Up or Down? September 8, 2008

One can never be sure which direction the market will go AND as a trader we should never make predictions. What we can do is observe what the market is doing and manage our account accordingly.

Since I only take swing and positions trades, I start my observation with the long term chart. I also know that price action is by far the most important factor in technical analysis. Therefore I first look at the monthly price chart for the DOW, COMP, SPX and OEX. Here we can clearly see the trend is down on all 4 indexes. If we now look at the MACD we see that monthly momentum is also down.

The weekly charts for all but the COMP show price is moving lower in bear waves. The
MACD for the DOW is also moving lower in bear waves. The MACD for the SPX and OEX both show a divergence between price action and indicator movement off the last low. For all indexes the MACD has been flat for the past few weeks.

Since early August daily price action has resulted in continued breaks in short term pivotal support levels. Even after today’s move the short term trend remains down. Momentum, as shown by the MACD, clearly remains down with the strongest downward momentum evident on the COMP. Here we must note that the COMP usually leads the DOW. This is because the COMP is a far broader index then the other three and being heavily weighted with tech stocks it tend to be far more volatile.

The market turn around, which began Friday, occurred after pivotal support was broken on all 4 indexes. What’s more, the reversal has taken the form of a V. Normally a V reversal after a break in support is indicative of a return move and not a major market reversal.

Based on the above observations, this is how I will manage my account. I will watch the indexes over the next few days paying close attention to the hourly chart. If I see a topping formation there accompanied by a diverging MACD, I will look for stocks that are good put candidates.

Good Luck,

Bob