Clean Gap Fill Example on Goldman Sachs GS

Sep 2, 2008: 1:18 PM CST

I wanted to highlight a quick, intraday example of a classic (or ideal) gap fade play that occurred on Goldman Sachs (GS) this morning.  As a bonus, I’ll show the S&P 500 (SPY) chart intraday and the interesting reaction move that occurred today.

Goldman Sachs (GS) Intraday:

The morning (and week) began with a large volatility gap up, and it’s usually best to try (trade) for at least a 50% retracement of a stock gap, but the odds for success (100% fill) trail off as the gap size increases.

Nevertheless, Goldman Sachs rose for the first 10 minutes and then collapsed $4.00 to fill its intraday gap (trade at the price of Friday’s close).  Often, with a gap fill complete, the next strategy is to try to trade IN the direction of the impulse (gap) and capture a portion of the (in this case) upside move.

I wanted to emphasize the hammer (buy signal) that occurred as price re-visited the prior close.

Goldman only gave a 62% retracement (stopping exactly at the Fibonacci line) of the gap before rolling back over, and now (as of this writing but not seen on the above chart) has retraced back to Friday’s close once again.

An interesting series of patterns have occurred so far on the S&P 500 (and Dow and NASDAQ for that matter) Index.  Keep in mind these are intraday charts and are not complete yet.

S&P 500 (SPY) Gap Fill:

The market has made two “Measured Move” plays already, and the most recent bear flag (measured move) has been remarkably violent (achieving its target very, very quickly).

Today’s action will be recorded as an official gap fill, though the gap was a relatively large gap.

I’ll be compiling the statistics for August’s gap fade strategy soon, so be sure to stay tuned for that.

Fascinating action so far – September could be wild!

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Looking at the August S&P 500 Action

Sep 2, 2008: 11:39 AM CST

With August now behind us, let’s look at what happened during that month in terms of the S&P 500 Index.  Hint:  A lot of up and down that left us relatively unchanged.

Let’s look at the Daily Chart of the S&P 500 Index:

It looked initially that we broke out solidly above moving average support and from an ascending triangle around August 11th, only to have that pattern ‘busted’ and then decide that a potential wedge was forming, and that a breakout down out of that wedge around August 18th happened, but that pattern too was ‘busted’ and so August was a month of great confusion and indecision according to the price charts.

Swing traders likely had great difficulty, as true signals were generated and then quickly eroded into losses on both sides of the market – the edge fell to the intraday trader, and even they were chopped up sometimes mercilessly through intraday buy and sell signals which themselves were quickly faded/busted.

One must understand that August’s (and July’s) rising price action was classified as a counter-trend retracement against the prevailing daily (and weekly) index down-trends, and as such, trading counter-trend is often far more difficult than trading swings in the direction of the trend (compare the price action of May to July in terms of a primary trend swing down with July to August’s counter-trend retracement swing – it’s a world of difference).

At the moment, we appear to be testing the rising trendline (trendlines, once broken, often switch polarity, in terms of support becoming resistance, which could be happening here), which offers a temporarily bearish assessment, but two previous signals have failed and the market is embroiled in a major power-struggle between buyers and sellers of various time-frames and so short-term patterns are not having the efficacy we would expect – things are more murky than we’d like.

Now, let’s take a look at the hourly chart that focuses in almost exclusively on August’s intraday action, which details the consolidation situation a little better:

All this chart shows is the August price action which confused many, many traders in terms of false break-outs and narrowing price swings.  There weren’t many (if any) momentum divergences on this time-scale, and moreover, we’re just looking at rhythmic swings that potentially gave traders many headaches.

One of the best explanations and insights I’ve found so far regarding the current state of the indexes comes from Trader Mike’s August Recap:  Holes in the Wall in which he details the current state of the main equity indexes and uses the Guppy Multiple Moving Average method to describe some conditions possibly missed by other analysts.

You can also take time to learn more by viewing educational videos from INO.com or other websites – including four free videos.  I strongly, strongly recommend joining the INO.com TV Premium educational video service for $99 for a full year which grants you access to on-demand access to over 500 videos and print-offs from over 150 trading educators.  These are recorded sessions of seminar presentations, which are often one and a half hours in length each.  Take time to check out and subscribe to this resource.

Otherwise, just keep learning and trading small to protect your capital in these choppy markets!

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How to View Sector Performance in StockCharts

Sep 1, 2008: 5:46 PM CST

There are two main ways I view broad sector performance and compare results to determine where we may be according to the Sector Rotation Model.  Here, I show those two methods.

First, I use the StockCharts.com AMEX Sector Performance page with a few modifications.  It’s located on the StockCharts homepage under the PerfCharts tab on the left.

Clicking on the AMEX Sectors launches a Java window with multiple, illegible lines on the graph.  To get a clearer picture, you’ll need to click on the “Bar” graph option at the bottom left to make the comparison clearer (the tab has a green and red bar on it – see example below).

Right now, the chart looks like this:

The above chart assumes no modifications – what fun is that?!

