Thursday, November 29, 2007

Travel Days & Consolidation Patterns

I will be traveling today and tomorrow on business. Constructive day. It will be interesting to see what Mr. B has to say tonight. Stay tuned next week for the promised VWAP study and an update on the Sentiment Measure.

Best, Jeff

PM UPDATE: I noticed this evening that a good number of fellow 'bloggers' are skeptical of the rally based on volume. That's fair enough, but be advised that relatively low-volume, narrow-range days subsequent to a big move off of a bottom, such as today, can also constitute consolidation days before another big leg higher. That plus end-of-month and December seasonality could spell a positive day tomorrow. Again, listen to Mr. B tonight for a read on the AM; respect price action; and trade well.

FRIDAY AM UPDATE: Nice pop; I'd trail a stop.


Wednesday, November 28, 2007

Federal Reserve Trial Balloons?

Compare and contrast today's Fed official statements with yesterday's:

Today (WSJ) - Though a repricing of risk "is not surprising or unwelcome," [Vice Chair]... Kohn noted that wider credit spreads and tighter credit standards "would make some types of credit more expensive and discourage some spending, developments that would require offsetting policy actions, other things being equal."

Yesterday (RTT) - ...Philly President [Plosser] explained... “It is important to recognize that the Federal Reserve cannot resolve this price discovery problem,” he said. “The markets will have to figure this out. Arbitrarily lowering interest rates or providing liquidity to the market does not provide the answers the market seeks. Indeed, in some circumstances, lowering interest rates may prolong the painful process of price discovery.”

Ever get the feeling the newly "transparent" Federal Reserve is floating trial balloons? What a difference a day makes! Go back over the last several months of Market Rewind month-end summaries. Irrespective of the occasional off-beat governor comment to the contrary and boxed policy statements, the Fed has consistently maintained throughout this disruption that they will "act as needed according to the data."

Here is a mid-day chart. The Dow has already hit its 200-day moving average. Cumulative Tick is strong, though trend strength is flattening out. Look for some prospective volatility around the Beige Book release.

2:50PM CST UPDATE: Nice. If you happened to have put on a long position when I mentioned the intra-day pullback was overdone yesterday mid-afternoon, you closed out today with a 4%+ gain on the SPY. I'd expect some follow-through by the end of the week on month-end buying, but personally used the opportunity to take some risk off the table. Hope it was a good day for you.


Tuesday, November 27, 2007

Brighter Days Ahead?

After reviewing recent price action, including yesterday's institutional throw away at the close, and contrary to my last remark, I am now more convinced that we are close to a near-term low here that will be buyable going into the new month.

Most compelling, I had very few stock pull back buy signals today, indicating that the stocks hardest hit most recently held their ground yesterday in spite of the significant damage done to the indices.

Perhaps the sovereign fund investment in Citi and oil price declines will provide the catalyst. Buyers just need a reason to step in here and scare the shorts a bit for a multi-day rally to ensue. After that, I have to say that I have drifted into the bearish camp. What took me so long -- probably as sure a sign of a bottom as any!

1:45PM CST UPDATE: Wow, made it all the way to 1:30PM to start selling in earnest. Adjusted TICK and Advance-Decline line remain stubbornly positive. Leaders still showing relative strength. Only two of nearly 100 pull-back buy orders have executed. This is overdone.

2:45PM CST UPDATE: How was that for a timely call! I wouldn't be surprised to see a run back up towards the 200-day moving averages/ short-term RSIs in the 80+ range from here. After that...

Monday, November 26, 2007

What I Track Intra-day

Here is a look at the various windows and indicators I track over the course of a day. Other indicators are more end-of-day in nature: more on these in later posts. I have another window that provides a view of various time frames as well. What do you track intra-day?

Interesting news on retail sales (Day After Thanksgiving +8.3%), from the Saudis (production increases) and Federal Reserve (liquidity infusion) today. The markets look morose and certainly very oversold in both price and time here -- but the primary down trend is quite obvious and the morning gap puts us at the top of the channel. Have I mentioned how I hate flat/narrow ranges (back through 10:00 am CST)? They can break hard and it's a tough call directionally here.

There is usually an end-of-month upside bias and negative sentiment seems quite overdone very short-term here in spite of the serious economic conditions we may be facing, but note how many of the seasonal patterns are failing. Nevertheless, it would be "nice" for the bulls to minimally see a higher low put in today.

3:03PM CST UPDATE: Ugly -- The SPY bounced down hard off of its declining VWAP and never looked back, forming a bearish engulfing bar exceeding last week's lows. I now expect further declines at least down to the August lows.


