Bill L.'s  Instablog

Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Tuesday, June 19, 2012 - Short Term Update - Short Term Overbought 5 comments
    Jun 19, 2012 5:35 PM | about stocks: SPY, QQQ, DIA

    Bottom Line:

    In my previous short term update I noted that some of the indicators that I watch had started to become overbought. Since then as the market has rallied some 100-150 points, the short term indicators that I watch have become even more overbought.

    Recent Article(s):

    1) The World Markets Teeter:

    2) Market Valuations Look Expensive:


    If this most recent move higher is indeed a correction before heading lower, prices in the SPY have reached levels that are important on a technical basis.

    (click to enlarge)

    Notes: We can see from the chart above that the SPY has reached the important 61.8% retracement level. Elliott wave enthusiasts, as well as Dow market theorists both assigned significance to this value. Charles Dow noted that corrections tend to end after retracing approximately 1/3 to 2/3 of the previous decline (both Fibonacci relationships), and Elliott wave practitioners believe that an idealized ABC wave 2 correction ends at 61.8 or phi (the golden ratio).

    Short Term Indicators:

    The short term indicators that I watch have also reached levels where statistically a turning point is likely.

    NYSE McClellan Oscillator:

    (click to enlarge)

    Notes: Both the three in the five day moving average had exceeded one standard deviation from the mean. A subsequent crossover lower would be a strong confirmation that the turn is in.

    NASDAQ McClellan Oscillator:

    (click to enlarge)

    Notes: The NASDAQ Mcclellan oscillator is not quite as overbought, though it too is at levels that make me think that the next profitable trade will be on the short side.

    Percentage Of Stocks Above Their 20 Day Moving Average:

    (click to enlarge)

    Notes: The percentage of stocks above their 20 day moving average has reached over 77%, while the five day averages its 60%. I would consider this an overbought reading. A one day close below 70% could indicate that the turn is in.

    Advance-Decline Line:

    (click to enlarge)

    Notes: There was a very strong close in advancing vs. declining issues, though this is dragged the five day moving average close to an overbought reading.

    Up-Down Volume:

    (click to enlarge)

    Notes: Similarly, the five day moving average for up vs. down volume has risen to one of the highest readings in last six months, and a reading that I would consider overbought.


    (click to enlarge)

    Notes:The NYSE Tech is not quite as overbought as I would prefer it when calling for turn, that said, the five day moving average is at the high end of the range for the last 5 to 6 months.


    (click to enlarge)

    Notes: The the five day moving average for the TRIN index has been pushed down to overbought levels.


    The markets are in rally mode, for now. This partially appears to be the result of the expectations of Fed easing tomorrow. Whenever the Fed's decision tomorrow is sure to cause some short term volatility.

    From my perspective, at the very least the markets appear to be short term overbought and ready to correct lower. Worst case scenario? If the global situation continues to decline, dragging down our economic data, a peak here could be the first stop on a journey much lower. One day at a time however.

    Long-term investors may want to use this rally to raise cash, or use the low vix to buy puts against their equity positions. Short term traders should watch for a possible turn lower this week, possibly tomorrow after a pop following the fed decision.

    Good luck trading, we'll talk again tomorrow.

    -Bill L.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours.

    Stocks: SPY, QQQ, DIA
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Comments (5)
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  • sundate36
    , contributor
    Comments (291) | Send Message
    It seems to me that the market moves in tandem with the VIX cycle that conveniently seems to coincide with FOMC meetings. The bottom range in VIX seems to correspond with the top in S&P, so if this scenario plays out again we can expect these overbought conditions to persist into the first week of the next cycle in VIX futures (tomorrow is the expiration date) and then we'll probably start seeing a decline. What's your take on this, Bill?
    19 Jun 2012, 06:18 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
    Author’s reply » How I use the VIX:


    -Bill L.
    19 Jun 2012, 08:17 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9903) | Send Message
    Great article and some very helpful indicators. Thanks for posting it.
    19 Jun 2012, 07:25 PM Reply Like
  • sundate36
    , contributor
    Comments (291) | Send Message
    Bill -- just another quick question. I was looking at the NYSE McClellan oscillator in the chart above and pretty much through FEB - MAR it was swinging back and forth between the overbought and oversold territory but no significant correction occurred. Were you surprised by that at the time? On the other hand, I think VIX kept falling during that time and so seemed to have been a better predictor of short-term market moves. (Of course, LTRO was in full swing then too.) I think the major "risk" to any significant downside move now is that Draghi (if he has an especially good latte in the morning) may decide to launch LTRO 2 and then it'll throw all indicators out of whack.
    20 Jun 2012, 10:08 AM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
    Author’s reply » That definitely surprised me, while you may see a divergence between two peaks in the market, that's the first time in about three or four years that I saw the McClellan oscillators stayed that overbought and then decline without a major correction. However I've been watching the VIX longer than I have been watching the McClellan oscillator,And I would say that if I had to trade with only one or the other, hands down I would choose the Mcclellan oscillator over the VIX.


    I chalk this up to, "there is no perfect indicator." I have not yet found, nor do I expect to ever find, an indicator that works perfectly all the time. In fact, I only expect an indicator to work slightly better than half the time. This is why I wait for a large number of indicators to be in agreement, and furthermore, any trade executed based off these readings, is done with risk management (position size and stops).


    After after reviewing this time period, one of the indicators that was not fooled was an indicator I created using block trading data. So perhaps in the future if there's a similar situation I will look to this indicator.


    Lastly I'll just say this, indicators are not as important as risk management. I remember an interview with Steve Cohen, he said that his best trader his best year was only right about 60% of the time, and that on average he was only write about 55 to 57% of the time. Now, I don't know what indicators Steve Cohen's best trader has access to, but they're probably better than mine, and yet he was only write 60% of the time. If you make and lose the same amount percentage wise per trade, and your winning percentage is 60%, you will not actually make any money. This really illustrates that risk management is just as important, no, more important, then an accurate trading system.


    -Bill L.
    21 Jun 2012, 06:25 PM Reply Like
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