Wednesday, May 20, 2009

Putting Today in Context

Click on Chart to Enlarge

I don't have a lot of time now, and there is probably not a lot more to be said that hasn't been said in recent posts, so this will be brief.

First off I suggested a trade on QID earlier today late in the trading day. The posted entry was 36.50. If anyone didn't have time to get in, I typically just suggest getting in on a market order the next day. Another option is to set a limit order of today's closing price to avoid getting a "bad" price if the markets gap down tomorrow. However, that means it is possible that you don't get in the trade.

While I have already given the rationale for this trade in recent posts I wanted to highlight a few things. Looking at the chart we see that volume has been downtrending this whole rally and yesterday put in a multi month low in volume. This is occurring right as the SPY is approaching the 200 day MA. From basically everything I've gathered about this type of action, it has bearish implications.

Also, today gapped up but then reversed to close below yesterday's open-close range. This creates what is called a bearish engulfing candlestick pattern. These are not extraordinarily reliable, but considering overbought conditions, increased volume today, etc, and resistance of the recent highs, this should give some more importance to the pattern.

What we have yet to see on this rally is a solid candlestick reversal that had immediate confirmation the next day. A sizeable down day tomorrow would help to strengthen the longer term bearish implications of the pattern. Also, last week's low's should be important. If they are broken before new highs occur, then that signals weakness. If they are broken by Friday this week, that will be a big score for the bears in retracing a bullish move in equal or less time than it took to form. Also, notice the blue moving average line on the chart which is a 21 day exponential. It has held every pullback on this rally. So a close below that line will indicate a weakening trend.

For QID, my plan is to wait for the next oversold short-term signal and then make an evaluation of whether to hold or exit there. The OEX put/call ratio spiked again today, indicating that smart option traders are protecting themselves right now. Additionally, the difference between the OEX put/call ratio and the equity put/call ratio has been progressively widening in recent weeks. The smart money OEX ratio has been increasing as those traders see risk ahead, while the Equity ratio has been falling indicating those traders see blue skies. The spread between these ratios has been pretty effective in helping spot major turns in the past.

I will leave it at that other than saying that if this trade does not catch the top of this rally, I would feel very confident that the next one at new highs will. We'll see.


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