It’s hard to avoid the constant coverage of economic events and to remember the last time a rosy picture was drawn for us. So much of my personal bearishness was based on the securitized asset problems, which is in the past—or is it? I personally believe the markets minimize spin and provide the best consensus information for the economy (it’s a leading indicator), whether that consensus is optimistic, pessimistic or uncertain. With that in mind, it can be argued that technical analysis provides the clearest view of market conditions.
Whenever economic news seems dire or you’re becoming overly enthusiastic, consider taking time to build some new charts when the markets are closed. Remember to look at the big picture with longer time intervals, pure price action with no time intervals (point and figure charts), different scales and some other measures between the two. If you don’t have a regular routine or standard measures to monitor, it may be a perfect time to develop those for 2009.
Technical analysis – or certainly my technical analysis – isn’t right. It’s just what keeps me grounded as a trader. While refining your routine be sure to identify and add those things that ground you.
Current Conditions
Figure 1, below, displays a weekly arithmetic chart of SPY, the S&P 500TM Depository Receipt (SPDR) that serves as a broad market proxy for the US equity markets.
- Chart 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).
The 40-week exponential moving average [EMA] is declining confirming the long-term downward trend in price. The 10-week EMA provides an objective view of sideways price action on an intermediate basis, while the slightly upward trending 4-week EMA shows bullish price movement in the short-term. If you’re a touch uncertain about the type of positions to establish, the different sentiment from these EMAs may help explain why.
When considering a short-term picture, Wednesday’s close was above the shortest-term EMA, but remained below the intermediate EMA. It is moving upward in the upper region of a short-term regression channel. So the lagging trend view is bullish in the short-term with the potential for this to sustain itself as an intermediate trend. RSI supports such a transition with bullish momentum as SPY approaches the 10-week EMA.
Figure 1: Weekly Arithmetic Bar Chart for SPY with Momentum
The MACD Graph also appears to be turning more bullish with a potential cross of the Signal Line by the end of the week (mid-week data shown here). Short-term traders will want to keep an eye on both momentum and volume as SPY reaches the 10-week EMA. If this resistance level is exceeded, the same conditions should be monitored if and when SPY reaches the upper line of the regression channel.
Figure 2 provides another weekly SPY chart with volume tools, including On Balance Volume and Volume with a 10-week simple moving average [SMA]. OBV is confirming the longer-term bearish move for SPY, as well as the shorter-term bullish one. Volume has begun to diminish a bit; however, we’re only half-way through the week – one that included a Fed meeting.
Figure 2: Weekly Arithmetic Bar Chart for SPY with Volume
Shorter-Term View
Figure 3 displays a daily chart for SPY with the same regression channels drawn and momentum indicators. The periods for the EMAs have been changed to reflect the same periods in the weekly chart (now 20-day, 50-day and 200-day EMAs). Note the change in price position relative to the short-term regression channel with this view. When using the daily bars to set the channels, SPY appears to be right at the upper channel line. Momentum is more bullish in this view, which is just what is needed for price to break above the daily regression channel and for the intermediate picture to turn more bullish.
Intermediate term traders will want to monitor momentum and volume at this level, with increases in both as SPY attempts to push out of the channel. A pullback to the 20-day EMA may help this development unfold. In the event SPY does not move up and out of the channel, momentum and volume should be monitored as SPY approaches its 20-day EMA. Increased volume and bearish momentum would favor a move back to the middle channel line, while decreased volume and bullish momentum may give SPY the strength to evolve into and intermediate upward trend. I suppose we’ll have to wait and see what Santa has to say.
Figure 3: Daily Arithmetic Bar Chart for SPY with Momentum
As always, remember your trading decisions do not have to be all or nothing ventures … you can build a new position and reduce it in pieces as well.
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Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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