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Q Final Signal Per J. Welles Wilder 8/5/2005
David's Thursday Market Update: FEAR FACTOR
Fear Factor
8/4/2005
by David Yu
I wrote "Once is Not Enough" after the Dow dropped 55 points on 7/25/2005. In that article I mentioned that the fear factor would not come into play until there’s a larger down day or a few more down days like that strung together. One Sentiment Oscillator that I use may validate today being one of the larger down days that has finally brought fear into the market. But, before we get into that, I'd like to touch basis on our portfolio and in particular GSS.
The long positions in our portfolio were picked by me with low degree of correlation with the market, so they should continue to perform as they're supposed to, independent of the market. The only exception was Southwest Airlines (LUV). It's a little too "market sensitive" to be kept for now. Therefore, LUV position is now closed for a small profit.
GSS - the very intriguing technical observation about GSS (Golden Star Resources) is that it's once again at that $3.30 resistance. Remember I showed you the psychological barrier that's manifested on this chart (Chart 1)? When I posted this chart on 7/25/2005, I pointed out the big gap down (yellow highlight) that's accompanied by the largest negative volume bars (blue circle) in February was where the share holders really sold off. And, every time GSS gets up to this level, it has to deal with that psychological trauma over and over again.
Well, here we are once more. Since this is such a great barrier, GSS could get pushed aside for some consolidation sessions. That shouldn't come as a surprise. It would be a surprise (a pleasant one) if it holds steady during these consolidation trading sessions. The more steady GSS holds right here, the more strengths it's going to gather.
CHART 1
Next, let's look at FEAR.
Chart 2 is one of the my Sentiment Oscillators. It's similar to the one I've shown you before except that Wilshire 5000 is used as the index here, instead of S&P. Wilshire 5000 covers more than 6000 companies headquartered in the U.S.
This oscillator compares the market's performance to the option traders’ total Put (sell) to Call (buy) option ratio (Symbol: CPC). When the market's bullish and there's little fear, this oscillator is on the rise as the market outperforms the Sell-to-Buy ratio. And, in order for this oscillator to rise, the faster 9-day simple moving average (MA) must first pull ahead of the slower 21-day MA. However, when the 9-day MA (blue line) crosses below the slower 21-day MA (red line), it signals the imminent market decline. You can see each of the yellow highlighted spot, where the fast MA crossed below the slow MA, marked the short-term top of the Wilshire 5000 index in the lower pane of the chart.
And, after almost 2 weeks of uncertainty, today's action finally brought the 9-day MA convincingly below the 21-day MA. There's no question about the completion of this market top because the FEAR factor has finally returned. The only question is how extensive this decline is going to be.
In addition, ever since I posted this chart (Chart 3) on my Trade Journal, I've been keeping an eye on the gaps. These "round-trip" gaps occurred, of course, on 7/7, the day of the London Bombing. I thought the fact that these 2 gaps were never filled was most peculiar. Chart 3 was the chart I posted on Wednesday 7/27/2005. I'll write up more details on Sunday when I have more time. For now, you can look up today's VIX chart for yourself and see what happened.
Have a great Friday! We'll be watching the show with our long position intact.
Trade Journal: Cogent Inc. (COGT) UPDATE
Added equal number of shares at $30.66 to average the cost down to $31.75.
Shorts have increased about 30% from June, and is now at 3.2 days to cover. Very interesting short selling action all day today, which resulted in closing below the lower end of the February gap ($31.40). Otherwise, no other major technical damages noted.
Long term hold with an eye on both "low monitors" of the RSI and the DPO plus the 20-day moving average. Target price near $37 or a 16% gain.
Trade Journal: Cogent Inc. (COGT)
And so, we continue to trade with the momentum and stay on the same side as the market - the long side for the time being. By the way, as the number of trades start to add up, I've lost track of whether I've posted all the closing positions. If you're also trading these stocks and options, please make sure that you set property stops and limits.
Cogent Inc. is a goverenment and law enforcement agencies AFIS (automated fingerprint identification systems) provider based in California, but it also provides the equipments and services worldwide. It just announced a record 2nd quarter revenues last week.
This is a trade based on the growing demand for this type of security technology and services. This chart shows a very strong technical uptrend. I added this to my long positioin at $32.84 today.
IIJI >>> This stock is a fundamental piece of junk David, I think it'll be a good short soon, mostly intuition with a sprinkle of technical experience...
*Would consider short-sell between $11.55-$12.15...
Trade Journal: INTERNET INITIATIVE JAPAN (IIJI)
David's Sunday Market Chartmentary 7/31/05
The Market According to Volume
Gauging the “Oversold” and “Overbought” conditions by following an absolute set of numbers or readings is “Over-simplifying” what technical analysis is all about. Quite often, these readings were arbitrarily imposed by someone other than the creator of the indicator. Technical analysis should be about the study of relativity – the relative movements of price and volume. When the market remains “oversold” or “overbought” for a long time, it’s just the market’s way of telling us to take our arbitrary readings and shove it. And, in frustration, we denounce the usefulness of the technical indicator.
