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Thursday, May 22, 2014

Daily update 5/22

Another run at the highs.  Here is the daily SPX chart.


SPX closed above 1890 for the fourth time ever.  Volume was extremely light again.  Is this the time we break out or turn back?  New SPX highs were very low once again at 20.  No big buying spree today. 

The SPY 60 minute chart does not work all that well in choppy narrow range markets like we have seen lately.  I also don't like the problem the dividend gap creates.  In looking for a substitute I did some research on the S&P futures chart with 24 hour data.  I have access to data going back to 1998.  After much looking at charts I found I like the 8 hour (3 bars per day) time frame.  I have included a MACD and an ADX indicator that I found useful in some instances.  I found a few interesting things about this chart.  One key thing I found is that the futures react to the 100 MA (white line) a lot.  They also react to the 200 (green line), but don't get to it as often.  On deeper corrections the 100 can cross below the 200.  This usually means the correction will last longer then just a quick pullback and the market will be volatile.  A strong break out above the 200 MA generally means the low of the correction is in, but not necessarily that the market is ready to fly up again.  There is often another pullback to a higher low.  The ADX indicator is on the chart specifically for the -DI (red line).  Every major sell off since 1998 has had a -DI reading of 35 or higher early in the move.  The trouble here is that not every occurrence of 35 causes a big sell off.  It is just a caution flag to monitor the market action going forward.  A pullback to the 100 MA without -DI reaching 35 is a high odds swing trade buying op.  SPX does not always make a new high, but it almost always has a decent bounce.  Sometimes a pullback with a -DI above 35 actually launches a new leg up.  That is the tricky part.  You need to monitory closely for the start of a move down, but it could actually be a great buying op.  This is why we love the market isn't it, LOL.  Those new legs up generally have a strong kick off bar off the low to help recognize them.  Big sell offs generally bounce weakly or not at all.
Here is a look at the chart.


As you can see the futures did some testing below the 100 SMA, but did not close below it the last few weeks.  The horizontal line in the ADX panel is the 35 level.  As you can see the -DI line never touched it during this trading range.  The yellow arrow marks the most recent -DI 35 reading and was followed by another leg lower before the final low.  Smaller pullbacks like that one do not always hit the 35 level.  However, all 10% or larger pullbacks did and usually when SPX was down less then 4%.   Unfortunately it is like all other charts, it only tells us where we have been and not where we are going.  We are currently testing the all time highs and we must wait to find out if we break out or turn back. 

The other two rallies above 1890 were turned back.  Will the third time be the charm or not?  This did not look like any kind of important thrust day.  Without getting one of those it seems likely we will turn back down at some point soon. 

Bob

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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.