Wednesday, August 11, 2010
Purge day number 2...
Click on image above to enlarge & see 8/1/10 for how to interpret the bottom 3 charts
Sure enough we got the second day of controlled purge I mentioned in closing last night. As long as that does it, it was truly a masterpiece. I was a little surprised to see them open the market just slightly below the 108 EMA this morning as shown in chart 3 row 2. This did exactly as it was supposed to do which was to trigger massive sell / dump it all programs. Everyone who wanted out of the stock market because of the direction the economy is going may well have gotten out today. As the sell programs took us farther down, they stopped it right to the penny where it has to stop on a short term basis - the 50 MA.
I have added the 50 MA to chart 1 row 1 and also I added the 21 MA to that same chart. These 4 moving averages (5, 10, 21, 50) are the "active" moving averages. Plays start, end, and restart off the interaction of these EMA lines.
Chart 2 row 1 shows the cluster of traditional moving averages that are the "static" moving averages, they rarely interact with each other. You will notice in this chart that the 50 MA is also shown here along with a thicker rose colored line which is the 324 EMA, another one of those special numbers that I will discuss at another time. Notice how they bottomed out today's selling at exactly at the 50 & 324 support. As long as they hold that 1087 number on the S&P500 we are still in business.
On over to chart 3 row 1, you can see that although we did slip thru the bottom red line of the bear channel we did turn sideways at the support of the thin green line you can barely see passing thru the center of the chart which is actually the center line of the 9 month downhill channel that I posted on 8/5/10. As long as we hold that we are also still in business.
In chart 1 row 2, we still have a divergence but it lost about half of its air today. In chart 2 of row 2, I posted a new chart, the support and resistance level chart, showing key support resistance levels on the SPY. You can also see where I darkened the line at 113 to show the really strong resistance we are trying to break thru which pretty much coincides with the brown 100 MA line in the chart directly above it. This particular chart is quite disturbing that we couldn't pull off the breakout of the 113 resistance level.
In chart 3 row 2, I have added market pivot point lines based upon pivot points in the volatility index which is a new chart I posted directly below it - the $VIX (volatility index). The vix is a visual method of keeping track of fear levels over the short, medium and long term. When we hit peaks of really high fear or fear is complacently low, the market turns to the opposite direction. It is a numerically indexed chart that you can draw trend lines and channel lines as if it were a stock or a market index. The vertical red green lines start with turning points in the vix below and then transfer vertically up into the SPY chart above it showing how changes in the volatility or fear causes the market to change direction.
On 1/21/10, the vix formed a small ascending triangle signaling fear is about to increase fast. As it climbed on that day you can see that directly above it the market tanked as fear rose. At the end of the second day 1/22/10, the vix had reached the upper trendline and fear reversed but basically went sideways with only a slight decline producing the odd sideways trading from 1/27/10 to 2/3/10. At that point we had external events shoot the fear right back up to the red line on 2/5/10 for a "double top" in fear which traders really like. As the vix fell from 2/8/10 thru 4/26/10 the market rose correspondingly. On 4/26/10 the vix started turning back up fast which transfers visually to the top of the market in the above chart.
Through the month of May we had erratic action on the volatility in the upper half of its red channel, but you can see how when the vix reverses at the upper or lower or centerline of its channel the market also reverses at the same point. On 6/21 we saw the volatility index reverse at its lower trendline for a 2 week selloff up to the center trendline. On 7/8/10, the vix actually slipped out of its inclined fear channel and rallied up thru 7/15 but then got back up in the channel for a couple of days causing selling but then on 7/20 fell out of it convincingly which started the run up we've had for the past 3 weeks.
The market has been in the big fear channel for the past 9 months but on 7/19 slipped out of it which is why I stated on my 7/19 blog that they were trying to turn the market up as of that day and they did. Fear is now downtrending below and away from the big fear channel as shown by the small green channel you see going down thru today's date. As long as the green channel continues downward and we never pierces up thru its upper green line, the bull run is still on. Today intraday we went right up to it exactly then pulled down from the line just a little into the close. Very short term swings are caused by the vix swinging back and forth between these 2 green lines of this channel. As long as they have control over this double purge, and so far it appears that they do, it will have been a successful release of massive built up sell pressure and we are still in business to the upside. If come tomorrow they don't work their magic and that vix breaks out of the green channel to the upside, it will get real ugly real fast. The fact it was stopped at the line shows there is some element of control over this twin purge, but we absolutely, absolutely must turn back up tomorrow.
P.S. I added one more chart tonight, the advance/decline at just left of the vix (chart 1 row 3). The symbol is ADVDEC-QC, you can see how yesterday we hit the 4500 line, the first green line, and then today we purged well on down close to the second green line, the 5500 level as I mentioned last night that I was looking to happen soon.
Also my 4% trailing stop loss took me out of DPZ & SHLD for losses and they are now in the closed trades. I will leave the untriggered buy orders at what are now high levels until tomorrow night then see if I want to keep them but reduce the trigger price or remove altogether.
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