On Friday traders were hit with a combination of news and events that pushed indexes to new six-week lows with the worst month of the year still ahead. Whether it was the news or the fear of worse news to come we will never know but the result was the same. The Dow closed under 10400, Nasdaq 2120 and the S&P very close to breaking the 1200 level. The talking heads on talk TV always find something to use as an excuse for major drops but seldom does it resemble reality. On Friday the excuses were Greenspan, Housing, Consumer Sentiment, Oil, Katrina, Yield curves and earnings.
Dow Chart - Daily
Nasdaq Chart - Daily
The opening salvo on Friday was the drop in Consumer Sentiment. The final reading of the August Sentiment came in at 89.1 compared to consensus estimates of 92.5. The 89.1 level was a substantial drop from July's 96.5 high. The -7 point drop was blamed on higher gas prices but a falling stock market and negative housing talk was also to blame. Consumers losing money on higher gas prices and in the market are being squeezed from all directions. The expectations component fell from 88.5 to 76.9 or -11.6 points. The present conditions component fell from 113.5 to 108.2 or -5.3 points. These are major moves for an index that tends to move in very low single digits or even fractional amounts from month to month. It represents a significant change in sentiment most notably towards the future. The gloom and doom surrounding the housing market is pressuring homeowners fearful that their equity will evaporate. Fears of lost equity in a housing crash puts those with high loan to value ratios at risk of not being able to sell at a time when interest rates are rising. All of these worries weighed on consumers. The corresponding drop in sentiment weighed on the market.
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When Wal-Mart warned that oil prices was pressuring consumers at the lowest and broadest level it was a strong warning signal of a coming problem. The flood of retail warnings by other companies over the last couple weeks has added to information base about that consumer cloud. The API said on Friday that every penny of increase in gasoline costs consumers an additional $1.4 billion a month. Just this past week gasoline prices rose +6 cents with an impact of -$8.4 billion. Over the last month gasoline has risen +37 cents for a monthly impact of -$51.8 billion, every week. Subtract an additional $51 billion from the economy every month and eventually you have a recession. OPEC does not have to attack us in retaliation for invading Iraq. They can just bleed us into a recession as a result of skillful management of oil expectations.
Greenspan has been a market mover for 18 years. In his retirement party speech on Friday he moved it again with his continued warning about the current housing bubble. The bottom line was a warning about the danger to the economy and the consumer and a warning that the Fed would continue to raise rates until it shrank. In the Fed's eyes the banking system is at risk much like the savings and loan problem in the 80s. In 2004 consumers added $1.75 trillion in new mortgage debt. This is more than seven times the annual average incurred during the 1990s. Consumers have the ability to borrow more than their house is worth and transfer short-term credit into long-term credit with the lure of an increased tax deduction. The problem with long-term credit is the difficulty in reducing it. Consumers find it too easy to re-use their zero balance credit cards and eventually those balances return to high levels as well. Consumers have to pay the credit cards to support their continued need to spend and there is no money left to pay down those high mortgages. As long as the economy is growing the consumer is able to make ends meet. Should we get another recession and the odds of that are very good, then these overburdened consumers will finally implode and foreclosures will surge. According to foreclosure.com that surge is already growing.
A reader alerted me to this info last week, thanks Joe. The June column was the foreclosures when an article was done on CNN Money at that point in 2004. CNN June 2004 Article The next column is the active foreclosures as shown by Foreclosure.com on August-23rd. If you take out Phoenix where retirees are seldom foreclosed and Las Vegas where an exploding market provides an easy out for those needing to sell, then the average for the other major areas is a +118% increase from 2004. A +118% increase and we are still in a growing economy and a strong housing market. Once the bubble bursts it could be a +1000% jump.
Another reader sent me an article last week about a For Sale sign installer in California. They had to hire new people to install signs because already record volume was increasing daily. Their latest record was 112 signs in one day. That is just one firm in one city.
The point to this is Greenspan's concerns that the banking system is not prepared to handle soaring defaults and rampant bankruptcies. The Fed warnings are falling on deaf ears and they are starting to become agitated that nobody is listening. It suggests they will continue to raise rates until the bubble becomes just a bulge. They definitely do not want to burst it because housing and banking are two pillars of the economy. They know that if it continues unchecked it will end badly.
