Positive Divergence in SPY Chart

I seldom use technical indicators, and even when I do, I don't use them for oversold/overbought purpose. As you all can see in this market, oversold can remain oversold for a long time or get even more oversold. When I do use them, its for the purpose of identifying divergence. Here's a look at the SPDR Trust (AMEX:SPY) chart. I'm using the SPY chart because it reflects the gapping action (see the empty spaces in between candlesticks), unlike S&P 500 index.

The SPY printed a new low on 10 Oct and a few days back, it tested that low and held. At the lower panel, we see the MACD printing higher lows. This is positive divergence. While this could be the first signal that may point to a more sustainable rally, bear in mind that we are still in a downtrend and bear market. This could well be one of those violent bear rallies. Remember: The trend is your friend until it is broken. Until we see higher highs and higher lows, the current trend is still intact. Next resistance I see is at 100, then 110 (gap fill).

Such volatile market can be highly rewarding for day traders, but nightmare for swing traders. If you must hold overnight, please keep your position size small such that even 100% loss is well within your risk tolerance. Another reason why I don't recommend holding options overnight is also because Implied Volatility (IV) is sky high now, meaning options are very expensive. A 10% drop in IV overnight can easily wipe off your gains and more even if the stock moves in your direction.

There are some very good day traders out there and I recommend you read MY DEL.ICIO.US on the left panel to see how they day trade in such markets. There are many gems in this bookmark.

Cup & Handle Pattern Example - Transocean Inc. (NYSE:RIG)

Above is a 15min chart of Transocean Inc. (NYSE:RIG) on Monday. It gapped up, retraced and found support at opening range low and 20 EMA. It then developed a Cup & Handle chart pattern. Notice the handle part of the pattern is on low volume, which is a feature of this pattern.

Below is a 5min close up of the chart. While one would typically enter on break of the cup's high at the 1.25pm ET bar, it would be prudent to wait for consolidation in this case as it has printed several consecutive bullish bars prior to breakout. This is a useful tip shared by seasoned day trader, Trader Jamie. Price tends to pullback on consolidate after 3 consecutive bullish/bearish bars. So best to wait out. Indeed, RIG consolidated around $76 before moving up again. Stop loss can be set on trigger bar low. Target is usually set at 100% fibonacci extension from bottom of cup to high of cup & handle pattern which was reached near the very end of the trading session. Of course, given the volatility of market these days, it would be wise to take partial profit at the 61.8% fibonacci extension, which is also near round number $78 and tightened up your stop.

Crude Oil - Glide and Slide

Adam from the Marketclub made a free new video on the "Glide and Slide" of crude oil. Crude oil has been hammered from highs of almost $150 per barrel in July to intra-day dip of below $70 on Thurs due to forecast of lower demand as a result of recession fears. The Energy Select Sector SPDR (XLE) and US Oil Fund ETF (AMEX: USO) mirror the moves of crude oil. So if you are interested in trading the crude oil using options, you can use XLE and USO as alternative vehicle. Below is a comparison chart of USO (in blue) and XLE. Unfortunately, the charting tool is not able to reflect crude oil. You can refer to this site for free crude oil chart.


As Adam rightly pointed out, it is always faster to slide than to glide, i.e. faster to fall than to rise. Just look at the S&P 500 index. It took just 10 months for it to lose the gains it accumulated from the past 5 years.

Ok, enough said. It has been a wild wild week and hope you traded safely. Have a good weekend ahead.

Overseas Stock Market Up, Can US Sustain?

As I'm writing now, overseas stock markets are up. The Hang Seng is up by more than 10% (Nikkei is closed today) and the major European markets are up by at least 4%. The S&P 500 low on Friday was about 40 points away from the 800 support level I mentioned in Where is the Market Bottom?. Its still early to rejoice on this positive market move, but if the US stock market can sustain it and close in the position territory for the first time in many days, then we are one step closer to a possible bounce.

This is an important week with many bellwether stocks announcing earnings and we've also got some key economic data being released.

Mon: Assistant Treasury Sec Kashkari speaks about implementation of economic stabilization Act

Tue:
Notable earnings: CSX, INTC, DNA, JNJ, USNA, PEP, GWW

Wed: PPI, NY Empire State Index, Retail Sales, Fed's Beige Book, Fed Chairman Bernanke to speak about economic outlook & financial market
Notable earnings: ABT, EBAY, JPM, PJC, NVLS, STJ, LUFK, KO, STLD, VMI, WFC

Thurs: CPI, Initial Claims, Capacity Utilization, Industrial Production, Phil Fed
Notable earnings: AMD, APH, BBT, C, COF, CY, CAL, GOOG, GILD, HWAY, ITW, RS, PH, IBM, ISRG, MER, NOK, NUE, SPWRA, TXT, SHW, UTX, ZION

Fri: Options Expiration, Building Permits, Housing Starts, Michigan Sentiment
Notable earnings: HON, CMA, SLB

Where is the Market Bottom?

I mentioned in my last post that we are possibly close to a near term bottom, but we need further supporting evidence on the chart to confirm. Well, the market is still continuing its free fall and it seems that no government intervention can put a stop to it at the moment. The above 10 year weekly S&P 500 chart shows that it has broken the 950 level support. Since its a weekly, chart, we will need to see if it can close below 950 on Friday to confirm it has indeed broken. But chances are high that it will now retest the lows we see in 2002 - around the 800 region. Because if it can't defend the 61.8% Fibonacci, it will usually retrace all the way back. Don't attempt to catch a falling knife. Wait for confirmation before going long.

VIX at New High and More

From the above volatility table (courtesy of briefing.com), we can see that VIX is now at unprecedented highs, surpassing those experienced during the 2002 bear market, 9/11 and even the Long Term Capital Management (LTCM) crisis. The same goes for VXO, a volatility measure which has been around for a longer time than VIX, except it has not yet matched the highs of the 1987 stock market crash. At that time, the VXO is almost 3 times higher than the highs we see in VXO today. We certainly do not wish to see that happening though. The market has moved from bearish mode to panic mode now. After aggressive sell-off throughout the day, we saw a good rally into the close on Monday, resulting in long lower tail candlestick printed in many charts. All these point to a possible close to a near term bottom, but we need further supporting evidence on the chart to confirm.

For those who are interested to find out more about VXO, you can read up here. But basically, the main differences between VIX and VXO are summarized below:

1) Different Index Base
VIX - calculated based on S&P 500 options
VXO - calculated based on OEX 100 options

2) Different Strike Prices used
VIX - all strikes prices are used, but weighted. ATM strikes have the most weightage
VXO - used only near the money strikes for calculation

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Tue: FOMC Minutes
Notable earnings: AA, AYI, YUM

Wed: Pending Home Sales
Notable earnings: COST, MON

Thurs: Initial Claims, Wholesale Inventories

Fri: Trade Balance
Notable earnings: GE, INFY