I, too, was indoctrinated into believing that the market “should” follow our pre-set mandatory readings. Of course, I had been wrong. One of my fond studies is the trading volume, and I can’t think of anyone who thinks and talks about the trading volume more than Richard W. Arms, Jr., who develops, among other indices, TRIN Index. Incidentally, if you’d read through his book, “Trading with Equivolume”, you’d find absolutely no mentioning of the word Overbought. And, he only used the word Oversold once in reference to a hypothetical market condition. Neither word was used for the purpose of his indicator.
Chart 1 is the 10-minute intraday chart of the big board’s composite index that covers Thursday and Friday’s action. If this chart looks different to you, it’s because it’s an Equivolume Chart with the TRIN Index. The width of the rectangular box is the volume. The top of the box is the high price of the period (10 minutes in this case), and the bottom of the box is the low. Richard Arms sees the “square boxes” as the turning points.
These squares boxes that are wide for their heights represent increased volume and tight price range. According to Richard Arms, after an advance, one or a group of these square Equivolume boxes tell us that there are still buyers trying to push the price higher, but they’re encountering sellers who are willing to give them all the shares they want at a given price. It’s usually a clear sign of the reversal of the current trend, and a warning that prices are likely to head lower.
CHART 1
On Thursday, a group of these square Equivolume boxes was formed as the NYSE Composite Index crossed above the 7500 – see blue circle at numeral 1. At the same time, the TRIN Index (lower pane) also reversed its uptrend and started declining. It eventually dropped below 1 (purple line). Indices which are under 1 are usually bullish because the stocks that are going up are getting more than their fare share of the volume. However, if it’s in a clear declining trend, then that could also mean that the advance issues were declining while the buying volume continues to pour in for these issues. This is a sign of the market breadth deterioration. We’ll take a look at the 1999 market top as an example when we get to the “big” picture chart. For now, this rapidly declining TRIN on Thursday confirmed the formation of the group of square Equivolume boxes as a warning that prices are likely to head lower.
Towards the end of Thursday’s session, another square box was formed (numeral 2) after the NYSE index reached its high. The TRIN Index meanwhile reversed its downtrend and started climbing. This rising TRIN Index indicated that the up volume for the advancing issues began to decline, which in turn meant that the buyers were leaving the market.
By the way, this Equivolume chart was one of the reasons that gave me that growing uneasy feeling, which prompted me to present the “Before” and “After” the London bombing pictures (charts) on Thursday, after the closing. In any regard, I think I've written enough about this baffling market behavior since the week of the terrorists bombing, so let's move on.
You may also notice that, along the red downtrend trendlines, there are “power” Equivolume Boxes that are long and wide. These show the ease of movement for the downtrend on Friday. Some buyers did come in and tried to stop the fall a couple of times (numeral 3 and 4) by forming some square boxes, but the selling eventually sliced right through them like a hot knife. And there’s no other square boxes in sight within the final hour of trading. So, in the short term the selling should continue. This seemed to be supported by a couple of my short-term observations.
In Richard Arms volume analysis, he disregards the unchanged issues and the unchanged volume due to their insignificant sizes. And, I don’t believe anyone else has paid any attention to them either. Usually, the unchanged issues average about 150, and the unchanged volume averages about 1.5% of the total trading volume. They really mean very little staying static. But any sudden movement could provide subtle indication of imminent change of the market directions.
For examples, the unchanged volume increased to almost 3% (100% increases) of the total trading volume on 7/6/2005, the day before the London bombing. And, on Tuesday, 7/26/2005 and Wednesday, 7/27/2005, the unchanged volumes were 3.52% and 3.61% respectively. The unchanged volume on these 3 occasions shot up 100% to 140% overnight. These unusual movements really caught my attention. We’ll cover more of this in the future. For now, let’s take a look at the TRIN Index in the “big” picture context.
On this multi-year chart, it should be noticeable that the TRIN Index stayed mostly under 1 (black horizontal line) while the bull market was in full force through most part of 1999. It then hit the trough in November 1999 before the TRIN Index started trending higher. And, that November 1999 TRIN bottom occurred at approximately the same time the market topped out. This TRIN bottom serves as a good example of how the volume had gone way ahead of the market. What then ensued was a period of price corrections.
After the uptrend from 1999 through the beginning of 2003, the TRIN Index then started moving sideways. It’s in consolidation, but it continues to stay mostly above 1, which is deemed bearish. This means that stocks that are going up are not getting their fare share of the volume. That indicates weaknesses in the market internals. As long as the TRIN Index stays above 1, the market participants should continue to trade with a bearish bias, which means trading with extreme caution.
The TRIN Index will not move below 1 and stay there unless either the excess in the current stock prices is corrected or an exponential amount of buying suddenly rushes into the market. We know which one is the likely scenario unless the Fed gone wild.
CHART 2
OBSERVATORY 023: Bunge (BG) & General Maritime (GMR)
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Before and After
7/28/2005
by David Yu
Even though most of the long positions have been doing quite well in the portfolio, somehow there's that uneasy feeling that keeps growing stronger. It feels as uneasy as crossing the street blindfolded. That's the feeling I get whenever I trade on just the technicals without the fundamental understanding of the current events. I can see what's happening in the market, but I really can't see a thing.
