Tuesday, January 27, 2009

Key Price Levels: January 27, 2009

With support levels in the major indices having fallen over the last couple of weeks, we are beginning to see volatility increase as the bulls are losing ground (or is it a grip on reality). Every new data point is spun bullishly, is capable of reversing months of bad news, and is good for a spike in prices at least for 45 minutes. The good news is that the November lows are still holding. For the most part, the major indices are travelling within well defined trend channels.

To review the methodology and the significance of the key price levels please click on this link.

My interpretation of the SPY (S&P500 proxy) chart (see figure 1) is as follows: resistance remains at 86.78, and in the current market climate (i.e., neutral sentiment picture plus short term overbought -see below), this would be the ideal low risk spot to bet against the market on any spike in prices. The November lows were tested last week, and so far they have held.

Figure 1. SPY/ weekly

Figure 2 is a weekly chart of the Dow Jones Industrial ETF proxy, the Diamond Trusts (symbol: DIA). The break of the maroon trend line is bearish and typically such trend line breaks should lead to an acceleration lower in prices. A spike into the trend line at $85 would be the place to bet against the market.

Figure 2. DIA/ weekly

Figure 3 is a weekly chart of the Power Shares QQQQ Trust (symbol: QQQQ). 29.36 to 29.72 is the key resistance that the QQQQ is struggling with.

Figure 3. QQQQ/ weekly
Figure 4 is a weekly chart of the i-Shares Russell 2000 Index (symbol: IWM). IWM is no man's land as prices remain in the middle of the channel.

Figure 4. IWM/ weekly

Lastly, Figure 5 is a daily bar chart of the PowerShares QQQ Trust (symbol: QQQQ); the indicator in the lower panel is our short term oscillator constructed from breadth and sentiment data. The indicator remains in over bought territory.
Figure 5. QQQQ/ daily


Anonymous said...

Guy - great oscillator - can you share any of the components?

Guy M. Lerner said...

I will be happy too...we are digging out an ice storm here in the midwest that is a doozy....I will post tonite

Guy M. Lerner said...

The data used in the short term indicator/ oscillator is the following: advance decline, vix, up vol total volume ratio, put call ratio, trin. If it is the QQQQ then I use NASDAQ related data; if it is the SPY then I use NYSE data.

The indicator is short term; with each data point I take a 5 day average; I then look for statistically significant extremes in that value over the last 20 trading days; I then normalize the each value within these bands and then I sum the normalize values; I then apply another set of bands to this value (with a 20 day look back) and normalize again (this is why the value is between 0 and 1).

The reality is that the indicator works like most oscillators -it doesn't tell you when things get more overbought or oversold; it isn't not good at identifying trends. However, divergences between price and the indicator appear to be more predictive

steveftw said...

Guy - thanks for the explanation; I'll do some homework this weekend.

By the way - didn't mean to leave the comment as Anonymous, I hate it when folks do that.

Steve FTW