Tuesday, November 20, 2007

Turkey Talk

Light posting during Thanksgiving week at the in-laws. I think Citigroup (C) should get the Turkey-of the-Year Award for gobbling up more than its fair share of the news cycle this year. At down 40% on the year and 8% this month alone, it has certainly done wonders for the Dow, yesterday being only the latest example. Speaking of wonders, I "wonder" if Goldman Sachs would have issued that downgrade yesterday if alumnus Thain had taken the top job! Talk about being late to the game. Any other Turkey nominations? You sling 'em and I'll post 'em.

More in keeping with the season, it looks like we are getting a little recovery bounce at the open off of yesterday's damage down to prior lows. I don't have any stats on hand, but I've observed that the market often puts in a nice performance after "W" double bottom retests that hold over the next few sessions -- we'll see, I'm more skeptical than usual of late. I hope you all enjoy time with family and friends this week.

Friday, November 16, 2007

China - "A Small Setback"?

Thanks to John W. for sending me this link to The Economist. An incredible must read. Just when I finally went long again... still a relative strength play in spite of recent set-backs. That pairs trade mentioned last month has only gotten better since I last commented on it.

The Economist: A Small Setback

"In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China's economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China's size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China's economy will turn out to be 40 per cent smaller than previously stated.

This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction. The number of people in China living below the World Bank's dollar-a-day poverty line is 300m - three times larger than currently estimated."

November Expiration Friday & Holiday Effects

The Cumulative Tick slope turned positive in the mid-morning as the Dow bounced off of S1. Looks like we may retest the positive VWAPs around here though. Also, the often leading Semis, Transports and Financials are showing relative weakness. On the other hand, once again, in spite of the initial morning weakness, I have had ZERO stock pullback buys today. But, expiration days can be volatile, as you well know, and the day is young.

Next Monday marks the official beginning of the bullish season going into the new year. Taking that trade with the SPY has been positive in 9 of the last ten years (with only a small draw in 2003). QQQQ can be quite a bit dicier, albeit with higher aggregate returns. There is also often a positive Holiday effect that you may want to investigate going into the shortened Thanksgiving trading week. Just remember that with recent sentiment so negative, lighter volume could cut both ways.

That VWAP trade report may have to wait until next week, as I'm traveling this afternoon right after the close.


Thursday, November 15, 2007

This Picture Says it All

Keep an eye on these slopes:

Price Trend - Negative
VWAP - Negative
Cumulative Tick - Negative
Advance-Decline - Negative

How many S&P points do you think you would have gained trading on the slope of the VWAP (Volume Weighted Average Price) alone during the last month? I'll answer this question in my next post! Meanwhile, I'd "like" price levels to hold around here. Hey, hope springs eternal!

2:25PM CST UPDATE: Talk about risk aversion. Interestingly, I am seeing significant levels of "supportive volume" today (unusual volume spikes during price declines). Also, inspite of the large index declines, I have had very few stock pullback trades trigger, indicating that the stocks that have been hit the hardest over the last several sessions may have already bottomed for the near-term.

Wednesday, November 14, 2007

S&P500 Opening Gap still Holding

The SPY's opening gap is still holding, the five-day MAs have flattened or are creeping north, and the tick is hanging in there, which together I consider bullish. However, all else is looking neutral at best at the mid-day, but not bad considering all the position closing that is no doubt occuring.

In case you need reminding, we are still in a volatile time and this could break in either direction. Is this a low volume consolidation day for another leg up? A set up for a "W" bottom retest (hopefully with a higher low)? Would either surprise you? I am thinking you need to be open to either possibility with a prospective bias towards the latter.

3:10PM CST UPDATE: Another institutional "throw away" at the close.

Tuesday, November 13, 2007

Reversal of Fortune Breadth Call

Looks like the "Warriors" came out to play after all. The NASDAQ 100'S 4.23% gain on the day was solidly in the middle and double the median of the next-day-4-day-down stats posted yesterday. The vast breadth in reversal participation today (proprietary), plus options expiration week statistics (see Bespoke) suggest an edge on a momentum follow-through day tomorrow.

Volume was a tad light though and the trend is still down. Why do I have a feeling there will be an equal number of calls for a "bear trap" out there? At least there was no "throw away" at the close, although there has been a small give back in the after hours.


Leaders Participation

Tick is still strong, but the trend has stalled as the NASDAQ bounced back down off its five-day moving average. I'd like to see Transports (IYT) and Semi's (SMH) keep up with Financials (XLF) if this bounce is to hold.

