Friday, June 8, 2007

Advance/Decline Ratio and Opening Range Swing Levels

"Fiscal policy is the other ladle in the macroeconomic punch bowl, and consistency in use of the two ladles is powerful, and inconsistency can be injurious."

Robert Rubin

Today and probably this weekend will be a time many of the carnival barkers on television will bring out ever cliche to describe the events and sentiment over the past few days. Prices can not go up every day, and when they do it can come with a price to pay when they don't. The chart above is of the S&P 500. It includes the advance decline moving average(red line in the top pane), and the target levels based off of the opening range from the beginning of this calendar year. The next support line is 1476.76, and should that not hold, 1453.09 is next. As volume increased yesterday, there should not be a rush to buy. It is worth it to wait for a short term base to form before looking for an entry. The sell off in the end of February and into March is market in the green box. As prices started to stabilize, there was a clear divergence in the advance/decline moving average. Prices made a lower low while the moving average showed that the new low prices didn't have the same selling momentum as the sell off before. This showed that it was time prices to reverse. It will take time for this setup to happen again, but it is worth the wait. Don't try to catch a falling knife--cliche #1.

This is the corresponding chart of the Nasdaq Composite Index. It had the same divergence set up in March. Its rally was not as strong as the Energy/Commodity heavy S&P 500, but it still put in a nice short term bottom.

Interest rates are something to keep on the radar screen. In this part of June the holders of futures contracts are closing positions, expecting to take delivery, or rolling over into the September futures contract. In past years this has caused extreme moves. Not so long ago there was the opposite move when one of the largest firms decided to hold their contracts and take delivery in a market that was overly short with not enough physical bonds to deliver. This caused rates to go down as this roll over occurred. In this cycle holders of long futures expiring in June were forced to sell and roll over into September to maintain their long positions. This is not the reason rates go higher, but it just adds to the velocity of the move. So June, September,December,and March are months to watch.

Below is a chart showing the 30yr and 5yr interest rates. This straight up move as of late should slow, but this won't mean that all is clear and rates are going lower. Don't get fooled by the same talking heads on television that said the Fed was going to stop raising rates at 4.25%. Inflation is global, no matter how manipulated our CPI number is.


For those traders not accustomed to shorting stocks or shorting futures to take advantage of down moves, it can be a great time to do research and develop ideas for when the market bottom comes. Charts are one aspect of picking levels, but digging around in fundamentals can lead to discovery of entire sectors that could prove profitable on the next move up.

Paradysz Matera
Value Line -- 71 years of Proven Performance

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