Luna $ Ticks

September 10, 2008

Did I see a rally?

Filed under: Trading SPX SPY — moontrader @ 3:54 pm

Or am I crazy? I can swear it was there half an hour ago.

Anyway, let’s not get overexcited. Excitement translates either into frustration if something goes wrong, or overconfidence if everything goes right. Both are detrimental to good trading. Let’s just focus on numbers and charts. After all, as technical analysts, we are not supposed to have emotions.

Today’s action only adds up to our sharp bear scenario. I’m not going to say much more, this post is more of a follow-up with the chart for today. It comes with an extra indicator I barely use, but sometimes it helps a lot. Many people talk about overbought and oversold levels, and to measure that they use Relative Strength Index. RSI does not work in a highly volatile market and please, don’t trade based on this indicator. Simply because this indicator has a limit, which is 100%. Meaning, you can’t really see the strength of a sharp movement. Instead, I use an extremely uncomplicated indicator: Detrend Price Oscillator. It’s a simple moving average minus the close of the current bar.

DPO usage is extensively explained in DiNapoli’s book “Trading with DiNapoli Levels,” a must in any trader’s library. To come up with overbought/oversold levels, just look at the last 6 months or 1 year (daily chart) and eyeball levels at which the market has significant rebounds. It works amazingly well. Last Thursday SPY reached an intermediate oversold level. Thus, a rebound. I marked that level with a thin orange line. Now the Detrend is back above that level, just so you know.

Important to notice that Stochastics, MACD are behaving well, in negative land, and SPY traded the whole day below DMA 3×3. As I said before, every time we approach that line, we should see a sharp move back down if the trend is still down. Probably – I say probably – tomorrow will be a negative day.

On the news, forget about Lehman. The next big ones in focus are WaMu (-29.7% today) and AIG (-4.7%). Fannie and Freddie fell sharply today as well, erasing yesterday gains. Seems like everything is converging to a big sell-off. At least it seems.



  1. Should the DPO(3) be the one below the horizontal line to show ovesold condition? As I eye ball the chart, I see on 9/4 that to be the case, while on 1/22, 3/10 etc both DPO3 and DPO7 had fallen below that line. Similarly, do you also use this to signal overbought levels and if so what is the criteria for that?

    I notice the DMA3X3 has moved about one point lower from yesterday – putting the clamp on!!

    Comment by Adam — September 10, 2008 @ 6:42 pm | Reply

  2. Looks like it may lead to your 19th-22th low

    Comment by Serg — September 10, 2008 @ 8:42 pm | Reply

  3. It would be extremely rare for the market to crash on Sep 19th. That’s options expiration day. Come Thursday, any out-of-the-money options would be trading at near pennies with zero time value. I just might gamble some Vegas money on your scenario. Thanks.

    Comment by Lawrence Chiu — September 10, 2008 @ 10:28 pm | Reply

  4. Who’s talking about market crash?
    A LOW

    Comment by Serg — September 11, 2008 @ 3:04 am | Reply

  5. Michael Parness is predicting a 1000 point, one day drop in the Dow.

    “We are going to get that 1000 point down day shortly I believe. This market is on the verge of busting to the July lows and less!”

    Comment by Jigsaw — September 11, 2008 @ 6:24 am | Reply

  6. Good morning everybody.
    Adam, those days you mentioned, 1/22 and 3/10 can be considered extremely oversold, and you can see the strength of the drop in the indicator. If you were using RSI, you wouldn’t be able to properly measure that strength. The horizontal orange line I draw is a normal oversold level. If a huge drop comes in the next days, we should be looking for levels around 1/22 and 3/10 as you noticed.

    Comment by moontrader — September 11, 2008 @ 7:36 am | Reply

  7. Lawrence, my scenario is an edge, it might happen, it might not on those days, 09/19 or 09/22, which, as I said, are just candidates for a bottom date. Usually the last leg of a correction is the steepest one, I thought it would fit well that scenario. I’m doing like you, I’m betting only Vegas money on this scenario. Low money, if you lose you don’t get hurt too much, if you win you make a lot.

    Comment by moontrader — September 11, 2008 @ 7:41 am | Reply

  8. One more thing, we should break July lows between today or tomorrow, otherwise I would start to be worried with my scenario.

    Comment by moontrader — September 11, 2008 @ 7:43 am | Reply

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