Let’s Review

I thought I’d walk through the NASDAQ chart for the last month or so to show you how I came up with my game plan. This chart will look a bit different than the charts I usually post because I’m showing Guppy’s Multiple Moving Averages instead of just showing the 10, 50 and 200-day moving averages. (That link gives a good, quick overview of MMAs.) This is actually the set of indicators I use by default when looking through charts every night in TC2000. The chart consists of MMAs (short term group is green, long term group is orange), Bollinger Bands (blue) with a 20-day moving average as the middle band (also blue), and stochastic in the lower panel, and of course Japanese Candlestick charts. The visual nature of these indicators, as opposed to looking for some specific indicator value, allows me to make very quick appraisals of a chart. (My actual charts also have volume and On Balance Volume on them.) So here’s the chart, followed by what I was thinking along the way (click for larger image):

Please keep in mind that no technical analysis (TA) is 100%. It’s all about trying to find an edge to put the odds in your favor. Remember, it’s really all about expectancy and money management. The TA just gives you an excuse (or you could say ‘the confidence’) to initiate (and exit) trades. It also allows traders the necessary flexibility to change their minds at the drop of a hat.

1. I fell for the okey doke on April 23^rd as that hanging man (clue #1, hanging men are bearish) was made. I was flipping from bullish to bearish in the preceding days, but didn’t do anything b/c the market was oversold. It appeared that we were out of the woods on the 23^rd as the index climbed back over all of the moving averages. I was looking for a retest of the April highs at that point. But the next session’s bearish engulfing pattern put a serious damper that idea, and gave us a downtrend line that I’m watching now for a retest. The next day the market just went nowhere, which prompted my ‘wake me when we move post‘ in the pre-market on the 28th. Well the market wasted no time in getting moving as it sold off hard that day and the following 2 days.


2. On the 30^th, during the pre-market of day 3 of the 3 day sell-off, I noted that my MMAs were all converged. That is a sign of agreement on price (equilibrium) between the long term and short term investors. And according to Guppy’s MMA methodology, such equilibrium should shortly lead to disequilibrium (a sharp price change). In retrospect I should have been paying more attention to the MMAs back at the hanging man and bearish engulfing candles. I could have had a nice short entry there. I felt it was too late to start shorting here though because we had just tested the lower Bollinger Band, stochastic was oversold, the short term group of MMAs was pretty extended, and we’d already been down 4 days in a row.


3. After the 3 day mini-rally I wrote why I thought that move was ‘a weak, uninspiring bounce’, which is exactly what it turned out to be. The long upper wicks of those 3 candles, which is a sign of selling pressure, combined with declining volume each of those days were red flags. Again, in retrospect, this would have been a good juncture to get short. A move under the May 5^th spinning top confirmed that bearish pattern. But there was a big jobs report due in a couple of days that kept me on the sidelines. And I was still wary of how extended the short term MMAs were.


4. On Sunday May 9th, before the next day’s hammer at the lower Bollinger Band, I noted how oversold the market was and said that I was looking for a snap-back rally. Then I noted all the hammers (my favorite candlestick pattern) made on the 10^th. I also pointed out how I don’t just buy off of hammers alone — I still want a stock that’s in an uptrend. I found a few and made some buys the next day or so as those hammers were confirmed by the stocks trading above the highs of the hammers. Two days later I pointed out still more bullish candlesticks. As you can tell by the choppiness over the next few days I was a little early and I got stopped out of some of those longs. But I was pleasantly surprised that I didn’t get stopped out of all of them. That made me believe that there was more strength in the market than was being shown by the indices.

   After the 12^th’s super long lower wick and tweezers bottom I was pretty convinced that we had made a bottom. I also joked about how everybody and their mother was calling a bottom after the intraday recovery on the 12th. I never like to take action when things are so obvious to the crowd. But I didn’t want to over-think things either. I had a pretty decent list of long candidates and I did a good amount of buying on the morning of the 13th as those stocks traded above the previous day’s highs. This buying also turned out to be a bit premature but again, because I bought stocks that were previously showing good relative strength I only got stopped out of a couple of them.



