Monday, February 23, 2009

Several Indicators Suggest Some Short-Term Gains are Ahead

Click on Chart to Enlarge

There are a lot of things I could look at for today's post, but since I'm getting a late start at this post and the conclusion wouldn't change by adding more analysis, I thought I'd just show some unique indicators that I made that I have never seen anyone else use. I value independent thought in market analysis. The tried and true indicators will be great guides, but I think there is some value in looking at a market from at least a slightly different perspective than most everybody else. It helps to avoid "group think" to some extent maybe.

The chart above is a chart of a 21 day running cumulative gap %. So the blue line is the sum of all the gap ups and gap downs for about the last month of trading. This chart is used as a contrary indicator. If there has been a large percentage of gapping down over the last month, that would indicate a bottom may be near. In the chart above, the current reading as of last Friday was just over -8%. That is in the range of past extremes. In fact, the -8% mark has been a kind of magic number as every time it has been reached since the beginning of this bear market, the next day has been positive (typically substantially positive) every time. That would suggest today should be a positive today, with likelihood of at least a bit more short-term gains ahead.

Click on Chart to Enlarge

This chart is the sum of the volume of SDS, QID, and DXD which are the 2X inverse index ETF's for the S&P, Nasdaq, and Dow respectively. I created this indicator last July and have found it to be useful in the same way as following put/call ratios. In fact, the reason I made the indicator was because during the decline of June and July 08, there was very little increase in put/call ratios, yet it was obvious that the market was bottoming, and these inverse ETFs were showing the highest volume in their history. This indicated that investors were using these funds as hedges (and speculative vehicles) in similar manner to put options.

The current readings are on par with past bottoms, though the Oct/Nov bottoms last year showed substantial further increases in volume. I view the current market situation as similar to last September. This indicator is reaching the same levels as mid September last year before a sharp 2 day rally followed by the "crash" into October.

In the interest of time, that is all for today's post. The conclusion from many indicators would suggest a short (couple days to 2 weeks) market rally starting today. After that I think a more vertical decline will ensue.

For trading purposes just maintain the limit order to buy BGZ at 67.50 until further instructions are given.


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