Tuesday, February 24, 2009

Long-Term Analysis

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Some of mine friends (not active traders) are asking what to do with their pension funds. So, I just summarized a few points that I think could be useful to everybody:
  1. If you are going to retire tomorrow it is too late to invest - think about how to save what you have;
  2. For the rest - do not be greedy, do not go into active trading, do not invest into options or any other speculative trading vehicle;
  3. Do not trust banks and portfolio managers - if you trust them your money they will buy personal jets and at the end you will be broken and they will be on the personal luxury boughts fishing;
  4. If you can invest into index derivatives (QQQQ, SPY, DIA...) or index tracking funds - index cannot file bankruptcy. If there is bad companies in the index they will be replaced by healthy companies;
  5. During the recession (stock market crash) stay in cash - do not look to reinvest in something other;
  6. When the stock market is back in the long-term up-trend you can move all the money from cash back in the market and start investing on regular basis using dollar cost averaging.

That is all - simple six points. The last two points could be confusing - you may ask "How should I know when to stay in cash and when to be in the market?". Again it is very simple - follow the money flow. Go in cash when you see that money flowing out of the market (investors are leaving the market) and start to invest when you see that investors are coming back in the market. For this purpose could be used volume based technical indicators applied to the indexes and exchanges. As an example I would refer to two charts I saw at


S&P 500 analysis 2000-2006

S&P 500 analysis 2007-2009
Based on the SBV Oscillator (volume based technical indicator) you supposed to have your pension funds in cash since December 2007. When you should be back in the market? - When you see SBV Oscillator is moving back after it crosses 20% line, it will indicate that investors going back into the market.

Keep in mind that with pension funds (long-term investment) it's usually one signal a year and you do not pay for service to see this indicator. You may sign up for free trial at www.marketvolume.com take a look at this indicator and then resign up for free trial again in 3-4 months.

Monday, February 23, 2009

Technical Analysis

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Since I did not make any reference to the charts and technical indicators in my last "DJI Volume" post, I decided to make a short additional post.

I already mentioned in my previous post (a few hours ago) that now, I would not like to be on the place of those traders who are in short position, either it sold short stocks, or bought put options... I think it expresses my opinion very clear. This statement is based on the same technical indicators I always use and it mainly based on the huge volume surge seen on Friday in the DJI sector which on my opinion could mark another bottom and reversal.

In more details my technical analysis applied to the set of technical indicators on the 60-day chart (1 bar = 1 hour) tells me:
1. SBV started to advance - positive sign, yet it would be nice to see further advance as confirmation of recovery.
2. A lot of read SBV - suggests strongly oversold market
3. Big red MVO - points to strongly oversold market and extremely high panic selling which may lead to strong reversal.
4. MVO did not started to advance yet - means that we still have a lot of traders who sells in panic or who sell short in greed.
5. Advance/Decline Oscillator still declines - which reveals dominance of negative sentiments.
6. Advance/Decline shows a lot of red - suggests strongly oversold market.
7.MACD almost flat - more as a neutral sign.
8. Stochastics advanced above 20 after being below this level - positive sign that show that market is moving away from its low levels.
9. RSI advanced above 30 after being below this level - positive dynamic movement.
10. McClellan Oscillator is on up-side after crossing zero line - considered as positive signal.

Sorry for not showing a chart, I think you may always take a look at chart on marketvolume.com - chart setting could be seen on chart in my "DJI Chart" post (look for indicators setting in the chart legend).

Sunday, February 22, 2009

DJI Volume

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In spite my last week neutral to slightly positive outlook (see "Technical Analysis" post on February 15, 2009) the market crashed during this week strongly down. If last Friday majority of my technical indicators were mixed with small dominance of positive sentiment, then on Monday February 17, 2009 right after the market opened all of them became negative.

It's like a "black irony" - right after the first bailout was announced back in September 2008 the market went strongly down. Now, again, when Wall Street smells the money it crashes market down by making a statement "I need a piece of pie"... Could it be that the recession will continue as long as we pump money into the Wall Street? We are trying to cure the "Monster" by giving him what make him sick in the first place and by hoping that he will recover very fast. Could it be that only when we stop feeding the "Monster" he will realize that help is not coming anymore and he start recover slowly but steady?...

