Weekly View of the Indexes

Jun 3, 2007: 9:06 AM CST

Here are basic weekly charts of the major indexes at a glance:

dow-weekly-june-3.png

nas-weekly-june-3.png

sp-weekly-june-3.png

With the exception of the Nasdaq, the Dow and S&P 500 are making new momentum highs confirmed by new price highs – a good picture. The technology focused Nasdaq is forming a weekly momentum divergence with price, in terms of swing highs – a caution sign, but no means to panic or doubt the rally.

Price on all indexes is far extended to the upside, which can happen indefinitely in strong trends. I define ‘overextended’ in terms of RSI above 70, Stochastic above 80, and price touching or exceeding the upper 20 period Bollinger Band (standard deviation function).

Notice from October 2006 until the February ‘plunge’ (which registered as a normal correction on the weekly charts) that the price exhibited the same overextended characteristics for about 4 months before a sharp and sudden correction. All charts showed momentum divergences with price before the correction which is typical of extended price runs.

I’ve read where some Elliott Wave Theory practitioners are saying we are at the end of a 5th wave and due for an ABC type correction, but time will tell on that. I’m not yet an Elliotician, yet am warming up more to the way to quantify price swings.

In my summary, now is probably not the time to invest your whole life savings into the market if you’ve been sitting on the sidelines all this time. I would recommend taking minor partial profits and ramping up your trailing stops if you have them. I see no compelling reason to panic and exit full positions yet – price needs to behave a bit wickedly before doing that. Remember trends have higher odds for continuation than reversal, and that is the environment and market principal guiding the current environment.

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Link: View Dozens of Blogs in 5 minutes or less!

Jun 2, 2007: 8:48 AM CST

Craig at Swing Trade Stocks provided an excellent summary of how to set-up blog feeds (via Bloglines or his favorite, NetVibes) and view headlines and updated content of your favorite blogs (which should have an ‘easy to subscribe’ feed button).  Doing so will keep you more up-to-date faster, and as we all know, speed and efficiency helps us more in today’s active society.

Check out his summary at “How to Read 100 Stock Blogs in 5 Minutes” and start subscribing and reading more in less time!

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DJ Utilities: A Lesson in Momentum Divergences

Jun 1, 2007: 1:35 AM CST

I wanted to point out the recent action in the Dow Jones Utilities Index – it is a lesson on how momentum divergences play out.

First, the chart:

dow-utilities-may-31.png

I have not annotated this chart (with trendlines) to show the divergences – note both oscillators making lower swing highs while price makes increasingly higher highs.

Divergences in momentum tend to correct down to where the momentum divergence (on the 3/10 Oscillator – bottom pane) first was observed.  Even the trusty stochastic indicator made clearly visible divergent patterns.

It is a known theorem from the Fathers of Technical Analysis to Linda Raschke and others today: Momentum Precedes Price.

This occurs both in the form of momentum highs leading to new price highs (indicated also on this chart with a new price and momentum high on March 26th) and the form of divergences, which are nothing more than a coming balance of buyers and sellers (and a reversion to the mean type of price behavior). This is evident with the ‘snap’ decline and rolling upper peaks in price throughout the month of May.

Now, we are observing new momentum lows and a potential “Impulse Sell” style trade where momentum makes a new low, corrects back upwards, and then makes new price lows. This could happen with a failure test of the (now) declining 20 period moving average.

Study your charts in terms of momentum readings and indicators. They are not the ‘magic bullet’ of course, but they can alert you to some greater than normal probabilities of potential upcoming price movement.

Of note, we are seeing clear momentum divergences just like this in the major indexes. I recommend caution, but I do not attempting to short this market yet.

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Overview of Major Indexes

May 31, 2007: 10:29 PM CST

We have survived this ‘heavily ladened’ week of economic reports, and the S&P along with the Dow Jones have made new lifetime highs.  Such action is impressive when reports indicate that first quarter GDP grew at 0.6%, or the worst reading since 2002.  We still have one trading day ahead of us before the weekend.

Dow Jones

dow-may-31.png

  • We are making new price highs, yet momentum (both 3/10 MACD and Stochastics) are clearly diverging now with price
  • Volume on the last 3 up-days was clearly decreased – consequently, volume on today’s ‘down’ day was markedly increased

nasd-may-31.png

spx-may-31.png

All indexes are showing clear and present momentum divergences.  A divergence is no reason to run for the hills and short, but it is a yellow light of caution.

Here’s a bonus chart of AAPL (Apple) which has absolutely been on a roll since late April.  It is now making new momentum highs.
aapl-may-31.png

Study well.

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Link: Identifying Transitional Structures

May 30, 2007: 9:31 AM CST

Dr. Steenbarger at TraderFeed posted a set-up (post:  Idenfitying Transitional Structures) using volume, momentum extremes, and the NYSE TICK readings to identify possible exhaustion and reversal points in daily price action which can be very helpful for day-traders (and even swing traders looking to enter a position at momentum extremes/reversal points).

It is recommended reading for those looking to better your information of short-term price patterns and possibilities.

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