Category Archives: Technical Analysis

dealing with high daily volatility

February 4, 2016 By in Technical Analysis, technical bounce, Uncategorized Tags: , , , 1 Comment

To state the obvious, we’re in a period of high daily volatility in the trading of stocks around the world.  What I find particularly striking is that we’ve had two days recently–January 20th and yesterday–where stocks in the US made dramatic intraday shifts in direction.  In both cases, heavy early selling that pushed indices down sharply was followed by a late reversal that wiped out most, or all, of the previous losses.  In my experience, this rarely happens once–to say nothing of twice, and within a couple of weeks of each other.

I’ve got little clue as to why the going is so choppy.  I imagine that algorithmic trading has something to do with it.  Sovereign wealth fund selling may be playing a role.  Investment banks reining in proprietary trading, thereby removing liquidity from the market, could be a factor, too.  I don’t believe that either oil or China are much more than straws the financial media are clutching to.

Still, I find it very strange.  The closest analog I can think of is the period following the collapse of the internet bubble in early 2000.  But even that wasn’t that much like the present.

My thoughts:

  1. The intraday reversals may be significant technical events.  Sometimes, they signal market bottoms.  In both recent cases, the market did bounce up off important support lines.  Time will tell, especially since markets have a habit of returning to prior lows after a month or so before resuming a new direction.
  2. Blackrock, the largest investment manager in the US, seems to be calling into question whether daily volatility really has any significance for ordinary investors.  Presumably, we all have equity investment horizons of three to five years.  So what do daily ups and downs matter? This is just common sense, in my view, and harks back to traditional Wall Street beliefs.  It is, however, heresy to devotees of the (wacky) academic theory of finance taught to in MBA schools.
  3. As a practical matter, you and I will never be able to outtrade high speed computers, or even low speed ones–or professional human traders, for that matter.  We don’t have–or want–the mindset.  We have lives; we aren’t interested in watching stock price feeds all day.  Our main advantage over traders is that we are willing and able to take a longer investment horizon.  We try to be aware of the shape of the forest, not the height and width of each individual tree.
  4. We can look for anomolies, though.  Yesterday is a case in point.  We can look for stocks that didn’t follow the herd.  Issues that went down less than the market in the panicky morning selling and rose more the the average during the afternoon rebound are probably worth looking at more closely as buy candidates.  The reverse is also true.  Stocks we own that sold off more heavily than the average in the morning and rebounded less have got to be reexamined for whether we still want to hold them.
  5. It’s conceivable that high daily volatility is the new normal.  Who knows.  But if so, we should consider what else we can to to turn this to our advantage.  More limit orders when we trade?  More aggressive limits?

 

three S&P 500 levels to watch

January 15, 2016 By in Technical Analysis, Uncategorized Tags: , , 1 Comment

I’ve written before that when all else fails, when there seems to be no rhyme or reason to the daily movement in stock prices, even the most fundamentals-oriented portfolio manager closes his door and starts to look at charts.

At one time, technical analysis was a respectable occupation–no door-closing needed.  But that was in the first quarter of the last century, before the Federal government began to force publicly traded companies to present meaningful financial statements.  It’s also before Washington clamped down on manipulative behavior by large investing syndicates and on trading on inside information, types of activity that studies of trading volume and daily price movements were designed to detect.

However, when stock prices are being driven by greed, or in the present case, by fear, it may make sense, even in today’s data-filled world, to take a look at index points where investors have been willing to buy and sell in the recent past.

 

Three S&P 500 levels stand out to me.  They are:

–1867, which is the intraday market low of August 24, 2015

–1871, which is the intraday low the market returned to on September 28, before starting to rise again, and

–1904, which represents a 10% decline from the latest intraday high of the S&P 500 on last November 3 (the close that day was 2109–a 10% decline from the close would be 1898).

 

The S&P 500 fell sharply to 1878 in early trading yesterday, before reversing itself and closing at 1921.

The market closed at 1890, two days ago, which is more than 10% below both the high and the close of last November 3rd.

 

In technical terms, then, we’re at an important juncture.  We’ve fallen by 10% from the highs and are flirting with an important low around 1870.  As I’m writing this, futures are indicating an open for the S&P around 1880.  This in itself could be a source of traders’ anxiety.

If the market can stabilize at current levels, it’s possible that fear will gradually ebb away.  If not, we’ve got to go back to the drawing board and figure out where next level of potential market support may be.  1815?

 

 

what comes after a double bottom?

October 8, 2015 By in double bottom, major changes in market direction, market bottoms, Technical Analysis, Trading Tags: , , , , , , Leave a comment

A double bottom marks a significant reversal in market direction.   There are two possibilities:

–after a bear market, meaning a nine-month to year+-long market decline caused by a recession.  (This is not the situation we’re in now.)  The market typically bottoms six months or so in advance of what government statistics will eventually say was the low point for the economy.  It does so partly on valuation, partly because the first anecdotal signs that the worst is over are beginning to be seen.

The market then begins its typical sawtooth pattern of upward movement, forming what technicians call a channel.  This is an upward sloping corridor whose ceiling is formed by progressive market highs and whose floor is similarly formed by progressive lows.  Initially, the slope can be quite steep.  Day to day, the market makes progress by bouncing along between floor and ceiling.

–after a correction, meaning a decline of, say, 5% to 10% in market value that occurs over several weeks and which, in effect, adjust market values back from stretched to the upside to levels where potential buyers see the potential for reasonable gains over a twelve month period.  (This is our current situation, in my view.)