It was some attempt to be ironic, but let us go back to the numbers and take a look what we have now on the stock market. Take a look at some statistics:

Index November 2008 Low October 2008 Low
Main Group
DJI Below this level Below this level
Nasdaq 100 Above this level Above this level
S&P 500 Above this level Below this level
NYSE Above this level Below this level
NASDAQ Above this level Below this level
AMEX Above this level Above this level
Other indexes
Dow Jones Transport Below this level Below this level
Dow Jones Utilities Above this level Below this level
S&P 100 Above this level Below this level
S&P 400 Above this level Almost the same
S&P 600 Above this level Below this level
Russell 1000 Above this level Below this level
Russell 2000 Above this level Below this level
Russell 3000 Above this level Below this level

By scrolling through the table above can we make an assumption that the recession has stopped for majority of the public companies back in October - November 2008 and only big monsters who are not profitable and not flexible enough to restructure its production (DJI and DJT companies) are drugging the stock market further down? Shouldn't we let them die and let other companies to grow on their ashes? Isn't the purpose of the recession to clean the market from old not profitable companies and let the new to be built?

Another interesting fact is that daily volume on Friday February 20, 2009 was third biggest daily volume in the history of DOW. The only biggest volume in Dow Jones Industrial sector was seen on September 16, 2008 (on September 19, 2008 the DJI index was 7% higher) and on October 10, 2008 (on October 14, 2008 the DJI index was 10% higher).

I think this volume is very important and indicates extremely high panic selling in the DJI sector and at the same time it shows that somebody started to satisfy the demands of the panicked traders. Who is buying from those investors who are panic? - I do not know. Could it be the Government started to buy by using second part of bailout money set in October 2008 in order to take a control over these companies? If yes, then I would consider that they are smart... But it does not really matter for me as an investor. All I know that such huge volume surge marks the bottom when those who wanted to sell in panic are satisfied and the number of willing to sell is dramatically reduced and we will see the market up in a couple of trading sessions. I’m really scary for those who went short on Friday 20, 2009 and I would not like to be on their place now.

Sunday, February 15, 2009

Technical Analysis

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My last week's worries about high volume surge during the market advance were not underestimated (see my last week "DJI Chart" report) - we had strong decline. In the same report I mentioned that the technical indicators were positive, yet, pointed to oversold indexes. We had only one day of flat market on Monday and on that day by the end of the session MACD, RSI, Stochastics, MVO and Advance/Decline Oscillators become negative on the DJI (Dow Jones Industrials). McClellan Oscillator was negative as well, yet still above zero line. Only SBV remained positive on that day, however even this indicator become strongly negative in the first hour of trading on Tuesday February 11, 2009.

So, were we now? By taking look at the same set of technical indicators I may say that now:
  • SBV is positive to neutral - it started to move up after being at low negative levels which is a positive sign, yet it became flat on Friday.
  • MVO - we had red MVO on February 10-11, 2009 and now MVO is equal zero which tell us that we had panic selling that could push indexes into oversold condition.
  • Advance/Decline Oscillator - still point on the negative sentiment - dominance of declining stocks. However, at the same time it shows that the indexes are oversold.
  • MACD is moving flat and could be considered neutral.
  • RSI is positive to neutral - it started to move up, yet it did not reach 70 line and become flat.
  •  Stochastics is negative - it dropped below 80 after being about that level.
  •  McClellan Oscillator is positive - it moves up and is very close to cross zero line.
As you may see the technical analysis results are a little bit mixed at this time. Some of the indicators are positive, some of them are negative and some are neutral. In summary I may assume based on my technical analysis that the sentiment is still undefined and we may see recovery as well as further decline, however, the indexes (DJI, S&P 500 and Nasdaq 100) are oversold in short-term (on 60-day chart where 1 bar = 1 hour) and because of that I would consider that the odds are on the recovery side.

Sunday, February 8, 2009

DJI Chart

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A week ago in "New Bailout" post on February 1, 2009 I have mentioned that the market is heavily oversold and possible run up. That was exactly what happened past week, however, there is some points that make me cautious. When I do not have certain degree of confidence I prefer to watch. Here they are:

  • I do not like that during the last up move the NASDAQ 100 recovered almost to the January 6, 2009 high (highest level after November 21, 2008 bottom) while the S&P 500 and DJI indexes are still close to the lowest support levels and they are still far from the January 6, 2009 high.
  • I do not like that the last up move we saw this week was supported by very high volume (especially in DJI sector). No doubt that institutional players were in game and I am not sure what they were doing. Volume is always two side transaction and we have volume only when we have buyers who satisfying sellers and I'm not sure on what side institutional traders were: a) they were buying because they know that the recovery will continue or b) they dump before decline.

