General Market

Critical Market Analysis

November 3, 2008 by Chris 2 Comments

The market had one of its best weeks in months with day one of the pivot reversal confirming on Tuesday as described in Pivot Reversal – Day 1. The Dow closed the week up 11.3%, the NASDAQ gained 10.9% and S&P 500 edged higher by 10.5%.

Airlines, housing, real estate and oil & gas explorers enjoyed some of the biggest gains this past week but they are all still in the red for the year (the US Dollar seems to be the only one enjoying gains in 2008 – YTD).

The NH-NL ratio started to show some strength as the week unfolded with new lows decreasing from 748 on Monday to 49 on Friday (NYSE). The NASDAQ logged 544 new lows on Monday with only 82 on Friday. New highs are lacking across the board but only 6% of all stocks in the S&P 500 are above their 200-d m.a. so we can’t expect new highs to play a major factor in any of our technical indicators.

The second indicator we are watching, based on Martin Zweig’s experience, is the advance-decline indicator. I still consider this indicator secondary to the others but the importance in this type of a market is elevated. Monday’s market showed 679 advances versus 2,526 declines for a 3.7-to-1 negative ratio where as Friday’s market showed 2,308 advances versus 883 declines for a 2.6-to-1 positive ratio. We moved from a collective -1,847 on Monday to +1,425 on Friday and -1,847 to +1,861 from just Monday to Tuesday. Overall, I would have to say this is positive.

The Four Percent Model Indicator, mentioned on Monday, uses the Value Line Composite Index (Value Line Arithmetic Index (EOD) or symbol $VLE on StockCharts.com). Martin Zweig noted that a buy signal is generated when the index rises four percent or more from the previous week. Similarly, a sell signal is indicated when the index falls four percent or more from the previous week. The $VLE was up 14.27% for the week with gains of 8.2%, 2.1%, 4.3% and 3.6% from Tuesday on. That’s a buy signal if you ask me but please tread cautiously because this indicator is clearly secondary so wait for the follow-through from the Dow or NASDAQ.

The “up volume indicator” is the total number of shares whose price rises. As noted, Zweig has found that when 90 percent of the volume (excluding volume in shares whose price has not changed) is upward (9-to-1 ratio), significant upward momentum in the market is likely.

Monday gave us a negative reading so we toss that.
Tuesday (the pivot reversal day 1) gave us an almost 19-to-1 positive reading with 95% of all volume associated with upward movements.
The following three days were positive but they didn’t cross the 9-to-1 ratio or exceed 90% with readings of 53%, 84% and 74% respectively.

All-in-all, let’s continue to wait for the follow-through before making a move.

Filed Under: General Market, Technical Analysis

Pivot Reversal – Day 1

October 29, 2008 by Chris 8 Comments

I think…, I predict…, I expect…, They said…, etc…

Everyone is an expert when it comes to the market, or at least a certified psychic. Everyone seems to think they know what’s supposed to happen, especially if you read the articles around the web and the newspapers on the stand.

You know what I think: Talking heads are useless!

Why don’t we just sit back and allow the market to tell us where it wants to go. I can’t say that expected the market to rally more than 10% or almost 900 points the exact morning I post the parameters to a pivot reversal (the article was written Monday night while watching the Titans smack around the Colts).

In any event, the market clearly marked day one of the attempted rally. No argument here.

Is it too early? Should we wait on the sidelines? Should we wait for the election? Are you scared to trade? Are you scared to lose? Are you embarrassed to be wrong?

Rule #1: Wait for a follow-through on overwhelming volume, 4-10 days from today’s 10% surge. The signal will be “buy” if we get a follow-through, so add a few shares at that time. Maybe it will reverse but we can’t think to hard about rules etched in stone, so we can only act based on the historical odds presented by this scenario. Trade small; enter a position that is 1/3 or 1/2 of your regular position size or trade fewer units but don’t sit on the sideline because you “think” this is a false move.

How to Spot a Market Reversal

October 28, 2008 by Chris 7 Comments

Before we get into screening individual stocks, let’s refresh our memories and understand what we are looking for in the major market indices: We are looking for a market reversal or as Jesse Livermore called it, the pivotal point.

“Whenever I have had the patience to wait for the market to arrive at what I call a “Pivotal Point” before I started to trade; I have always made money in my operations” – Jesse Livermore, 1940

Market direction or the ‘M’ in CANSLIM as I have highlighted it in the past is the most critical characteristic to consider when investing. Seventy five percent of all stocks follow the general market averages with these numbers becoming more skewed in times of extreme pessimism (like now – 90% of all stocks are following the carnage).