Sometimes it takes a while for the market to reveal itself to us. And, this is one of those times. What happened after the terrorists bombing in London on 7/7/2005?
No, it's not about the earnings season. If I believe the financial market is a discounting mechanism, then everything known is already not worth knowing. Earnings are the things of the past. And If I believe the financial market is instead a measure of liquidity, then it's not about the corporate earnings either.
We shall find out soon.
Trade Journal: Caremark Rx, Inc. (CMX)
In the rising health care cost environment, pharmacy benefit management service is one of the health care sectors that should continue to perform well. And, CAREMARK RX seems to offer a very good entrance opportunity for those interested.
The Full Stochastic Oscillator is showing bullish signs of a possible breakout of the current consolidation phase - see annotations on the chart. The only concern is the lack of volume, but then the declining volume usually means the end is near for consolidation. And, judging from the way CMX bounced off the multi month support of $42 and touching its 20-day simple moving average line, the next move after the consolidation is most probable to go up.
And so, this is our trade:
Buy: Long position buy under $45
Holding Period: 3 to 6 months
Stop: $40 and trailing as the price moves up
Target: $55 - $60 or about 27% - 39% gains.
My Buy order was filled in two separate lots that averaged $43.1667, and so that's the actual cost of my long position in CMX.
Trade Journal: Golden Star Resources (GSS)
Here's a couple of trades that I had posted on my website, but I hadn't had time to post them on iHub till now. I'll post GSS first.
Technically, the May 2 intraday low $2.33 should’ve been the long-term bottom. It’s not probable for GSS to go any lower than that, and we’ll go over that later. For now, this short term chart shows some very positive technical signs as per my annotations. The only thing I’d like to point out is the resistance at $3.20 - $3.40 level (red circles). GSS had attempted to cross above this resistance, but it got defeated every time. It may seem odd, but the next chart should provide some insights.
You can see on this price and volume chart, that $3.30 was the second gap (yellow highlight) when GSS fell the hardest enroute to the $2.33 low. You can tell how hard the fall was just by looking at the volume bars (blue circle). That was when the big sell-off occurred, and I’m sure share holders still traumatized by that. And that might’ve been the reason for the selling activity at that $3.30 level. That’s the shareholders' psychology GSS will just have to overcome.
And, finally, I’ve annotated the lowest points on this multi-year chart that took place right around the same time as the May 2, 2005 intraday low $2.33. Interesting note was that the volume also happened to be the lowest since GSS started its descend. This verifies that $2.33 low as the bottom.
And so, this is our trade:
Buy: Long position buy on the dip and under $3.25
Holding Period: 6 months to a year
Stop: $2.95 and trailing as the price moves higher
Target: $7 - $8 or 24% - 56% gains.
My buy-on-the-dip order was filled on Tuesday, 7/26/2005, at the cost of $3.02.
The Baffling Behavior
What happened to the market after the terrorists bombing in London on 7/7/2005 continues to baffle me.
VIX was visibly starting to trend higher towards the end of June - about the time when M3 money supply started to shrink. This signaled increased "implied volatility", which in turn means market was deemed to become riskier. And then, the London bombing suddenly brought the "calming" effect that knocked the VIX down to lower low while boosted the market higher??? And, those 2 gaps that weren't filled was most unusual.
If what happened after 7/7 was what I thought it was, then these two "countries" (see red arrows) holdings of the Treasury Securities should go up much higher in June. I can't wait to see the report due in a couple weeks.
Incidentally, the amount of money ($120 billions - $130 billions monthly) that "Caribbean Banking Centers" have to invest in our Treasuries every month is something else. What happened to the "real" investigative journalism?
Once is Not Enough
7/25/2005
by David Yu
A down day with low volume should be just as easily dismissed as an upday with low trading volume. The trading volume on the big board (NYSE) and NASDAQ today were about 10% lower than their respective 60-day EMA’s (Exponential Moving Average). And, the S&P volume was even lower - 13% lower than the same moving average.
Chart 1 is one of the fine market sentiment indicators that compares the S&P performance to the option traders’ Put (sell) to Call (buy) option ratio. Although option traders are not necessarily gifted with visions to see the future, they’re one of the “fastest” traders due to the leverages used in the option trading. When this index is rising, as it was in May and early June (blue price channel), it’s a sign of bullish sentiment. Even with a down day like today, this index is still staying above the 20-day simple moving average. It has been, more or less, moving sideways since mid June. This is a sign of uncertainty but not bearish, and thus could be deemed as complacency. There’s not much fear.
Chart 1
And, the market does not sell off without fear. This “no fear” sentiment could also be seen on Chart 2. Even though NASDAQ was the biggest percentage loser of all 3 major indices, the NASDAQ TRIN Index stood almost at 1. This means that there’s no particular selling pressure. The up and down volumes were in perfect accords with the advancing and declining issues. In addition, if you had looked through the charts of the major indices today, you'd see that there’s hardly any technical damages done today.
