Tue 13 Oct 2011 before market open:
The S&P 500 has done something it hasn't since July - triggered a buy signal as measured by an intraday violation of the trailing 20-day high (yesterday at 121.99).
Technically, this is all we should need, mechanically following this signal, buying at a slightly lower price if we simply entered a market order today (assuming it doesn't gap at the open above the buy level, which is unlikely but possible).
As always with the market, however, there is a on-the-one-hand, on-the-other-hand quality to this buy signal.
Positives:
Volume on up days has been improving over the past 8 trading sessions;
3 closes above the 50 day moving average;
5 closes in the upper half of the 20-day trading range;
Last trading signal in this direction led to a (small) loss (bullish): although the last trading signal was a profitable short sell from 129 to 122, the last long signal generated a loss (from about 131 to 129). Believe it or not, this is bullish, and one Turtle Trading System insists that signals only be taken if the last signal generated (taken or not) would have led to a loss.
Negatives:
SPY was turned back at almost exactly the point where it met resistance twice before (in late September and mid-October);
Volume, although improving recently, is below average; for a true breakout, you would like to see a strong surge in volume accompanied by at or near the intraday high;
Short-term over-extended: the market has retraced half of the distance from the 110 closing low to the 135 high set in July; markets tend to find resistance after covering 1/3, 1/2, and 2/3 of the prior move (although this is a weak factor and certainly not always true).
The most likely scenario at this point is a pullback either to the 50-day (117.5) or the middle of the range (115) if not a test of the recent lows, but markets exist (or so it seems) to confound the most people most of the time, so a slog upwards from here with the market finding itself 20, 30, or 40% higher a few months from now is certainly possible. When markets bottom, it is not pretty, and the fundamental news usually remains awful (the reasons for the buying only become evident long afterwards which is why following the money by studying the charts works so much better than following the talking heads on CNBC).
At this point, an investor or trader true to the 20-day signal would go long at the market. A less aggressive trader would place a high above the high of this move (122.14) which would only be triggered if the market confirmed its buy signal and moved higher. Another way to enter the market would be to place a buy stop at the trailing 1- or 3-day high (take your pick), adjusting it every day as necessary. That way, if the market pulls back then turns around, you will likely get in at a lower price and not have to waste time (and lose sleep) fearing that you bought at the very top of a move (a risk with any trend-following system). Speaking of risk, there's quite a bit, over 12% if you use the 20-day low as your sell stop, 10% if you use the 20-day 110 closing low as your sell signal.
Other charts:
The dollar is pulling back with 2 unfilled down gaps after an initially impressive rally; this tends to be bearish for the stock market in the short-intermediate term:
Of course, part of this is simply a mirror index of the Euro, which is rallying apparently in relief to the Greece bailout plan:
Anything that helps Europe will ultimately be bullish for the United States also, since the Eurozone taken as a whole is about the same size as the United States economy and one of our greatest trading partners.
Gold has been hammered recently, gapping across its 20-day sell signal line at 165 in late September, and unable to rally up even to the bottom of the gap, much less filling it. That buy signal, however, gave a nice run from 151 in July to 165 in September or 9% in a little over 2.5 months.
Germany is breaking out nicely with follow-through:
You would like to see better volume, however, but you had some very strong up days in September and the first trading day of October, indicating net accumulation.
If you missed the Germany Web buy signal, you could always trade the Germany Fund (more of an active ETF rather than an attempt to mirror an index) which gave a buy signal on heavy volume:
Contrarians might keep an eye on solar energy (TAN @ 3.42) since the news out of this sector has been unrelentingly negative, distorted by a toxic political atmosphere (an attempt to highlight a failed $500 million investment in a much larger sector, an exception that does not prove the rule). Because this ETF is so low-priced, it is not marginable and many pension and mutual funds maybe prohibited from buying it (meaning that the usual drivers of an explosive upside rally may have to stay on the sidelines), but for the individual retail investor or trader, this ETF maybe starting to get ready to rally. I wouldn't bite here, but the fact it found support at 3 after such a brutal sell-off from 9, and on heavy volume no less, warrants close watching:
Of the sectors making up the S&P 500, only a few have triggered buy signals, notably excluding financials and energy.
Technology is a stand-out but up volume remains anemic and following the breakout yesterday, it closed at the lows of the day:
One bullish thing about technology is that it gave a recent false buy signal leading to about a 10% loss, which again is bullish, but the trading range is wide and sloppy.
The Swiss Franc, after getting hammered, gapping down a staggering (in currency terms) 10 points from 125 to 115 in early September, has not even been able to approach the lower part of this gap and volume on down days remains much higher than on up days:
The Swiss stock market has issued a buy signal, however:
Not for the faint of hart, the ETF that attempts to mirror the VIX (volatility index) looks as though it is approaching a sell signal after a fantastic trade was triggered at 25; if it does not gap below 41.35, then this would be a 65% profit in a little over 2 months. The fact that volatility is settling down is settling down, or at least approaching lower end of its elevated trading range, maybe a sign that things are returning to normal, or at least that the panic levels of volatility recently seen are backing off.
The S&P 500 has done something it hasn't since July - triggered a buy signal as measured by an intraday violation of the trailing 20-day high (yesterday at 121.99).