I hate narrow ranges. Hopefully the VWAP for the QQQQ and 5-day MAs on the other ETF proxies (all breached today) will provide support. It's going to take more than this to inspire a true short-cover rally.

12:45PM CST UPDATE: There we go -- to the letter!

Short QQQQ/ Long SPY Trade Idea Result

Last Thursday under "just a thought", I casually pondered a Short NASDAQ 100 (QQQQ) and Long S&P 500 (SPY) trade based on their unusual divergence/ spread. I thought I would report on that trade idea result today.

Excluding costs, if the trade had been put on Thursday morning and taken off this morning with equal dollar weightings, the Long SPY side would have been down -1.7% while the Short QQQQ side would have been up +7.6% for a net gain of about +5.9%. As it turns out, there was plenty of opportunity to put the trade on Thursday after posting.

Looks like we are finally getting that statistically indicated (bear?) bounce. I imagine it will stick for all the reasons posted yesterday before the closing "throw away", plus the emphasis on some positive news for change. Keep an eye out on those declining 5-day moving averages as potential resistance though.

NASDAQ 100 Down 2 Days > 6%: What Happens Next?

Monday, November 12, 2007

Last Hour Breakdown...

Second day in a row and indicative of very negative market sentiment with traders not willing to risk the overnight, which typically pays a premium. VWAP did go negative around noon. That's what I get for "The Warriors" taunt link -- Respect-Price-Action!

Speaking of pain, take a look at E*Trade Financial Corp. (ETFC), minus 58% today on downgrade/ writedown news -- Ouch!

P.S. No, I'm not long ETFC!

NASDAQ 100 Update: Down Again...

This particular blog thread is getting dull (in fact, I will only bother to post it here), but to play it out -- here we go.

Downward momentum seems to be slowing, if not diverging on an hourly basis; short-term daily RSI is bottomed out; daily pivot S2 seems to be holding; Adjusted Tick is positive (see Steenbarger); the index is nearing in on a 62% Fibonnaci retracement; and the Financials and Transports are starting to pull on a relative basis (come on Semis). I know -- all technical observations that may amount to a hill of beans in this fearful, split market environment!

As of the time of this mid-day post, the NASDAQ 100 is down more than 10% from recent highs, including four successive down days cumulatively exceeding -9.75%. Again, going back through 1998 (2,480 market days) looking to see what happens the next day when:

(a) The index is down four days in a row; and,
(b) The sum total is less than (more negative than) -9.75%.

We find that of the 15 instances (note how this is becoming increasingly rare), 11 days were positive (+73%) for a cumulative next day gain of +37% or an average of +2.5%. The maximum next day gain was 10.0%, while the maximum loss was -9.7%. The specific instances and next day index change close-to-close (and VIX) are shown in the table below:

04/13/2000 -9.7% (29)
09/20/2001 -3.4% (44)
11/10/2000 -1.9% (29)
12/15/2000 -0.0% (27)
06/18/2001 +0.6% (23)
02/22/2001 +1.2% (27)
11/30/2000 +1.7% (30)
06/21/2002 +2.1% (27)
08/05/2002 +5.2% (45)
09/21/2001 +5.7% (43)
07/23/2002 +6.1% (45)
10/08/1998 +6.1% (46)
08/31/1998 +6.6% (44)
11/13/2000 +7.2% (29)
04/14/2000 +10.% (33)

Max. 10.0%
Min. -9.7%
Med. 2.1%
Ave. 2.5%

Today's VIX is straddling 30. Looking at just four successive down days irrespective of degree, there were 49 next day gains (+60%) averaging about +0.8%. I'm sure that I'm dating myself with this link, but remember this b-movie? The five-day MA is proving resistance here for the S&P 500; that taunt link is as good a jinx as any for another downside "outlier"!


Friday, November 9, 2007

NASDAQ 100 Down 3 Days > 7%: What Happens Next?

As one might imagine, the longer the duration of sell offs like these, the higher the odds of a mean reversion. Here is an update of yesterday's post. As of the time of this writing, the NASDAQ 100 (QQQQ) has declined more than 7.25% over the last three days. This last occurred in August of 2002. Once again, I ran a quick scan back through 1998 to see what happens the next day when:

(a) The index is down three days in a row; and,
(b) The sum total is less than (more negative than) -7.25%.

Of the 52 instances, 36 were positive (69%) for a cumulative gain of 93% (average of 1.8%). The maximum next day gain was 10.8%, while the maximum loss was -9.9%. Pretty hairy edge, if you can call it that.