Yes, Once is Not Enough. The fear factor would not come into play until there’s a larger down day or a few more down days like this strung together. Before that, we’re still in the “Buy on the Dip” cycle.
Don’t’ go too short.
David's Weekly Market Chartmentary 7/24/2005 THE MONEY FLOW
The Money Flow
by David Yu
This rally that started in May was likely fueled by the shrinking float of trading shares due to corporate buybacks and explosive cash merger activity. It could also have been fueled by the foreign purchase of U.S. equities after the EU constitution referendum debacle although we won’t know that for sure until we get the June data from the Treasury Department. Incidentally, from the recent inventory buildup of existing homes for sale, it’s also possible that some of the real estate speculation money might’ve started flowing back to the equity market.
One thing we do know is that the aggregate M3 money stock (Chart 1) increased by a big chunk - $100.4 billion, from 5/23 to 6/27 (blue arrow). Prior to that M3 was actually in a slow but gradual decline for 3 weeks (red arrow). And so, from May to June, the system's loaded with liquidity but with fewer shares to buy. In addition, the Non-M2 M3 increased by $59.2 billion during this same period, and almost half of that (48.5%) went to the Institutional Money Funds.
Technically speaking, these conditions could result in a low volume environment (low overall participation) with sporadic big volume trading days. This could also distort the accuracy of some technical indicators. And, of course, the technical distortion is the mother of all divergences.
Chart 1
Let's get technical and see what the market has to say about this. Chart 2 raised the question of the divergence between the PVO and the CMF after 5/27/2005. The sharp rise of PVO (Percentage Volume Oscillator) at the end of May indicates a drastic reversal of the volume downtrend that started about a month ago in April. Meanwhile, Marc Chaikin’s Money Flow (CMF) indicator started declining by forming lower highs.
Since CMF is Accumulation/Distribution (Accum/Dist) divided by Volume, a declining CMF would also mean declining Accum/Dist. But, the Accum/Dist indicator on the same chart was actually in a steady uptrend. So, what gives?
The Accum/Dist indicator is basically a volume indicator with CLV (Closing Location Value) as its multiplier. The values of CLV were determined based on the location of the closing price relative to the price range of the recent period. High values were assigned to higher closing locations. CLV is then multiplied by the volume to form the Accum/Dist indicator. The Accum/Dist therefore could get a boost from sporadic surge of large volume.
PVO is the percentage differential between the two Exponential Moving Averages (EMA) of volume - namely 12-day and 26-day, per my specific setup. It's an indicator of the relative change in trading volume. And, so all it takes for PVO to move is the relative change, not the absolute level of volume. The fact that PVO was rising sharply doesn't mean the overall level of volume was also rising.
Chart 2
Let’s call up the volume on Chart 2 to get a visual of my technical mumbo jumbo. First thing you’d notice is the extreme low level of volume prior to PVO’s uptrend at the end of May - most notably the space between the 42-day EMA trendline and the volume bars. And, even when PVO was on the move, the volume was still staying under the 42-day EMA during that period. The 42-day EMA was used because it’s the equivalence of about two months of trading sessions. This demonstrates that even low volume could cause PVO to oscillate higher due to the relative change in the volume. Subsequently, PVO was held along the 0 line by a few sporadic surges of large volume bars. The overall volume level was still a notch below the March and April level. This irregular volume pattern also contributed to the uptrend of the Accum/Dist indicator and the divergence of the CMF.
Since CMF is the ratio of the Accum/Dist to the trading Volume, it removes the effect of the irregular volume. This makes CMF a much more accurate market strength indicator.
Chart 3
And, if we’d smooth the CMF out to 21 days (approximately 1 month of trading sessions), we can see it’s clearly trending lower and getting close to 0 line. This is a bearish sign indicating money's flowing out of the market. Of course, when this is accompanied by the PVO that’s also hovering around the 0 line, it indicates that the internal strength of this “rally” is getting stagnant.
Chart 4
The money supply has been tightening for the past 2 weeks. And, by now the rising short-term discount rates should’ve been felt by many home owners who use the adjustable rate equity line of credit to support their household expenditures. The average interest rate on these equity line of credits after the next FOMC meeting could move up to 7%. On a $100,000 line of credit, this translates to additional $3,000 annual interest expenses from just a little over a year ago.
This uptrend that's built on low volume and declining money flow doesn't appear to have the momentum to go much further.
Trade Talk: CITIGROUP Analysis by Price and Volume
nlightn- Excellent question. This is the kinda question that puts all of us in the learning mode.
From my study of “the language of the market”, it might’ve been a little late in the game of shorting the Citigroup, perhaps by about a month. This chart that I prepared for you should be quite self-explanatory. And, of course, from a contrarian point of view, we’d want to stay away when everyone’s on the same side. In fact, we may have to go to “the other side” – a hedge play on the long side. I’ll come back to that.