As a result of the housing bubble the rental market has also risen. Rents in 85% of the U.S. markets have risen over the last year, some by obscene amounts. The rent index is currently at a 30-year high. This produces an additional burden for those consumers who do not own homes. Renters rarely have a large amount of disposable income and higher rents, higher electric bills and higher gasoline are going to squeeze them even harder. Another sign of a consumer stress is the recent warning by Petsmart. When times get tough consumers quit buying accessories for their pets. They still feed them but buying doghouses, new birdcages and cute play toys screeches to a halt. That is happening now according to PETM. A veterinarian friend of mine is seeing a sharp drop in patients because consumers can't afford to pay for grooming, shots, operations, etc. If the animals are sick they come in but only for the minimum treatment.
For me all the signs are pointing to a coming recession rather than good times ahead. There appears to be another soft patch developing and with higher interest rates and higher energy prices and it may not moderate as quickly as the March/April version. I believe the builders are reading the tealeaves and seeing the future. Lumber prices have fallen -25% in the last five months and that suggests to me that demand is slipping. Builders are erecting houses at a record rate but the selling season is about over. The building numbers for the next couple months will be very interesting and could show a sharp decline. On the flip side the price of copper has been rising with Friday's close only a couple cents off its all time highs. If a growing economy has a copper roof then copper prices are suggesting the current soft patch will be brief. Should copper begin to fall it could be a factor of higher oil prices reducing global demand.
Lumber Futures Chart - Daily
Copper Futures Chart - Daily
The main reason for a coming recession is oil prices. They soared to another new high this week at $68 on all the normal excuses. We had terrorist attacks, civil unrest, political hostility, fires, breakdowns and hurricanes. Oil was holding near $68 until 1:30 on Friday as all eyes were on the hurricane and forecasters tried to predict the eventual path. The outlook at the time was for the hurricane to turn north into the Florida panhandle on Sunday and miss the oil fields. Traders thought the danger was over and decided not to get caught in gap down open on Monday. Instead they bailed just before the close on Friday and oil prices fell -$2 in less than an hour. As I type this late Friday night the new storm track is aiming dead center for the big oil terminal off the coast of Louisiana. Five companies have announced evacuations from oil rigs in the gulf and more are probably scrambling to evacuate Saturday morning. Since storm track predictions leave a lot to be desired in the form of accuracy it could miss Louisiana entirely but it really does not matter. We are only in the beginning of the worst storm season in a decade and it will only take one direct hit to recreate last years shortage as a result of Ivan.
October Crude Chart - 30 min
October Crude Chart - Daily
I think the near double top at $68 on the October contract could provide a barrier to further advances unless a specific event occurs like significant damage from a hurricane. However, that does not mean I expect a major drop. We are only a week away from the end of the peak driving season and gasoline prices should moderate as that demand eases. Next traders will start focusing on heating oil, jet fuel and diesel, all of which see demand spikes in Q4. The Q4 demand typically increases by about 2 million bbls per day and given how tight supplies have been all summer there is serious doubt about supply in Q4. This means oil prices should remain high and I am told the floor traders expect $70 any day. Michael Economides, editor of the monthly World Energy Review, a petroleum engineer and a professor, said $75 oil before the year is out and $100 oil soon. He bases his prediction on the same story you have heard here numerous times.
This means the pain for the consumer will continue only more indirectly through higher prices for consumer goods, electricity and heating oil. There is no change in the natural gas picture with high demand also a Q4 problem.
I believe energy prices coupled with the rising Fed rates will bring about a recession in 2006. I believe the market is finally starting to see that vision. However, the current drop is simply the Q3 doldrums that we have been expecting for the last two months. The sell offs have been orderly and broad based as we head into what is typically the worst month for the markets. The true test of the market is not going to be the next six weeks but what happens around Halloween. If the market has not started a rebound by then we could be in serious trouble. That gives us two more months of economic data and the energy picture for Q4 should be a lot clearer.
