NASDAQ Hit the Hardest

Oct 15, 2008: 10:25 AM CST

Of the major US Equity Indexes, the NASDAQ has suffered the most on Tuesday and now on Wednesday, and was only able to retrace to the 38.2% Fibonacci retracement of the August highs to the October lows.  Let’s see this index on the daily and weekly charts:

NASDAQ Daily Chart:

Price clearly made news lows into 2008, which also were new price lows (1,550) not seen since 2003.  The technical picture favored a retracement going into this week (actually favored it towards the end of last week yet price continued to fall), with initial retracement targets being the 38.2% Fibonacci retracement at 1,899, and secondary resistance via the falling 20 day EMA at 1920.

Also, there was expected to be a time component, taking at least a few days to meet this objective.

From the looks of things as it stands now, we met that Fibonacci objective in three short days before the retracement – as it appears currently – completed.

Notice also the new significant momentum low, registering beneath -150.  This means that the difference between the 3 and 10 day EMA reached a spread of 150 index points – remarkable.  New momentum lows frequently precede new price lows, so be aware of this.  We’re not currently far away from testing these new price lows soon unless the situation changes.

On to the weekly chart.

NASDAQ Weekly Chart:

Price found tentative support about the rising 200 week SMA, though it violated it on two closing instances prior to the official break in September before breaking down to new annual lows.  One could have drawn a triangle (draw a trendlne beneath the lows) which represented price consolidation which would have favored eventual price expansion – we got that expansion via the recent surge to the downside.

Elliott Wave analysts likely identify a full Elliott pattern (Wave 1) from the October Highs to the March lows, with an “ABC” corrective pattern from March to August forming the larger Wave 2.  If this is the correct count, then the NASDAQ and other equity indexes are in (or are completing) Large Wave 3… meaning there’s a Wave 4 up expected and then a Wave 5 down to new price lows yet to come according to that count.

Stay alert and don’t get complacent either long or short in this volatile environment.

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Is the Retracement Rally Already Finished?

Oct 14, 2008: 1:44 PM CST

The day’s action hasn’t closed yet, but I wanted to throw this chart out quickly and ask the question:  “Is the retracement rally everyone expected already over?”

Let’s look at the DIA Daily Chart:

Not only have we already tested (and failed officially) at the 50% Fibonacci retracement from the August highs to the October lows (the 50% price is $98.61), but we have also came into confluence resistance just shy of the falling 20 period EMA.

We’ve rallied from $80.00 (Dow 8,000) to $98.80 (Dow 9,880 estimate) in three short days – is that all she wrote?

If so, that’s horrible.  I’ll try to look at more charts on a closing basis this evening.

Be aware that this could be a possible technical development that has just occurred faster than perhaps anyone expected.

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Fear

Oct 14, 2008: 11:32 AM CST

Adam Hewison of Market Club released a video I wanted to share with you today entitled “Fear.“  In it, Hewison describes Roosevelt’s famous quote “The only thing we have to fear is … fear itself” and then applies this concept to trading as he discusses the recent moves in Crude Oil, Gold, and the US Dollar Index.

Here is a portion of Adam’s text introducing the video (reproduced with permission):

Looking back on Roosevelt’s speech in 1933, 4 years after the infamous crash of ‘29, he was referring to the economic conditions of the time — better known as The Great Depression. In essence he was saying that if we can’t shake our pessimistic economic outlook, it will be tough to turn things around.

The question is… are things different this time?

The answer is yes and no. People are still fearful of what the future holds and they have very little confidence in the economy. The big difference between the crash of ‘08 and the crash of ‘29 is that we now have India and China on the world stage. Back in ‘29, both of these countries were not on the radar. In fact India was under British Rule.

Both India and China’s economies will suffer with the downturn here in the US. They are now going to have to generate their own domestic consumption patterns for the goods and services they formerly sold to the US. This is going to be hard to do as so much of their economy is based on exports which are evaporating quickly.

The fact of the matter is that the markets are extraordinarily turbulent. We do not expect, even with the worldwide bailout, for things will be rosy again anytime soon. However, that does not rule out some extraordinary trading opportunities in the markets. This is a time for rational thinking. It is also a time to eliminate fear from trading.

There is no need for fear in one’s trading plan if you’re running with a diversified program that has proven to be successful over time. What I mean by over time is not just the last six months, or six years, but over a long period of time I mean as much as 30 years.

When you have a program that puts the odds on your side, you can trade with confidence knowing that you’re going to lose some small skirmishes in the market, but overall you will make money based on your own trading decisions.

Hewison then describes how the Market Club services and strategies can help newer and intermediate traders:

Many of you know that we trade using MarketClub’s “Trade Triangle” technology. This approach has proven successful in all types of markets, including the ones we are in now.

I’ve put together a short 12 minute video (entitled “Fear”) to show you how we have fared in three different markets using this technology.

Trading should be an unemotional experience. If you are trading for the excitement, odds are you’re going to lose. If you are trading just to say that you trade, you’re probably going to lose. If your trade for any other reason than to make money, you’re probably going to lose.

The possibility of successfully trading any market is out there. This video will show you how our unemotional, time tested approach to the stock, future, forex, etf, and mutual fund market will put the odds in your favor that you are on the right side of these extraordinary trading times.

“The only limits to our realization of tomorrow will be our doubts of today.”
Franklin D. Roosevelt

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Classic (though record) Trend Day Example

Oct 13, 2008: 8:37 PM CST

What a day and what a recovery we have underway!  The major US Equity Indexes surged over 10% today, with the Dow gaining a record point gain in a singular day.  It gave us a good example of a classically defined “Trend Day” so let’s waste no time in looking at this example.