Generally speaking, the same upward channel forms.  But the slope may be very shallow.  In fact, until new, positive, economic information emerges, there may not be much of a slope at all, so that stocks move more sideways than up.  Nevertheless, in the case that the channel is almost completely horizontal, periodic successful testing of the bottom established at the end of the correction reinforces the idea that downside risk is limited.

double bottom

October 7, 2015 By in Basic Concepts, Technical Analysis Tags: , , , , Leave a comment

As regular readers may have discerned, I have a complicated view of the value of technical analysis, which is the attempt to derive useful investment information from studying the volume and price trends of individual securities and/or entire markets.

In the US of the 1920s, technical analysis was king.  That’s because there were no real standards for reporting of financial results by companies (some of which switched accounting standards the way most people do shirts to show themselves to the best advantage) at that time.  Nor were there legal bars to prevent syndicates of wealthy investors from creating artificial enthusiasm by manipulating individual names up and down in bucket shop fashion.  Basically, technical analysis was all there was.  In my view, subsequent legislation mandating minimum auditing and disclosure standards, and outlawing syndicate activity, have rendered much technical work obsolete.

By the way, I also find much of technical analysis to be useless/incomprehensible.  Take head-and-shoulders movements as an example   …or the Dow Theory.  But my main objection remains that technical analysis is a century-old tool that has been superceded by fundamental analysis of audited and SEC reported financial results.  It’s like riding a bicycle in a NASCAR race.

Nevertheless, even fundamental analysts fall back on technicals in times of panic, which is, after all, completely about sentiment with no room in fear-gripped minds for fundamentals.  And there are a few indicators that I think are very helpful in gauging sentiment.

One of these is a double (sometimes triple) bottom.

what a double bottom is

The idea is to figure out the index level where selling that is driving down a market/stock either exhausts itself or meets potentially strong resistance from buyers.

A bottom occurs when downward movement stops and reverses itself.  Often this happens on higher than normal volume.  Sometimes the final down period is marked by a steeper than normal decline.  The level of the low may also be closely related to a prior significant low.  At times, however, none of these confirming signals are present.  The important thing is that the marke/stock stops falling and begins rising again.

Four to six weeks later–not any sooner, but occasionally even later than six weeks–the market/stock stops rising and declines again to the vicinity of the prior low.  If the market/stock then reverses course and begins rising a second time, it is said to have tested and confirmed the prior low.  In most cases, this double bottom signals the end to the down phase.

Sometimes, the market repeats this process and forms a triple bottom.

 

From a psychological point of view, the fact that the market/stock falls to a significant low but repeatedly fails to break through that low creates and strengthens the belief that this is a point where significant resistance to further decline will occur.  The more the low is successfully tested, the stronger this conviction grows.

relevance for now?

The S&P 500 made a low of 1867 on August 25th.  This is very close to the closing low of 1862 (intraday:  1820) on October 15, 2014–and another low (1816) on April 11, 2014.  The index reversed course on all these occasions, this time reaching 2020 on September 17th.  The S&P then declined to 1882 on September 28th.  The market then reversed course again and has been rising since.

So far this looks like a classic double bottom–the first low, the four-week interval, the confirmation of the first low, all linked to prior significant lows.  We’ll only know for sure as we see trading unfold over the next few weeks.

In the present case, the formation of a firm bottom for the market would also be evidence in favor of the idea that investors are willing to separate clearly the (weak) commodities-related sectors from the (strong) rest of the market and are not prone to let the former infect the latter.

 

 

NASDAQ at an all-time high …significance?

April 24, 2015 By in stock market, Technical Analysis Tags: , , , , Leave a comment

The NASDAQ Composite index closed yesterday at a level of 5056.06.  That’s an all-time high, surpassing the previous peak of 5048.62 achieved on March 10, 2000.  NASDAQ is the last of the three major US indices to close above the highs made during the last gasps of the internet bubble of 1999-2000.   A purist might say that the all-time intraday high of 5132 and change–also made on March 10, 2000–has not yet been broken through.  Although I’m somewhat of a stickler about these things, I think the closing figure is much more important in this case.  So I buy the idea that we’re at a new high, even though on an intraday basis we’re fifty-some points short.

Does this achievement have any significance?

In terms of fundamentals, no.

In terms of market psychology, yes, in three ways:

–it finally closes the book on the Internet Bubble, allowing technically minded investors to concentrate their attention on the future, rather than retaining this one tiny cautionary reminder of an ugly period in the past

–an old high acts as a psychological ceiling, particularly for chart-oriented investors.  The more time an individual stock or an index spends just below that level, trying to break through but having no success, the stronger and more impenetrable the ceiling becomes (in the NASDAQ case, we’ve been hovering below the old high for about two months).  Once a breakthrough occurs, and provided the stock/index can stay above the old high, the ceiling reverses its role to become a floor that lends support.  In addition, once the old high is crossed, there are no further barriers to advance for chartists to worry about–no more it-can’t-go-higher-than-this levels, just blue sky

–with 2000 out of the way, I think the relevant chart period to consider is from the highs in late 2007 until now.  Over this time frame, NASDAQ isn’t a laggard.  Quite the opposite.   It’s up by 80% from the old highs vs. +35% for the S&P 500.  NASDAQ is the healthy one, not the S&P.

No, the fundamentals haven’t changed.  And no, I’m not going to skew my portfolio further toward NASDAQ names.  Still, it wouldn’t be surprising to see the OTC index show relative strength over the next few months–provided we can stay above 5048–purely because technically driven buyers will become more favorably disposed toward it.