Next week has a very heavy economic calendar. Tuesday has the sentiment twin in Consumer Confidence, Factory Orders and FOMC minutes of the June meeting. Wednesday it begins to intensify with the GDP, NAPM, PMI and Kansas City Fed Survey. Thursday we get the ISM, Construction Spending, Personal Income and Monster Employment. The ISM is the most critical of these with a consensus estimate for a rise in August to 58.0 from 56.6. Friday has the second most watched report in the August Jobs data. Current estimates are for a gain of +195,000. Remember last month the +207,000 gain was entirely from a quarterly seasonal adjustment, not evidence of real hiring. This sets up next Friday's report as a potential problem if non-adjusted jobs don't appear. We will also get the Challenger Employment Report on Friday.
With this strong of an economic calendar there is likely to be very little interest in buying. Fears of a soft patch return and memories of Friday's dip on the weak sentiment should keep most investors on the sideline. TrimTabs.com reported that only $1.8 billion flowed into funds last week but only about $400 million went into U.S. equity funds. International funds garnered about $1.4 billion. TrimTabs director of Fund Flow Research said "speculative appetite for domestic funds is completely dormant."
Also hampering the August close is its horrible history. The last five days of August typically see index declines averaging -2.5% according to the Stock Traders Almanac. Follow that with September being historically the worst month of the year for the markets and there is little to prompt investors to part with their money.
The lack of buyers was apparent as the week progressed and internals continued to shrink. The Dow closed under 10400 and is on its way to hit my initial support target of 10250. Even the addition of $4 billion in stock buybacks by HPQ failed to lift the index. Wal-Mart was the biggest gainer at +41 cents on a rebound from fresh new 52-week lows. The Dow has been declining for four weeks but the rate of decline has increased with a -161 point loss for the week.
The Nasdaq finally broke support at 2135 that had held with increasing difficulty for six days. Even a remarkable performance from the SOX in the face of extreme pessimism failed to support the Nasdaq. The Russell was the leading loser for the day with a -9 point, -1.37% drop. If anything this is a clear signal that the sentiment of funds has changed. The Russell had been trading in little more than a 10-point range since August 5th and the breakdown from that range on Friday came on very strong volume and it continued right into the close. When funds begin dumping the small caps they loved just a few weeks ago the sentiment has taken a turn for the worse.
Nasdaq Chart - Weekly
Nasdaq Chart - 90 min
I mentioned on Tuesday we had not seen any fund turnover and time was growing short ahead of the September weakness. I warned that once it began it could get ugly fast. I believe Friday's Russell rout was the leading indications of an impending flush.
The S&P-500 also accelerated its decline with a close at 1205 and is also on target to reach my initial support target of 1185-1190. This is where I expect the bulls to make a stand but the economics we see next week will determine the commitment level of that defense. Near record oil prices could not protect the energy stocks from also being sold on Friday. There is simply too much profit at risk and without the support of the energy stocks the S&P is a sinking ship. Financials, materials, homebuilders, etc are all floundering in their own pool of misery within the S&P. The SPX has multiple support lines converging in the 1185-1190 range. The 100/200-day averages, uptrend support and horizontal support are all coming together for a rebound party. We should at least get a decent pause at that level. Should 1185 break there is a distinct possibility we could see 1150. That would correspond with a Dow failure to 10,000.
SPX Chart - Daily
SPX Chart - Weekly
If you are bullish on stocks either short term or long term then your buying opportunity is just ahead. Even if economic disaster is going to strike in 2006 there will probably still be a Q4 rally. The strength and length will depend on evolving economic indicators and earnings expectations as we get closer to year-end. This means we need to start looking for a bottom to form after the third week in September. It might take 2-3 weeks but it will form somewhere in that September/October transition. Buying that dip would be the game plan for me. While I expect energy stocks to continue to be the strongest sector while we are waiting for that bottom to form I do not think they will escape the profit taking and portfolio rebalancing by the funds. If oil goes through the roof then all bets are off but I think we need to be very picky about which energy stocks to own over the next six weeks. Many analysts and fund managers believe the oil boom is over now that summer is over. They will be rotating out of oil and into other sectors. This is good for the general market and good for those of us who want new entry positions in energy stocks.
