MAILBAG QUESTION:

"... my s&p day chart shows different open versus 30-60m charts. I got filled on an order well above the daily open. it also seems like guesswork to suggest saturday that the indexes were a buy again without knowing what the coming week would bring, like today on china easing?

MY RESPONSE:

The first part of your query is fairly straight-forward about chart gaps in the S&P and how the 'open' is reported by Standard & Poor's. This is different than how the Nasdaq reports the Open, which is based on the composite price of ALL first trades in the Composite or Nas 100. There are no delayed Nasdaq openings due to order imbalances; e.g., large buy orders versus limited sell orders. Posting the S&P bids in question before actual trading is allowed to begin gives more sellers a chance to come in and thereby have a more 'orderly' open. That's the theory.

The second part of your question is more complex in that there are often differing philosophies about trading. Technical analysis suggests that price and volume patterns alone can 'predict' how a trend will unfold. Moreover, unfolding and future 'news' affecting stock prices will often push prices in a direction that could have been foreseen by using chart patterns alone. So called fundamental analysis suggests that price direction can't really be known until market participants react to economic events that occur from day to day, week to week. Theories on random walk suggest you can't 'predict' stock prices.

CHART 'GAPS':

Chart gaps come about on overnight 'news' that is seen as more bullish or bearish than reflected in the prior day's trading. An upside chart 'gap' is created when the Open of a stock or Index jumps above or well above the prior day's High. If the Low stays below the prior day's High, there is a price 'gap' (difference) between one day's High and next day's Low. This is an upside price gap and is often construed as a bullish chart development, especially if further upside follows the gap 'up' day.

A downside price gap is the reverse of this, with a lower Opening ending up with the day's High being BELOW the prior's day's Low. This is a downside price gap and is often construed as a bearish technical pattern, especially if it leads to further downside.

In the S&P Index, when there are a number of delayed openings due to order imbalances, the S&P treatment is to report the prior day's Close in this group of stocks (with delayed openings) as equal to the prior day's Close. Whereas, the actual first/opening price for the Index today (3/30/15) was HIGHER than the reported daily Open.

So, you see the DAILY chart, with an almost non-existent (upside) price gap, looking like this:

Above daily chart picture VERSUS the first print of the hour today (3/30/15) showing on the 60-minute chart:

TECHNICAL VERSUS 'FUNDAMENTAL' ANALYSIS:

TECHNICAL ANALYSIS RATIONALE: Why would someone rely on just studying charts that plot past stock price and volume information, as well as perhaps technical indicators or formulas that use the same?

The reasons are basically observations first noted by Charles Dow in this country and could be distilled into three topic areas:

'EFFICIENT' MARKET THEORY: Over time, stock prices reflect everything that can be known about stocks. The market as a mechanism is efficient. Even unknown (not yet publicized) fundamental factors such as a sharp earnings drop in a particular stock or sector are seldom unknown or unanticipated by everyone and those who know often act on the information; e.g., selling volume starts to pick up and rallies don't carry as far as the last upswing.

TREND: The information about stocks in general and overall future earnings prospects will be reflected in a price TREND. Trends are not only up or down, but sideways as well. Basically, the idea of directional trends in stocks is similar to the 'trend' concept in physics; i.e., the action of a body in motion tends to stay in motion until an equal countervailing action occurs. Dominant trends tend to PERSIST is a basis notion. Trends both existent and reversing can be forecast by trendlines, movement above or below certain key moving averages (e.g., 21, 50, 200-day), momentum indicators, etc.

REOCCURRENCE: Price trends occur and reoccur in patterns that are often or largely predictable. The idea of trends reoccurring is contained in the idea that 'history repeats itself'. If there was abundant stock for sale (supply) previously for sale at a certain price and that selling caused a retreat in prices, it is often the case again when a stock or an Index again approaches this level. If buying powers through that level this tells us that demand this time was strong enough to overcome selling and change the trend.

Another reoccurrence seen again and again is that trader and investor 'sentiment', or the predominate expectation for stock prices, tends to be quite bullish at Market tops and bearish at bottoms; often called the theory of contrary opinion.

CURRENT 'REAL WORLD' CHART EXAMPLES:

In the S&P 500 (SPX) seen below, the Thursday and Friday lows held above the prior bottom and at approximately a 50% retracement of the previous advance, which is a common pullback amount before the dominate trend (UP) resumes. If the trend is our friend so to speak this most recent pullback was going to be 'friendly' to buyers.

Bullish 'sentiment' as measured by my equities call to put volume ratio (CPRATIO) indicator seen at the bottom of the SPX chart dropped to a bearish extreme. Just like the last low. This pattern suggested another reason to forecast a potential bottom. Traders are great at generally getting more and more bearish on pullbacks, without study of charts and indicators. In other words, we react EMOTIONALLY based on micro-trends.

The Dow 30 (INDU) pulled back to it prior low, also a 50% retracement, after 'cleaning out' some sell stops no doubt that caused the brief dip to 17600. The next move was likely to be up and outside events could be anticipated to 'support' this idea. The Market discounts bearish news on pullbacks and if it's a bull market, upcoming 'news' has a good chance of being BULLISH.

The big cap Nas 100 (NDX) made a more or less picture perfect double bottom in the 4289 area per the chart highlights below. Given the Friday Open and Low being up from there, what was coming next, more bearish news? The Market was 'saying' no to this so to speak. Unlike the S&P and Dow, there's no move yet in NDX above its 21-day moving average, which tends to demonstrate upside momentum, so stay tuned on the somewhat 'lagging' NDX index.

The STRONGEST Indexes tend to forecast price direction for the overall Market. Lo and behold, the small to medium cap Russell 2000 Index (RUT), has been leading the Market of late.

Bullish action is suggested by RUT holding an up trendline on its last pullback and then Closing above its 21-day moving average by the end of this past week. This made a bet on Friday in calls a reasonable speculation WITHOUT waiting to see what THIS week would bring. So far, so good!


GOOD TRADING SUCCESS!