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Dhierin Bechai
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My name is Dhierin Bechai, I started investing little over a year ago after having followed the markets for several years. I initially started trading in silver and later on changed my focus to stocks (at first Dutch stocks), later on US and German stocks. To decide whether to trade in a stock... More
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  • Technical View On Dow Jones And SP500

    The Dow Jones and SP500 have seen a pullback in the past days and I was asked to do a SMA analysis to look at how the Dow Jones and SP500 stand at the moment.

    A little bit more about the background of the recent pullback:

    Stocks fell due to the speech Ben Bernanke gave and later on the news came that some of the Fed members already wanted to reduce the quantitative easing . At first stocks made a jump, to fall back later that day (resulting in the Doji Candle visible before the 2 red candles).

    Since the speech was given there has been a lot of uncertainty . Stock traders are afraid that the Fed might already cut back the QE in July.

    Besides that the Hindenburg Omen signals showed up, which scared stock traders, as it might be a sign of a stockmarket crash.

    The market is indecisive at the moment in my opinion. Bernanke signaled that if the economy showed recovery they might start cutting back. The fact that he said this made stocks drop. Some good macro-economic numbers came and stocks fell. This week some disappointing numbers came in and stocks fell even further.

    So at this moment:

    "Good news is bad news, bad news is bad news and no news is good news."

    I will look at the week chart (step size: 1 week) and the day chart (step size : 1 day).

    Dow Jones (US30)

    Week chart

    (click to enlarge)

    Figure 1: Dow Jones week chart

    10 SMA: Rising

    55 SMA: Rising

    RSI (14): About 70

    Comment: Actually the technical image didn't change that much. The SMAs are still rising. A Doji Candle is visible showing an indecisive stance. The RSI is slightly above 70 and is returning from being 'overbought'. The Dow Jones is moving away from the upper Bollinger Band, but is still above the 10 SMA.

    Day chart

    (click to enlarge)

    Figure 2: Dow Jones day chart

    10 SMA: Declining

    55 SMA: Rising

    RSI (14): Slightly above 30

    Comment: The 10 SMA has a negative gradient, but a cross is still far away. The candle hits the lower Bollinger Bands, we might see a bounce away from the lower Bollinger Band. The RSI signals that the market is approaching an oversold condition.

    SP500 (US500)

    Week chart

    (click to enlarge)

    Figure 3: SP500 week chart

    10 SMA: Rising

    55 SMA: Rising

    RSI (14): Slightly below 70

    Comment: Actually the technical image didn't change that much. The SMAs are still rising. RSI is slightly below 70 and is returning from being 'overbought'. The SP500 is moving away from the upper Bollinger Band, but is still above the 10 SMA.

    Day chart

    (click to enlarge)

    Figure 4: SP500 week chart

    10 SMA: Declining

    55 SMA: Rising

    RSI (14): below 30

    Comment: The 10 SMA has a negative gradient, but a cross is still far away. The candle is below the lower Bollinger Bands, we might see a bounce (up) away from the lower Bollinger Band. The RSI signals that the market is in oversold condition.

    At the moment it is very hard to make a call on this, as on the day charts the market is trading at or near the lower Bollinger Band and might see a bounce up and the RSI shows an oversold condition. Additionally most stock traders are in my opinion overreacting about the QE. It is important that QE continues and it was also said that at the moment recovery is too brittle to cut back the QE and the most recent macro-economic data have also shown this. If stock traders will start trading with sense again rather than emotion and panic, we might see a bounce up.

    Jun 05 9:19 PM | Link | Comment!
  • How To Use SMAs To Your Benefit...

    As soon as I started trading in November 2012, I found out the hard way that technical analysis of stocks is the way to go, rather than going with the flow. Soon I started looking for different methods using the technical indicators. What I came up with is a famous set of technical indicators: the SMAs (used here as dynamic trendlines) and Bollinger Bands.

    IMPORTANT: Although to me this method has proven to work, it might not work for you or might not satisfy your expectations. If you don't feel certain about a set of signals coming from the technical indicators, stay away from it.

    THE TECHNICAL INDICATORS

    The method, I use, involves the following technical indicators (which can be used on basically all timescale charts, but I primarily use them on the day chart and the week chart):

    1. 10 SMA(On the day chart this is the moving average of the last 10 days)
    2. 55 SMA(On the day chart this is the moving average of the last 55 days)
    3. 120 SMA(On the day chart this is the moving average of the last 120 days)
    4. Bollinger Bands, deviation 2, period 20.

    The indicators above might require some explanation:

    1. 10 SMA, this gives the short term trend, you could also work with the 15 SMA. Either one you use, pay attention to the gradient of the SMA.
    • Is it heading up? You have a short term uptrend.
    • Is it heading down? You have a short term downtrend.
    • Is it level? The stock is moving sideways, market is indecisive.

    2. 55 SMA, this gives the mid term trend, you could also work with the 50 SMA. For the 55 SMA you have to ask yourself the same question as for the 10 SMA.

    3. 120 SMA, this gives the long term trend. For the 120 SMA you have to ask yourself the same question as for the 10 and 55 SMA.

    4. The Bollinger Bands show the where in which region the stock is trading 95% of the time. A breakout of the upper Bollinger Band is bullish, a break below is bearish. Furthermore Bollinger Bands can form a resistance (bounce back from the upper band can occur) or support (revival from the lower band can occur).

    After you have set up the technical indicators, half of the work is already done.

    Now what you will have to look for is how the smaller trend is acting in the bigger trend.

    WHEN DO YOU TAKE POSITION?