The only guarantee for the next six weeks is an increased level of volatility.
That means for the uninitiated that there will be large swings in the market and
probably a few strong short squeezes but the predominate direction should be
down. Everyone has had ample opportunity to get short at SPX 1225 with four
retests over the last two weeks once it broke. I have been warning everyone for
weeks to be ready so there should
be no excuses for missing the train. It is far
too early to start predicting a September low but the near term support levels
are still Dow 10250, Nasdaq 2050 and SPX 1185-1190. We should find traders
willing to buy the dip at that level but I would only do it as a scalp trade. Be
patient, our buying opportunity is coming but still too far away to be worried
about it. Short/put any material bounce for the next couple weeks and then we
will start making plans for the rebound. Just
remember to enter passively and
exit aggressively and definitely don't get married to your positions.
AutoZone - AZO - close: 95.45 change: -1.47 stop: 97.75
Why We Like It:
BUY PUT 100.00 AZO-VT OI= 1 current ask $6.30
Picked on August 28 at $ 95.45
CDW Corp - CDWC - close: 59.44 chg: -0.50 stop: 62.01
We Like It:
BUY PUT OCT 60.00 DWQ-VL OI= 688 current ask $2.75
Picked on August xx at $ xx.xx <-- see TRIGGER
Kerr Mcgee - KMG - close: 86.02 chg: -0.48 stop: 81.99
News out on Friday from the weather service suggesting that hurricane Katrina will miss most of the oil infrastructure in the gulf helped spark some profit taking in the oil sector. Crude oil posted its first drop in seven sessions. This lead to KMG's minor decline on Friday and its fourth failed rally at the $88.00 level in the last two weeks. Given the sell-off in crude on Friday we could turn defensive here but the latest reports over the weekend suggest that Katrina is now headed for the oil infrastructure. This could send oil higher again on Monday. Of course we're talking about the weather and nothing is a guarantee when you're dealing with forecasts. We would keep a close eye on KMG and the $85.00 level or its 21-dma near $84.40. A breakdown below either could be a sign that KMG is going to produce a deeper consolidation although chart readers will notice on the intraday chart that KMG also has some support near $84.00 and again near $82.00. We're not suggesting new plays at this time.
Picked on August 21 at $ 85.99
Carnival Corp - CCL - close: 49.74 chg: -0.55 stop: 52.01*new*
We don't have any complaints with CCL. The stock appears to be channeling lower and the recent failed rally under $52 did prove to be a new entry point for bearish positions. Technicals are naturally bearish and its P&F chart points to a $39.00 target. Our only concern is the trendline of support on CCL's weekly chart. Our target is the $47.75-47.00 range. We are lowering the stop loss to $52.01.
Picked on August 10 at $ 51.79
Federated Dept. Stores - FD - cls: 70.50 chg: -0.49 stop: 75.01*new
A lower than expected consumer sentiment number on Friday really undermined the retail sector and a 10% drop in shares of Saks Inc (SKS) didn't help the bulls either. Shares of SKS turned lower after announcing it would plan to sell-off the various pieces of the company as there did not appear to be enough interest in buying the whole company outright. Shares of Federated (FD) turned lower again and look poised to breakdown under support at the $70.00 mark and its simple 100-dma. We're lowering the stop loss to $75.01 but more conservative types can probably get away with a stop closer toward $74. Should FD surprise us with a bounce look for resistance in the $72.00-72.50 region. Our target is the $67-65 range.
BUY PUT SEP 75.00 FD-UO OI=1001 current ask $4.90
Picked on August 22 at $ 71.99
Fedex Corp - FDX - close: 81.68 chg: -0.77 stop: 86.01
Shares of FDX hit new monthly lows on Friday despite a pull back in crude oil prices. The overall bearish trend in FDX appears to be asserting itself. We do expect a bounce at round-number support near $80.00 but the bottom of FDX's channel is a lot lower. We're targeting a move into the $76-75 range. Readers can choose to enter positions now or wait for possible bounce from $80.00 to fail and then enter positions. FYI: the Point & Figure chart for FDX is bearish and points to a $71.00 target.