5. The gap down on the 17th was big fun! I really got caught here after holding a bunch of longs over the weekend only to be greeted by a huge gap down on Monday morning. As you all know, I’m always suspicious of gaps in the direction of the prevailing trend after a long move. That led me to not put in my stops that morning (don’t try this at home!). I wanted to wait an hour or so to see if the previous two May lows would hold. They did in fact hold, and again, to my pleasant surprise my stocks didn’t get hit that badly. If you’ve read John Bollinger’s book you’ll notice that the 17th’s hammer-like candle didn’t touch the lower Bollinger Band as the previous two May lows did. (And for that matter note how the candles at the end of April blasted right through the lower Bollinger Bands.) That’s a sign of the bears losing power. It’s also a sign of a potential W bottom with respect to the bands.

   The next day, the 18^th we had a gap up which made an island reversal and an abandoned baby bottom. At this point I was feeling a lot better about being net long. It seemed like the bears were starting to cover their positions. And I was still expecting that snap-back rally which would bring the short term group of MMAs back up towards the long term group. We got another gap up on the 19^th, which led me to make my ‘this market sucks’ post, even though the gap was in my favor. (Did I mention that I hate gaps?) The reason I was so disgusted by that gap was because I had a feeling it would do nothing but bring out sellers. Those sellers would either be taking profits from great long entries two days before, be getting out at break-even from longs initiated the week before, or just be plain old bears getting short(er). For whichever reason the sellers did indeed come out. Luckily for me the tide had turned as the market continued to chop its way higher over the next few days. The choppiness stopped me out of yet more longs along the way, but I still had some that were working nicely.



6. On the morning of the 25^th I pointed out the resistance levels just above on the NASDAQ. I wasn’t all that thrilled with the 24^th’s doji right at the middle Bollinger Band but I was just gonna keep my stops where they were and hope for the best. I certainly felt better about being long after the strong move higher that day.


7. But now the technical picture has me in more of a profit taking mode. The NASDAQ has now risen above the long term group of MMAs, which could be looked at as a bullish sign. But the MMAs themselves raise some red flags. First, the long term group is inverted, meaning the longer averages are above the shorter averages. So that group is telling me that the longer term trend is still down. What’s worse is that they’re pretty well spaced out, which indicates a strong trend. That tells me that the odds are that the long term group will repel the short term group. Other bearish signs are the two doji patterns made over the last two days, the overbought stochastic and the tags of the upper Bollinger Band.

So that brings us to the hard right edge of the chart, the place where we ask ‘now what?’ It’s certainly possible for the market to stay overbought a bit longer. I think that it’s possible for the NASDAQ to continue walking up its upper Bollinger Band and touch the downtrend line that’s about 20 points higher. My plan is to tighten my stops on my longs and just wait and see. I have nothing but potential shorts (most of which made hanging men just under their middle Bollinger Band) on my list for Tuesday, so if any of those trigger I’ll jump on them. I doubt that we’ll retest the May lows but I do think some consolidation is in store before the next major move.

P.S. In looking back at point 1 on this chart, I’m kicking myself for not getting short at that time. (Hindsight is a mofo.) But part of why I started this weblog was to allow me to go back and see what I was thinking on a certain date. That peak occurred in the midst of one of the heaviest weeks of earnings reports. There are two weeks in every quarter in which I purposely plan to do little to no trading because of the extremely high number of earnings reports. That peak was during one of those weeks. Those weeks are usually really choppy and it’s impossible to get an edge on stocks that are reporting earnings. Often times one company’s report will cause a big reaction in a whole sector. I learned long ago to just take a vacation during those weeks. So even though I was watching the market then I can blame my missing that downdraft on my trading vacation. But it still bothers me that I missed that move. I’ll have to remember to just trade the QQQ during those times if I see what looks like a good set-up.