One additional footnote on CMF (Chaikin Money Flow)… And this is for my iHub buddy billkat as he had asked me about the money flow before. It’s a derivative of the Accumulation/Distribution indicator. It’s a ratio of the total Accumulation/Distribution to the total Volume. Thus, CMF starts to move up when the stock’s being accumulated. And, when the stock’s being accumulated, the CLV (Closing Location Value) starts to rise. When the CLV starts rising, the price starts to close in the higher range relative to the period, which is 14 days in my analysis.
And, when the price starts to close upward, it starts to narrow the Average True Range (ATR), which in turn starts changing the momentum of the current trend, whichever the direction of that trend is.
One play comes to mind is to buy the stock once it’s bottomed, and then sell the call option. I might consider that as a documented trade on this Journal once I have more time to work out the numbers.
Trade Journal: Elan Corp (ELN) Chart Update
Chart Talk: When The Citi Goes...
Trade Journal: Dynamic Materials (BOOM) Short & Tight
After the Bell: 7/14/2005 An Internal Audit
An Internal Audit
Let's audit the internal market strength to determine if this recent uptrend is for real or if it's the secondary reaction to the "London Bombing" effect. I'll use my favorite NASDAQ for the purpose of our audit here.
First, I'd like to show you TRIN Index of the Big Board for comparison purpose.
Here we see although NYSE TRIN is in the overbought territory of under 0.8, it's been hugging the line.
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And, there above we see how much NASDAQ is submerged in the extreme overbought territory. It's at 0.44 low today.
NASDAQ became overbought when its TRIN dropped below 0.8 on 7/7, the day of the London bombing. The price continued to be pushed upward by the bulls.
Let's check up on the price next.
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With the reference of the NASDAQ TRIN Index chart above, the price curve here shows that it had already gone into the overbought territory after moving above 2100 on Thursday, 7/7. Yet, the bulls continued to push forward. However, the price movement didn't seem to be supported by the internal strength.
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NASDAQ Advancing-Declining Issues, coincidentally, started declining after 7/7/2005.
When this is combined with the lack of volume and participation, it lowers the TRIN Index reading. And, that provides little support for the price movement. Candlestick chart also verifies this weakness.
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Here's the Candlestick chart of the price action right after we returned from the 4th of July weekend.
Does the Doji and the Spinning Top here look similar to the pattern developed in December, near the end of the uptrend? Subsequently, NAZ fell from 2191 in January to 1889 in May?
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Red circle on this chart identifies that similar Candlestick pattern in Decemer.
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And, then this was what happened after December...
I think it should be anyone's objective observation that the market's internal strength looks quite "unsafe" right now. Taking some profits off the table on the long positions may not be such a bad idea at this time.
Trade Journal: Every 3rd Session of The Week Update
Although it’s a minor up day, it’s an up day nonetheless. So, this chain of occurrences has been broken today.
Is the market teaching me to apply the trendline instead? This Monday and Tuesday’s price action did move convincingly above the downtrend trendline.
It worked for me like clockwork in the past 3 weeks, and that confidence had probably blurred my vision. I should’ve seen the trendline was broken. But, why every 3rd trading session in every single week, except for 5/25, for the past 2 months? Is it psychological or mechanical? What’s the significance of the 3rd session?
Since nobody I know even noticed the existence of this pattern, and I know quite a few people, I guess I’ll have to, once again, figure this one out myself.
Fascinating, absolutely fascinating... Things that make you go Hmmmm....
And here’s the chart I posted yesterday.
OBSERVATORY 022: Morningstar Inc. (MORN)
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Trade Journal: Every 3rd Session of The Week
Just got a chance to check my emails. One of the orders that was filled was an interesting enough experiment that I thought I’d share with y’all.
Based on my observation, when the market’s in an uptrend, every third trading session of the week is an up day. The third session doesn’t have to be a Wednesday. June 2nd, for example, was Thursday, but it was the third session of that holiday shortened week. Incidentally, that too was an up day. When this pattern is broken, that usually signals the end is near for the uptrend. That’s what happened on 5/25, the only down day in the chain. And, when the market’s in a downtrend, every third session is a down day.
I used to do back-testing, but I'm finding out what happened a year ago is becoming less relevant than the way it used to be. So, I'm only focusing on the recent months, and sometimes even just weeks and days.
Since the recent run-up has not exceeded the June 2 intraday high, I’d still consider the market’s in a downtrend. And thus, I bought July $38 PUT at only $0.10 just to test this observation of mine.
And, that’s it for now. Have a wonderful evening.
Trade Journal: Southwest Airlines (LUV) -Elliott Wave
Bought Southwest Airlines shares at $13.69 to test this Elliott Wave pattern. I'll try to find time to write up the details, but I'm not sure if I'd be able to do it today or tomorrow.
I'll have to use more charts and less description from now on as my trading volume's expanding and my businesses are demanding more of my time. And, I really miss my books. This is probably the only way I could continue to keep this Journal going. I'm committed to the weekly Chartmentary for my website anyway.
Chart Talk: ATR & BB Width Divergence
Thank you Shaun. I'm glad you could appreciate it. Here's one more study of the language of the market. Both the previous 200 EMA chart and this divergence between ATR (Average True Range) and Bollinger Band Width are all indicating an imminent trend reversal. Very very intriguing....