BUY PUT OCT 85.00 FDX-VQ OI=2328 current ask $4.40
Picked on August 23 at $ 82.99
Google - GOOG - close: 283.58 chg: +0.99 stop: 290.51
Unfortunately we have little news to report on for GOOG. The stock tried to breakout over the $285 level on Friday but failed to generate enough momentum. Yet neither did the stock turn lower with the rest of the market. The five-week trend of lower highs and lower lows is still in play and that puts GOOG near resistance. Readers might want to consider new bearish positions here. Keep in mind that our biggest risk (and it's a big one) is that the S&P could announce that GOOG is being added to the S&P 500 index at any time. We are targeting the rising 100-dma and have been adjusting our suggested exit range on a daily basis. We're setting the exit at $267.00-265.00 now that the 100-dma is at $265.00. FYI: the Point & Figure chart is bearish and points to a $232.00 target. Plus, if you're following this play there's been a big increase in puts at the 280 and 270 strikes.
BUY PUT SEP 290.00 GGD-UR OI= 6552 current ask $10.60
Picked on August 11 at $284.50
Ingersoll Rand - IR - close: 77.33 chg: -0.01 stop: 80.01*new*
Time is running out for our play in IR. We have four more trading sessions to see how low IR will slip before we plan to exit. The stock is splitting 2-for-1 on Friday, September 2nd and we do not want to hold over the split. We are going to lower the stop loss to $80.01. The next level of support appears to be the $76 mark near its exponential 200-dma.
Picked on August 24 at $ 77.49
Illinois Tool Works - ITW - cls: 83.79 chg: -0.35 stop: 87.35
Our plan to trade the descending channel ITW is working. However, it looks like ITW is a little short-term oversold and could be due for a bounce. We would watch for a bounce toward the $84.50-85.00 region as a new bearish entry point. Our target is the $80.25-80.00 range although more aggressive traders might want to target the bottom of its channel.
BUY PUT OCT 90.00 ITW-VR OI= 53 current ask $6.60
Picked on August 23 at $ 85.05
KOS Pharma - KOSP - close: 68.84 chg: -0.92 stop: 72.51
It's no shock that the action in KOSP is mirroring the BTK biotech index. Some have said that up to eight percent of a stock's move is based on movement in the broader indices and/or the sector specific index. That bodes well for us as short-term bears on KOSP. Both the stock and the BTK index are showing a double-top pattern with peaks in July and August. Plus, both KOSP and the BTK are consolidating lower with a three-week trend of lower highs. We like KOSP because the stock has broken through round-number support at the $70.00 level and technical support at its 50-dma. The P&F chart for KOSP is currently bearish and points to a $62 target. We have been targeting the $62 region but we're going to adjust our target to account for the rising 100-dma. Our new target range is the $63-62 area and we'll adjust this as needed as the 100-dma moves.
BUY PUT SEP 70.00 KQW-UN OI=552 current
Picked on August 22 at $ 68.25
3M Co. - MMM - close: 70.99 change: -0.31 stop: 73.01 *new*
It should be just a matter of time now. MMM continues to drift lower and is within one dollar of our target at the $70.00 level. Actually we've been suggesting that more conservative traders exit in the $70.50-70.00 range since the $70 level could act as round-number support. Longer-term MMM doesn't look that healthy now that its weekly chart shows a breakdown below the 200-week moving average and its P&F chart points to a $63 target. We are lowering the stop loss to $73.01.
Picked on July 19 at $ 74.29
Simon Prpty Grp - SPG - close: 74.62 chg: -1.13 stop: 77.01*new*
Buckle those seat belts it looks like SPG is finally read to move lower. The stock has been consolidating sideways the past couple of weeks after shares produced an oversold bounce from its early August sell-off. The sell-off broke SPG's April-August up trend and now the stock has clear resistance near the $77 level. We can probably thank Greenspan's comments about real estate for the final push lower in SPG. This is a new entry point to buy puts. Our target is the $71.50-70.50 range near its 100-dma. We are lowering the stop loss to $77.01.
