Are the markets overbought?

Well, 2012 has been great for the bulls so far and it's time to turn to our trusty old McClellan Oscillator to see if the markets are overbought here. Below are the charts of NASDAQ and NYSE McClellan Oscillators with the overbought levels marked on them.

From the above charts, it is clear that the markets have entered, or at least are very close to entering, the overbought region. Another up day and we will be well into overbought territory.

That being said, do remember that an overbought market can very easily become "more overbought" just as an oversold market can very well become "more oversold". Then how does one play overbought markets? Well, here are a few tips on playing overbought markets.

(1) Don't go chasing momentum stocks now. Chances are you will be left holding the bag.

(2) Take partial profits from longs and let the rest run. 

(3) Don't wait to sell at the top. Calling the top is a fool's game.

(4) If you want to go short, start with a small position. This way you can give it room to run instead of being forced to call the exact top. If the market indeed reverses, you will get plenty of chances to add to your positions later.

(5) Most importantly, keep your stops on all short positions no matter how confident you are of a pullback here. Remember, the markets can stay irrational a lot longer than you can stay solvent. 

Take care and good luck!

Relief rally or something more meaningful?

The markets did finally bounce today, from the highly oversold conditions. The bounce indeed was very impressive but the question is whether this is just a relief rally, where we continue going down after a brief respite or something more meaningful that. Here are the levels I will be looking at to get the answer to this questions.

 

The very obvious level to watch out for is MA(50), which the market might tackle as soon as tomorrow. But the line in the sand, at least for me, would be the 1220-1225 zone. Of course, higher highs would be great but a move above the 1220-1225 zone is needed to show that this move actually has some legs.

Take care and good luck!

Are the markets oversold here?

With the market action that we have seen in the past few days, there has been a lot of talk about the markets being oversold. Well, that's not so, at least according to the McClellan Oscillator. And that's especially true in case of the NASDAQ as can be seen in the charts below. While the markets are close to oversold levels, they are not quite there yet.

 

 

Another one or two down days, and THEN the odds will start favoring the bulls. If you are long, what you dont want to see is consolidation at or close to oversold levels (compared to a decent move up). That would just give the bears a chance to regroup and hit back again.

Take care and good luck!

Overbought markets and how to trade them

Its been a great month for the bulls and its now time to turn to McClellan Oscillator to see if the markets are overbought here. While an indicator that calls tops and bottoms perfectly does not exist and will never exist, McClellan Oscillator in my opinion, is fairly decent in determining overbought and oversold conditions. The overbought levels are marked on the Nasdaq and NYSE McClellan Oscillator charts below.

An overbought market can easily become "more overbought" just as an oversold market can easily get "more oversold", but the odds greatly favor a pullback or a period of consolidation here.

How to trade these markets?
(1) Don't go chasing momentum stocks now. Chances are you will be left holding the bag.
(2) Take partial profits from longs and let the rest run.
(3) Don't wait to sell at the top. Calling the top is a fool's game.
(4) If you want to go short, start with a small position. This way you can give it room to run instead of being forced to call the exact top. If the market indeed reverses, you will get plenty of chances to add to your positions later.
(5) Most importantly, keep your stops on all short positions no matter how confident you are of a pullback here. Remember, the markets can stay irrational a lot longer than you can stay solvent. The above assumes that you are rational in the first place :).

Here is a post outlining the important S&P levels for the coming week.

You can follow me on twitter for latest post updates.

Take care and good luck!

The week ahead

Friday was the perfect day of consolidation for the bulls after the huge run-up the day before. The market bounced from close to MA(200), which is the immediate support level with 1300 being the next resistance level.

A few more sessions of consolidation or even a pullback would do the bulls no harm here. Let me rephrase that by saying that a few days of consolidation or a pullback is actually what is required now considering the overbought conditions the market currently finds itself (I will try and do a post on that later in the day). No harm done in either case as long as 1260 holds. So, the following are the important levels for next week:

Resistance: 1300

Support: MA(200), 1260

Take care and good luck!