    What you basically are looking for (if you want to initiate a long position) is the 10 SMA crossing above the 55 SMA. If the 55 SMA is heading down (downtrend) and the 10 SMA crosses (above) the 55 SMA, you are looking to a revival in the downtrend. You might want to initiate a long position at the moment the 10 SMA (so not the stock price) crosses the 55 SMA. If the 55 SMA is heading up and is getting crossed by the 10 SMA you get a boost/rush in the uptrend. You can also apply this method on the 55 day SMA and the 120 SMA.

    So you initiate a position at the moment the smaller SMA (e.g. 10) crosses the bigger SMA (e.g. 55).

    WHEN DO YOU SELL YOUR POSITION?

    Now when do you get out? Simple answer to that is: at the top. Depends on your ability to take gain and be satisfied (or not). As a key note: If you have been holding the stock also after the 10 SMA (acting above the 55 SMA) started heading down, I would advice your to close your position at the moment the 10 SMA crosses below the 55 SMA. When you close your position at this point it does not mean that you didn't make any profit, but you did not make the optimal profit. A second helpful condition to sell is when the stock hits the upper Bollinger Band, because of the possibility of a bounce away from the upper band.

    For a short position you want to do the opposite, initiate a short position when the 10 SMA crosses below the 55 SMA and close the position preferably at the top, but ultimately at the point where the 10 SMA and the 55 SMA cross again. A second helpful condition to sell is when the stock hits the lower Bollinger Band, because of the possibility of a bounce away from the lower band.

    ADDITIONAL INFORMATION

    I don't use the 120 SMA that much, but it gives you some nice information for the long term trend.

    Next to using the SMA crosses I use the other indications:

    Bullish: stock closes above the 55 SMA, this often happens a bit earlier than the 10 SMA crossing the 55 SMA. Using the stock closing above the 55 SMA, you can already initiate a position. Only risk is that the 10 SMA doesn't cross above the 55 SMA. But if the 10 SMA does cross the 55 SMA, this is an extra signal for an uptrend.

    Bearish: stock closes below the 55 SMA.

    Bollinger Bands: This gives you the 2 bands in between which the stock is trading 95% of the time. It happens often that a stock bounces back from the upper Bollinger Band or lives up from the lower Bollinger Band, this could give you an indication on when to close your position on an ideal spot (at the top) or open your position (at the bottom). It can happen though that the stock breaks above the Bollinger Bands, this often happens at high volumes, high momentum, approaching strong quarter results, in this case you want to hold the stock.

    SUMMARY

    Long story short for long positions:

    1. Establish a stock, for which the 10 SMA is about to cross above the 55 SMA.
    2. Make a decision (buy or not), preferably buy if the cross has been made. Stock traders who are willing to take risk, can buy if they see enough potential for a cross to be made or when the stock closes above the 55 SMA.
    3. Preferably step out at the top, this top can be caused by a pullback of the stock, bounce from the upper Bollinger Band, pullback of the stock market, economic data, or a resistance level).
    4. If you hold on to your stock, close when the 10 SMA crosses below the 55 SMA. If the 55 SMA has a positive heading, you still make profit. If the 55 SMA is heading downwards you may lose some money.

    Long story short for short positions:

    1. Establish a stock, for which the 10 SMA is about to cross below the 55 SMA.
    2. Make a decision (buy or not), preferably buy if the cross has been made. Stock traders who are willing to take risk, can buy if they see enough potential for a cross to be made or when the stock closes below the 55 SMA.
    3. Preferably step out at the bottom, this bottom can be caused by a revival of the stock, bounce from the lower Bollinger Band, strong rally of stock market, economic data, or a support level.
    4. If you hold on to your stock, close when the 10 SMA crosses above the 55 SMA. If the 55 SMA has a negative heading, you still make profit. If the 55 SMA is heading upwards you may loose some money.

    GRAPHICAL EXAMPLES

    You can search for stock charts and try analyzing the stock the way I explained above. It is hard to find stocks that are about to cross, so as an exercise try establishing the intersections that the SMA has already made in the past and see what happened to the stock ever since, in most of the cases you will find that a trend started which could give you a gain of +60% if you are patient enough. Don't hesitate to send me a message if something is unclear.

    10 SMA = RED

    55 SMA = BLACK

    120 SMA = LIME

    Example 1: Agilent Technologies (A)

    I made a stock talk about Agilent Technologies a few days ago that it was about to make a cross.

    (click to enlarge)

    Example 2: FedEx Corporation (FDX)

    The second example is $FDX. FDX has been hammered down after showing a bad forecast for the remainder of 2013 after the quarter results. At that moment I did not use the SMA method and I kept my position (stubborn as I was, not willing to take losses). A few days ago as I saw that the SMAs were about to cross in the coming days (a cross has been made recently), I initiated a long position.

    (click to enlarge)

    There are a lot of examples that can be used to show how this method works.

    I made a small list of stocks that probably will make a SMA cross (up) on the day chart soon: ATI, ALTR, AMZN, AVGO, CBG, CVE, CHK, COV, EMC, FDX, GE, ITUB, JDSU, MXIM, PSX, QCOM, X, USB, WIN.

    Also for crosses on the week chart I came up with a list: ALXN, ASNA, AVGO, BXP, CCJ, CAJ, COF, DVN, DCM, EQR, FTR, GRPN, INFA, INTC, JBL, MNST, NIHD, POT, SHLD, SINA, SU, UDR, WCRX, WU, WFM, WPZ.

    Disclosure: I am long QCOM, GE, FDX, SINA, NIHD, ATI.

    May 20 5:35 PM | Link | Comment!
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