THE TRADER'S NOTES for Tuesday, October 26, 1999
Yesterday's Observations: The most interesting thing seen today on TV was the palpable anxiety associated with Treasury Bonds analysis made by TV commentators. Why they suddenly picked a reversal (finally!) day to fret over the state of interest rates was amusing. Perhaps a bottom is in the making after such a long and torturous erosion. Significant resistance remains just above 112^16 overhead.
The more intriguing possibility is the potential head and shoulders bottom seen on the 65-minute chart of the S&P 500. If the SPX can hold 1290 on a pull back to the 20-period EMA in this timeframe and rally from there, it will confirm the pattern.
The intraday pattern on the S&P is now very important to the fate of the market, as the bounce from the October lows seen on the daily chart has reached resistance at the 20-day EMA. Today formed an inside day on several key stock indices. This indicates hesitation. With the 50-day MA and the downtrend lines overhead, this is the moment of truth. The 10-day MA of Net Differential of NYSE New Highs/New Lows is still going down with 44 new 52-week highs vs. 285 new 52-week lows, a sign of continuing internal weakness.
Today's Theme: Remains vulnerable. That's how we can describe this make or break week for the market. With both the S&P and the Dow Industrials approaching resistance on the upside, and the Nasdaq 100 and CBOE Internet index in a test of top (or trading range) in the works, buyers need to step up to the plate in a big way to move the market to the upside. Any hesitation will bring sellers back.
The Trader's Notes prepares the trader for the day ahead, providing observations on market sentiment, internals, support/resistance levels and key pivot points in the major market indices using the daily chart. Use of moving averages and the Average Directional Index (ADX) indicator helps to determine whether the market is trending up/down or chopping sideways. Using Japanese candlestick charting techniques, observation of market action around support and resistance assists in the analysis of supply and demand based on fundamental principles of classical technical analysis. The results set up "if-then" scenarios used by the trader during market hours.
Technical analysis is not used as a tool to "predict" the future or to pick tops and bottoms. It is used to detect areas of trend change and emerging trends. In a trading range, traders generally look to buy at the low end of the range and to sell at the high end of the range ? or stay out all together. In a trending market, traders generally look to enter the market on every retracement until it enters a trading range and ends on a test. The goal is to buy every dip in an uptrend and sell every rally in a downtrend. The trend is your friend until the end when it bends!
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