Thursday, November 8, 2007

NASDAQ 100 Down 2 Days > 6%: What Happens Next?

As of the time of this post, the NASDAQ 100 (QQQQ) has declined more than 6% over the last two days alone. This last happened in August of 2002. I ran a quick scan over the last ten years to see what happens the next day when:

(a) The index is down two days in a row;
(b) The second day is down more than the first; and,
(c) The sum total is less than (more negative than) -6%.

Of the 38 instances, 24 were positive (63%) for a total gain of 56% (average of 1.5%). The maximum gain of 18.8% was set on 1/3/01, while the maximum loss of -7.3% occurred on 3/12/01. Talk about volatility! Next I loosened the rules, as follows:

(a) The index is down two days in a row; and,
(b) The sum total is less than -5%.

Of 103 instances, 58 were positive (56%) for a total gain of 55% (average of 0.5%). The maximum loss changed to -9.9%, which occurred on 8/31/98. A more thorough analysis might relate these statistics to the index's differential versus its 200-day moving average. I'm guessing that this wouldn't favor the current environment for the NASDAQ 100 with that index just coming off of recent highs. However, the picture may be quite different looking at the S&P 500, which has already breached its 200-day moving average. Can you say, "short QQQQ, long SPY?" Just a thought.

Speaking of which, be careful with the 200-day average of the S&P 500 having been breached out there gang. The behavior of the market can change dramatically when this happens favoring downside volatility.


Wednesday, November 7, 2007

Sentiment Trading System

In my prior post, I outlined a market sentiment oscillator building on work published by Dr. Brett Steenbarger. In this post I will present a hypothetical trading system based on that oscillator, as follows:

Buy – Buy the SPY at the close when the oscillator falls below 0.995 and the two-day RSI of the SPY is below 40. This criteria was met three days ago on November 5. Filtering signals when the RSI is high reduces total gains somewhat, but reduces returns volatility to an even greater extent by avoiding high level entries.

Sell – Sell after the earliest of the following: the oscillator reaches 1.01, the two-day RSI of the SPY exceeds 90, or twenty days has passed. It’s that last condition that gets me… this simple system can generate long holds during very rocky times, today being no exception!

During the 1,221 trading days back through January 1, 2003, this system would have generated a 52% gain before trading costs with 24 wins out of 28 signals (86%), and was invested 25% of the time for an average hold period of 11 days. The equity curve for the system is shown below:

During this same period, the SPY has gained about 76%. As nice as that equity curve looks (RSQ = 97%), I probably wouldn't trade the model because: a) I can’t promise based on my quick study that it is not "best fit" in some way; and, b) I have alternate systems based purely on price that I prefer. However, I find it to be an interesting concept worthy of further research. I also wonder if it holds any intra-day promise. If nothing else, I hope that you find it instructive and a nice distraction on this otherwise brutal market day.



Market Sentiment Oscillator

Earlier this fall, Dr. Brett Steenbarger of TraderFeed published an excellent series of articles outlining three market sentiment indicators based on inter-market ratios. The articles presenting the rational follow:

Gold as a Sentiment Measure for Technology

Using Sector Relationships to Catch Trader Sentiment

Global Performance as a Gauge of Trader Psychology

Intrigued and inspired by the good doctor, I developed a simple unified sentiment oscillator and trading system incorporating the core concepts from these three posts, plus an additional ratio relating the Dow Transports to the S&P500. The oscillator is calculated by adding the log ratios of EEM:SPY, XLK:^XAU, XLY:XLP, and IYT:SPY. A ten-day ratio of the result converts the calculation to an oscillator.

You will find that the oscillator moves fairly consistently between 0.99 and 1.01, which indicate short-term market despair and euphoria, respectively. Today's ugly market pushed this indicator down to .994. In my next post I will suggest a hypothetical trading system that employs this oscillator.

Thursday, November 1, 2007

November 2007 Monthly Pivots

Below are monthly support and resistance pivots for November. At the close of October, the indices sat just above their respective pivot points. Renewed credit and oil concerns have the indices challenging those pivots on the very first day of trading (sound familiar?), as follows:

S&P 500/ GSPC (SPY)-
Close: 1,549
Resistance: 1,570
Pivot: 1,538
Support: 1,506

Dow Jones Industrials/ DJI (DIA)-
Close: 13,930
Resistance: 14,193
Pivot: 13,872
Support: 13,551

Close: 2,239
Resistance: 2,262
Pivot: 2,194
Support: 2,126