There’s a little trick that you might miss when you’re looking at this chart.  What you’re actually viewing is RELATIVE performance over the last 65 days (time frame is scaled and adjusted on the bottom right of the chart – right click to adjust).

The reason it’s relative is that you’re comparing performance to the S&P 500 Index (which is ‘zeroed’ and sector performance is shown above or below the performance of the S&P).  That’s great for comparison purposes, and gives good insight into what sectors are outperforming or underperforming the S&P 500 for the given time period (perhaps year to date, monthly or weekly comparison).

Right now, Health Care and Consumer Staples have outperformed all other sectors over the last 3 months.  That’s useful information.

However, what if we want to know ABSOLUTE performance of the sectors?

We’ll need to click the S&P 500 (the red box at the top left) to compare to absolute performance (in other words, what exact percent has the sector moved in the given period we’re examining).  This chart pops up.

I’ve actually changed the time scale in this chart (by right-clicking on the ‘days’ tab) to show “Year-to-Date” performance of all AMEX Sectors.

We see that the Financial sector has underperformed all others (losing 25%), followed by Technology (losing 14%) so far this year.  None of the sectors at this time are positive for the year (which may be surprising to you, given the attention energy stocks have received).

Again, you can change the time scale to reflect weekly performance, or you can scale it back to the October peak and see performance from there.  To do so, left click and hold on the left side of the “days” bar to change the size and scale of the chart.

You can also click in the middle and drag the entire bar to go ‘back in time’ and see what the performance was for the scale you chose – this can be an interesting exercise in seeing how money flows from sector to sector over time, and what that might mean for the broader market and economy.

Play around with this useful and free tool to see what insights you might gather about the current and past sector rotation that has occurred!

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Holiday Links

Aug 31, 2008: 8:12 PM CST

Let’s take a quick look at some of the stories around the business blogosphere, courtesy Newsflashr’s Business Blog section.

For an official link-fest, the Big Picture offers a “Labor Day Weekend Linkfest.”

CXO’s Trading Calendar (trading day historical percentage change) for September (via Kirk Report’s Quick Links).

From the “Winning Mental Edge” site, “Persistence (in Trading) – Is it Always Good?”

Dr. Steenbarger posts a simple but thoughtful post on a potentially profitable system entitled:  “Making the Trend Your Friend: A Remarkably Consistent Trading System”

Chris Perruna notes a “US Dollar Buy Signal

Adam Warner discusses InTrade prediction markets (building on Paul Kedrosky’s assertion that “Prediction Markets … Suck“) in his post “Prediction or Reflection?

The Stock Chartist asks, “Bottom or Consolidation Channel? What’s Your View?”

Hopefully these will get you started for a market holiday Monday!

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Recent US Dollar Index Action Chart

Aug 30, 2008: 11:06 AM CST

With the US Dollar Strengthening, officially reversing the trend back to the upside, and consolidating above support, let’s look at the daily and weekly chart to see what’s happened and what might be in store.

US Dollar Index Daily Chart:

The dollar bottomed at the same time that the US Stock Market bottomed (July 15th), yet the dollar has surged with massive relative strength over the equity indexes, which rallied comfortably and then now are ‘chopping’ around the daily charts.

I cannot underscore how powerful and meaningful this recent momentum impulse was and what it means for the US Dollar Index.  This is one of the strongest upward surges in the index in years (both on the daily and weekly chart) and the assumption is that it is powerfully bullish for the Dollar.  New momentum highs often precede new price highs.

The trend of the Dollar Index is now positively confirmed as “up” (after making a higher low, higher high, and then taking out that high) and then breaking solidly above moving average resistance.

In terms of the moving averages, the 20, 50, and 200 day moving averages are officially in the “most bullish orientation possible” in terms of the 20 being above the 50, with both above the 200.  One cannot ignore this development – these moving averages now serve as expected price support.

Also, I have drawn in small blue Fibonacci retracement levels off the July 15th low to the August $77.50 high.  The retracement support levels are the following:

38.2%:  $75.25
50.0%:  $74.50
61.8%:  $73.75

That being said, let’s look at the structure on the weekly chart.

US Dollar Index Weekly Chart:

A positively confirmed trend reversal (up) has also occurred on the weekly chart, which is a dramatic development many assumed to be impossible.  The blue hash marks represent a higher high, higher low, and the confirmation (break above) that level.  Also, price has broken above the 20 period EMA (which is a significant development) and now above the 50 week EMA (also a critical development).

We can now expect these averages to provide potential (initial) support.  The 20 week EMA rests at $73.30 and the 50 week EMA rests at $75.40.

We could be due for a clean retracement of the recent powerful impulse (price doesn’t go up forever) which is why I’ve called attention to the potential support levels.  But for now, with a fresh trend change officially in place, we have to shift our interpretation and focus to the bullish side unless proven otherwise.

The downtrend has ended and now we’re into a new environment – be sure to pay attention to all the intermarket relationships and economic realities that will come from this new development.

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