Tuesday, July 24, 2007

Erasing Friday's Sell-off or More to Come?

"Be Organized. It is critical that you make the best possible use of the available time and resources. Being organized is the single best way to avoid wasting either."

Bill Walsh - Finding The Winning Edge

This is a basic chart of the S&P 500 showing the advance/decline moving average in the top pane. This average shows that not every stock is participating in this latest leg up. It is important to watch how today reacts when testing some key areas in relation to Friday's sell off. Below is an intra-day chart showing the sell off Friday and the attempted recovery Monday.

A key reaction level to watch is 1550, it is the mid-point of the down move from Friday. To make any attempt at recovering from the negative momentum from this move, prices are going to need to get above this area and establish that they can hold, before an attempt will be made at new highs.

A couple charts to watch are the Broker-Dealer Index and the Dow Jones Transportation Index. The transports are holding strong, but a couple stems are showing on candles from the last few days. This in the past has acted as a decent caution sign.

The Broker-Dealer Index is significantly weaker than the transports. This is due to the concern over their exposure to the sub-prime mortgage fiasco and the fact that this problem is effecting the financing of lucrative deals for these brokers. In the past the market as a whole follows the health of these stocks. While the sub-prime issue is a domestic concern, these companies are still growing and doing significant business on a global scale. How bad things can get for these companies is yet to be seen, but use charts of Goldman Sachs and Morgan Stanley to get a gauge on what the best are doing.

Below is a chart of the Nasdaq Composite Index. It shows the expanding wedge that the current prices had escaped from but then retraced back into. This could prove to be a "throw-over" and eventually lead to prices retracing back down to the lower trend-line. It is hard to say at this juncture that this is the case, but more selling followed by an attempt to rally back to this upper line could prove to be a decent short entry spot.

The bottom pane shows a custom indicator that takes into account the daily pivot and volume. Divergences and zero line crosses are the two triggers used to set up trades. This indicator is similar to a type of money flow, but with a twist. This indicator will be discussed in later posts with examples of when it can be helpful.

No comments: