A 400 Point Dow Day?

Mar 11, 2008: 8:32 PM CST

Before you get ultra bullish, realize that the sharpest volatility price moves to the upside often occur during a bearish downtrend. That’s likely what happened today.

The day began with a strong upside gap in all US Indexes, and proceeded to a near 50% gap fade, followed by a strong surge of buying power (combined with short-covering) into the close.

When the dust settled, the Dow Jones Index climbed more than 400 points today, representing a 3.5% daily increase over yesterday’s close. The NASDAQ and the QQQQ ETF closed 4% higher today.

Did anything change on the daily chart (DIA is shown)?

The quick answer is surprisingly “no.” Although price completed a large volatility price move to the upside, it is still beneath the falling key 20 and 50 period moving averages, which are both a good distance beneath the 200 period moving average, representing the most bearish orientation possible.

If indeed price continues to trend higher as it may, price will have likely broken these key averages and carved out a higher low than the January lows. This does little to change the current bearish structure at the moment before more buying (with short-covering) enters the market.

Volume was relatively light today, given the large magnitude of the intraday price swing, and unless we get higher prices on higher volume, then there is a developing divergence.

Did much change on the weekly chart? Let’s peek at the S&P 500 chart:

There appears to be a larger consolidation pattern taking place within the larger frame of the market, which has yet to break either up or down. Price has tested and successfully defended both the rising 200 period moving average and (near) the January intraday low.

Let’s rise a little higher and peek at an interesting insight on the S&P 500 monthly chart:

 

The S&P 500 Index recently inflected twice (intramonth lows) off the 38.2% Fibonacci Retracement line drawn from the bear market low to the recent bull market high.

Price also has failed to close beneath the key 50 period moving average (which could act as support) on the monthly chart. Notice that the last 4 months in the market have closed lower.

Odds may shift to favor a counterswing up, but recall that the upward swing is currently just that – a counterswing. Until the trend undergoes the formal change from down to up, we are still in a relatively dangerous situation for buying stocks at the moment.

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Off to the Races!

Mar 11, 2008: 1:27 PM CST

I think the Market shocked a lot of people today by making such a large volatility upwards price move, both in reaction to the Fed announcing a $200 Billion stimulus package to help the credit crisis, and by shorts covering to avoid being steamrolled (combined with new longs buying in anticipation of a bottom – or bottom fishing).

Let’s peek at the intraday action just before the close:

dia15m.png

The opening gap that was beyond 100 Dow points was the first major clue that a trend day up was likely to occur. Breadth was highly skewed to the upside, though the near 50% gap fade took care of some of the disparity, only to have it resurface into the afternoon.

Both on the 5-minute (not shown) and the 15-minute chart, price pulled back to key moving average support before pausing and rocketing higher into the later afternoon, forming a neat 45 degree angle bull flag which has just now achieved its price projection target (which also corresponded with the falling 200 period moving average on the 15 minute chart).

Although the pattern is similar on the QQQQ (NASDAQ ETF), price breached the key moving average support levels there (further confirming my preference as a Dow Jones ETF and @YM Dow Mini Futures trader):

Also, I have not annotated this QQQQ chart so you can see the pure price patterns and momentum readings as they exist currently. Notice the recent divergence that has formed as price made its most recent up-swing into resistance.

The bull flag pattern here also completed its objective and appears to be failing currently at resistance.

Today will be an excellent day for you to go back, print out for your records, and annotate the action for the betterment of your pattern recognition skills, and will serve as an example of a reversal countertrend-day up.

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A Quick Look at AAPL

Mar 11, 2008: 11:25 AM CST

Apple (AAPL) has fallen from $200 per share to $115 in two months – a mammoth drop for such a strong, newsworthy stock. Let’s look at the charts to see what might be ahead next.

applemar11.png

Notice in early November 2007 how the large volatility price move sent shockwaves through the stock, and led to a ‘driving on fumes’ rally that set up a key momentum divergence as price gently made two new higher highs.

The large downthrust sent shockwaves that that led to aggressive distribution (by the insiders) into the hands of the public, who were buying for a variety of reasons, including,

“The price just made a new high and will keep going,”

“The iPhone will be wonderful”

“It’s Christmas, and everyone will be getting an iPod, iPhone or new Mac this year”

“I just don’t see how Apple stock could decline that far”

… along with other valid reasons such as fundamentals, earnings, etc. Nevertheless, these reasons – while valid – did not play out, or the demand created by these rationales did not overcome the supply or the larger tide of the market shifting into a downtrend.

I highlighted a key area on the chart that was the “Last Stand” for the bulls, which I marked with the Red Arrow in early 2008 when price fell beneath the key 50 and 20 period moving averages and rallied back to test these levels, but failed at the dual crossover zone, which created a massive resistance area. The large volatility move down (massive price rejection on higher volume) was the absolute final signal of any potential strength that was left in this stock.

This was a key signal for all longs to bail (a few skilled ones did) and for savvy traders to ‘get short.’ The price then cascaded lower and the price has not taken part in the broad market rally following the massive January 22nd market lows.

Price does appear to be forming a consolidation pattern that would resemble a type of ‘saucer’ or ‘rounded bottom’ type pattern (which may eventually form into a cup with handle).

