. On the other hand, it’s important also to notice that volume today wasn’t much different from last Friday. Considering the extent of the drop, I’d say that volume was extremely low.

I wasn’t expecting such a drop today, but the scenario of new short-term highs until next week is still valid. Just to remind you, the set of criteria I’m using for a short-term uptrend is very simple and it is:

  • Daily closes above DMA 25×5
  • MACD in positive territory

I would short only when both criteria are met.

August 24, 2008

Hibernation

Filed under: Trading SPX SPY — moontrader @ 6:42 pm

“Hibernation is a state of inactivity and metabolic depression in animals, characterized by lower body temperature, slower breathing, and lower metabolic rate. Hibernation conserves energy, especially during winter. Hibernation may last several days, or weeks depending on species, ambient temperature, and time of year.”

For financial bears out there, this is still hibernation time.

On Friday, 22nd, the market rallied to close at the highs of the day. Not only SPY bounced off and away from DMA 25×5, but it also closed above DMA 3×3 and 7×5, confirming a short term uptrend and increasing the odds that we will see new highs before the downtrend resumes.

SPY also closed hitting on two important trendlines (dotted) which means that we might see some weakness on Monday. But DMA’s levels should hold and, on Monday, they’ll be:

DMA 3×3 = 127.65

DMA 7×5 = 129.44

DMA 25×5 = 127.02

To keep it simple and clean, I didn’t add other studies to the chart, but Stochastics is giving a buy signal in positive territory (above 50%) while MACD is in positive territory with an “almost buy signal.”

VIX is already below 20, but ideally it should be below 18 before the reversal. Two important things to notice here.

First. On May 19th, 2008, VIX was below the all-time top of October 11th, 2007. We don’t need to reach those levels, but the point is: if this is a leg up correcting the down movement from May 19th to July 15th, SPY peak should correspond to a VIX bottom. However, VIX is already below August 11th level, when SPY peaked at 131.51. This increases the odds that SPY is heading back above 131.55. I would expect VIX to bottom in the range between 18.63 and 17.56, which correspond to the two immediate short-term VIX bottoms after May 19th, when the trend reversed.

Second. Usually SPX ends a correction with a peak in VIX and, on July 15th, VIX peak was below March 17th and January 22nd highs. This is a strong signal that we’ll go below July 15th bottom before the end of the year. I believe that, from where we are today, there’s much more room to the downside than to the upside, so I prefer to be a bear: hibernating and saving energy (or better, money).

August 22, 2008

New Date Proportions

Filed under: Trading SPX SPY — moontrader @ 1:45 pm

A couple of posts ago, I made the case for a top on 08/11 and it did happen. However, the market isn’t behaving as it is “THE TOP.” And the proof of this was yesterday and today’s market action. As I posted yesterday (and, btw, the day before yesterday) with simple charts that deliver the message, DMA 25×5 held prices, therefore, short term trend is still up. Which means, we can see new highs in the next trading sessions. So, here’s my idea for a top, in terms of time. There’s no blog around using time as part of a study, so here’s something you might find helpful.

In this first chart, you see how the top on May 19th has consistently producing tops according to these proportions, and the next important date is September 2nd.

In the next chart, you can see that from July 15th to September 2nd is a period equivalent to all-time top October 11th to the first significant bottom on November 26th. Notice how October 11th, 2007, relates to the bottom on July 15th, 2008, with an error of only 1 day (that’s 1 day in a period of 279 days!).

This last chart shows September 2nd relating backwards to certain dates. Other than the dates pointed in the previous charts, you have the top of July 23rd relating to, what I believe, will be an important date for the markets.

Just to remind you, if we do resume the downtrend, there’ll be no doubts about it from the very beginning. It’ll be fast and furious.

August 21, 2008

Cash and Popcorn

Filed under: Trading SPX SPY — moontrader @ 3:14 pm

Yesterday I posted a chart showing that the confirmation of a downtrend would be a close below DMA 25×5. This is the updated chart:

However, I also believe there’s no much room to the upside that worth going long. So, my strategy for now is to sit on my cash and patiently watch the market with a bowl of popcorn on my lap until I see a good entry point. Meaning either one of these:

  • A close below DMA 25×5 along with MACD sell signal confirming the downtrend
  • SPY 132.55 (stoploss right above it, around 133.5)

Since I’m trading options, this is all about timing, so it’s better to wait and catch a big chunk of a movement as it happens rather than grabbing the tip of a top and witness the options lose Theta before prices gain momentum to the downside.

August 20, 2008

Going up

Filed under: Trading SPX SPY — moontrader @ 3:34 pm

All I have to say is…

August 19, 2008

Mixed Signals

Filed under: Trading SPX SPY — moontrader @ 5:45 pm

Although I would feel more comfortable in shorting if I had seen SPX reaching 1325, there are mixed signals that a short term top is in place. In a previous post, I showed this chart:

The top of 05/06/08 produced indeed a short term top of a relative significance in the F5 series (42 days).

Here’s the updated chart, with an extra bottom/bottom correlation added (the orange one, pointing to 07/15 year bottom) (notice how accurate the tops can be projected from past ones):

MACD and Stochastics are both giving sell signals, but they’re still in positive territory. Today we also traded the whole day below the trendline that I showed yesterday, as well as below Daily DMA 3×3 (blue) and Daily DMA 7×5 (green). However, we still haven’t pierced the Daily DMA 25×5 (brown), which is the most important one and holds trends fairly well:

Timing is very important, and I prefer to wait for a clear confirmation of a trend reversal instead of trying to catch the extremes of a movement. For me, the confirmation would be SPY/SPX closing below the Daily DMA 25×5 (brown).

Next Page »

Blog at WordPress.com.