The Trend Continues

In April as we bounced off support at 1540 I wrote a post called Technical Analysis Doesn’t Have to be Difficult,  I identified the uptrend and showed possible levels of support. Today I wanted to provide an update, however not much needs to be said. The Relative Strength Index has continued to stay elevated above 40 and price found support. Yep, it’s that simple.

I’ll continue to post charts that look below the surface of the major indices and see if things begin to breakdown that could threaten the current trend. But at the end of the day we are still in an uptrend.

SPX

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Equities May Recover Based on Other Ways to View Momentum

Based on a short-term view, things appear quite extended to the downside in the equity market. I tweeted yesterday that I’d be surprised if we didn’t get some kind of bounce following where we closed on Friday. From what I’m seeing after yesterday’s price action, I think it’s very possible price advances from here. A lot of traders will be setting their scopes on the May high if we begin to catch some bids, personally I don’t know nor do I care if we get there. Patience is a virtue.

In Constance Brown’s book, Technical Analysis for the Trading Professional, she discusses different ways we can view the Relative Strength Index. Two of the methods Brown mentions are what I’m going to look at today.

In the chart below I’ve put Bollinger Bands on top of the 14-period Relative Strength Index. As you can see, when RSI breaks out from the bands, momentum appears extended – without taking into consideration the nominal value of the indicator. We can also apply trend line analysis to momentum. For example, RSI is currently sitting above a rising trend line from the November lows. Based on both of these methods of looking at the RSI indicator, the bias appears to be to the upside.

So while most of the time we view momentum, specifically the Relative Strength Index, based on divergences and where the indicator is in relation to being overbought or oversold, there are other ways we can view the data.

SPXHowever, we can still observe that the RSI is above 50 – staying in the bullish range as it finds the previously mentioned trend line support. The S&P 500 ($SPX) is also at support as we connect the November, December, and intraday low in April. The slope of this trend is higher than desired, but if this period of weakness does in fact turn into just healthy consolidation, then the bulls may be able to lick their wounds and keep marching. Time will tell.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Fearful Traders Send Put Buying to Lofty Levels

Just three days of weakness with Friday being one of the lowest volume trading days of the year and traders are still shaking in their custom-made boots. Over the last few days we’ve seen a pick up in put buying as fear pours into the market.

Below is a chart of the S&P 500 ($SPX) and the three breakdowns of the put/call ratio. First we have index options, then equity options, and all options. Index put/call and all options put/call are both at extended levels as a surge in buying of puts has pushed the ratios off-balance. This type of data can help give us an idea of market sentiment. As more puts are purchased it typically signals more fear entering the market – sometimes too much fear.

put callBased on the strength of equity futures this morning, it looks like we are in for a pop – although still plenty of trading to be done. Last week I discussed whether the bout of weakness we were experiencing was a sign of a top or just the markets taking a breather. I put my ballot in the latter, guessing that we would see some continued strength as bulls buy the dip, and that appears to be taking place this morning.

Market participants appear jittery, fearful to have equity exposure but still nervous of missing out on any rally attempts. It’s important to stay focused and not get lost in the minutia. Create a plan and follow it and there’s a good chance you live to fight another day.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.