VIX Settles Into a Channel

Apr 9, 2008: 7:56 PM CST

The VIX (Volatility Index) has now formed clear and distinct channels from which to assess current conditions.

I found drawing trendlines on this chart to be difficult, and you may have your own method for drawing a trend channel, so be aware of this when looking at this chart.

Right now, the VIX seems to be contained within 32 to the upside and 23 to the downside. If this is correct, then the VIX has either broken slightly to the downside of the channel, or is set to reverse back to the upside.

Keep in mind that the VIX is said to measure ‘fear’ in the marketplace, as it measures the implied volatility of index options (specifically the S&P 500). Higher VIX prices correlate with lower prices in the index, but more specifically large volatility (often downside) moves.

What this means is, IF the VIX is testing the bottom of its trend channel, and IF the VIX reverses to the upside after testing this level, THEN we would expect to see higher volatility and (potentially) sharply lower US Index prices.

Keep in mind that the Markets have bounced up against resistance and are forming a potential consolidation triangle, meaning a large volatility move is not out of the realm of possibilities.

I recommend studying and learning more about this important index and what it might mean for the broader market.


What Would You like to Hear in a Podcast?

Apr 9, 2008: 11:15 AM CST

podcasticon.pngI’d like to ask you a quick favor – What would you like to hear in a podcast?

I’m toying around with the idea of producing a weekly (free) informational podcast and I would like to know your thoughts on what you would like discussed.

Please take a brief moment and let me know through a comment on the page your thoughts on the following questions (you don’t have to provide your email address or even your real name):

1. What are some ideas for potential segments to discuss (market analysis, psychology, book/product reviews, current trends, interviews, polls)?

2. What would you like me NOT to discuss?

3. What are some examples of other online podcasts (if any) that you enjoy? Also, would you benefit from an audio service/podcast?

4. How long should the podcast be? Also, how frequently should it be released?

I would greatly appreciate any feedback at all to these questions, and any tips, pointers, or suggestions you may have.

Thank you in advance for reading and participating!


Which Way is Gold Headed

Apr 9, 2008: 9:18 AM CST

Although commodities recently were recently featured in the news due to their stratospheric rise, you may not be aware now that since that media blitz, these commodities have fallen in price. The “Sell the news” strategy strikes again!

Let’s look at the current conditions of Gold prices and Crude Oil Prices:

Gold prices peaked above $1,020 an ounce, and the news was full of stories of gold soaring even higher which caused little gold ‘trade shows’ to pop up to appeal to everyday people. Euphoria and fears of scarcity, along with a compelling story, can often precede large sharp sell-offs that confuse the public who participated or at least felt convinced that prices could only go higher.

Afterwards, gold surged down in two impulse waves down to $880 per ounce (falling more than 10% in 3 days) and then set-up a classic “bear flag” trade which retraced 50% of the impulse (Fibonacci) and also found key resistance at the falling 20 period moving average. That would be a ’sweet-short’ set-up.

Price got its downside target following the bear flag and then retraced to form a potential new bear flag which has set-up currently and may also achieve its target just above $860 per ounce. Notice the key overhead resistance formed by the confluence of the 20 and 50 period moving averages. That would be a logical place for futures (or ETF traders) to place a stop, but it is also unfortunately an ‘obvious’ level so be careful there.

Another word of caution for the shorts – notice the slight positive momentum divergence that formed. That could limit the absolute gain (target) of the bear flag’s measured move. Divergences are warnings, and do not inherently reflect a trend change. The trend on the daily chart is now confirmed as down.

Another word of warning comes from the weekly chart:

Gold has significant potential support just beneath the $900 per ounce level due to the sharply rising 20 period moving average. This could also limit any potential further bearishness in the commodity.

Also, notice that what looks absolutely bearish on the daily chart (confirmed downtrend, large volatility moves down, bear flags) is actually little more than a clean and stable retracement on the weekly chart. In fact, one could even make an argument for the current levels to be a buy based on the structure of the longer term charts (increasing momentum, solid uptrend, pullback to support).

