Wednesday, May 2, 2007

Advance/Decline Ratios and Intra Day Futures

This chart of the S&P 500 shows that the index is at an important juncture. There was a test of the recent trend line, and it held yesterday. The top pane in the chart is showing the advance/decline moving average is not confirming the last part of this rally. Fewer stocks are carrying the load. This is not always a bad thing, if some of the other stocks start to play catch up, but with earnings partly out of the way, what the next catalyst will be to carry things higher is unknown. There are some great individual stock charts, but the market as a whole is approaching short term over bought. Below is an intra day chart of the S&P 500 Index futures from Monday and Tuesday.

This chart shows the sell off Monday afternoon and the trading day yesterday. The market spent the morning below the opening range, but in the afternoon the test of the morning lows couldn't even come close, and short covering started and took the market back to high of the opening range. Today is an important day to watch the opening range. A review of this concept can be seen clicking here

The market is currently at about the 50% retracement of the sell off started Monday, so today should be a key day and could provide market direction and carry things into the weekend.

The NDX futures in this chart show a similar pattern to the S&P 500. A key difference was that the NDX make a lower low in the afternoon before the short covering/buying started the move back to the top of the opening range. Some days it is important to watch these two side by side if day trading, look for divergence and some great trades can jump off the screen.

This day chart of the Nasdaq Composite shows the test of the trend line just like the S&P 500. Today should be an important day to watch the advance/decline ratio and how the market acts going into the afternoon with about 90 minutes left in the day. The weekly chart below shows what could be setting up as an expanding triangle. This pattern can be very profitable to trade, but often catches most investors off guard. The NDX 100 is also approaching a longer term upper channel line.

It is time to at the very least to consider playing some defense. This can be done in many ways without abandoning long positions, but it does depend on how long a portfolio is and what weighting and sectors the stocks are in. A put spread on the QQQQ going out a few months or doing a pairs/spread trade with some related stocks might be in order. Consult your broker and remember--he will trade your money until it is all gone!

PS. No one has yet to correctly name the starting 11 in Red Right-20 Bingo Cross from the last post from Monday.

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