S&P important levels

Sorry for having disappeared for so long but life has been hectic as usual and add to that, a fair bit of travelling and what you get is a lot more hectic than usual and no time to trade. However, this being a holiday week in India combined with the time change from Nov 6 means I should have a lot more time to trade in the near future (fingers crossed!). And that should also mean a lot more regular blog posts. Well, like I said, I havent got time to trade in the last few weeks, and also havent been following the markets much, so its time to get some homework done before market open on Monday. Let's get started by looking at the important levels at the S&P for the short term.

First thing that stands out, at least to me, is the heavy resistance we can expect at 1260. The erstwhile support level from both March and June has now become an important resistance level and should be a tough nut to crack.

It turns out that 1260 is also an important Fibonnaci level, adding further to its importance. Its amazing how these things play out!

Looking for support levels, Friday was a pretty important day for the markets with the index finally closing above 1230, the first time it has done so since early August. One could expect some support at this level.

Following is a 15 minute chart of the S&P that shows that 1220 is an important support level. So, 1220-1230 would be your support zone.

So, those are the levels to watch out for on S&P for the coming week. Above all, watch out for the news with it being an important week for the Euro. But then, which week isn't?

Take care and good luck!

Resistance levels

I haven't been able to update the blog for quite a while and my apologies to you readers for the same. But a change of jobs during the course of the last couple of weeks accompanied by computer troubles have meant that I haven't had much time for trading lately. I understand that I have missed out on quite a bit of excitement during this time period :-).

Before moving on to the charts, let's get one thing clear. Despite some late relief late in the week, the bears are very much in control. Also, these are still news dominated markets, so be prepared for volatility and position yourself accordingly. 

 

Here are the upcoming resistance levels considering various time frames. 

 

15 minute chart - Resistance at 1188 and 1212.

 

Daily chart - Resistance at 1200.

Weekly chart - Resistance at 1220.

 

I will be back later in the day with both long and short setups to watch out for next week.

Take care and good luck!

Blood on the street

What a day! Just when one thought that the worst was over, on came today.

Following is the weekly chart of S&P 500. In three week's time, we have given away approximately a year's gains.

And finally here is a chart of the Nasdaq McClellan Oscillator showing how oversold the markets are. Its lower than it was anytime in the past three time.

1. Am I looking to go short here?

No, the markets are way too oversold for me to be comfortable holding any short positions here.

2. Am I looking to go long here?

No, the momentum behind this down move has just been too great for me to be comfortable playing any bounces here. Chances are that it will be shortlived.

3. I am just going to stay away from the markets and try not to be a hero here.When will be the right time to step in again?

When the fear is out of the picture. These are markets ruled by fear, not by technicals or fundamentals. And when the technicals dont matter, I pretty much have no edge in trading. And trading without an edge is akin to gambling.

4. How will I know that fear is out of the picture?

When the market stops going down on bad news. In fact, when it starts going up inspite of bad news.

That's it from me. Take care and good luck!

Of broken hard disks and markets

The week ahead

Sorry for the no show last week but things have been pretty hectic at work lately. Before I post any charts, let me just say that we are currently in news dominated markets where news might possibly trump fundamentals or technicals. And always remember to trade the reaction to the news rather than the news itself. Let's now move on to the charts.

Firstly, the markets are in oversold territory. This can seen from the Nasdaq and NYSE McClellan charts posted below. This means that the odds favor a bounce but we will have to see how much that counts for in a news-dominated market. But I would be very careful in starting new short positions or having too much short exposure overnight here.

Moving on to the S&P chart, all eyes will be on MA(200) next week. The market has found support here  five times in the last couple of months. 

But the strong support shown here the last couple of months makes me wonder if this is too obvious a technical level now. Let me explain what I mean by that. To be successful in the markets over a long period of time, you have got to expect the unexpected. The market works on the principle of fooling most of the people most of the time. With MA(200) being such an obvious support level, there will be surely lot of stops put right underneath it. I wouldn't be surprised to see the MA(200) break, all these stops got taken out and the markets to then go right up again.

I wont be posting a watchlist today as I plan to stick to day trades till all the debt news gets out of the way.