Guess which way it's reversing to? It's just a rhetorical question, but this is absolutely fascinating.
Chart Talk: 200-Day Exponential Moving Average
What a simplistic yet effective indicator! I'd reserve my description, and let this chart speaks for itself. That's the whole purpose of the "Chart Talk".
David's Weekly Market Chartmentary 7/10/2005 CORRECTION
Thank you, Roger, for your email that pointed out this error.
The amount of M1 increase from point 2 to point 3 on this chart was not $7.6 billion. Instead, it should've been $37.1 billion over the 2 week period, from 6/13 to 6/27.
David's Weekly Market Chartmentary 7/10/05 Is It Rally Time?
Is It Rally Time Yet?
"There is only one side of the market and it is not the bull side or the bear side, but the right side." --- Jesse Livermore
There’s no need to be a bear or a bull, but there’s every need to be a true student of the market who studies the language of the market objectively. The grand debate of the bullish and the bearish ideologies may fulfill some of our emotional needs, but it renders little pertinence to the understanding of the market’s constant and unpredictable fluctuations. If the purpose of being in this business of investment is to be profitable, then we'd want to put aside our personal beliefs and heed the teaching of the market.
Let's turn to the market and see what the market's saying about Friday's action. Is it rally time yet?
In last Sunday’s market commentary, I pointed out how the market would be buoyed last week by the favorable confluence of the interest rates, the mortgage refinancing volume, the Personal Consumption Expenditure, the retail sector, and finally the price of oil. We know that if we’d only pay attention to the consumption, we’d have a very clear view to the path of our economy, and thus, the market. Since the retail sector is directly affected by the consumption, let’s take a look at it first.
Chart 1 below shows a high degree of positive correlation between the S&P Retail Index and the 4-week SMA (simple moving average) of M1 (green curve), which is the most liquid forms of money that consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. The black dotted zigzag lines are the weekly fluctuations of M1. I use the 4-period simple moving average to smooth it out. The red curve is the S&P Retail Index. The Fed’s money stock report has an 8-day lag time behind the weekly S&P data.
M1's 4-week SMA had been in a downtrend due primarily to the $49 billion sharp decline from 5/30 to 6/13 (from 1 to 2 on the chart). Coincidentally, in the following week (6/13-6/20), the Retail Index dropped 3.60% (black short slant arrow). In the most recent week ended 6/27, M1 increased $7.6 billion (from 2 to 3). This provided a big uptick for the Retail Index, and it should also give the moving average of M1 a lift this week when the report comes out.
Chart 1
Removing the Retail Index and the moving average gives us Chart 2 that provides a better visual of the weekly M1 movement. On this chart, we can see a very strong uptrend in progress from June through December of the election year last year. The strength was particularly noticeable in the final three months of 2004. It didn’t even touch the lower channel support line once (see x marks). The reversal of M1 uptrend occurred abruptly after the election. From 12/27/2004 to 1/10/2005, M1 dropped a hefty $55.8 billion. This knocked M1 supply into a sideway motion. And, that’s what happened to the Retail Sector.
The weekly S&P Retail index was 443.23 for the week ended 1/3/2005, and it’s at 446.32 as of 7/5/2005. The difference is less than 1%. This, interestingly, also set the market going sideways. The weekly S&P 500 moved from side to side, from 1186.19 to 1194.94, during this same period.
As I’ve mentioned last week, the consumption stems primarily from extracting the equity from the “wealth effect” of the home price appreciation via mortgage refinancing. And, the interest rate movement has a positive correlation with the refinancing volume. So, let’s check in on the interest rates next.
Chart 2
Since banks generally peg mortgage interest rates to the bellwether 10-year T-bond yield, let’s take a look at this 7-10 year T-bond iShares, which has an inverse correlation with the yield. The technical pattern on Chart 3 shows an obvious trading range after it broke the uptrend around June 9. That's confirmed by the 9-day RSI that never went over the overbought territory of 70 or under the oversold territory of 30. In addition, the PVO (Percentage Volume Oscillator), one of the best volume (or enthusiasm) indicators, also stayed within a range. These all translate to a range bound interest rate after the previous period of decreasing rates (increasing bond prices). This seems to be in concert with the recent M1 trend.
However, Chart 3 does show some bearish bias. If the bond prices continue to form lower highs, the dotted red slanting arrow could become the upper resistance line of a bearish Descending Triangle pattern. This could potentially mean higher interest rates, which would reduce the refinancing volume and would then reduce the consumption. But, this bearish bias may be neutralized by the short-term oil price top.
Chart 3
Last Sunday, I mentioned how the equivalence of a tax relief from the drop of 8%-10% gasoline price at the pump in April and May, due to the drop of 17.44% in the price of crude, had provided a boost to both the consumption and the consumer confidence. To carry this further, let’s take a look at the price of the crude as a ratio to the Dollar by dividing the oil price into the USD Index.
