Volatility

In my previous post on August 30, 2009 ("Swing in Trading")  I have talked a lot about swing at the market open on August 28, 2009 by encouraging everybody to take a look at history to see what usually happens after such spikes in price during a side-way trading. I think, now, those who did not have chance to take a look at history understand what message I wanted to deliver. The massage was that this is important having access to historical charts. Ability to see the past gives you a tool to compare present price movement to the past, find similar patterns and act accordingly. I think the correction down we saw at the first half of this week (after my post) is the best witness of my words.

From my communications with other traders I know that many of them ignore analyzing history. The most popular way of trading is to take the most popular technical studies, apply the most popular setting and use the most popular trading strategies to generate signals. No offence, but personally I call it "gambling". With the same success you may go to casino.

The last person I communicated called himself an "experienced trader" and he was upset that a technical indicator does not work as it is told in the book… Again, no offence, but my answer is bs. This is great that people read books, go to the universities and receive education. However, real life, real job and real trading differ a little bit from what you read in a book and study in the university. Books and university gives you general knowledge and basic tools. However in real life, on real job in real trading you have to adjust what you learned, improve it and learn how to use it on practice. If you do not do it then you always going to be upset that a technical indicator does not work as it is told in the book and blame everything around in bad trading signals.

Most technical indicators were introduced 20-30 years ago, when nobody had access to intraday data and intraday charts. Most of the mentioned in the books setting for technical studies are for daily data and long-term trading. It is not a good idea to use the same indicators setting in intraday trading. It simply does not always work. When you look at 10-year chart you may ignore the market volatility because in 10-year frame you see market decline, market crash, recovery, up-trend, etc. Basically, you see different markets with different volatility in one time-frame. When you dig into intraday charts you cannot ignore volatility. On intraday levels, price trend acts differently in down-trend (high volatility), during the crashes (extremely high volatility), recoveries (middle volatility) and up-trends (low volatility). Respectfully, on intraday level a technical indicator setting should be adjusted in accordance to the market condition.

The simplest way of adjusting a technical indicator to the current market is

1. Find in the history periods with similar to the current market volatility and similar longer-term trend.

2. Find out what indicator setting would work best for you in those periods in history.

3. Try to apply the same indicator setting in current market.

In my understanding, the history is the strongest weapon in the arsenal of a trader and the most important component in technical analysis.

I think, I went out of my weekly posts topic. Coming back to it - see below the S&P 500 chart with the sentiment on technical studies I track. By the end of the week all technical indicators are bullish. The Nasdaq 100 and DJI technical analysis results look the same which is a good sign. There is still a room to the upper sensitive level.

The S&P 500 Chart with elements of technical analysis.

Long-Term Analysis

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

http://www.marketvolume.com/sbv/trading_longterm.asp




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.

S&P 500 Chart

Let's put aside automaker's business and take a look at technical analysis to see what indicators tell us. Overall, the hourly charts (1 bar = 1 hour) are similar on all major indexes (NASDAQ 100, S&P 500 and Dow Jones Industrial) and majority of the indicators are pointing to the dominance of the Bullish sentiment. The question is, for how long? Until the November 28, 2009 high is hit?


There is no doubt that the market has set new support level on November 21, 2009 (see my "DJI Analysis" post) and it looks like November 28, 2009 high is another sensitive point that should be watch closely. If the indexes break this high and move higher, there is a possibility that we will not be back down soon. Yet, if this is not the end of recession and the market meant to be even lower, most likely we will see bounce from this top with further attempt to retest the November 21 support.

So far the indicators are Bullish, however the recent recovery has pushed the stock market into the short-term oversold condition. The market is still very volatile and what seems today Bullish may turn into strong Bearish tomorrow. That is why I still consider monitoring charts during the trading hours as very important part of trading. This is not a time when you can come to the chart once a day after the market closes or once a week. I do not believe in the mid-term trading now either, you may trade short-time or for long-term investment you may use simple strategy "Buy every time you see big volume surges during the decline".