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Putting It All Together

HAVING TROUBLE PRINTING?
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You said in your recent Sunday Index Trader that the market was at or near a bottom and had some price targets that pretty well fit the lows of this week (mon,tues). Did you mean to say your Nas 100 target was 1447 to 1440 since it looked like the bottom of your channel was about 1550?

Since the strong rally today (wed) looks like the market reversal that was near, do you find similar recurring technical aspects that suggest that that its getting close to a turnaround at either a top or bottom?

RESPONSE:
No on the Nasdaq 100 (NDX) going to FOURteen something; I had a typo in my summary ('bottom line') commentary at top where I said that my original Nasdaq targets had been '1447 to perhaps '1440': I meant to say '1547' to '1540'.

In my specific NDX index commentary further on, which I hope you saw, the one WITH the NDX chart, I went on to say: " I continue to have call buying interest if the (NDX) index gets to its up trendline, at the green (up) arrow in the 1550 area." Monday's low (8/29) was 1551, versus the close today (8/31) at 1581. See the full commentary, on the OI web site by clicking here.

I also thought that NDX might make a final low 10 points or more lower than this target. However, the Nas 100 tends to trade pretty 'technically' and it often would find support at the its well-defined up trendline; even, though the Nasdaq Composite (COMP) broke below its lower trendline, but the COMP rally was way 'overdone' on the upside, reflecting many smaller Nas stocks that were perceived as undervalued.

I've overlooked factors in the past that might have caused me to hold off from a premature trade. Being WRONG! sometimes can be helpful if you go back and do a post-mortem on what you overlooked; e.g., the market was quite overbought or oversold; their was a prior top or bottom you weren't paying attention to, that again brought in major selling or buying interest; etc.

I use an acronym, "POVS", for my check list of factors I find most important to review carefully and standing for:
Pattern
Overbought/Oversold
Volume (a 10-day average of UpVolume, useful to see BOTTOMS only
Sentiment

PATTERN relates to chart patterns like key reversals, double tops, etc.; also, steepness of a trend, trendlines, retracements and things of this nature that mostly relates to PRICE patterns.

OVERBOUGHT/OVERSOLD is mostly, for me, defined by a 13-day RSI for most of the major indexes, with the exception of a 21-day Slow Stochastic indicator that I find especially useful in seeing the Dow 30's (INDU) relative overbought or oversold condition.

SENTIMENT is the level of bullishness or bearishness that I measure by looking at a daily ratio of CBOE call volume relative to total put volume for EQUITIES. I don't want to use the Index options volume numbers, as there's significant hedging going on with them a lot of the time. So, TRADER 'sentiment' is important.

I'll show my "POVS" chart for the Nasdaq here and compare what I assume to be THIS current BOTTOM with the last one in April, which was picture perfect, so to speak, in that ALL aspects were showing a bottom type pattern:

PATTERN
Completion of a 62% 'Fibonacci' retracement. Trendline 1 (T1), drawn with only TWO points, versus the more 'trustworthy' three points, was pierced and prices continued lower. However, an up trendline of 3 points was formed with Monday and Tuesday's lows and this appears to be the new 'valid' up trendline.

PATTERN contu:
Monday's low in COMP also corresponded with completion of a 62% retracement. Common retracements of a prior price swing are: 38% (sometimes 33%); if exceeded, a retracement often becomes one-half or 50%; if exceeded again (and UNLESS the index or stock is going to have a ROUND-TRIP to its prior low), its common for a retracement to go about an eighth more and achieve a 62% retracement (sometimes, 2/3rds or 66%).

OVERBOUGHT/OVERSOLD
The Nasdaq Composite as can be seen above, did not get to what I would call a typical 'fully' oversold extreme, which is a reading between 35 and 30.

The Nasdaq 100 (NDX) was somewhat closer to achieving this condition and its chart is below. The main consideration of PATTERN relative to NDX, is that it has bottomed so far right at its up trendline, or the lower end of its (uptrend) channel:

BACK TO THE NASDAQ COMPOSITE 'POVS' CHART
in order to discuss my 'VOLUME' and 'SENTIMENT' indicators:

VOLUME
This is an indicator that is significant for BOTTOMS only.