Here once again, from the CCI's lower highs formation, it would seem that the price of oil had just topped out. However, as I also mentioned last Sunday, the decline this time may not be as drastic as it did in April and May. The reason is that the intermediate term uptrend trendline (blue line) that started after the New Year is still far from being violated. The dip below this trendline in May coincided with the France “No” vote to the new EU constitution referendum. It’s highly probable this dip in oil price was due to the sudden rise of the USD. And, without accounting for those 4 days of irregularity, the uptrend seems very well intact.
It’s very likely that the price of oil could come down and test this trendline again within a month. Nevertheless, barring unforeseen events, it should continue to hold above this trendline. And, that is why the market is going to stay “afloat” for now. However, I can’t see how it’s technically possible for any meaningful rally to gather momentum. Friday’s “big” rally should not be deemed as the commencement of such momentum. Since there’s no intraday volume available for the major indices, I’d like to use QQQQ intraday chart as the proxy for the market.
Chart 4
On this 30-minute, 15-day intraday chart below (Chart 5), I blacked out about three quarters of Thursday’s action that appeared to be the obvious reaction to the event in London. And, without taking Friday’s parabolic rise into account, that leaves us with the market pretty much resuming its sideways movement right under 37.20 (red arrow) since June 28. Coincidentally, 37.2 happened to be the approximation of the average of Friday’s “aftermath” high and Thursday’s “bombing” low.
Chart 5
This average seems to indicate that without the London “bombing” low and the “aftermath” high, the market should continue to wander around the 37 - 37.20 area. Since any sudden reaction in the market tends to eventually revert back to the means, it shouldn’t come as a surprise if the market reverts back to the sideway movement along the 37 support level next week.
The move of the 12-period RSI (6-hour on this 30-minute chart) to the 80’s territory also indicates Friday afternoon’s action was an overbought reaction. And, the TRIN Index table shown below also confirms this overbought condition. NASDAQ’s TRIN Index reading dropped from the “healthy” 0.88 to 0.71 to the extreme overbought reading of 0.43 on Friday.
Perhaps it'd be time better spent to take a vacation rather than sitting around waiting for the major rally to take place.
OTC BB As a Market Indicator
FinancialAdvisor- Looking at that table, I just realized that I left out the Total Issues for 7/6/2005. Thanks for pasting that table again with your message. Actually, thanks for getting me interested in looking into the OTC BB market. Trading between commodities, options, bonds, and equities, I’ve never really paid much attention to the OTC BB segment until you brought up the question about its correlation with the rest of the market.
Here’s the improved version of that same TRIN table.
As I had mentioned in After the Market on 7/5/2005, both AMEX & OTC were way overbought. And then the correction came swiftly the very next day. OTC TRIN Index rose to the opposite oversold extreme of 1.95. You can tell from the contrast of the volume data between 7/5 and 7/6. By the way, TRIN is a non-trending index. It doesn’t stay range bound for long. When it reaches the extreme low or high, the next move tends to run all the way to the other side.
In any case, OTC has been improving steadily since. If this trend continues, OTC could go up further. For the time being, I would consider OTC to be in a bullish mode. And, this chart that I found on one of the BB websites confirmed that. Both the volume and the “Pulse Index” were above their respective 10-day SMA. This chart was updated through Thursday, but we know that Friday’s action had further improved the technical picture.
So, now we have OTC BB standing alone on the oversold side while AMEX continued to stay in the “overbought” territory, NASDAQ was getting close to the extreme overbought area due to its big surge on Friday, and NYSE took another step towards the overbought territory. What does this tell us?
I’d look at OTC traders as the options traders except that the options traders use more hedging strategies than the OTC traders. And, as I’ve mentioned before, option traders (including yours truly) are not necessarily smarter than other traders. They’re just faster traders simply due to the high risk associated with the financial leverage used in the option trading.
(To be revised)...Hence, let’s assume that we can use OTC TRIN reading as a contrarian indicator. When everyone’s selling OTC shares, then it’d be the time to buy them....(If I couldn't get the revision of this paragraph in time, I'd post a new message as a supplement.)
As for the parabolic surge on Friday, my technical analysis indicated that as more of a secondary reaction than the norm. For that reason, I would not be surprised if the market reverts back to the range bound status next week.
Have a nice weekend, FA. By the way, do you at least have a first name that we can use? Thanks.
OTC BB still not confirming this parabolic surge, what do you think David, does it need to? Or is the OTC BB telling the truth of these markets heading forward?...
Trade Journal: NASDAQ 100 (QQQQ) Round-Trip Position Closed
Closed QQQQ Aug $37 Call at $1.20 for a gain of 71.43%, and also closed QQQQ Aug $38 Call at $0.60 simultaneously for a gain of 20%. Since the Aug $37 was 1/3 of the quantity of the $38 call, the combined gain for this follow-up QQQQ trade was 36.36%. This gives the entire “round-trip” trade a combined gain of 124.96% (36.36% plus the previous 88.6%).
Here’s why I set these target prices.