A positive momentum divergence is developing, but always be very careful about gleaning insights from any momentum oscillator during a period of market contraction or consolidation. Remember that the market (price) alternates between range expansion and range contraction, and so it would make sense that following a massive period of price expansion (from $200 down to $115), then the market (price) would consolidate for roughly an equal period of time, so to allow traders to ‘digest’ these new price levels. Price may have found ‘value’ at these levels and needs to rest here for a pause.

There really isn’t a major reason to buy Apple stock from a technical (chart) perspective at the moment, but the bullish case may be gaining strength over the bears as price continues to diverge and consolidate. A clean buy signal could come when price penetrates the falling 20 period moving average (for an aggressive buy) or makes a higher high and higher low (for a conservative buy).

Nevertheless, the lesson Apple teaches newer traders is that price can fall harder, faster, and lower than expected – and no stock (not even wonderful Apple) is immune from shocking the masses and going lower despite cries from traders that “It just can’t get any lower!” It always can!

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How Did Oil Get to $108 per Barrel?

Mar 10, 2008: 8:22 PM CST

Let’s start by looking at the charts of this parabolic rise of this critical commodity:

Daily View:

Weekly View:

Monthly View:

Can you remember how, less than 10 years ago, the price of one barrel of oil cost less than $15? Gas prices in the US cost less than $1.00 per gallon about that time. Filling up most cars cost less than $20. Now, you’re lucky to fill-up most cars for less than $50 at the pump.

But is this a fundamentally driven rise, or a speculator driven one? In other words, is there a real reason for this climb, or is it just because traders are betting that it goes higher, and taking positions expecting to profit in the short-term?

According to a February 2008 Explorer article from the American Association of Petroleum Geologists, oil prices are likely to go higher.

Paul Roberts, author of the prescient book The End of Oil, “Clearly, there’s more than just the fundamentals at play – the Saudis and OPEC have been pointing the finger at speculators, and there’s some truth to that.”

But speculators aren’t solely to blame. Why?

“If it were strictly speculator-driven, some speculators would start making money by taking a short position,” essentially betting that oil prices would have to fall

Production declines have been quicker and steeper than expected, while new production from newly developed areas (like Kazakhstan) have disappointed, Roberts added.

However, “on the demand side of the equation, there’s no uncertainty. It’s just rising steadily.”

“The resulting imbalance, with producers straining to meet increased global demand, has led to soaring oil prices and [angry] consumers.”

Other factors beyond supply-demand (and speculation) do influence crude prices.

“The most obvious is the sagging dollar,” Roberts wrote. “Because oil is priced in dollars, and because the dollar has fallen nearly a third against major developed-country currencies since 2002, Americans are spending more for a barrel of oil.”

However, there’s no guarantee of higher prices, argues writer Ed Crooks. “”Recession in the world’s biggest oil consumer (the United States, which consumes almost one quarter of the world’s oil) plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil price,” he observed.

While futures traders can take advantage of this almost stratospheric trend, consumers do not benefit from higher oil prices, which serve as a tax on drivers and companies. Higher oil/gasoline prices certainly do not help ease the pressures of a possible US recession.

In the meantime, should oil prices stay at, or increase beyond this level, there may be further economical repercussions that affect your personal pocket book that cause you to cut back on other expenses, which again would be a bad omen for the broad economy.

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Brief Weekly Index Overview

Mar 10, 2008: 10:21 AM CST

Let’s peek at some of the major Indexes to see what may be the next play in the upcoming weeks:

First, the Dow Jones:

Notice that the Broadening Top formation (bearish) that I mentioned months ago is completing to the downside.

Momentum keeps making lower lows, signaling the increased probability of lower index prices are yet to come.

A test of the 200 period moving average at 11,500 (red arrow) seems to be a near certainty (which is only 250 points away). The index may get a potential upswing (counter-swing) bounce at this level. This would cause a subsequent test of the January lows (when the market had the stellar recovery of January 22nd).

The most recent upswing (counter-swing) was not confirmed by volume (volume declined as price moved higher – blue line on volume). The recent downswing seems to be picking up more volume, further confirming the downtrend in place.

The moving averages have crossed, and price has found resistance (in the form of a long upper shadow) at that junction.

Now, let’s view the NASDAQ:

The long-term trend channel up was violated strongly with a large volatility move out of the channel, signaling a potential early trend reversal was at hand. This break was confirmed by higher volume.

Price surged down without stopping until it reached the 200 period moving average, which served as a key support level. That support level was broken with a close beneath it last week on (relatively) higher volume, further confirming the break.

Price made a new momentum low, signaling lower prices are likely yet to come.

One key note to remember is that the NASDAQ frequently leads the Dow Jones (and S&P 500) up and down. From a technical (and price performance) perspective, the NASDAQ had fared worse than the Dow and S&P, and this is a generally bearish sign for the major indexes, which signals that the big funds are worried about lower prices and are taking action.

For those who love going short, there are choice opportunities, but for newer traders, please trade with caution in this difficult market period we are experiencing currently. If you have been experiencing frequent losses, take a step back and preserve your capital, rather than trying to trade more aggressively and win back those losses. Bear markets can be more difficult to trade than bull markets.

Visit INO.com TV for access to a plethora of educational video seminars to help you during this time, or for deeper education, check out a membership to Market Club.com, which provides far more tools including scanning, daily news, “trade school” education, daily market videos/commentary, and trading signals.

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