Luna $ Ticks

October 29, 2008

Case for a Bottom and Guideline to Trade this Reversal

Filed under: Trading SPX SPY — moontrader @ 9:22 am

Some yesterday asked me to explain through my usual set of studies why I called I bottom. Here’s an annotated chart with the case:

(I’m showing ToS charts because they plot DMA’s ahead of the current bar – Tim, suggestion for Prophet Charts)

What happened is called by Joe DiNapoli a Double RePo – a Double Re-Penetration (ok, you can get excited about that) of DMA 3×3. A Double RePo is a close above DMA 3×3, followed by a close below it, followed by another close above it – all in less than 8 trading sessions. This happened inside the timeframe suggested by him between the first and the second times SPY closed above it. Right after that, it came back below DMA 3×3 and closed below it for 4 sessions until it broke above it in an amazing rally yesterday, while MACD and Stochastics gave buy signals.

Question: am I 100% confident we won’t have another low for the year? No. What to look for in the next days? Here the guideline:

  • DMA 3×3 turned into a support. Another close below it would be threatening for the bulls.
  • I expect SPY to test and possibly break DMA 7×5, closing above it, in the next days.
  • I expect MACD to rush towards the zero line in the following week. The fact that it is giving a buy signal means that the trend is losing strength, but a more solid confirmation of a trend reversal and a bottom in place would come with MACD turning positive.

Another question: is there something weird in the chart above? Yes. Too deep of a retraction. What looks like a triple bottom in an intraday chart, looks like a double bottom on a daily chart. So, that could be a double bottom.

But I underline: jugding by the sort of reaction we had yesterday, followed by the turn in the indicators, odds are, in my view, that we have a bottom in place. Let’s also not forget our friend VIX, who gave us so many great signals this year. Coming below 50 would be good for the bulls. Right now, 10:10 ET, it’s around 70.

Last, a poll:

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4 Comments »

  1. Hi Moontrader,
    Can you tell me how to get the DMA plotted on TOS? Even TOS could not tell me.
    Thanks,
    Dan.

    Comment by Dan — October 29, 2008 @ 10:28 am | Reply

  2. Moon, great site. Just started following you here after seeing your posts on Tim’s site.

    best,
    rb

    Comment by Bonanza36 — October 29, 2008 @ 10:37 am | Reply

  3. Dan, DMA stands for Displaced Moving Average and you can find it on Prophet Charts. However, on ToS charts you have to program it. Here is the code, just press “New Study” and paste it there (do the same for the others, 7×5 and 25×5):

    input length = 3;
    input displace = 3;
    input price = close;

    def MAPrice = Average(price, length);

    plot DMA = MAPrice[displace];
    DMA.SetDefaultColor(GetColor(1));

    Comment by moontrader — October 29, 2008 @ 11:13 am | Reply

  4. With the late sell off, has it closed below the 3X3 dma? If so, what is your next call?

    Comment by bullnbear87 — October 29, 2008 @ 3:16 pm | Reply


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