After the strong swings in the market this past October, the relatively subdued movement in late November has felt like cause for celebration. This makes it a perfect time to check out a different chart view to keep things in perspective. Rather than defaulting to the standard arithmetic chart that typically appears here, the first figure displays a daily log chart of SPY, the S&P 500TM Depository Receipt (SPDR) that serves as a broad market proxy for the US equity markets.
Figure 1: Daily Bar Chart for SPY (log scale) with Moving Averages and Volume
click here for larger view
As a colleague from Charles Schwab pointed out at an industry gathering I attended last week, the 600+ point drop in the Dow on December 1st didn’t feel as bad or volatile after the moves we experienced earlier in the quarter. The only problem, he noted, was that such a move was close to an 8% decline with the index in the 8000’s. It’s pretty amazing what we’ve become accustomed to monitoring.
Figure 1 provides the SPY daily bar chart in log form to help provide a sense of the relative volatility in this exchange traded fund [ETF]. As of Wednesday’s close, both volatility and volume have quieted over the past few days, but it doesn’t necessarily mean the year will draw to close in this manner. Note the sideways movement in price as SPY sits between the 20-day Exponential Moving Average [EMA] and the 50-day EMA. Expect volume to increase as it moves towards either of these EMAs to improve chances price will break through (up or down).
Standard Views
Since no one knows what the nest day’s trading will bring the best reminder is for traders to do the following:
Remain aware of current conditions including volatility (particularly option traders);
- Try to put the odds in your favor with the information you have by having apportion of your positions in the direction of the trend as well as those that are consistent with relative volatility conditions;
- Recognize things can change with each new data point added to the chart; and with all of this in mind,
- Manage your risk.
Current Conditions
Figure 2 provides a weekly arithmetic bar chart for SPY as of Wednesday, 12/10/08.
Figure 2: Weekly Arithmetic Bar Chart for SPY
I took some time to draw new regression channels to remove the severe decline that occurred in early October. Now a short-term channel captures the new downward trend initiated on 10/6/08. Detailed chart specifications follow.
Specifications: The SPY weekly bar chart includes the 4-week (pink), 10-week (magenta) and 40-week (blue) Exponential Moving Averages [EMAs] which are lagging indicators that translate to a 20-day, 50-day and 200-day EMA on a daily chart. Two active linear regression channels are also included to assess trend conditions. These include extended channels drawn using the following dates: 1/4/02 – 1/2/04 (longer-term, aqua channel) and 10/6/08 – 11/28/08 (shorter-term, red channel).
Two momentum indicators on the chart include MACD (12, 26, 9 periods) and RSI (14-period), with its bullish range (green) and bearish range (red) (see Optionetics.com Analytical Toolbox article series on Andrew Cardwell for more information on these ranges).
SPY is in a decline on a long-term basis as displayed by a declining 40-week EMA. The intermediate to short-term view is one that appears to be more transitional with a flat 10-week EMA and recent upward move in the 4-week EMA. SPY is travelling in a short-term downward regression channel, confirming the overall downward trend. That is, while the current direction for the ETF is up, this move remains within the confines of a down trend.
SPY recently moved above its 4-week EMA while crossing into the upper channel area. Price is expected to proceed to the next regression line in the direction of the trend according to channel theory (check out Regression Channels in the ProfitSource index or Google Gilberto Raff for more information). The upper regression line is then expected to serve as resistance unless strong volume and bullish momentum can push price upward and out of the channel.
Short-term momentum is deemed bullish as displayed by both MACD and RSI. The MACD Graph (dotted line) has recently turned upward and is heading towards its Signal Line (solid). RSI is above its 9-period SMA and is moving upward. On a longer-term basis, both MACD and RSI are displaying bearish conditions with MACD the MACD histogram in negative territory and RSI moving in a bearish range between 20 and 60.
Figure 3 provides a daily arithmetic bar chart with the same indicators and settings. Note the change in price position relative to the short-term regression channel with this view.
Figure 3: Daily Arithmetic Bar Chart for SPY
While MACD momentum is more bullish in the short-term, it does appear price is struggling to break above the upper channel line. RSI recently turned flat and may be experiencing some resistance at the 50 line. In order to continue its upward trend, SPY:
- Will need to build more bullish momentum and volume or
- May need to retrace back towards the middle regression line.
In the event SPY retraces, a move short of the middle line that reverses is deemed more bullish than a move that proceeds to the middle line. The presence of the 20-day EMA below price may help support SPY in the short-term. Once again, momentum and volume should be monitored if and when it approaches either support line (20-day EMA or middle regression line).
As always, be sure to employ good money management and risk management practices when entering new positions and monitoring your portfolio.
To access other articles written by Clare White, please click here.
Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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