The lesson to take away is that you should always confirm your analysis with higher (and perhaps lower) time frame annotations. Also, when something looks so obvious that it appears too good to be true, it probably is.


Market Faces Two Lines in the Sand

Apr 8, 2008: 9:06 PM CST

The Dow Jones Index is trapped between two key support and resistance areas, and it will be interesting to see which force breaks first – a break of the upper level will have profound implications for the future.

Notice I have drawn the proverbial “Line in the Sand,” which is an area just beneath 12,800 which has served as both key support and resistance (going back further even than this chart shows).

A clean break of this level would be significant because the area would likely revert to support and the market would be set to retest highs (or at least other congestion zones) near 13,600. Can anyone foresee a 1,000 point run-up in the Dow under these conditions? The charts may be hinting that scenario could be in the cards.

Also, notice we have a technical ‘ascending triangle’ which is struggling to complete itself (two black converging trendlines). Generally, ascending triangles are bullish, but there is no guarantee of any outcome from a consolidation pattern.

There is a slight momentum divergence forming, but that is unsurprising considering that momentum narrows as price forms (and completes) any consolidation pattern.

Notice how many ‘long upper shadows’ have formed as price has failed to rally above the “Line in the Sand” around 12,700.

Also, I wanted to highlight the potential crossing of the 20 period moving average above the 50 period average. Should this cross complete (if price stays above these levels), this would be another significant sign of market strength and support.

As it stands, we would say the odds may favor pullbacks to this area serving as support.

But wait! The market is trapped! There is support just above 12,400 and resistance beneath 12,750. What is the market to do? Can it stay in this 350 point zone forever?!

Of course not! The market is bound to break one of these levels in the near future, and there is potential for a momentum burst in the direction that the market breaks. It’s really difficult to predict the direction of the break, but easy to predict that the odds are high for some sort of continuation move once a clear direction is established out of this recent consolidation zone.

Be ready for anything and try to have fun when it happens!


Charting Microsoft and Yahoo

Apr 8, 2008: 10:33 AM CST

With Microsoft (MSFT) and Yahoo! (YHOO) in the news lately regarding take-over bids and deadlines, let’s allow cooler heads to prevail by looking at the charts of these two stocks.

It’s clear that Yahoo has been the beneficiary of the latest news, which is the cast most often for potential take-over stocks.

From a low of beneath $19 to a high of $30, Yahoo shareholders certainly welcomed the price behavior following the announcement. On February 1st, Yahoo received a $31 per share acquisition offer, sending the stock just shy of this value on the announcement. Yahoo rejected this deal, and as of yesterday, said it was open to a better arrangement.

According to the above Reuters article, “”Yahoo management’s position is still that Microsoft’s bid is too low and undervalues the company,” said Bernstein analyst Charles Di Bona in a note to clients. “Investors are becoming increasingly skeptical and there appears to be growing concern that this view is both unrealistic and self-interested on the part of Yahoo’s management.”

Yahoo rebuffed Microsoft’s 3-week deadline by declaring “”As a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal,” Yahoo’s letter said.”

What has happened to Microsoft’s stock since the initial offer?

MSFT closed near $32.50 the day before the proposal was made public. The stock then trended downward and hit a low of $27 before recovering some of the losses.

This is a standard and expected pattern that occurs frequently in take-over negotiations. The stock of the company that is making the offer usually declines (possibly due to concerns of over-spending, etc) and the stock of the company that is being acquired usually rises, sometimes dramatically.

As traders, we have very little information at all regarding possible take-over announcements, and so I suggest that it’s generally a bad idea for new traders to try to anticipate these moves. Consequently, traders should not be discouraged when they miss one of these overnight large price increase moves – remind yourself that there was nothing feasible you could have done to buy the day before and sell the day after the announcement.

If anything, there may be a slightly profitable edge to playing the reaction against these moves, but still due to the large volatility moves that are possible, I would suggest newer traders stand aside and let the more experienced traders take part in such volatile plays.

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