The Trader's Notes for Tuesday, November 23, 1999
Market internals continue to deteriorate with NYSE 52-week new lows exceed that of new highs by 4 to 1. The 10-day moving average of the net differential turned over last week and continues to move down.
Looking at the CBOE market volatility index, the VIX, a sell signal was produced using a setup named the Connors VIX Reversal II. It calls for a 5 day RSI of the VIX to be plotted. When the 5-day RSI gets to 30 or below, the market is overbought. When an RSI reading below 30 is followed by an uptick in RSI, tradehard.com Larry Connors, the author of Connors on Advanced Trading Strategies, sells the market that day on the close. The goal is to exit 5 to 8 trading days later with a trailing stop loss in place. We also have a Connors VIX Reversal III sell setup that requires the high of the VIX to be below the 10-day exponential average together with a close of the VIX ten percent below it's 10-day MA. It got as close as we could get last Friday. In addition, the VIX reached the lower 21-period Bollinger Band on Friday, indicating a near term sentiment high, based on the research of consensus-inc.com Bernard Schaeffer.
With so many signals in place, and Treasury bonds slipping under the 20-day EMA, we would expect traders to be very aggressive in protecting profits. In addition, the S&P 500, along with the Dow Industrials are testing highs on the weekly chart. Last week's low must hold on any pullback this week to avoid producing a short-term sell signal. A break of last week's lows will trigger selling.
Last week, we wrote about the long-term intermarket chart and as of yesterday, the Dow Jones Utilities Index closed at a 20-week low near the neckline of a potential head and shoulders pattern. Traditionally, weakness in this index foreshadows higher rates and lower equity prices. We will be watching this situation closely, particularly as the U.S. dollar reaches resistance with commodities prices and interest rates staying firm.
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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