Technical talk…

Since early August the key indexes have essentially been in a 10% or so trading range; the Dow Jones Industrial Average (chart), Nasdaq (chart), S&P 500 (chart) and the Russell 2000 (chart). This has created a variety of entry and exit points for traders depending on the trading style of the individual. This type of market can also create lots of head fakes and headaches should you attempt to time a range bound market. Which leads me to highlight two of the more popular technical indicators that certain market technicians, program trading and even institutional investors utilize, and they are, the Relative Strength Index (RSI) and the Moving Averages. Put simply, the RSI typically indicates whether or not a given index or equity is either overbought or oversold, depending on certain value levels. According to the RSI principle, the 70 value level or greater is an overbought condition and the 30 value or lower is an oversold condition. Pertaining to the moving averages, the 50-day and the more closely gauged 200-day moving average are the key levels that certain market technicians and program traders act on.

In analyzing the four key indices, currently all of them are trading well below their respective 200-day and also below their 50-day moving averages. That said, these levels may act as resistance until the markets can break out of their current range. Furthermore, in looking at the Relative Strength Index, the key indices all appear to be around the 50 level, which is no where near an overbought or oversold condition.

To sum this up, for me personally in order to act I look for extreme indicators of market conditions, which are not currently present. This could change and most probably will once a market moving catalyst presents itself. What that catalyst will be, time will tell. I suspect that it will come out of Europe or the upcoming 3rd quarter earnings reporting season.

Have a good afternoon.


What a difference a week makes….

As impressive as the week of September 12th-16th was with the key indices gaining over 5%, this past week was equally as impressive, but to the downside. The bears came out in full force this past week and sold just about every asset class off. For the week, the Dow Jones Industrial Average (chart) lost 6.41% of its value, the S&P 500 (chart) fell 6.54%, the Nasdaq (chart) gave up 5.3% and the Russell 2000 (chart) finished down a staggering 8.66%. Even Gold (GLD) (chart) which has been a Wall Street darling over the past couple of years, was clobbered this week.

While the Federal Reserve came out on Wednesday with a very somber outlook on our economy, this should have been no surprise. One may ask, why such a dramatic market reaction? Well, my take is that this also is nothing new. For the past two months or so we have witnessed breathtaking market swings such as what we have seen over the past two weeks. Without a question, volatility is here to stay. I would not expect an end to such sensational market moves until there are definitive resolutions to the EU debt crisis as well as our own government forming effective policies to begin a recovery for our economy.

Recently, we have been speaking about the markets trading in a range (blog), in particlular the S&P 500 (chart). Now the S&P is near the lower end of this trading range and should it break below the 1100 mark, most technicians believe the next stop would be the 1020 zone. Let’s see how the markets trade early next week and we will visit a more detailed technical analysis by Wednesday.

Have a great weekend 🙂


Fed’s outlook spooks stocks…

Although the Federal Reserve today committed to the continuance of bond purchases to help the struggling economy, it was their growth and job outlook that appeared to take the markets lower. On the day the Dow Jones Industrial Average (chart) lost 282.82 points, the Nasdaq (chart) -52.05, the S&P 500 (chart) -35.33 and the Russell 2000 (chart) -25.37.

In last weekend’s blog we discussed that the S&P 500 has been “range bound” and that a significant break above the 1225 level would need to occur for a valid breakout of the trading range.  Both Monday and Tuesday the S&P 500 (chart) flirted with the 1220 level only to retrace and close below it. Fast forward to today and we now find ourselves back in the middle of this multi-week trading range that seemingly has no end in sight. As long as the economy and the labor markets continue to experience anemic growth, I would expect this range will hold true to form.

So how can you trade this type of market? Very carefully!! A range bound market relies on the timing of the swings and if you attempt to “time the market”, you can easily get whipsawed back and forth and end up losing a lot of money. So my preference is to wait for a definitive breakout above or breakdown below the trading range of a given index or stock before considering entering a position.

Have a good evening.


Big week for the Bulls!

Stocks notched one of their best week’s in a year as it appears that Europe is getting closer to resolving their debt crisis. The Dow Jones Industrial Average (chart) closed the week up 4.7%, the Nasdaq (chart) +6.3%, the S&P 500 (chart) +5.4% and the Russell 2000 (chart) finished the week up 6%. What a performance for the bellwether indexes, especially the Nasdaq (chart).

In my last blog, I referred to the markets being “range bound” and that some type of catalyst would need to occur in order for the markets to “breakout” of its recent range. Based on the progress that the EU is making in solving their debt crisis, equities are now finding themselves at the upper end of their trading ranges. If a concrete resolution can come out of Europe, this may be just enough for the markets to breakout and resume its uptrend. However, should the debt and credit crisis continue in Europe, we could very easily trade within the range that has been established over the past month or so.