Technically, this is all we should need, mechanically following this signal, buying at a slightly lower price if we simply entered a market order today (assuming it doesn't gap at the open above the buy level, which is unlikely but possible).
As always with the market, however, there is a on-the-one-hand, on-the-other-hand quality to this buy signal.
Positives:
Volume on up days has been improving over the past 8 trading sessions;
Volume on the first trading day of October surged higher, at which time
SPY made a low of 107.5 then closed 5% higher just below 112.5 AND
Gave a failed sell signal, making a
new relative low, then reversing and closing higher;
7 days of higher lows and higher highs in a row; 3 closes above the 50 day moving average;
5 closes in the upper half of the 20-day trading range;
Last trading signal in this direction led to a (small) loss (bullish): although the last trading signal was a profitable short sell from 129 to 122, the last long signal generated a loss (from about 131 to 129). Believe it or not, this is bullish, and one Turtle Trading System insists that signals only be taken if the last signal generated (taken or not) would have led to a loss.
Negatives:
SPY was turned back at almost exactly the point where it met resistance twice before (in late September and mid-October);
Volume, although improving recently, is below average; for a true breakout, you would like to see a strong surge in volume accompanied by at or near the intraday high;
Short-term over-extended: the market has retraced half of the distance from the 110 closing low to the 135 high set in July; markets tend to find resistance after covering 1/3, 1/2, and 2/3 of the prior move (although this is a weak factor and certainly not always true).
The most likely scenario at this point is a pullback either to the 50-day (117.5) or the middle of the range (115) if not a test of the recent lows, but markets exist (or so it seems) to confound the most people most of the time, so a slog upwards from here with the market finding itself 20, 30, or 40% higher a few months from now is certainly possible. When markets bottom, it is not pretty, and the fundamental news usually remains awful (the reasons for the buying only become evident long afterwards which is why following the money by studying the charts works so much better than following the talking heads on CNBC).
At this point, an investor or trader true to the 20-day signal would go long at the market. A less aggressive trader would place a high above the high of this move (122.14) which would only be triggered if the market confirmed its buy signal and moved higher. Another way to enter the market would be to place a buy stop at the trailing 1- or 3-day high (take your pick), adjusting it every day as necessary. That way, if the market pulls back then turns around, you will likely get in at a lower price and not have to waste time (and lose sleep) fearing that you bought at the very top of a move (a risk with any trend-following system). Speaking of risk, there's quite a bit, over 12% if you use the 20-day low as your sell stop, 10% if you use the 20-day 110 closing low as your sell signal.
Other charts:
The dollar is pulling back with 2 unfilled down gaps after an initially impressive rally; this tends to be bearish for the stock market in the short-intermediate term:
Of course, part of this is simply a mirror index of the Euro, which is rallying apparently in relief to the Greece bailout plan:
Anything that helps Europe will ultimately be bullish for the United States also, since the Eurozone taken as a whole is about the same size as the United States economy and one of our greatest trading partners.
Gold has been hammered recently, gapping across its 20-day sell signal line at 165 in late September, and unable to rally up even to the bottom of the gap, much less filling it. That buy signal, however, gave a nice run from 151 in July to 165 in September or 9% in a little over 2.5 months.
Germany is breaking out nicely with follow-through:
You would like to see better volume, however, but you had some very strong up days in September and the first trading day of October, indicating net accumulation.
If you missed the Germany Web buy signal, you could always trade the Germany Fund (more of an active ETF rather than an attempt to mirror an index) which gave a buy signal on heavy volume:
Contrarians might keep an eye on solar energy (TAN @ 3.42) since the news out of this sector has been unrelentingly negative, distorted by a toxic political atmosphere (an attempt to highlight a failed $500 million investment in a much larger sector, an exception that does not prove the rule). Because this ETF is so low-priced, it is not marginable and many pension and mutual funds maybe prohibited from buying it (meaning that the usual drivers of an explosive upside rally may have to stay on the sidelines), but for the individual retail investor or trader, this ETF maybe starting to get ready to rally. I wouldn't bite here, but the fact it found support at 3 after such a brutal sell-off from 9, and on heavy volume no less, warrants close watching:
Of the sectors making up the S&P 500, only a few have triggered buy signals, notably excluding financials and energy.
Technology is a stand-out but up volume remains anemic and following the breakout yesterday, it closed at the lows of the day:
One bullish thing about technology is that it gave a recent false buy signal leading to about a 10% loss, which again is bullish, but the trading range is wide and sloppy.
The Swiss Franc, after getting hammered, gapping down a staggering (in currency terms) 10 points from 125 to 115 in early September, has not even been able to approach the lower part of this gap and volume on down days remains much higher than on up days:
The Swiss stock market has issued a buy signal, however:
Not for the faint of hart, the ETF that attempts to mirror the VIX (volatility index) looks as though it is approaching a sell signal after a fantastic trade was triggered at 25; if it does not gap below 41.35, then this would be a 65% profit in a little over 2 months. The fact that volatility is settling down is settling down, or at least approaching lower end of its elevated trading range, maybe a sign that things are returning to normal, or at least that the panic levels of volatility recently seen are backing off.
