Dow View May 17

May 17, 2007: 8:21 AM CST

A reader informed me I failed to include the Dow chart in the recent chart analysis so here is today’ s Dow Jones action – the Dow has held up the strongest in the recent environment, perhaps because of capital flowing into larger capitalized securities.  The Russell (small cap) is still showing relative weakness.

dow-may-17.png

We see declining momentum, which is characterized by all the indexes which serves as a warning, and not a reason to exit long positions.

All moving averages have formed a highly bullish angular pattern and continue to rise (look at how nicely the 200 period average is rising – about a 33 degree angle).

A trend is clearly developed, and odds favor continuation, yet trends do end at some point, so I’m not suggesting to bet the farm with new longs in the current environment, but to enjoy the ride and marvel at the recent strength.

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Recommendation: New Trader Psychology Blogsite

May 16, 2007: 8:37 AM CST

Dr. Bruce Hong recently published his blog on Trading Psychology with the perspective of biological psychology and academic research/information.

I am thoroughly impressed with his posts so far (they are very detailed and informative to all levels of readers) and I highly recommend reading and following his posts.

The site is simply entitled TraderPsychology and site link is http://traderpsychology.blogspot.com/

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Technical Damage to the Indexes

May 15, 2007: 7:50 PM CST

The Russell 2000 suffered the worst technical damage today (in terms of support/resistance), while the Nasdaq isn’t far behind. The S&P and Dow are still looking comfortable, yet a test of the rising 20 period moving average isn’t far away.

For the Nasdaq, a test of the 50 MA would mean shedding 25 more points (keep in mind we lost 21 points today).

The Russell (and Nasdaq) have violated the 20 period moving average and now rests at the stabilizing 50 period MA. This area could find support, but if not, odds favor continuation to the downside.

S&P (Strongest of the indexes, along with the Dow)

spx-may-15.png

The Nasdaq, which could test the 50 soon (shedding 25 points):

nasdaq-may-15.png

The Russell (small-cap) which has languished the other indexes:

russell-may-15.png

We are seeing momentum divergences (with price – declining momentum) in all the indexes, which is a caution sign.

Keep this in mind when you’re putting on swing trades this week. Most major indexes stand at critical junctures, or what I call “technical decision nodes.”

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Daily Chart Views

May 14, 2007: 8:04 PM CST

Here are the most recent index charts for May 14:

Dow Jones

dow-may-14.png

Nasdaq

nas-may-14.png

S&P 500

spx-may-14.png

Russell:

russell-may-14.png

In almost all indexes, price bounced off (found support at) the rising 20 period moving average.

All indexes are making divergences with price, in that momentum is decreasing while price increases which signals caution.

The Stochastic indicator has pulled back to 50 on all indexes.

The Dow Jones is the strongest index while the Russell is the weakest (from a technical standpoint).

This indicates the big investors are finding protection in the larger capitalization companies as compared with the smaller cap stocks of the Russell.

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Weekly Dow Chart May 12

May 12, 2007: 2:36 PM CST

Attached is the weekly chart of the Dow Jones:

dow-weekly-may-12.JPG

  •  Momentum is confirming new price highs (but this is NOT the case on the Nasdaq)
  • Price is clearly overextended in terms of oscillators (yet this isn’t a reason to reverse)
  • Price is above the upper Bollinger Band (again, no reason to reverse)

My observations:  We are overextended and due for a correction (how many times have you heard this from others in the financial media or other bloggers?)

Another observation:  The market can remain irrational (beyond odds) longer than you can remain solvant (or run out of capital)

Trading is about odds and probabilities.  People see things differently, in that while some traders (like myself) see this environment as highly risky and are unlikely to initiate new long positions (and in fact, more likely to take profits on open long positions), other traders see this as a breakout and runaway market and can’t wait to get on board and are buying the market aggressively.

Who will win?  No one knows.  We only watch and play the odds, and in this case, with the stochastic above 80 (and possibly crossing), price above the upper Bollinger Band, price well overextended above the rising moving averages, and momentum making new highs, odds favor a correction/pullback/profit taking/etc.

However, just because odds say it will happen does not mean it will happen.  You can’t force your will on the market, and in such an environment (strong momentum move), you are either long or stay out of the way.  Otherwise you – like the bears and shorts out there – will sustain heavy losses, especially in a creeping or runaway trend environment.

Play the odds and be careful.  Control your risk either way.

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