DIA (Dow Jones) EFT:

This rally was long overdue and the magnitude of it should not be all that surprising, given the rampant volatility climate we’ve experienced recently.  Let’s define a couple of points on a classic “Trend Day:”

Generally, Trend Days open with a (relatively) large Index Gap
Often, Volume at the Open is larger than prior opens (this was NOT the case today)
Price Fails to fill the opening gap
Price finds support at multiple tests of the 20 period EMA
Price NEVER crosses beneath the 50 period EMA
The Market opens at its lows and closes at its highs

There are many other characteristics of a trend day, including Breadth insights, TICK/TRIN, prior day’s range, larger time-frame, etc.

Let’s keep it simple and just focus on the large gap open and finding repeated support about the rising 20 period EMA.

This was the case until the 2:00 break, but the 50 period EMA supported price, and created a clean retracement buy signal.

Often, a hallmark of trend days is that most people can’t resist ‘fading’ them, or are – in this case – looking for zones to get short.  That is a fatal strategy.  Once you feel the odds are strongly in favor of a trend day, establish a core position that moment and place a trailing stop beneath the 50 period EMA and plan to exit at the close – if it is a true trend day, you will make profit no matter where you enter originally.

You’re able to scalp each time price retraces to the 20 period EMA with a tight stop beneath it.  How aggressively you trade can dictate the size and frequency of your trading activity on perceived trend days.

The SPY shows an identical chart as the DIA.
SPY (S&P 500) ETF:

Let’s look at the Sector Breakdown via StockCharts of the day’s activity:

Energy surged the most on the day, with XOM gaining 17% and Chevron (CVX) rising 20%.  Materials came in 2nd on the day’s gains, with the Consumer Discretionary (retail) sector underperforming the S&P and all other major sectors (posting ‘only’ a 4% gain).

Morgan Stanley (MS) surged almost 90% in a single day, though the ‘gold’ was not distributed throughout the broader Financial Sector – it only gained just under 8% on the day (nothing to sneeze at, but clearly not part of the larger gains on the day – how amazing is that).

Congrats to all of you who did well today, and for being ‘vindicated’ (as some of you emailed me) that we were due for a bounce.

Still be careful – we’re clearly not out of the ‘volatile’ woods yet.

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Why is the US Dollar Index Rallying So Sharply?

Oct 13, 2008: 11:33 AM CST

A popular question I’ve been asked recently is “With the US Government ‘printing money’ and the Economy going into recession, why in the world is the US Dollar Index rising?!?”  Let’s take a look at a possible prevailing reason.

While clearly, there are dozens of fundamental and economic reasons as to the development, I wanted to focus on one of those major reasons:  It’s because foreign currencies are falling faster/harder than the US Dollar due to fears their economies will suffer worse than the US Economy.

Think in terms of relative strength.  Currency indexes are baskets of currency crosses, or how a particular currency is performing relative to other currencies.  It’s just like if you perform relative strength analysis on a stock to an index.  For example, if you want to know if Microsoft is doing better or worse than the S&P 500 over time, you would divide MSFT by the S&P 500 (in StockCharts.com, this is done by typing MSFT:$SPX into a chart).  You are then given a ratio which either rises or falls as MSFT outperforms (rising line) or underperforms (falling line) the S&P 500.

There’s a particularly strange phenomenon that develops when both are declining in price, but MSFT is declining at a lesser pace than the S&P 500, in which the relative strength line will be rising while Microsoft is falling.  It can be a puzzling scenario, especially when you see MSFT has a rising relative strength line and you invest in it, only to lose money and get confused.  In reality, MSFT declined less than the S&P 500, but it still declined.

This occurrence likely a major reason in the US Dollar Index rise relative to other countries’ currencies.  Remember, the US Dollar Index is structured as the following:

The Euro (57%), Japanese Yen (13%), British Pound (12%), Canadian Dollar (9%), Swedish Krona (4%), and Swiss Franc (4%).

For a full definition of the US Dollar Index and its calculations, see the Wikipedia Article or the explanation from Akmos Trade.

That being said, let’s view a comparison at some of these currencies, and then look specifically at the Australian Dollar, which has declined precipitously recently:

Remember that the Euro currency makes up roughly half the ‘value’ of the US Dollar Index, and it fell sharply from the mid-July peak (along with other currencies) to the current lows on the year.  The Canadian Dollar also suffered sharply during this time, along with the British Pound.

The Japanese Yen (not shown in the comparison) actually has shown relative strength as well against other currencies, and it almost mirrors the US Dollar Index recently (though again, a recent phenomena – not a salient one).  While the Yen is rising against other currencies, the Yen makes up only 13% of the US Dollar Index, thus the impact is mitigated, and clearly offset by the majority of currencies falling relative to the US Dollar.

Look at some of these currency index charts on your own for more insights.

Although the Australian Dollar does not comprise the US Dollar Index, it represents a ‘poster-child’ of the commodity collapse (along with Canada) and its currency – and economy – has suffered in kind:

This is a weekly chart, which captures the rising trend which coincided along with the commodity rally, both of which turned sharply downward in mid-July 2008.  The Aussie Dollar paid the severe price.

So, perhaps it’s not necessarily that the US Dollar Index is the ‘greatest thing since sliced bread’ or that the value is rising because of the hopes and dreams of investors.  It’s more likely that the Credit Crisis has spread and investors are expecting foreign economies will suffer worse relative to the United States in this global economic ‘recession,’ and that commodities – which often trade ‘inverse’ the US Dollar Index – have fallen under the same hypothesis of global ‘demand destruction.’

This is just one of the many phenomena at play – continue to watch the US Dollar Index and other currency pairs for deeper insights going forward.

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