Bear markets are necessary to help deflate the overvalued price/ earnings ratios and overpriced shares in times of extreme exuberance. Bear markets create widespread negativity, overwhelming pessimism, fear, uncertainty and a total lack of confidence among investors. Cash exits the stock market as people panic like sheep and prices start to adjust back to reasonable levels, paving the way to new opportunities around the corner.

We are clearly looking for a new uptrend that sustains some life with a rally on above average volume. Bear markets will provide several head fakes as they typically fall in multiple waves of lower highs and lower lows. It usually takes the majority of stocks listed on the exchanges to sell off enough that a true base can form that will propel the next up-trend or bull market.

Study the charts below for the down-waves prior to the 1982 and 2002 bull markets. I selected these two years because they represent the strongest up-trends (bull markets) following a bear market over the past 30 years.

The first rally will feature one or more of the major market indices gaining at least 3% or more on higher volume than the previous day. It is then critical for at least one of these indices to follow-through with similar action four to ten days later (preferably four to seven days later – rules from original O’Neil books).

We won’t be able to tell if the market is building a rally after the first 3% up-swing so give it time and look for at least one, if not multiple follow-throughs from the four day on. The more, the better. Markets will give head-fakes about 1/5th of the time after a true follow-through so we will pay careful attention to the number of waves down during the current bear market. We have had three waves down but only one major wave down on the DOW (it could go lower – easily, before moving higher).

See charts below for the pivot point reversals and follow-throughs for the 1982 and 2002 bull markets.

We must understand that head-fakes and multiple pullbacks are clearly in the historical descriptions of former bear markets. I don’t quite know if the current markets have had sufficient pullbacks before launching a new up-trend (see the charts of the DOW and NASDAQ from yesterday’s post).

What should we do?

October 27, 2008 by Chris 7 Comments

The Dow is down 40% since its all-time high set on Thursday, October 9, 2007 and the NASDAQ is down 45% its 52-week high set on Wednesday, October 31, 2007. The NASDAQ’s all-time high was set on March 10th, 2000 at 5132.52; a 69%+ decline calculated using Friday’s close of 1,552.03.

So, what should we do?

That’s the question everyone seems to be asking.

A number of people have e-mailed me, sent me messages on Facebook or have asked me in person what I am doing or what they should do. It’s not a simple answer because everyone’s goal is different and the road each of us takes will vary. So, the best way for me to answer this question is to tell you what I am doing.

Let’s start at the automatic investments: 401(k) or IRA. Both my wife and I have these accounts and we will continue to fund them, especially with employer matches (why not – it’s free money). For example, my company matches 100% of the first 3% and then 50% of the next two percent. That’s a 5-to-4 ratio for the first 5% of my salary or in other words, I get an 80% return on the first 5% I add to my account without making a move (profit sharing is another perk that gets added to this account as well).

For example, a $100,000 salary would get $4,000 added by the employer for the first 5% or $5,000 invested into that 401(k). I suggest that anyone that doesn’t currently participate in a plan that offers a match is not making a great decision (in my opinion). Enroll and start making “automatic” deposits into the account; every year wasted is a year you lose out on an employer match and more importantly, the power of compounding. I don’t think this is the best option to grow wealth but it’s not bad when you get a match.

What about my individual stock investing account?

First, I always run to my personal library of “yellow highlighted” stock market books in times of extreme pessimism or extreme optimism. Why, because I can pick the brains of men and women who have gone through similar situations and learn from their experiences. In particular, I read Martin Zweig, Jesse Livermore, William O’Neil, Gerald Loeb and Victor Sperandeo (see reading list for details). I’ll also glance at pieces written by Warren Buffett and Peter Lynch for fundamental pointers.

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Filed Under: General Market, Wall Street

False Markets

October 1, 2008 by Chris 9 Comments

I only have a few things to say: the up and down swings of the market over the past few days is an illusion. The prices are not completely true as short sellers have been eliminated from the equation (in the most important area). Do we trade in a free market system? I guess not. Until the short sellers return, the rest is baloney! I wonder if that 777 point drop would have been closer to 1,500 if short sellers were in the market.

Be careful when they do return (as restrictions are lifted).

Keep this in mind: the 777 point drop may have been the largest one day point drop but it was only #17 for total percentage points at 9%. The largest drop ever was 22%.

I am still long the dollar (and believe it or not, shares in Visa). What a mess!

We may have false markets but charts don’t lie!

8/24/08, $76.81: US Dollar Buy Signal

12/17/07, $77.43: US Dollar Snapshot