TODAY'S ACTION

We're in a corrective phase as expected. We formed a doji which is typical and healthy for any normal consolidation. Notice how the market bounced off of major support at 920? So far, the charts say that we go higher. I'm not saying that we're going to go up in a straight and uninterrupted line, but I think we have enough juice for another breakout or two.

I would watch the VIX. We are extremely close to the very important long-term 200-day MA. The VIX is currently sitting at September support when the VIX actually flagged before the major breakout to 48. This suggests that the VIX will likely stay within a tight range between 35-45 for several days.

As for myself, I am up +10.87% for January so far. This is mainly due to massive double-digit gains from spikers/momentum plays. GMO, ZLC were held from Friday. CWST was sold. In addition, LVS, ARTC, FIG, and others were bought in the morning. These kinds of stocks are 1-3 day holds and then you just dump them or go short at the end of their runs. I already wrote a short primer on my Spiker strategy here on October 10th, 2008. It's not complete, but I am working on creating a "cheap tricks" manual.

I've mentioned many times in the past that breadth must improve to support a market's rally. New Highs & New Lows for the NYSE ($NYHL) and the NASDAQ ($NAHL) have been net positive for a few days now. In fact, this is the longest streak for the NYSE since May and the longest for the NASDAQ since August. Today, we made 21 new highs and 8 new lows (a huge improvement from the 22 new highs and 4,320 new lows made on October 10th 2008!) . The Advance-Decline lines ($NYAD, $NAAD) also confirm the rally.

This consolidation area is critical. 920 SPX is obviously THE support level. What we don't want to see are breakdowns from conslidation like we've seen many times in the past (Just look at the trading range we've been in since December 8th. I would use a 920 SPX and 20-day MA combo as guides for any significant upcoming bounces. As long as the SPX stays above 920, the bulls are in full control.

SPX 5-day

SPX 10-day

SPX 40-day

SPX 5-month

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

TODAY'S ACTION

The rally today was nice. It's even better if you add in the past two days. There's a lot of reason to be bullish just by looking at a chart. After spending nearly a month inside a trading range, the SPX finally broke out from 920 resistance and it did so without a problem, even on a low volume day. I would give it a few days for the market to restore "normal" volume levels.

Next week, I would wait for a pullback before getting serious on the longs. Why? Because it's at the pullback where the market tests it's strength. It also gets rid of the weak hands. If the market breaks down, then you have nothing to worry about..you weren't in it. Likewise, if you missed the move the past few days, the market will give a second chance for entry at the pullback.

The targets for the pullback would be at 920, and/or wherever the 20-day MA ends up meeting the market, and finally, at the 50-day MA (if it gets to that point). Did you notice the 20-day/50-day MA crossover? It's lagging confirmation for a short-term bullish move. In addition, the market's neutral range narrowed the bollinger bands that is setting up a squeeze. Watch the upper band expand.

Take a look at the steepness of the 3-day uptrend on the 30-day chart. The purple area shows the likely consolidation area. Many people want to see the market go up, up, and away! However, consolidation marked with down days are necessary and a part of the trending process. The rally continues until the trend changes.

Almost everything did very well today, except for the REITs. If they can't participate on a +3% day in the market, then they have problems (maybe people realize that many REITs will get crushed this year). On an interesting note, retailers did very well today, which is confusing with what I just said about commercial RE. Many retailers must fail before REITs fail because store closures cut into the REITs NOI and the ability for them to fulfill their debt service.

Yesterday, I briefly mentioned 12 indicators, so I'll describe what they are and how to use them below the usual charts. This is a bear market rally so don't expect this uptrend to continue forever. Many indicators say that the market is overbought, but remember that the market can stay overbought or oversold for extended periods of time. Trade with the trend and keep an open mind as we cautiously climb this Wall of Worry.

SPX 30-day

SPX 6-month

REITs stood like like a sore thumb.