Take care and good luck!

P.S.: Here is my analysis of the Indian stock market posted on my Indian stock market blog.

Earnings season strategy

This is from a post that I had written earlier. This is my strategy for each and every earnings season, so obviously it is still holds true.

Do keep in mind that it is the earnings season and the big guns start reporting today onwards with **** reporting after hours. Any surprises and all the technicals get thrown out of the window. I know (and hope) that this is stating the obvious but please do see when a particular stock is reporting before getting into it. Also, do remember that what is important is not the news itself but the reaction to the news. It is very common to see a stock beat the street estimates easily and still fall down hard and similarly, a stock can easily rally on "bad" news.

I personally don't like holding any stock through its earnings. I feel that no matter how much one thinks one knows about a stock, holding a stock through its earnings is basically gambling. A bad reaction and one might not even get a chance to get out with a small loss. If you are great at studying the fundamentals of the company and the particular industry, you will be justified the argue the validity of this point here but again keep in mind, that a stock can fall down hard even on an earnings beat. If you are like me, you will just enjoy the action from the sidelines!

Meanwhile here is a stock that I had posted about twice last week. TZOO was up over 10% yesterday and looks good for more. However, it does report tomorrow and like I have written above holding it through earnings would be pure gambling, no matter how good it looks.

Take care and good luck!

Strategy and Stocks Watchlist

Today was a good example of why one has to be quick while playing these markets. The bulls were well in control for most of the day but ended poorly, to share the honors for the day with the bears. One must remember that just technical analysis is not sufficient to trade these markets. With all these debt problems throughout the world, these are news dominated markets right now, not markets that necessarily follow fundamental or technical analysis. To a large degree, its not only logical analysis that counts right now, but also the emotions and the sentiments. The good news is that while the bulls and the bears wrestle it out, you can make money either on the long side or the short side in these markets (or both), but the only condition is that you have to be quick. Quick in taking losses as well as gains.

Here are few of the stocks that are in my watchlist for tomorrow. Out of the three stocks that I posted yesterday, IMGN and PCYC were up 4.3% and 2.88% respectively. TZOO is still setting up, so it remains in my watchlist.

Take care and good luck!

What is the dollar telling us?

A strong dollar does not bode well for the equity market. Considering this, signs do not look good for the market. Below is a daily chart of the dollar.

An ascending triangle has formed in the last few months and it looks like it will finally be broken today. Expect resistance at the MA(200). This is where the index got rejected in November and January and how the dollar deals with it, will provide a good estimate of the strength in the current move, and consequently, of the weakness in equity markets.

Let's step back a bit. The following is the weekly chart of the dollar.

The dollar is also going to come up against a multi year trendline in the near future. For swing traders, I would recommend keeping a close watch on this trendline and how the dollar deals with it as it could be crucial for the markets in general. Exciting times ahead!

Take care and good luck!

Bulls very much in control

Don't let the action on Friday fool you. The bulls are still very much in control and if anything, the late recovery by the bulls on Friday was very impressive. The market had reached such overbought levels, that it was a given that they would fall sharply on any bad news. Actually let me correct that. The market had reached SUCH overbought levels that a pullback was on the cards even if we got any good news. The bad jobs number was just a convenient excuse for the market to fall. But like I said earlier, the late comeback by the bulls was impressive.

So much for last week. Looking at the week ahead, the markets are still at overbought levels, at least according to the McClellan Oscillator. If you are bullish, and there really is no reason to be in the bearish camp here, what you would ideally like to see here is a low volume pullback or a period of consolidation. The market has two ways to work off overbought conditions, like the one it currently finds itself in, (a) a sharp pullback (b) a period of consolidation. No prizes for guessing what the bulls would prefer! Another big move up right here and the market probably gets rejected at upcoming resistance levels.

And if you are short or are looking to go short, don't try calling the exact top unless you are a day trader. By that I mean, be cautious and don't take large positions all at once. Stick to smaller time frames as the bigger picture is very much in favor of the bulls.

Days like Friday are good in assessing which stocks held up well and are going to probably lead the market higher. I will be back with a watchlist of such stocks later in the day.

