The Technical Analyst http://www.tradersclassroom.com Alan R. Northam
S&P500 INDEX TECHNICAL ANALYSIS READING THE BAR Today the S&P500 Index formed a second higher high and higher low signaling that the market is in the process of reversing trends from down to up. However, the process is not yet complete (see Rate of Change section). The market also opened near the low of today’s session and closed near the high indicating that the buyers were firmly in control of the market action today. This therefore suggests that the market should open higher in the morning. MOVING AVERAGES The 50 day, and 170 day EMA’s continue to point downward indicating that the intermediate term, and long term trends are in the downward direction.
TREND: S↓ I↓ L↓ BUY SIGNAL FOR HYPOTHETICAL PORTFOLIO
Thursday, July 22, 2010
The 20 day EMA however, is once again pointing upward confirming that the short term trend is in the process of reversing from a downward trend to an upward one. RATE OF CHANGE The 20 Day Rate of Change Indicator has now moved up to its zero line indicating that price is now the same as it was 20 days ago. Normally I would call a short term trend reversal complete once the 20 Day ROC moves above its zero line and the 20 day EMA is pointing upward. However, since the ROC will not have yet made a higher high I will wait until it does so in order to try and avoid a whipsaw reversal signal. TREND Short Term Trend: DOWN Intermediate Term Trend: DOWN Long Term Trend: DOWN
S&P500 INDEX TA (CONTINUED) VOLUME OSCILLATOR The NYSE Volume has now moved back uo to the +1 sigma line (upper blue line) indicating that the net advancing market volume has started an overbought condition. As a result we should now see the market turn back down within the next 1 to 2 trading sessions. STATISTICS FOR MARKET TOPS The chart shows 9 volume oscillator indicator peaks. Seven of these peaks indicated a reversal in trend within 4 days for a 78% accuracy in prediction. STATISTICS FOR MARKET BOTTOMS The chart shows 12 volume oscillator valleys. 4 of these 12 valleys indicated a reversal in trend for a 33% accuracy in prediction. Thus the valley statistics show that there is a higher probability of the market continuing lower than reversing back upward when the volume oscillator forms a valley.
FORECAST Expect the market to reverse back downward within the next 1 to 2 trading sessions. BOLLINGER BANDS The Bollinger Bands are mainly used in this analysis as a measure of when the market is overbought and oversold. When price fails to reach the upper edge of the Bbands it is an indication of buying weakness as is now occurring. This then signals that the market should continue lower as the strength of the sellers continue to sell off this market. In addition, in a downward trend the market should move up to and trade around the 20 day moving average during pull backs and should then reverse back downward without moving up to the upper band of the Bollinger Bands.
ANDREWS PITCHFORK ANALYSIS Today the S&P500 Index has now broken out above the Sliding Horizontal line (SH) signaling that price wants to continue to move higher and calling for the addition of Warning Line 1 (WL1). The warning line is the next high probability price area for a reversal in trend. The pitchforks are now informing up that price should continue upward along the median line of the green pitchfork until it reaches red Warning Line 1 at which point the market could reverse back to the downside.
.â€œHigh probability trades are made in the direction of the prevailing stock market trend.â€?
ELLIOTT WAVE ANALYSIS (MONTHLY) This chart is a monthly chart of the S&P500 Index showing the Elliott wave count. This chart shows that from the year 2000 the S&P500 Index has been forming an Extended Flat wave pattern. An Extended Flat occurs when the ‘b’ wave extends higher than the origin of the ‘a’ wave. The ‘c’ wave then ends below the low of wave ‘a’. We know that wave ‘b’ which began in 2002 is a corrective wave. The reason is two fold. First of all wave ‘a’ was made up of five non-overlapping waves. This makes it an impulse wave (a trending wave). Following an impulse, or a trending wave, the market goes through a correction. Therefore the move upward from the end of impulsive wave ‘a’ is corrective. Secondly we know that wave ‘b’ is corrective because it is not impulsive. Impulsive waves do not overlap. Notice wave ‘x circle’ overlaps wave ‘a’ and the second wave ‘b’ overlaps the first wave ‘c’. Also the middle of wave ‘b’ has a more shallow slope than its beginning and end. In an impulse wave the middle of the wave has the steepest slope. Many technical analyst mistake wave be as a trending wave which it cannot be for both
the cited reasons. Following wave ‘b’ we have a final wave ‘c’ down. This wave ‘c’ is unfolding as an ABC zigzag. Notice that wave ‘a’ unfolded as a five wave nonoverlapping impulse whereas wave ‘c’ is unfolding as a zigzag. This is in agreement with the Elliott wave rule of Alternations and helps to verify the wave count as being proper. Of wave ‘c’ waves ‘A circle’ and ‘B circle’ are now complete with the final wave ‘C circle’ down now unfolding. We have a pretty good idea that wave ‘B circle’ is now complete because the last two monthly price bars both formed lower highs and lower lows which is a Dow Theory rule for the start of a downward trend. Wave ‘C circle’ is expected to end sometime in 2011 according to the Benner Fibonacci time cycle. However, there has been times when this time cycle has been off by a year. Therefore wave ‘C circle’ could possible end in 2012. Once wave ‘C circle is complete it will also complete wave ‘c’. Once wave ‘c’ is complete then we should start to see the beginning of a new bull market. The price target for the completion of wave ‘c’ is calculated to be at 300.