BUY PUT OCT 80.00 SPG-VP OI= 95 current ask $5.80
Picked on August 18 at $ 75.24
United Parcel Svc - UPS - cls: 71.33 chg: -0.58 stop: 74.21
The slow drift lower in UPS just might be picking up speed. Transport stocks are feeling the pinch as investors ponder the affect of record high oil and fuel prices. Wednesday's failed rally under the exponential 200-dma was a new entry point to buy puts but Friday's decline under the simple 50-dma doesn't look like a bad spot to consider new positions either. We're essentially playing the wide trading range in UPS although it's worth noting that there is a definite bearish tilt to the upper boundary. The P&F chart currently points to a $56 target but we are targeting the $68-67 range.
BUY PUT OCT 75.00 UPS-VO OI= 3333 current ask $4.00
Picked on August 17 at $ 71.99
Wynn Resorts - WYNN - close: 48.01 chg: -0.55 stop: 52.01 *new*
Lack of follow through on Thursday's bounce is good news for the bears in WYNN. Yet we believe that traders should prepare themselves for a probable oversold bounce back toward the $50.00 level and/or its simple 10-dma (49.66). A failed rally in that area could be used as a new bearish entry point to buy puts. Daily and weekly technicals point lower for WYNN and its P&F chart points to a $37 target. We are targeting the $45.25-45.0 range. We're going to lower our stop loss to $52.01.
BUY PUT SEP 55.00 UWY-UK OI=2368 current ask $7.10
Picked on August 19 at $ 49.95
Sierra Health Svs. - SIE - cls: 67.05 chg: +0.16 stop: 66.95
We are going to drop SIE as a bullish candidate. Our strategy was to catch a breakout over resistance at $70.00 and its simple 50-dma with a trigger to buy calls at $70.11. On Thursday SIE moved the opposite direction and broke down under technical support at its 100-dma. We're going to drop this play unopened and look elsewhere. Readers can keep an eye on SIE for a bounce from the $65 level or its 200-dma near $62.50 and its July low.
Picked on August xx at $ xx.xx <-- see TRIGGER
F5 Networks - FFIV - close: 40.65 chg: +0.79 stop: 40.01
The unexplained rebound continues in shares of FFIV. Its peers in the networking sector are breaking down to new relative lows but someone is buying up FFIV. Volume has been above average on two of its biggest gains this past week. It's easy to feel frustrated here since FFIV came within 35 cents of our target at $35.00 back on the 16th of August. We're closing this play with a loss at $40.01.
Picked on August 03 at $ 38.76
Precision Castparts - PCP - cls: 96.75 chg: +6.73 stop: 92.01
Normally when a company announces it's making an acquisition the acquiring company's stock goes down and the company to be acquired stock goes up. Occasionally when Wall Street really likes the deal the company making the purchase will see its stock go up. That's what happened on Friday with PCP when they announced plans to buy Special Metals Corp for $303 million plus debt ($540 million total). Our plan had been to trade the consolidation with PCP starting to fade from the top of its longer-term channel. Friday's rally definitely throws a monkey wrench in that plan. The stock has now broken through the top of its rising channel. Fortunately, we were still on the sidelines waiting for PCP to hit our trigger to buy puts at $89.49. We are going to drop PCP as a bearish candidate for now but we'll keep an eye on it. The $100 level is likely to be round-number, psychological resistance.
Picked on August xx at $ xx.xx <-- see TRIGGER
You wake to find that futures trade higher in the pre-market session. European markets post gains after six days of losses. The previous day of trading, the OEX pierced the 200-sma and the support of a rising regression channel in place since late April, but then bounced back above both by the close. It was time for day traders to try a long play.
Think again. On the day in question, August 19, adept scalpers could have benefited from a long play all right. They were the only day traders who could have profited. Ultimately, the OEX ended the day below its opening level.
Annotated Daily Chart of the OEX:
In this instance, traders might have been forewarned to take that quick profit at the 50-sma. The previous two days, tests of the 50-sma had seen pullbacks. However, traders didn't have to rely on this historical behavior alone. Another indicator would have warned that gains might not be sustainable, even in the absence of that recent OEX behavior.