Take care and good luck!

Consolidation would be nice

An impressive show by the bulls yesterday ensured that the market finished with gains for four consecutive days. The action yesterday also meant that the market made higher lows for the first time in over a couple of weeks. Interestingly, the S&P finished just short of MA(20) level.

What next? Call me crazy, but I would rather see a day or two of consolidation here rather than another big move up. Its been four consecutive positive days for the bulls and some consolidation right over here, just below the MA(20), would increase the odds of staying over the MA(20) once they break it. Expect the downtrend line marked in the above chart to act as support.

I will be back with few charts for the watchlist.

Take care and good luck!

Why consolidation here is not good for the bulls?

Make no mistake about that - this is certainly not an easy tape to trade. The markets bounced off MA(200) today, but things don't look too encouraging for the bulls. If MA(200) does break, the next support level is the March lows - 1256.

If you are long, you want to see the MA(200) act as support, but you don't want to see consolidation around these levels. Ideally, major moving averages should act as springboard and not as a consolidation zone. Too much time around these levels gives the market time to work itself off from oversold levels and the bears a chance to regroup and make a fresh attack on the indices. 

So, how to play these markets? All things said and done, the momentum lies firmly with the bears. Plus, with Greece weighing on the markets, this also becomes a news dominated market, making it a tough market to trade. If you are not comfortable shorting stocks or do not have time to monitor your positions closely, cash is not a bad option here. Remember, being short term investors, we have the luxury of staying in cash, which buy and hold investors do not have. This seems like a good time to use that option.

Take care and good luck!

Expected bounce but ........

The bounce that I have been talking about did finally happen. From the last blog post, " 1250-1260 is not only a strong area of support but also a well-known area of strong support. Because of that, I would not be surprised to see buyers step in even before the market reaches these levels. Rather, I expect that to happen. " As can be seen from the chart below, the low since this post was 1265.

 

So, definitely a good day for the bulls, but not a game changer as far as the overall picture is concerned. The momentum still remains with the bears. 1295 and the descending trendline still remain the resistance levels to watch out for. In fact, the market got rejected right at these levels, that I had pointed out on Monday, yesterday. I expect this bounce to last for a few days and oversold stocks to do well in the next few days, but caution is still warranted. Take smaller positions or be quick with those profits.

Take care and good luck!

Market close to support zone

The momentum continues to build in favor of the bears here but there is some good news for the bulls. The S&P is very close to entering a major support zone. That coupled with the fact that the indices are deep in oversold levels, and also taking into account the speed and magnitude of the recent decline means that I am expecting a comeback by the bulls next week.

Looking at the chart above, 1250-1260 has been an area of strength for the bulls and I am expecting it to act as strong support even at this time.

Here are some other points to consider:

(1) 1250-1260 is not only a strong area of support but also a well-known area of strong support. Because of that, I would not be surprised to see buyers step in even before the market reaches these levels. Rather, I expect that to happen.

(2) Even if we bounce here, overall advantage remains with the bears here. Take those gains quickly or keep a decent cash position until 1295 gets broken. Before that, I also expect the downtrend line shown in the chart above to act as resistance.

Following is the corresponding NASDAQ chart with important support and resistance levels marked for next week.

Take care and good luck!

Rejected right at resistance

My overall thoughts on the market still remain the same as they were yesterday. Despite today's positive action, the bears remain firmly in control. I just wanted to point out that both the S&P and the Nasdaq got rejected right at important resistance levels today, thereby affirming the dominance of the bears and also making these the important levels to watch out for tomorrow.

Take care and good luck!

Oversold

With yesterday's market action, the market now finds itself in oversold territory according to the McClellan Oscillator. This does not mean that the market HAS to bounce here, just that the odds favor a bounce now.

But here are a couple of questions before you get too excited about the bounce - 

(a) Seeing the momentum of the current down move and the break of key levels, do you think traders will be looking to buy into a rally or sell into it?

(b) If people are looking to sell into the rally or get out of their existing longs, will the rally last for long or even happen?

Take care and good luck!