I choose to start with very fundamental analysis of price levels AND add time to the mix. Volume is important for me only when it is significantly less than or greater than the average OR when volume diverges from price movement. For example, if I see S&P futures price is rising into a flat bollinger band on decreasing volume - I'll sell contracts looking for a reversal or at least a retracement to the normal line. But that is pretty tactical.
I do like to supplement my fundamental analysis of price trends with key technical studies. During a topping process - I seek confirmation of my thesis through key divergences. One that I like to rely on is the Advance/Decline ratio. Look it up to get more details on this indicator and how it can be used to guage market strength. In a nutshell, the ratio is calculated by dividing the number of shares advanced by the number of shares declined in a day. Plotting the ration across time below price action gives you a better appreciation for the strength of a market. Though it is an oscillator primarily used as a "signal" - it can also be analyzed with trends and levels - just like price action. Therefor, if we see a divergence - meaning a decrease in the ratio while the price is rising - we should be concerned. A decreasing ratio during increasing price suggests that the price is rising based on the action of fewer shares than the broad market. Alone this may not be important, analyzed within the context of the broader market developments it may be very significant.
Take a look at what I see on the daily chart:
Why is the ratio decreasing over this last rally?
Though a negative divergence between market breadth and price action is not a requirement for a major reversal, it has been the most successful method during the past 50 years for warning of a market top.
Something to think about...
5 comments:
Einhorn: http://www.marketfolly.com/2009/08/david-einhorns-greenlight-capital-loads.html
The notional value of his puts is 25% of the stocks in his portfolio, and he does have some long positions.
Thanks KPH. I read the letter a couple of weeks ago - just can't find a reference to the expiry dates for his S&P puts. I am sure they are spread out.
well, it's looking like we will rally a bit next week. Logically, I do think that we have topped out. The current China bubble is bursting, financials have already turned in the US, etc. The fed is making some noise about raising rates. I guess we will have to wait and see.
The markets are following friday's action in the US and the G20 pledge to support the madness. Not sure that we'll see a new top on these fumes. I expect continued volatility during coming sessions. I'm analyzing some option spreads now to best capitalize on the short term price action.
It is times like this that you have to ask a few important questions. Why are the markets where they are now? What is necessary to keep them there? What are the possible catalysts for change?
I agree. The overriding theme will be deleveraging for the next 5-7 years. I do not know if the US is going to do what it needs to do to come out of this successfully, but it is going to be very damn tricky. First step should be balancing the deficit or getting close to it, but that is probably out the window for the near term or medium term.
I plan to add to my position at 1021+, 1025+, but will take short term swing profits because I am an idiot. I am expecting that we topped out 2 weeks ago and that we will have a sideways market with a down bias for the next x years. I guess we will see.
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