For our little OT group... I enjoy Dr. Elder's trading commentary. Sorry the charts are not in the post. Over my head on how to link them up here.
Dear Trader,
I usually write to you about once a month, but this time decided to write sooner than usual, in view of the tremendous activity in the stock market.
Those who participated in my webinars this year, came to our January Camp, or attended my talk at the Traders' Expo in February know that I have become extremely bearish on the stock market since the start of the year.
There has been a broad range of bearish signs, including this severe bearish divergence on the weekly chart of the Dow. You can see the great power of bulls at point A in October, followed by the breaking of their back when MACD-H fell below zero at point B. A great sign of weakness emerged at point C, when the Dow rallied to its lifetime high, while MACD-H, measuring the power of the bulls, managed only a little pipsqueak of a rally. When the decline did come, it was fast and furious. I believe the yellow dotted line on this chart indicates a reasonable target for the downmove.
With so many traders and investors bloodied and hurting, many are asking, whether this is the bottom. Is the bounce coming? Will I get a second chance to sell? Is now the time to start bargain-hunting?
To find answers to these questions, I turn to the New High - New Low Index, described in detail in Trading for a Living. I believe it is the best leading indicator of the stock market.
The chart above reflects the behavior of weekly NH-NL during the 2003-2007 bull market. One of its striking features is that every bottom of any importance saw NH-NL decline below -1,000 (minus one thousand). Please keep in mind that the - 1,000 level does not automatically give a buy signal - this indicator had spiked as low as -7,000 in the preceding bear market. It is simply a minimum requirement for any bottom, a place to look for good buying opportunities. Last Friday, the weekly NH-NL closed at +337. It has still quite a distance to fall before it might begin to signal a bottom.
Let us now turn to the daily charts and see how the daily NH-NL has behaved at recent bottoms. It turns out that every stock market bottom since the bull market began in 2003 was marked by a period of between one and three months during which the New Lows exceeded the New Highs. You can see how many New Lows there were in June, fewer in July, even fewer in August - and then the bull took off. So, where does this indicator stand now?
This chart, updated last Friday, shows that New Lows exceeded New Highs for only four days and by a very slim margin. This is not how serious bottoms are made!
By now you can see why I keep an eye on NH-NL every day, to help me decide whether to trade with the bulls or the bears. NH-NL is very easy to track by hand, since the raw data is published in all major newspapers. Amazingly, none of the major software vendors supply this data! Kerry Lovvorn, my co-manager of the Spike group, has spent a great deal of time and energy to develop a proprietary method of locating this data and transferring it into TradeStation. He sends out a NH-NL update to all members of our Spike and Spike Spectator groups (see www.elder.com/spike.html). Most days I don't even generate my own charts, but simply glance at Kerry’s emails.
To return to our question, is this the bottom? You can easily deduce the answer from what you have just read!
Is the bounce coming? Will I get a second chance to sell? We may well get what is called 'a dead cat bounce,' but the market is neither nice nor helpful to those who sit on losses. Generally, the first loss is the best loss, and the sooner one cuts his or her losses, the less they hurt.
Signatures are so yesterday!
AI
