Click chart to enlarge We bought some SSO when the market broke through the top of its downtrending moving average where indicated by the first purple arrow on the chart above. Somewhere there is a post or comment made at the time about this trade. We sold some DDM when the market broke the uptrending channel at the second purple arrow. There is a post or comment that mentions that, too. These were our only trades for the time period shown on the chart above.
The reason we mention this is because it seems there is some confusion on this blog about the purpose of the channels/averages and TA in general. We tried to sum it up on the previous thread in a comment to Anon, then realized that a picture is worth a thousand words, hence this new post. The bottom line is that since the market broke the channel and moving average, we're in no man's land right now. You must be cautious because the market does not have a clear direction as it did when it was in its downtrending channel or when it was in its uptrending channel. Until a new channel forms, the market is in limbo (stage 3).
Here is our comment to Anon on the previous thread...
Anon, there are four stages...
Stage 1- sideways after a downtrend - choppy, breaks the moving average many times in both directions
Stage 2- uptrend (price is above uptrending moving average)
Stage 3- sideways after an uptrend - choppy, breaks the moving average many times in both directions
Stage 4- downtrend (price is below a downtrending moving average)
These stages typically take months or years to play out, using the 200dma as the average. We've applied the concept to the current short term rally just to get a better idea of how to time it for ourselves. Right now, the market as a whole is no doubt in a Stage 4 downtrend. There's no disputing that. It is trending lower below a downtrending 200dma. If you zero in on just this little multi-week rally that we're having, then the market is in a little Stage 3. It is no longer in a Stage 2 uptrend. Nor is it in a Stage 4 downtrend... yet. Once it enters Stage 4, if it does, then you have to assume it's going to zero until it stops falling. It may just be resting right now, consolidating the recent huge advance of the past several weeks. We may start a new Stage 2 uptrend after this consolidation is over, or we may fall into a Stage 4 downtrend. Nobody knows. We sold some DDM when the channel broke because we had left the Stage 2 uptrend, making the market riskier going ahead. It isn't that we thought it would tank, it's just that once the channel was broken, the odds of it rallying further were much less than they were when the channel was intact.TA is not meant to give you foolproof buy and sell signals, although sometimes it does. What it really does is helps you put the odds in your favor over time.Right now, the market is less decisive than it was when it was in the channel. It could go either way. We buy the dips when the market is in the channel. Right now, we would not buy the dips because if one of these dips makes a new low, we may be starting a Stage 4. You see, the stages help you decide what mood to be in... bullish, cautious, bearish, etc.Right now, we're in a short term Stage 3, so our mood is neither bullish nor bearish, it's cautious.
14 comments:
Snot, Thanks for the summary post. I printed it out for reference. One comment - your chart seems to go until April 3rd ... which isn't here yet. ???
XLF is about 50 cents from the 100dma right now. If it makes it there on top of all this hoopla from G20 & the mark-to-market scam, I am betting it wont make it past. So I'm buying FAZ now at 17.20 and preparing to buy more when XLF gets up around 9.8
Hey Snot whats up with that chart? You had me thinking it was April 3rd. lol. April 2nd is already on the chart, and the market hasnt even opened yet.
You're right, Icon, that is weird. It must have something to do with the chart compression tool. To make the past few weeks show up, you have to compress the chart. It doesn't change the MA or the channel, but plays games with the dates.
The Dow and S&P just broke through the 75dma. If it can manage to close above it, it'll be the first time since early June 2008. It'll be a real milestone if it happens. It wouldn't be a reversal of the bear market on its own, but it would be the most bullish move the market has made in almost a full year.
so no one is shorting here besides Icon? (FXP, SDS, QID etc...)
With the G20 hype and M-to-M rule already out, what can push the mkt higher?
It may be a good idea to enter some shorts, agree?
IYR has reached its 50dma... it even surged past it. Needless to say it has no business being there. Not by a longshot. The shorts are gonna jump all over that. Myself included.
Notice what GLD is doing. I bet the gold bugs are having fits over this! Like I said, DZZ was the way to go. It doesnt make much sense given the monetization going on, but hey I just read the charts. And that's a good thing because the news I've read today is some of the grimmest so far: 9% unemployment by the end of the month, AIG labeled a Ponzi scheme by reputable institutions, bond yields not falling like Bernanke expects, etc. That's some grim stuff! Rally ho!
I took some profits today, went to 50% cash and did a 1.5% of my portfolio short with SRS at $46.18 as a Snot style hedge, not as a money maker. I'm guessing down tomorrow with jobs numbers, but who knows?
We broke through the 75dma yesterday and closed about 80 points above it. For all intents and purposes, we're basically just sitting at resistance awaiting confirmation that the average has been decisively broken. We need some follow-through before saying that the market is "different this time". Friday may not provide that. It's usually a dead day. Next week we'll know. Our guess is that there will be follow through, to about 8600 or so, and then the market will correct back to the 75dma. Just a guess, though, based on the S-curve it's forming.
There is a new uptrending channel on the indices.
http://kepfeltoltes.hu/090403/116564887spx_www.kepfeltoltes.hu_.jpg
You are really reaching to call that a "new uptrending channel". Looks more like the beginnings of a tipping over point.
Whew. Yesterday wasn't the day to buy SRS. I'm glad I put a 3% stop under it. It is now down 16%. Snot, some people say that institutions are starting to buy into the market. If so, this 75 DMA may be the bottom resistance like you suggested. I hope so, since I'm now in 76% with 24% cash and no hedge.
Icon must be gut wrenchingly underwater right now. Ouch. Told you all his chart reading "skills" were hogwash.
Ya, you made your little 'scalps' here and there...but is it really worth it when you get your head chopped off when things go the other way on you like this? You'll have the weekend to ruminate on that one. I'm sure you'll think of little else.
Damn those inverse ultra ETFs are capital detroyers!!
Nonsense Violet. Only a fool would short the market to any significant degree until Bernanke is done taking his dump on the dollar. I havent even gotten a top signal for the market yet. Rest assured I will get one. And I'll post it here along with the analysis just like I did back in december. I have complete confidence that I will be able to call the next down leg well in advance. Only then will I be commiting to a serious short position. My best guess for a top is 860 on SPX, but it is too soon to tell since this rally is so shortlived.
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