Markets find Support at Moving Averages

Jun 27, 2007: 6:36 PM CST

It’s rare when a particular moving average will capture (halt) the price action exactly, but these averages often serve as areas of support or resistance.

Today’s action was no exception; in fact, the Dow tagged the 50 period MA and the Nasdaq ‘tagged’ the average almost to the penny before rallying sharply to close up 1.2%.

Here are unedited charts – focus only on the price interaction on the moving averages (particularly the 50 day moving average):

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I know there are many critics to using moving averages as support or resistance and that’s fine. What matters is what works for you and what you can interpret and execute in the market.

For example, the S&P 500 closed above the 50 EMA, but not before a significant ‘rinse and wash’ below it.  It’s evidence that markets don’t always do as expected, and those seeking ‘absolute perfection’ aren’t rewarded often.

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Using moving averages on higher time frames for execution/position management on lower time frames can indeed provide low risk/high reward zones when they hold (key word = when).

If you’re not using moving averages in this way, it’s worth pulling up a few of your favorite charts and viewing the 50 period exponential (or simple) moving average, as well as the 20 period exponential (and simple) moving average. Do your own research and see what you discover.

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Dow Observation and Bonus Charts

Jun 26, 2007: 4:54 PM CST

Monday was an absolutely wild day for traders, with a large volatility price swing. As hectic as the trading day was, an interesting pattern emerged.

The intraday low coincided with the rising 50 EMA and with the round number 13,300. This was a significant support area.

The high of the day coincided with the flattening 20 period moving average (almost) and neared 13,500, a round number resistance. This now establishes a short-term trading range until price can eject from this 200 point range.

dow-june-26.png

As for the bonus charts:

Google perfectly completed its Impulse Buy trade I highlighted recently (odds now favor a pullback):

goog-june-26.png

Jabil Circuit (JBL) recently surged to a new momentum high, yet its gap is being ‘faded’ and could setup an Impulse Buy trade (or even a “Sweet Spot” trade if it breaks its downtrend):

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Finally, Wal-Mart is having a little bit of trouble after its recent surge in price, and may be stabilizing for a ‘buy’ (or at least support):

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Wal-Mart serves as another example where buying on news/earnings can cost you when so many retail traders surge in with wildly bullish hopes and dreams.

As insane as it sounds, money is often made more reliably by trading against retail traders’ euphoria for whatever reason.

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Blackstone IPO Causes Pain and Regret

Jun 26, 2007: 9:51 AM CST

I had to point the Blackstone IPO (BX) chart out to readers, simply for its major irony to me. I watched a television report where it showed a montage of news sources that were literally giddy with excitement discussing the Blackstone Financial Group IPO and how it will make investors so much money and how traders were so excited to invest in the successful fund, and how wonderful it was, and how the Chinese government did so, and how nothing could go wrong.

As you may suspect, something went wrong (in the short term, that is – I’m not speaking of long-term price appreciation here, which I believe will happen).

This story is one of the many instances of ‘retail traders’ or new traders being lured by the Siren song and then dashed among the rocks.

View the chart:

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Giddy traders rushed out, possibly cashing out positions in long term mutual funds and the like to speculate on this ‘sure thing,’ and probably bought in the $37.oo to $38.oo range. Today, we hit a new low at $30.50.  The IPO was initially set at $31.oo.  The good news is that volume is clearly drying up, but please note that over 100 million shares were traded on Friday. Yesterday – 50 million.

There are literally hundreds of thousands (possibly millions) of disappointed traders/investors (in the short-term), and many have bailed out of their positions at a possible 30% loss in three days. Those holding tight are experiencing pain, but it should be temporary. Patience is key, here, as well as allowing the crowd to get ‘rinsed’ before entering (which appears to be happening).

Trading is hard, and what is popular doesn’t always make money.  In fact, how many people could have known that the way to make money with Blackstone’s IPO was to short it?!  And how many people could have shorted it (psychologically) when literally everyone everywhere was bullish?

That is exactly why it would have worked.

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Link: Trading by Regimes

Jun 25, 2007: 11:30 PM CST

Dr. Steenbarger recently posted on the topic of “Trading Regimes,” which are ‘relationships which exist between one or more variables and prospective price changes in a trading instrument.’ The relationships tend to be temporary, and one must discover various relationships and be open to the possibility of variance in analysis. Rather, regimes should be analyzed as ‘recent history relationships.’

Regimes are assumed to persist unless the following occurs:

1) There are fundamental, market-breaking news items or economic reports moving markets sharply;
2) Volume and volatility today are meaningfully different from the recent past;
3) Interest rates, currencies, oil, etc. are behaving abnormally relative to their recent past.

Analyzing the market this way provides clues to what may happen, and gives you trading ideas to execute and evaluate.

I particularly enjoyed the final quote:

“Markets play by rules. The rules change. The key is figuring out when fundamental shifts in markets are creating rule changes and when regimes will persist at least one more day. “

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Weekend Strongest Industry and Index Overview

Jun 24, 2007: 8:09 PM CST

Here are some daily and weekly views of some of the major indexes for your study:

Daily Charts of the Dow and Russell 2000:

dow-june-24.png

russ-june-24.png

Weekly Charts of the Russell and S&P 500:

russ-weekly-june24.png

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As an added bonus, consider pulling trade ideas from these strongest industries (via Prophet.net) over the last three months:

industry-june24.jpg

Notice the major jump in flow in the “Specialty Chemicals” group.  With 45 stocks, this is a major move not to be taken lightly.

We see resounding strength (from 92 stocks) in the Independent Oil & Gas industry as well.

Use this to supplement your analysis to build your watchlist for the week.

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