Annotated 30-Minute Chart of the ADVDEC Values:
Those examining this chart could draw the conclusion that an obvious connection exists between the swing highs and lows in the advdec values and this particular Keltner channel's boundaries. The advdec values may not always turn exactly on this Keltner channel's boundaries, but the relationship exists. The Keltner settings for this channel are at a length of 45, a multiplier of 3, and exponential AvgHLC.
At the open on Friday, August 19, traders watching the advdec values on this Keltner chart would have known approximately the point at which those values would have begun reaching extreme levels for that particular move. They might then expect the advdec values to begin either a sideways movement or a pullback.
Would a stalling in the advdec values result in a direct reaction in equities? Anecdotally at least, there appears to be a congruence. The broad-based Wilshire 5000 might be used to study some examples of such congruencies.
Annotated 30-Minute Chart of the Wilshire 5000:
In this instance, and in many others studied over the last four weeks, the congruence often plays out. This happens although indices might not appear to be at similar extreme levels as measured on the same Keltner chart setting.
Annotated 30-Minute Chart of the Wilshire 5000:
A technician might conclude that although the Wilshire 5000's chart did not show that index to be overbought according to this Keltner channel basis, the advdec value did appear to be extreme, and so any index early index gains might not be sustainable.
The theory this trader has developed is that technicians can use a Keltner-based measure of extreme advdec values to predict when a short-term equity move might be topping or bottoming. Other recent anecdotal evidence supports this theory. Even for a cursory and anecdotal look, it's important to study times when markets are trending and when they're range-bound, to see whether the theory holds up in both instances. The previous example related to a day when markets had been range-bound.
Beginning about July 7, many indices began a new leg up in their rallies off April lows. They began trending.
Annotated Daily Chart of the Wilshire 5000:
Because countertrend signals prove most suspect during a trending move, it might be important to look at an instance the advdec values were hitting the upper Keltner boundary during that bounce. That's when a pullback or sideways trend in the advdec values would have looked likely. The theory being tested here then would have signaled a countertrend move.
Annotated 30-Minute Chart of ADVDEC Values:
Annotated 30-Minute Chart of the Wilshire 5000:
These few examples certainly do not prove a theory, but they do prove intriguing. At least anecdotally, being able to identify an extreme level on advdec values helps day traders determine when a short-term move might be topping or bottoming. In this trader's recent studies, the Keltner channel depicted here, as seen on a 30-minute chart, proves most helpful in determining those times when extremes might have been reached in short-term moves. At times, nesting Keltner channels of different lengths, one within the other, proves helpful for fine-tuning impressions about the advdec values.
Annotated 15-Minute Chart of the ADVDEC Values:
On this chart, three Keltner channels and their basis lines are all included. The parameters for the channels all use AvgHLC values and are exponential. The smallest channel (blue on this chart) uses a length of 9 and a multiplier of 1.4, the middle-sized one (black) uses a length of 45 and a multiplier of 3, and the largest (purple) uses a length of 120 and a multiplier of 7.2. As you can see, the central basis line of the largest chart, the gold line, sometimes does serve as support or resistance for advdec values. Places where Keltner lines converge also sometimes serve as support or resistance.
Previous TradersCorner articles discussed using Keltner lines in more depth, but with the advdec values, it may be best to concentrate on the outer boundaries of the channels. The convergence of basis lines may prove less helpful than they do on equity charts.
While evidence remains anecdotal, that evidence supports the use of Keltner channels to determine when the advdec values may have topped or bottomed. Since this evidence remains anecdotal only, it should not be used as a buy or sell signal, but rather as one tool among many in the day trader's kit. It offers a warning only to watch for other signs of a potential slowing of momentum or actual reversal, but a powerful warning. Also, because of the nature of the advdec values, this tool proves helpful only for day trades or occasionally for swing trades of one to three days, but not for position trades. A daily chart of the advdec values would provide little information of use.
The next time you think that traditional technical analysis suggests a move in a
certain direction, think again. Check the Keltner-based measurements of the
advdec values. You might think differently after you do.
Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
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