12 Common Technical Indicators

1) Relative Strength Index (RSI) - The RSI is a momentum oscillator that shows overbought/oversold conditions. Typically, if a stock falls below 30, it is oversold. If a stock rises above 70, it is overbought. In addition, a stock rising above 30 is bullish and a fall from 70 is bearish.

2) Moving Average Convergence/Divergence (MACD) - The MACD is a centered oscillator that measures the difference between the 12-day and 26-day exponential MA's (EMA). A 9-day EMA is used as a "trigger". The best way to use the MACD is to look for divergences between the indicator and the price. If the market is dropping, but the MACD is rising, there's a high probability that the market will reverse soon.

3) Commodity Channel Index (CCI) - The CCI was created for commodities, but it used for everything now. It is a cyclical indicator. The primary purpose of the CCI, for myself, is to confirm reversals. A move above +100 indicates overbought and a move below -100 indicates oversold. Just like MACD, a divergence can give additional clues to a pending reversal.

4) TRIX - The TRIX is a momentum oscillator that measures the rate-of-change of closing prices of a stock. For longer time periods, if the TRIX moves above o, it confirms a uptrend and a move below 0 confirms a downtrend. TRIX crossovers also give buy/sell signals. If the TRIX crosses over the signal line (the 9-day MA in red), it is a buy. If the signal line crosses over the TRIX, it a sell.

5) Force Index - The Force Index was created by Alexander Elder, the author of Trading for a Living, and it is used to determine if the trend is getting stronger or weaker. It is a price/volume oscillator. Buy signals are generated when the Force Index crosses above 0 and sell signals are generated when it crosses below 0. A sideways movement shows a possible trend change.

6) Slow Stochastics - The Slow STO is a momentum oscillator that indicates overbought and oversold levels. Typically, anything below 20 is oversold and anything over 80 is overbought. I'm not writing out the calculations for the %K (black line) and the %D (red line), but just know that if the %K crosses over the %D, it is bullish and if the %D crosses over the %K, it is bearish.

7) On Balance Volume (OBV) - I've mentioned that volume precedes price action several times. The OBV was created with that in mind. It basically adds volume when the price is up and subtracts volume when the price is down. This creates the line. A OBV line that is heading up means that there is more volume on up days. The opposite is true for down days. With many other indicators, a divergence between price and the OBV may signal a pending reversal.

8) Money Flow Index (MFI) - The MFI is a RSI that is more volume-weighted that shows positive or negative money flow. Just like other indicators, it can measure overbought (80)/oversold(20) levels. If the MFI is trending down, but the price is higher, the stock may reverse. The opposite is also true.

9) Rate-of-Change (ROC) - The ROC is a momentum oscillator that simply measures day-to-day (or period-to-period) change, therefore it is one of the more "choppier" ones. If the ROC moves above 0, it is a buy signal, and if it drops below 0, then it's time to sell. Any divergences between the ROC and price should be paid attention.

10) Williams %R (W%R) - The W%R is similar to the Stochastics and it shows overbought/oversold levels. A reading below -80 is oversold and a reading above -20 is overbought.

11) Accumulation/Distribution (A/D Line) - The A/D line is similar to the MFI and OBV, but the calculations are different (you can look it up yourself). The best use for A/D line is to confirma move or identify a divergence.

12) Average Directional Index (ADX) - The ADX confirms the strength of a trend. The +D1 is the positive directional indicator (green) that measures upside force, the -D1 is the negative directional indicator (red) that measures downside force, and the ADX is the black line. The +D1 and -D1 are self-explanantory and the ADX is most useful when a divergence can be identify over a longer period of time.

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

A LOOK AT THE INDICATORS

I usually don't cover much on technical indicators because I don't need them every day. I like to take a look at them once every 2 weeks or so just to see what all of these indicators are trying to tell me.

