Luna $ Ticks

September 25, 2008

Critical Point

Filed under: Trading SPX SPY — moontrader @ 4:13 pm

There’s a lot of speculation on whether the bailout plan will be approved or not and the markets have been swinging up and down, driven by the expectations. Remember that, every sort of speculation – whether by the media, by blogs, by reliable sources, whatever – is nothing but that: a speculation. It doesn’t matter what the theory is, it’s just a theory, not the fact. In moments like this, it’s important to stick to your criteria or strategy – whatever that is, even staying on 100% cash – and exercise a lot of caution. I, for myself, prefer to trade small positions and stick to my charts. Here they are.

To start with, I’m going to show two SPY charts. They are exactly the same, I just don’t want to get it cluttered.

As you can notice, SPY found a strong resistance today exactly at where DMA’s 3×3 and 7×5 meet (numeric values shown in the dotted red rectangle). At the very end of the trading session, it gave away a good chunk of its gains, still closing well in green. However, below the three DMA’s. MACD is a thin hair giving a buy signal, but the crossing angle is almost horizontal, while both lines are deep in negative territory. The Stochasticsis giving the buy signal, but in negative territory as well (the blue dotted line is zero).

The next chart is exactly the same, with a Fib retracement added:

Above you can see that the convergence of DMA’s 3×3 and 7×5 fell exactly on the 38% retracement level. In my analysis, the trend is still well down. However, if tomorrow SPY manages to close above those DMA’s, then this scenario would be at risk.

In the meantime, VIX is well up and no sign yet of a reversal.

Today it closed a little below DMA 3×3. In the last two weeks, everytime it touched the blue line (DMA 3×3) it jumped up. So, let’s see what’s cooking for tomorrow.

And last, man’s best friend at the moment: Treasury Notes.

Although the trend is well up, you can see through DPO’s that the Treasuries are overbought. DMA’s 7×5 and 25×5 should provide some sort of support.

To conclude, I think the market is at a critical point and on the verge of a huge movement, either way. Based on my charts, my bet is to the downside. However, no matter what your bet is, my advice is: stay small, stay cool and, most important, stay alive.

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5 Comments »

  1. Haha SPY is in a down trend, yet the treasuries are overbought. Hmmm how about SPY is oversold with a higher low on the MACD and treasuries are in an uptrend. But that wouldn’t fit your bearish bias =P. We are pretty neutral. We will probably be down tomorrow due to RIMM, and fighting over the bailout bill. I doubt people will sell stocks before this bill gets passed, (there will be plenty of buyers around the lows) and I doubt they will buy it up above the highs because they have already gotten burned last time. Neutral.

    Comment by Sia — September 25, 2008 @ 6:31 pm | Reply

  2. I recognize how diligently you work to trade your plan & appreciate the insight every day. Thanks.

    Ok – so we’re looking for new lows on a potential wash out move which is slated to occur b/ween now & sometime next week based on your time cycle estimation. However, how does one account for the resilience of the $BKX in not making new lows since July 15th?

    Yes – the $SPX, $NYA, $INDU, $NDX, $COMPQ, $XBD & $SOX all have, but if this is supposed to be a financially driven crisis, why is the $BKX not following suit? It’s actually slowly climbed above it’s 50 daily SMA & briefly popped above it’s 200 daily SMA on the initial bail-out rally. Is this a bullish divergence?

    Not to say that we won’t resume the move down given RIMM & the rest of tech-land after hours, but seems to me that if all markets are inter-related somehow, price action on what was supposed to be the weakest link in the chain should confirm the trend already in place, not move against it…

    Anyway, food for thought.

    Comment by mktstudent — September 25, 2008 @ 8:33 pm | Reply

  3. I appreciated your work again and will follow your advice – play small.

    Comment by David YZ — September 25, 2008 @ 10:07 pm | Reply

  4. MKTStudent, good points. I actually noticed the divergence you mention between the Financial Sector and SPX regarding July lows in a couple of posts last week. And I agree with you. This is supposed to be a financial crisis and yet the Financial sector is relatively doing better. My conclusion is that this crisis is not limited to banks and Wall St. The whole economy seems to be built on credit, therefore the lack of it affects every single sector. SPX is making new lows prior to the Financial Sector because the government is focusing only on saving banks, which, by the way, is a terrible mistake (and the Congress seems to be getting to that conclusion). But I think we’ll soon see $BKX follow the major indexes and produce new lows.

    Comment by moontrader — September 26, 2008 @ 7:54 am | Reply

  5. Sia, I never trade based on MACD or Stochastics or any other divergences and you’ll rarely see me point one here, especially in a market like this. They are just too tricky. You can see dozens of divergences in the charts above (just look at $TNX) and yet no reversal.

    Comment by moontrader — September 26, 2008 @ 8:06 am | Reply


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