OIN SUBSCRIBER QUESTION:
"...also, maybe you could do a 2008 recap of the major turning points, pinpointing how the charts and indicators were showing the big trend changes."
I should go back to more than 2008 in terms of seeing more of the big chart and indicator changes to set the 'stage' for this year. This gives me more major trend changes to highlight and is helpful in showing that usually, most of the money is made in only going in or going in 'heavy' two to three times a year.
Going back to the last very strong and prolonged trend takes us to the middle of 2006 as you'll see on my first chart. I'll use the S&P 500 (SPX) stock index, which has had the biggest volume in terms of the SPX stocks and options for the past two and a half years.
Of course, looking at the trend changes in a rear view mirror so to speak makes it seem 'obvious' as to how the chart and indicator patterns were forecasting each new big trend change. This is obviously WRONG! When you're in the heat of trading, the big trend shifts are far from obvious.
However, if you see enough predictive technical/chart patterns over and over, you'll better see future trading opportunities. I'm an advocate of watching the charts and indicators on an hourly basis, not so much for shorter term trading purposes, but more for the fact that you see more patterns develop.
CHART, MOVING AVERAGES, RSI and SENTIMENT patterns are my primary focus in assessing trend strength and potential reversals of trend. Chart patterns are the 'first among equals', as they say of the British Prime Minister. Price patterns are number ONE. Most technical indicators, except for my equities call to put daily volume study (used as a gauge of trader 'sentiment' or market outlook), are derived from price and are secondary in that sense. Volume is an important study for individual stocks, but it is also a secondary type indicator.
June 2006 on:
As a trader, I 'live' for trends like this one and the multimonth period shown where the pullback lows traced out a well-defined bullish up trendline. The 'alert' for an upcoming trend reversal was when 1.) prices dipped under the dominant up trendline and that former line of support 'became' resistance later on (see the two red down arrows), even though prices continued higher for awhile longer. Prices were going higher but on 'flat' Relative Strength as highlighted on the RSI portion of the chart below. RSI stopped confirming the move to higher highs.
My sentiment indicator did not signal "a" single top to any degree for the period shown above, although there were TWO definite 'overbought' extreme just prior to when price momentum SLOWED as seen in the drop to below the up trendline; i.e., where prices came back up TO what had become the 'kiss of death' trendline, but stopped there.
On the downside, the two dips below the lower 'oversold' line on the sentiment indicator did highlight a bottom in March (2007) on the above SPX daily chart. Moving on...
The trend changed from a dominant bull market to a mixed or a wide-swinging/broad trading range. This type mixed period is when identifying trend changes becomes more crucial; a trend following approach is no longer the thing. The first pattern I've highlighted in March (2007) on the SPX chart below is a bull flag. The bullish pattern was consistent with the bullish 'signal' given by the RSI and my sentiment indicator per the green up arrows.
The trend was UP into July (2007) as is easily seen by the two moving averages. However, there reached a point where the moving averages 'caught up' with prices so to speak. Trend momentum slowed by July as both averages turned down. After there were two (consecutive) days' closes below both averages, followed a sharp down day and this was the breakdown point when prices well under the prior range.
A next bottom set up after a bullish price/RSI divergence, as prices were falling but, in terms of the lows, RSI started trending higher as highlighted below. A good-sized rally followed, one well worth participating in with index calls, etc. A the top, a 'typical' RSI overbought extreme was seen and a fairly high degree of bullish sentiment, but it wasn't until the secondary top in late-October that there was a 1-day Sentiment well into 'extreme' territory.
The aforementioned spike in bullish sentiment is fairly common in this kind of cycle: traders have gotten quite bullish and assume that the first big rebound signifies that there will be another up leg and probably even a move to a new relative high. NOT! An astute reader of technical tea leaves would have noticed that there was only one subsequent close above the 21-day moving average but this was not sustained; momentum was not being sustained on the upside.
SPX continued lower until the RSI and Sentiment indicators got to low extremes again as seen above, but the rally was short lived. Again, on the 3rd rally, traders got quite bullish, but this rally was again a bull fake out. Definition of a DOWN trend is that successive rally highs top out progressively lower.
2008, first half:
There were two sustained trends, one up and one down, in the first half, as highlighted by the uptrend and downtrend price channels. An 'oversold'/extreme bearishness sentiment reading kicked off the March-May uptrend and an 'overbought'/extreme bullishness sentiment extreme, the downtrend that followed. Once the up trendline was pierced, it was look out below.
A second RSI extreme at the May (2008) top was significant also. The RSI doesn't usually reach hit extremes more than 2, maybe 3, times before signaling a trend reversal; at least this tends to be the pattern during periods when the major trend has turned mixed. Successive RSI oversold lows signaled the upside reversal that was coming in July. The pullback to the previously broken downtrend line, followed by a rally, was suggesting that prior resistance had 'become' support, suggesting that the declining trend had played itself out for the present.
I highlighted in recent weeks what I perceived to be an upside breakout above the upper trendline of a bullish falling wedge pattern as seen below. My most recent Index Wrap commentaries also alerted the significant overhead technical resistance implied by the upper end of the SPX downtrend channel, as well as by significant resistance suggested by the 55 and 50-day moving averages. (I use the 55 fibonacci number, whereas the 50-day 'length' setting is the most widely followed; along with the 200-day average).
Although it's sometimes important to see confirmation of a bullish upside breakout that comes AFTER a low-volume holiday period, the fact that SPX yesterday and today has pierced resistance in the 900 area implied by both the upper trendline and as suggested by the two moving averages is impressive. Stay tuned for upside follow through, or not, in the early going of 2009.
The November SPX bottom was kicked off or preceded by the 1-day extreme bearishness suggested by the low highlighted (by the green up arrow) on the CPRATIO indicator (above). The Market seems to still be operating still on this buy 'signal'.
Although there have been high levels of bullishness suggested recently by a recent venture of my sentiment indicator into 'overbought'/high bullishness territory, there has yet to be the kind of extreme seen by a reading at 2 or above; i.e., equity call volume double (or more) total put volume on any one (or more) trading day(s).