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QUOTE CHART OPINION

Naked Trades

from TA Today

The Ride Continues?
 
In the last look at the markets I talked about the volatility being higher than usual. That typically takes place when the market is undergoing a significant correction or a long term change of direction. So far we have seen a significant correction develop within the NASDAQ but not overall. The following chart can give you a sense of the choppy volatility that has been present of late. Look how we had a period of tighter and tighter advancing issues versus declining ones. The market was in balance. Look at what has happened since late April of this year; right around when the volatility increased on the markets. Declining issues ballooned and advancing ones shrunk. Since they we have seen alternating moves back and forth in this chart which tells us that volatility is ripe. It will end I'm sure, but there are no signs of it yet.

 

The question remains though, is it a long term change of direction? Will the listed issues undergo a significant correction before this disturbance is over?

Space and Time

This is an appropriate time to consider once more where we are in the big scheme of things. This past week (Friday in particular) we saw nominal new highs set on the listed issues but they did not hold. I've my thoughts about why that was so. Let's start with the 4-7 week cycle of turns. I've shown this chart before and though I continue to try and perfect my thoughts on this time and space portion of technical analysis, I've not come to any grand conclusions yet. I have changed the appearance a bit to show the turns more vividly. Although not in anyway a perfect timing tool, when combined with other indicators including the long term 4-7 month cycle it can shed light on when to be a bit more careful in your trades. The long term turning point is still another couple months out, by my calculations,  in case you are wondering.

 

So the short term cycle suggests another move. As I've said before, that move can be any direction; an acceleration of the existing move, or a change in direction. In the chart above, almost all the moves are associated with directional change for the intervening period.

Combine the above chart with the oscillators that we watch. All of these oscillators attempt to gauge whether the existing directional movement of the market is about over and, yes, they all are pointed to that being true. As you know, the existing direction has been to push higher the past few weeks. Here's a 10 day moving average of the up versus down volume on the NYSE with an overlay of the SPX for reference purposes. As can be seen, when the red line gets extended toward the top of the chart and then begins to roll over as we see happening now, prices typically come down as a result.

 

The same is true of the oscillator that tracks the moving average of the advancers and decliners. Again, I've overlaid the SPX for comparative purposes. Although here we do not yet see a rollover of the indicator, it has stopped moving higher and is poised to turn.

 

The same indicators apply to the OTC issues as well. Here's the same chart for the NASDAQ advancers to decliners. Note it has rolled over.

 

The above are all short term indicators. If we move to our 30 day oscillators, they too are starting to line up for a change in direction or at least a pause in the current trend. Note that the indicators are at the top of the chart (bearish) and starting to rollover.

 

 

Squeezes

I have recently been fascinated with the setup that has occurred in these markets for a squeeze higher. Price squeezes occur when there are too many people leaning the same way. You can squeeze higher (which is usually the way it is thought about) or lower, you just need the conditions to be ripe. Those conditions are primarily found in the various sentiment indexes such as the Investors Intelligence numbers as shown here.

 

These numbers tell us a squeeze play higher is possible because the number of bears is starting to reach an extreme (too many of them) as is the bulls (too few). When there are too many bearish folks two things occur; there are bears who short sell the market and the only way for them to realize profits are reduce losses is to buy stocks in the future; and secondly, if you are bearish on the market you have probably either sold what stocks you have or are in the process of doing so. When most stocks have been sold and when short sales are high, then you have the potential for much higher prices once the ball gets rolling. Look at the short sale interest ratio on the NYSE. It's not extreme but heading that direction.

 

The fact that a squeeze play could actualize has what has kept me in check with my shorting activities of late. When such a potential exists, you have to factor it into your overall strategy.

Where to Now?

So, finally turning to the charts. Given my bearish near term thoughts tempered with the potential for a squeeze play higher, let's look at the charts. Friday (Aug 4th) we did see that squeeze play develop just as we worried about. You can tell a squeeze from a more sustaining move as a result of whether the move continues. When the move quickly dies on the vine that tells you that what you just witnessed were mostly short positions being stopped out. Looking at a 30 day chart of the SPX, we see Friday's move pushed right up to the next line of resistance at the beginning of the day and then steadily decline. When it broke the trend line it got a bit of a further surge taking the long stops out and then rebounding into the close. With the Federal Reserve looming in the upcoming week, it's hard to get too bearish or bullish in front of the Fed.

 

I show this shorter term picture of the SPX because it shows a resistance line honored, a break of an up trend line and now a push back to the underbelly of that trend line break. Like anything in technical analysis, it's not a given that we decline from here but that's the odds on bet short term. Again, with the Federal Reserve to announce their interest rate decision on Tuesday, don't expect a large move either way to stick in front of that announcement. What we are interested in though is what will be the continuing trend be once the announcement is made and the price points that are to be established stick. From the evidence I have shown, I believe we will see this market trade sideways to down at best. Worst case we should see the market begin to cave in again and head back towards the recent lows of June and July.

 

Sell this Strength

Although there is the possibility of a squeeze higher such as what was experience Friday, you have to look to sell strength on these short covering spikes. I do not know if we will see another spike as a result of the Fed and my guess is that it will be the last one for a while but if it occurs, I intend to short into it. The resistance lines are clear just as the support lines. The highs of Friday are the top area and the supports areas are shown above.

There is a good risk/reward setup at these levels to get short. This entire move higher has come on no volume and it is likely that it will fail. The fact that there are a lot of bearish troops makes the timing difficult from a squeeze perspective so you have to sell rallies and hold steady unless they truly break them higher. That, though very unlikely, would indeed be a heck of a squeeze as no one in their right mind would want to stand short on a breakout above 1300.
 

 

 

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L.A. Little is the author of TA Today (www.tatoday.com). He champions the idea that the trading fields are far fairer now than they have ever been for the small trader and that the tools, cost structure, and access to the markets requires one to actively manage their securities and thus their financial destiny. As an outsider to Wall Street, but with an interest in trading that spans two decades, you get a different view on what today's trading landscape consists of and how you can profit by it. He is the author and presenter of numerous technical articles both domestically and internationally, primarily in the field of Telecommunications Quality Assurance.

TA Today (www.tatoday.com) is a practical online trading service. It is premised upon the idea that trading based upon technical analysis and probability measures can become a profitable pastime or profession for most anyone. The site features daily commentary and potential trading ideas coupled with a public trading diary. Additionally, a weekly Heads Up column attempts to game the market's tendencies for the coming week. Finally, there is a weekly email subscription service, Naked Trades, that exposes potential trades in the context of an educational journey.


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