There are not perfect and they are not "sure things". The purpose of these indicators is to confirm price/volume action and their significance should not exceed those of the basics (price, volume, candles, moving averages, sup/res, etc.). What I like to find when analyzing indicators are divergences among them. Just as volume sometimes creates a divergence with price, so do technical indicators with the broad market.

There are many indicators, but here are twelve that are commonly used:

1) RSI (Relative Strength Index)
2) MACD (MA Convergence/Divergence)
3) CCI (Commodity Channel Index)
4) TRIX
5) Force Index
6) Slow STO (Slow Stochastics)
7) OBV (On Balance Volume)
8) MFI (Money Flow Index)
9) ROC (Rate of Change)
10) WM%R (Williams %R)
11) A/D Line (Accumulation/Distribution)
12) ADX (Average Directional Index)

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

HAPPY NEW YEAR!!!

Happy New Year!

This year was the year that defined “smart money” and “dumb money”. There was very little “in between”. This year was also a year full of the unexpected. Complete shockers. Who would have known that all of this stuff would happen?

The only way to trade was to expect the worst…even when we didn’t know how bad it could get. I remember pulling all-niters on Sundays in October, just because I knew something would happen! I’m sure many others had sleepless nights.

I am also sure that many people who have their money managed by a mutual fund or a shitty hedge fund may want to re-think where they invest. The biggest investment should be in yourself through education. You are the master of your money. I met my target of reading over 100 books this year. I read 113. What’s your target for 2009?

The fact is, I turned 24 just last month and I made north of 265%, my best year ever. I made a killing in CWST to cap off the year (just ask my students). I have an I.Q. of about 120, so I’m not a genius, I am just an average person. In fact, I failed Calculus I the first time I took it. The point is, anyone with the right mindset can become a successful trader – yes, even in the worst crisis of our generation.

I am glad that I finally stepped up to the plate to create this blog for the many readers who did want to learn about technical analysis, chart reading, and short-term trading. Going into 2009, I will make my best effort in presenting the technical picture of the market on a daily basis. I take pleasure in doing what I do best.

Below are the usual charts but also my predictions for 2009:

SPX 10-day

SPX 40-day

SPX 4-month

VIX 4-month

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The S&P 500 will re-test the 750 lows in the first half of 2009, and we will close below 700 by the end of 2009. This bear market will not end in 2009.

Crude oil will stay below $75/barrel for all of 2009.

Gold will break out above $1100/oz.

The VIX will hit 100 for the first time ever.

Posted unemployment will hit 10.5%. Total Unemployment (U-6) will hit 20%. The Employment Diffusion Index will hit the teens.

Commercial real estate values will drop 30-40%. Land development, office space, warehouses, shopping malls, hotels, and resorts will do the worst. Large multi-family properties will do the “best” because they will house all the folks who will lose their homes.

20% of retailers will file for Chapter 11 bankruptcy.

The bailout money will run out and the Fed/Treasury will request an additional package…and be denied. This debate will drag on for weeks and weeks.

Numerous local municipalities and/or states will go bankrupt. Many states will be unable to pay out full unemployment benefits.

The U.S. will be involved in another war.

A major terrorist attack, economic/financial, and/or political crisis will hit the U.S.

Martial law will be declared and FEMA’s Executive Orders 10990-11921 will be activated by the President. Military units will be deployed on the streets of America. The UN will continue to ship large numbers of military vehicles to the US mostly via Port of Beaumont, TX. There will be a massive build up of military equipment.

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Ok, maybe not the last one, but you get the idea. I don’t see how our bear market (in the worst crisis since the Great Depression) can last for only 2 years. The tech bear lasted for more than 2 years and that didn’t even involve a global credit crisis! Bulls should not get too comfortable in 2009. There will be disappointments.

I think this will once again be a trader’s market, rewarding those that are nimble. Join me in battle next year and let’s slay this motherfuckin’ dragon and make some serious money!

P.S. Have fun tonight and tomorrow and try not to get into a situation where YOU’LL need a bailout!