Tuesday, August 12, 2008

New Highs/Lows

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I missed my weekly post and I do it now. There were not a lot of changes in the sentiment on the market and my bullish technical indications described in my "Short-Term Technical Analysis" on August 5, 2008 post pushed all the indexes (including the Nasdaq 100, S&P and DJI) higher.

Now, looking on the past week you may see that short-term trading strategy based on the longer-term technical analysis could be successfully used if this technical analysis is correct (see my "Simple Trading Strategy" post).

Going back to my longer 1-year charts I do not see any changes in the bullish sentiment. So far, all indicators point to the good odds that we may see the stock market higher.

S&P 500 chart

This time I have added New Highs/Lows Ratio - another breadth indicator that is used in technical analysis to confirm a trend as well as to spot reversal points. The New Highs/Lows Rule tells us that when we see increasing number of stocks that are making new 52-weeks highs (New Highs/Lows Ratio is increasing) we have confirmation of the up-trend and when we see that this number starts to decrease we should be worried about possible changes in the market sentiment and trend. So far, this indicator is bullish as well.

I think a trader should not be afraid to use several technical indicators. The more indicators are used the more informed trading decision could be made. Of course, with many indicators there could be situations when they all point in different directions and some traders could be confused and even desperate by this. I would say in this situation "Stop trading, take a few days vacation until you see a clear picture again". I consider professional traders those traders who knows when to trade and when to stay in cash and who can stay in cash long enough do not make a wrong step.

So, my longer term technical analysis shows me that the stock market still has room for further recovery. Yet, when you look at longer-term chart I would recommend comparing different indices - you may notice that the Nasdaq 100 index is not as oversold as S&P 500 and DJI indexes (see my previous post), on the other hand the Nasdaq 100 does not include financial companies...

Even if my longer-term charts point towards up-trend it does not mean that tomorrow we will see rising market. For tomorrow outlook, when I analyze 60-day chart I see that the indexes are oversold in short term. We already had first day of decline today and it would be nice before making any assumption on what I wrote to take a look at smaller time frames.

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