Joined Nov 11, 2007
1,458 Blog Posts

The Daily Breakdown: GES Revisited

So you missed the 8 point drop in GES after it was first profiled in this post, The Daily Breakdown: GES.

Don’t fret, as the stock has set up again perfectly for another fall. All the usual apply for these types of moves: monitor the 50 and 200 day moving averages, and make sure support at $44 gets busted before putting on a full position.

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The Daily Breakout: ECL

This chart was chosen as a study in support and resistance, trend lines, and pivot points.

The patient trader could have bought the breakout from the flat base, and then added shares on the successful retest of the pivot area. Also, the failed breakdown, evidenced by the price getting above the downtrend line, would have been an excellent entry point.

It makes sense in this environment to take a small position as a candidate breaks out, and then wait for a retest before committing more capital. The key, as this chart shows, is patience and discipline.

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Euphoric Bulls Led to Slaughter

After perusing the Investor’s Business Daily weekend edition, I am bewildered by the number of IBD 100 stocks that appear ready to make new highs. It was then I realized why slaughter yards use a series of sluices and gates to lead the naive beasts to their demise. The system allows the animals to be led easily to their deaths, keeping them calm and completely unaware of what is going to happen.

Odd, no?

How many bulls are blindly following other bulls, straight to the house of pain?

You see, this oversold rally has unfolded just like every one that has come before it. For four days we’ve have bulls getting in line behind the other bulls, blindly following each other into the trap. Yes, that clanking of metal and chains was the gate being locked and shut behind you.

What? You say you did not notice volume decline as the price rose? Huh? You did not notice the Nasdaq reversal on greater volume than Wednesday’s big gain? What about the failures, across the indices, at previous resistances and a major moving average?

Sure, dismiss technical analysis as hocus pocus. Ignore the lines. Then ask yourself how often you develop habits. Then consider how often the people around you exhibit the same routines, day after day, month after month, year after year. As the market is a proxy for human beliefs and behavior, what habits and routines are in play at this junction?

The following is a handy dandy list of economic data to be released next week. There are some significant reports due, so bears and bulls alike should be braced for more volatility.

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Key Resistance Bars Bulls in Early Trading

Both the SPY and the Nasdaq Composite held back the bull raid in early trading, with the indexes reversing just under the 50 day moving averages. This average is widely used by traders to determine whether markets are in an intermediate up or down trend.

So far, the Nasdaq was beaten back at 2696 (with 2700 noted previously here as heavy resistance), while the SPY reversed at 149. This level on the SPY has also been highlighted previously as an area of heavy resistance.

A SPY close below 148.00 will also place this proxy of the S&P 500 just beneath its 200 day moving average. This would place the index back into the bears’ honey hole, and may provoke more aggressive selling.

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IBD Abandons Their System and Places Market in Confirmed Rally.

In an unusually ass-backward move, Investor’s Business Daily switched their market timing signal from “Market in Correction” to “Market in Confirmed Rally.”

From Wednesday to Thursday, the leader in technical market timing decided to abandon their system of waiting for a follow-through day on the major indexes, proclaiming that the markets are safe to enter.

The paper reports, “On Wednesday, the IBD 85-85 index vaulted 3.3%, the New America 4.2% and the IBD 100 4.5%, as volume surged market wide. Those values, which are posted late in the day, signaled a follow-through session for each of those indexes.”

Acknowledging the departure from their tried and tested system of market timing, the paper noted, “IBD analyzes its proprietary indexes every day to help track the action of the stock market. Though we haven’t formally used them to signal follow-throughs before, they greatly contribute to our understanding of the market’s health, day in and day out.”

If the last several months of market action have left traders feeling bewildered and confused, evidently Investor’s Business Daily is equally perplexed.

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Improve Your Timing With RSI(2)

Many indicators are often representations of similar measures. I prefer to not get bogged down with multiple measures of a trend. To keep things simple, I typically monitor price and volume, MACD, RSI, and sometimes the Stochastics. While the MACD can help traders judge the strength of a trend and also identify when a new trend is beginning, the RSI is often used to help with timing, i.e., when to get in, and when to get out of a trade.

Because of its simplicity, the Relative Strength Index (RSI) is one indicator that has always made intuitive sense to me. The calculation is simply the average of x days up closes / x days down closes. What traders have often differed on is what average to use. The default with most charting software is a 14 day average. However, several bloggers have advocated, or at least discussed using a 2 day(period) average. I know Bill Rempell, Bullish Jim, and Marlyn from Filtering Wall Street (no longer being updated) have all presented trades using the 2 day RSI.

Some new research shows the benefit of using a 2 day RSI average. In the November issue of Technical Analysis of Stocks and Commodities, an article by Larry Connors and Ashton Dorkins describes the results generated during testing more than 8,000,000 trades from January 1, 1995, to December 31, 2006. The average one week percentage gain or loss for all stocks during the period tested was +0.25%.

After quantifying overbought and oversold conditions (RSI above 98 is overbought; RSI below 2 is oversold), their research showed that stocks with a 2 period RSI below 2 averaged a gain of +0.88% one week later (beating the benchmark average by more than 3:1). Conversely, stocks that were overbought with a 2 day RSI greater than 98 lost money (-0.17%) one week later as well as underperforming the benchmark.

The implications of this research are crystal clear: Traders should use a 2 period RSI if they want the indicator to actually give them an edge.

I have been experimenting with the RSI(2) for about a month and have anecdotally observed several characteristics of the indicator. 

  • First, it seems to work better with stocks that are trending up or down and making regular peaks and valleys. 
  • When applied to a stock in an uptrend, it will do a good job of identifying a buying opportunity, but does not seem to perform as well as a sell signal because good stocks seem to stay overbought for longer than they stay oversold.  
  • It seems to work especially well when the RSI(2) is 2 or less and the stock is sitting near support, whether it be a trendline or moving average. 
  • The RSI(2) does not seem to work well for stocks that have fallen off of a cliff or are in a sharp downtrend. In these cases, stocks can stay oversold for long periods of time before bouncing.

When I find stocks which are oversold on the RSI(2) and meet the above criteria, I will post the chart so that we may examine the effectiveness of the indicator.

2006. Connors, L. and Ashton Dorkins. “Does the RSI give you an edge?” Technical Analysis of Stocks and Commodities. 48-52, November, 2007.

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The Last Bull In Rome

I do not care who you are, today was a great day for the bulls. I could try and poo-poo the rally, but to what end?

No, to hell with it. I will poo-poo it.

 To begin with, for a day that found the Nasdaq up 3+% and over 80 points, the volume was just a little above yesterday’s and no where near the volume experienced during the sell-off. Obviously some players did not participate today. I’ll leave who they might be and why up for speculation.

Secondly, the Nasdaq has significant resistance ahead at 2700, created from both the falling 50 day average and overhead supply. Getting beyond that level anytime soon will be a shock to me. Should that occur, well then I will have been just plain wrong.

Thirdly, the gap left from today’s bull orgy is screaming to be filled. Look back over charts and see how often these types of gaps are left unfilled by indexes.

Finally, on Monday, everyone was a bear, and the sentiment was often mentioned as a reason to get long. Remember, Rome was lit ablaze? Well now everyone is a bull again, dreaming cockeyed dreams of “runs until Christmas.” Beware the sentiment.

To be true to my lazy and ignorant method of analysis, there are several bullish elements: namely the MACD and Stochastics are both looking like a powerful and lasting push up could occur.

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