ELLIOTT WAVE ANALYSIS (DAILY) This chart is the daily chart of the S&P500 Index showing the Elliott wave count. This chart shows Elliot wave (1) (see monthly chart for clarity) in progress. Wave (1) is unfolding in five non-overlapping waves, wave 1,2,3,4, and 5. Once wave 5 is complete it will also complete wave (1). To-date, wave 1 and 2 are complete with wave 3 down underway. Wave 3 down is also unfolding in five non-overlapping
waves, waves (i), (ii), (iii), (iv), and (v). Of these waves wave (i) and (ii) are now complete and wave (iii) down is now underway. The blue zigzag lines are my construction as to how the wave should play out. I expect this construction to be fairly accurate but not perfect. If the construction proves to be considerably in error I will adjust it along the way so as to better describe what the market is expected to do.
ELLIOTT WAVE ANALYSIS (CONTINUED) This chart is the daily chart of the S&P500 Index showing the Elliott wave count. This chart zooms in on wave (iii) down for more detail. Wave (iii) will be made up of five non-overlapping waves and will be labeled as waves i, ii, iii, iv, and v. It now looks like wave ‘i’ of (iii) is now complete with wave ‘ii’ in progress. Once wave ‘ii’ is complete then wave ‘iii’ of (iii) in the downward direction will commence. Wave ‘iii’ down should fall like a rock once it gets started and should
bring price back down to the area of the solid blue construction line. Note that wave ‘ii’ cannot move above the origin of wave ‘i’ (see red horizontal line) or the wave count is not correct and wave (ii) upward is still unfolding. Wave ‘ii’ is now up against this red horizontal line so there is not much room for the market to continue to correct upward. Therefore if the wave count is correct then the market must reverse back to the downside immediately.
IN CONCLUSION The whole purpose of technical analysis is to use past stock market price and volume data to project what the market is expected to do in the future and to be correct in this analysis more times than wrong. Since the majority of stocks follow the overall trend of the market, knowing the trend of the market gives the trader the edge necessary to succeed in trading by informing the trader in which direction, long or short, he or she should be trading. If a technical analysis only shows what the market has done but does not make a forecast as to what the market is expected to do then it is not a true technical analysis. The traditional technical analysis shows the market in a short term, intermediate term and long term downward trend. Traditional TA shows that the short term downward trend remains in progress but could be on the verge of reversing back upward. The Andrews Pitchfork Analysis shows that the market should continue higher in the days ahead. The Elliott Wave analysis shows that the market is now in wave (iii) down. The bottom line: The market remains in a short term, intermediate term and long term downward trend. However, the short term trend is on the brink of turning upward but has not yet done so. Longer term, the market still has a long way to go on the downside before mounting a new bull market rally. The long term downward trend is expected to last into late 2011 after which time a new bull market could emerge.
Happy Trading, Alan Northam Address Questions about this analysis to: email@example.com
.â€œA trend in motion, stays in motion, until proven otherwise.â€?
TWM MODEL PORTFOLIO The purpose of showing the Model Portfolio is for educational purposes only to show how I enter, manage, and exit a trade. It is not a recommendation, nor do I solicit actually trading this security based upon this information. MANAGING THE TRADE
Once the hypothetical portfolio is in the trade it stays in the trade until either the initial target price is reached or it is stopped out. How to determine position size for the hypothetical portfolio: Take the price at which you plan on buying the security ($22.93) and subtract the Stop Loss pirce $20.32. This yields 2.61. Multiply the total trading capital $9730 by 6% (maximum allowable risk). This yields $583.80. Divide 583.8 by 2.61. This yields 223.6. Round down to 200. This is the number of shares
that can be bought. This is the position size. PORTFOLIO (STARTED ON 6/8/2010) TWM: ENTER LONG ON 7/19/2010 CASH: $5144.00 CAPITAL: $9730 (2.7% loss) BOUGHT AT: $22.93 STOP LOSS: $20.32 LOT SIZE: 200 shares RISK: 5.4% (Max, allowable exposure is 6%) INITIAL TARGET: $24.95
EXTENDED TARGET: $26.50 Please note that this is not a recommendation to actually buy this ETF. This BUY signal is shown only for educational purposes to show how I determine BUY and SELL signals and how I manage the trade. The decision to actually BUY this ETF is the sole decision of the trader and is not a recommendation from me or this newsletter. Trading ETFâ€™s involves risk of loss of money and any loss incurred by the trader is not the responsibility of me or this newsletter but is the sole responsibility of the trader.
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