Although today was an impressive up-day, I had doubts whether this was a reaction from yesterday’s bombing incident in London. From the study of the language of the market, it seems to indicate this possibility.
On this 30-minute, 15-day chart, I blacked out about three quarters of yesterday’s action that appeared to be the obvious reaction to the event in London. Visually, that leaves us with the market pretty much going sideways right under the 37.20 level this morning, which was the continuation of the market trend from the day before yesterday. Coincidentally, 37.2 happened to be the approximation of the average of today’s high and yesterday’s “bombing” low.
This average seem to indicate that without the extreme low form yesterday and the extreme high (relatively speaking) from today, the market should continue to wander around the 37.20 area. Since any sudden reaction in the market tends to eventually revert back to the means, it shouldn’t come as a surprise if the market reverts back to the sideway movement along the 37 support level next week. Well, it would be a surprise if one “feels” that this was the kick-off of the “summer rally”, if there’s one.
The move of the 12-period RSI (6-hour on this 30-minute chart) to the 80’s territory also indicates this afternoon’s action was an overbought reaction. TRIN also confirms this condition. We’ll go over that later. For now, we’ll zoom in on the past 3 days of action to have a better close-up look.
Again, I’ve blacked out large part of yesterday’s action on this next chart, which clearly shows that without the attack in London yesterday, the 37 was still the support. And, this morning’s action was simply the continuation of the previous market action.
The rise of the price action channeled like a mega phone, which shows technical weakness of this upturn. It didn’t touch the upper channel resistance line in the afternoon. And, despite this uptrend, the RSI stayed leveled in the afternoon. In fact, it formed a lower high in the late afternoon, and then fell below the lower support (thin red line) briefly. The negative volume started grouping together in late afternoon as well.
Finally, we have the NASDAQ TRIN Index declined to 0.43, which indicates, again, overbought condition.
This is all the time I have for now. I’ll write this up more comprehensively along with a nice email from one of the readers and post it on my website later tonight or tomorrow.
TRIN INDEX Watch
I’m keeping track of the TRIN Index here just for my own amusement and discipline. This is a fascinating tool for volume study that deserves more attention than it’s getting.
So, after the drop to 0.81 yesterday, the big board’s TRIN shot up to 1.54 today with the 10-day sma at 1.21. This is very interesting as these readings represent the “oversold” market condition. Since today’s a down day, this means the declining volume did not keep up with the number of declining issues.
AMEX & OTC are also shown in the table below as "oversold".
The only “normal” index was NASDAQ, which has about the same TRIN reading (0.88) as yesterday (0.85). Both numbers indicate normal buying and selling volume. This then puts NASDAQ at a very intersting juncture.
If it stays below or near 1, then NASDAQ should pick up the pace on its recent uptrend, which started last week. If it started trending higher above 1.20, then it’s due to collapse again.
Trade Journal: Korn Ferry International (KFY) Position Closed
I think I did this to myself. This is the last time I’d ever publish short sales in the public before the trade is completed. This really ruins the purpose of this trade, which is primarily for experimentation.
After I published this trade idea on both iHub and my website, I’ve gotten 2 calls from my broker asking me to cover this short position. Both calls resulted in visible technical pattern reversals. I’ve decided to go ahead and close it. It doesn’t serve any purpose anymore.
I bought the shares back at $18.07 resulted in a 2.8% loss. It’s not a big deal as far as the money goes. I’m more upset with myself for doing the wrong thing than anything else.
I still don’t think there’s any question on the technical or the fundamental aspects of this trade. So, what have I found out from this trade? Although I tried not to think of this possibility, I couldn’t help but wonder whether my trade ideas carried more influence than I’ve ever known.
Market Chartmentary Update
This is an update on the Refi Charts in my Sunday’s market Chartmentary.
MBA reported this morning the latest Refinancing Application Volume as of Friday, 7/1/2005, increased by 10.2% to 2788.2 from 2529.2 the week before. The Refi volume is now at the highest level this year, and it’s climbing to the same level as April last year. The big difference is that last April the Refi volume was in the midst of a rapid decline; this April was the beginning of an uptrend.
This is indicative that the 2nd quarter GDP may come out better than expected.
After The Bell: 07/05/2005 TRIN INDEX
TRIN Index study is the study of the Volume, and volume is probably the most important study of the internal strength of the market.
It’s very fascinating to see TRIN (ARMS) Index dropped from Thursday’s high of 1.92 to today’s 0.81. The last time this type of sharp decline occurred was in late April and early May followed by a one-month rally that took the big board (NYSE) index up by about 6%.
The probability of that happening again seems quite high except the increase may not be as much this time.
My own calculation based on today’s issues and volume gave me the TRIN index listed at the bottom of this chart.
NYSE and NASDAQ both have a very “healthy” TRIN reading at 0.85. This shows that the advancing issues were strongly supported by the volume today. The problems are with both AMEX and OTC Indices. Their respective TRIN Index of 0.27 and 0.29 indicate overbought condition, and they should continue to go through some corrections. Of course, AMEX and OTC are homes to many gold/silver mining companies. This is one of the sectors that may continue to go through a correction period.
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