Let’s see if this 5-day winning streak we are on can continue next week and if indeed the key indicies can breakout to the upside. I will be paying close attention to the S&P 500 (chart) to see if it can break above the 1225 level with significant volume. In addition, my preferance would be to see multiple days of trading and closing above that mark in order for me to believe that the breakout is valid.

Enjoy the weekend 🙂


Range bound…

For the past month or so the markets have settled into a trading range. For example, the S&P 500 (chart) has essentially traded between 112o and 1200 since August 7th. This has included some of the most stunning daily swings the markets have ever endured.  What typically happens next after a stock or an index trades in a range for an extended period of time, is a breakout to either side of the range. Right now the S&P 500 (chart) is in the middle of its range.

So what does it normally take to breakout of a trading range and how can you trade this? Typically there must be some type of catalyst to occur in order for a range bound equity or index to breakout. This catalyst may come out of Europe and their current debt crisis, or it could come from the upcoming 3rd quarter earnings reporting season? Whatever the catalyst is, it’s imminent and should provide the required conditions for the breakout. Once the S&P 500 or any other range bound index or equity breaks significantly above the upper or lower part of its trading range with volume, that’s usually the time to take positions. In the case of the S&P 500 (chart), it appears a strong break above 122o or a breakdown below 1100 would do it.

Of course history or technical analysis does not always repeat itself, but in today’s age of computerized trading and the plethora of market technicans that follow this type of analysis, one can make a strong case.

Have a great day.


300 points again?

Even the most seasoned Wall Street veterans are astonished by the volatility in the marketplace. Yet again this week , enormous swings occurred in the Dow (chart) which finished lower today by over 30o points. The Nasdaq (chart) on the day lost 61.15 points, the S&P 500 (chart) -31.67 points and the Russell 2000 (chart) -20.96.

Today you can blame the crisis of confidence on Europe. Renewed fears of Greece defaulting on its debt and the ECB’s Stark resigning at year end was enough to jolt the global markets. Negative headlines are abound and it’s no wonder the (VIX) (chart) also known as the fear gauge, spiked to over 40 today as well.  When the VIX spikes the way it has over the past month and continues to remain elevated, this historically is an indication of a near term bottom being put in. Add the incessant negative headlines that we are all exposed to daily, and that too historically is a sign of a bottoming process in the markets.

Don’t misunderstand me for the problems here and abroad are very real, and true leadership needs to emerge once and for all to address the global crisis we find ourselves in. However, it is times like these that do indeed create some of the best opportunities for investors, so long as you have the patience and fortitude to ride through one of the most volatile markets in recent history. Good luck to all.

Have a great weekend 🙂


Not the best start…

The markets kicked off September pretty much the same way the entire summer has gone and that is with the bears in control. The Dow (chart), Nasdaq (chart), S&P 500 (chart) and the Russell 2000 (chart) all lost over 3% in the first two trading days of the month. This was a direct result of the ISM manufacturing report and the August employment report which came in much weaker than expected, ramping up fears that the economy is heading back into recession.

Fast forward to today and across the pond the European markets have sold off sharply, as their debt crisis continues to weigh heavily on the minds of investors and consumers alike. All in all, it appears that we are heading into a very volatile week ahead and we will see if our markets can continue to hold key technical support zones that were visited in August. I know this may sound like a broken record, but if you choose to go long this market during these extremely volatile times, make sure that you scale in very slowly and that you stay as diverse as possible for what may look cheap now, could become even more of a bargain as the month progresses.

Good luck to all.


An August to forget, a September to remember?

August 2011 should go down as one of the most volatile months for stocks in recent memory. For example, for the first time in its history, the Dow (chart) experienced four consecutive days of 400 point swings. The Dow Jones Industrial Average also had a trading range of over 1400 points in August. In addition, the VIX index (chart) also referred to as the fear gauge soared over 50% on the month before retracing and is still at elevated levels. This is truly astonishing volatility that is rarely seen. For the month, the Dow (chart) fell 4.4%, the S&P 500 (chart) -5.7% and the Nasdaq (chart) lost 6.4%. Since the highs in May, these indices have corrected by approximately 10%.

Welcome September! Historically, September tends to be one of the weakest months if not the weakest month for equities. But after this summer’s sell-off, I am not so sure that this month will comply with history. What may help the markets in September is that throughout the August bear raid, the major averages managed to hold critical support levels, which included a four day rally at the end of the month. That said, the economy and the jobs market are going to have to show some signs of recovery in order for the fear and unprecedented volatility in this marketplace to abate. We had a decent start this morning with the ISM manufacturing index reporting a value of 50.6, which was better than expected. However, this is just slightly above contraction. Tomorrow all eyes will be watching for the key jobs report which comes out before the market opens. Good luck to all.

Have a great day.