You can see from the chart segment above of 'Volume', that the 10-day average of daily Nasdaq (total) Up Volume, bottomed below the lower line recently and then turned up. What is this all about, since I don't often show this (volume) chart on my weekly commentaries?

Volume is an important ancillary indicator that is second only to price in being important for technical analysis. Of course in fact, all technical works with is price and volume information - well, in stock index futures, there is some analysis that can be done with "open interest", but this doesn't enter in here.

Stock market volume will often 'precede' price. For example, before a market gets to or near a price area that will be perceived as offering 'value', especially a market that is in transition, there will usually tend to be a contraction of trading activity (volume) to a similar and reoccurring level and this occurrence will tend to precede the most substantial and sustained market rallies.

I wrote something about this topic and its use as a type of bottoming "indicator" recently, as part of an article that was published in the July '04' issue of Technical Analysis of Stocks & Commodities magazine.

The most significant volume figure for stocks, for its use as one type of indication for significant or major bottoms, is up or advancing volume. Total NYSE or Nasdaq daily advancing volume is a count of all shares bought on upticks, or at a price higher than the preceding transaction.

Up volume is an excellent test of buying interest being as this type trading activity reflects a willingness to "pay up" for stocks so to speak. To refine the daily figure, I use a 10-day moving average of advancing volume for both the New York Stock Exchange (NYSE) and Nasdaq.

There is a tendency in any given period, of months or years, for there to be a "base" line for how far (what contraction level) a 10-day moving average of Nasdaq or NYSE Up volume will fall to before there is a market bottom. For example, when a 10-day moving average of total NYSE up volume contracts to around 530-545 million shares - this figure will vary depending on what phase of the trend that we are in.

With Nasdaq, the 'baseline' 10-day moving average figure has been in recent months, around 490 million shares. The NYSE daily UpVolume average is what I use on my S&P 'POVS' chart and will be shown with my last chart, that of the S&P 500. I use the SAME 'SENTIMENT' indicator for both the Nasdaq and the S&P.

PATTERN aspects of the S&P 500 (SPX) was completion of a 'well-defined' up trendline with the two lows of this week. The rally from this trendline suggests that a bottom is in. (See the up green arrows for the points.) The RSI, in the case of the S&P 500 DID achieve a 'fully' OVERSOLD reading. The 10-day moving average of NYSE UpVolume got to its 'baseline' and a strong rally ensued today. Stay tuned for what's next.

Note that in the LAST bottom (see the yellow circles), the 10-day UpVolume line did not get to its more typical 'baseline'. ALL of these indicators do not have to line, just as SPX and COMP did not get 'fully' oversold in this most recent rally that, nonetheless, suggests that a bottom has been reached ahead of another rally.

Last, but not least is my 'SENTIMENT" indicator. A discussion of the most recent 'oversold' reading was discussed in my most recent (8/28) Index Trader column as can be seen online (go to LINK in the early paragraphs ABOVE) and was as follows:

"I anticipated last week that a bottom would not come UNTIL there was a reading on my sentiment indicator at or near (or below) at least one day's total equities CBOE call to put volume ratio closer to parity; specifically, 1.2 or less. Friday's reading on my sentiment scale was 1.2. The chart plotting these (call/put) numbers is seen on the OEX chart.

The greater activity in puts finally put my bullish/bearish sentiment indicator down pretty close to the level of sufficient 'bearishness' to suggest a bottom. A further fall to the price levels mentioned above, might give me an even lower reading, but its gotten pretty close already, as can be seen on 'Sentiment' section on the OEX chart above."

The THEORY of 'contrary opinion' is that when traders/investors reach a certain level of bullishness, or bearishness, the market is in a condition to rally, or fall, as the case may be.

This because, at an extreme level of bullishness, a point has been reached where everyone who is going to buy into the market has (mostly) done so. When an absence of bullish news occurs or there is bearish news or views that come out, the market tends to sink due to a lack of buying; i.e., it may not be huge selling that occurs, but what there is, is not met by enough buying to keep prices from falling; e.g., the past few weeks.

Conversely, when there is even one day where the bulls 'throw in the towel' so to speak and finally get active in puts, this usually signals that those who were going to sell have done so already and the market is ready to rally again.

IMPORTANT NOTE:
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

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