Because of these two points I think I will wait until I see how market react on this high bullish volume - will this volume be ignored? or will we see decline? Taking look at the technical analysis of the hourly charts (1 bar = 1 hour) I may say that despite the disharmony in the recovery between Nasdaq 100 and DJI with S&P 500, the technical indicators an all these three indexes show basically the same picture and the same sentiment. Furthermore I would refer to DJI chart again, since the volume surges were most expressed on this index.

DJI chart
 Almost all of the technical studies on the DJI chart above still show positive sentiment, yet, at the same time they show that the market is overbought at this stage. Exception is RSI which is still on the up move. MVO is growing up by emphasizing the overbought condition. By ignoring what I say above I may say that this chart is still positive and suggest possibility of the further recovery, yet, with elements of overbought market which may push indexes lower. Based on the past experience I would not expect to see down turn until I see some flat market, MVO decline to zero, McClellan crossing zero line, SBV and Advance/Decline Oscillator decline.

Saturday, February 7, 2009

Bailout Rush

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I do not believe in any bailout. For me recessional is a process of natural selection when: those companies who lie about their stability and profitability have to die because the truth is revealed; those companies that have produced uncompetitive product and oversupplied market with useless stuff have to die because they become too fat and too slow. When you bailout these companies you are breaking the order of natural market flow when economy corrects itself in recession. This is why recession is needed - to kill and destroy the old spoiled corrupted and lazy monsters, so economy may move forward again. If you bail them out they will continue to destroy the economy, still they will die later by bringing more harm than it would be now. If you bail them out new businesses will not be born because old monsters are still alive and they are still hungry.

The purpose of the recession is too clean the economy from parasites. Yes, the current recession is very strong and very scary and this is because the parasites are very big and are in the core of the economy - in the financial system. If you continue to feed them they will not be changed into good bacteria they will grow and they will demand more and more food.

We had several bailouts in January 2008 and it was under the umbrella that it has to be done to save the economy and protect people. Yet, we still had crash in fall 2008. Then another bailout was sold to us that should save us all. Half of this bailout is already spent and we still where we were. Now we are told that we need another huge bailout... I'm just trying to image what would happened if none was bailed out in the first place and those bailout money would be invested directly into building, for instance, of plants for batteries for electric cars (30 of such plants in China and zero in USA) or building a wind, solar and nuclear power plants or in oil drilling... If it would be done a year ago instead of the first bailouts wouldn't it created new jobs and slowed down the recession? But it was not done because the old government was weak and future government (current) had interest in the economy crash and did whatever it took to make the recession as bad as possible - it guaranteed them the victory...

But this is all past. What is now? Why do we need another bailout ("Stimulus Plan") when the second half of the previous bailout ("Rescue Plan") is not spent yet? Why in rush to borrow again? Is it because tomorrow we may discover that we do not need them at all? There is no question that with all the money left from previous "rescue plan" and money from new "Stimulus Plan" the new government will be able to create jobs within the next two years and will look like a heroic government. But what is going to happen in two years when the money is gone? New bailout or new crash, even worthier then the recent? Sooner or later the borrowed money will hunt us down.

On my opinion there should be changes in the regulation of the Wall Street, in the regulation of the financial institution and regulation in the government spending. Until then, pumping money into the economy is just wasteful feeding spoiled monsters...

Sunday, February 1, 2009

New Bailout

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Will the new rescue package save us or this it just another project to be wasted? New President has received first slap in the face when he received numbers from Wall Street about "bonuses". It looks like the Government has power to borrow money from China and print money only. When money are moved to banks they control it and they can do with it whatever they want. I do not think there is any regulation that allows the Government to control how the Government's money are spend and until there no any I do not think the "New Stimulus Package" will work. As soon as the funds from the new rescue plan are moved to banks the banks will control them and no one including President and Government will be able to tell to the banks what to do with this money otherwise they call it "socialism".  Sorry, I'm a pessimist in trusting banks, I'll just hope and pray that new President will have enough courage to fight...

I do not want to go deep into the politics, this is a job of fundamental analysis. My job is technical analysis, to watch charts and to spot possible reversal points. At this point my charts are negative by pointing to a possibility of further slide. However, they point to the oversold market as well, thus recommending to monitor charts closely over the next few sessions because based on how heavy indexes are oversold the reversal could be sharp and very strong.