madtrader]
Thu Mar 7, 8:54am PST RSI
MOM
I guess there isn't much going on until Big Al gets done with his talk on the Hill. So let's spend some time going over why I disagree with Rumordude here. I know RSI is one of the most popular oscillators out there, and that is also a problem. The classic interpretation with Wilder's RSI is using 14 day (or bar) moving average, then draw 70 and 30 lines as overbought and oversold levels. When stocks gets above 70, it makes a lot of traders nervous, some even want to short because of it. Or when it drops below 30, it brings out the dip buyers. That only works if we are in a sideways market, or trendless market. When a stock is trending, regardless the direction there is a major flaw, or worse pitfall with this approach. Oscillators, by nature are designed to work in a trendless market, unless MACD, etc. Let's use BA for example. Back in middle of August of 2001, when RSI dropped below 30, the stock was still in it's 50s. Assuming one is a dip buyer, one would bid based on the fact RSI is below 30 (assuming no other factors are considered), a month later the stock gets cut in half while the RSI reading stays below 30. On the flipside, BA got to be "overbought" and has it's RSI reading above 70 in early February, if one sells the stock, or worse yet short the stock based on the fact RSI is over 70, the trade would be done when the stock is around 40. A month later RSI stays above 70 the entire month and the stock is almost 10 points higher. With this example, it is very clear to see how dangerous it can be by simply using RSI without factor in whether the stock is trending or not. However, there is a another approach that can take advantage of RSI positive attributes and allow one to better time the entry and exit points. If your charting software has the ability to apply moving averages on top of indicator this might work for you. I like to couple RSI along with Momentum indicator, some application might now have the MOM indicator and instead have what's called price rate of change. They are more or less the same, one measures in points while the other measure in percentages, but the key is the zero line. Anyhow, using 14 bar RSI, then apply 10 bar simple moving average to it, using MOM with a measurement of 18 bar, then apply 10 bar moving averages as well. The trading rule is when both indicator cross above their 10 bar moving averages go long, sell when both cross lower the same moving average. It one doesn't confirm the other, don't trade. I hope this little trick helps. none
[RumorDude]
Thu Mar 7, 8:05am PST $VIX.X
Warnings
Overbought/RSI
Just adding to madtraders comments (even though he doesn't like my VIX comments though they'd been dead on for over a month, save this week...) VIX is bumping up slightly on this drop, but is still at the same point the past three large market drops were, so I'm a bit cautious. We're definitely heading into warning season - we've already seen some. And this isn't the first time I've heard "exepectations are so low...". Lastly, many issues are jhust plain overbought (RSI method). BA from yesterday was a classic case, but there are so many it's tough to decide. Just look for ones that are overbought with a resistance line of sorts above (200 day, 50 day, horizontal...)
However, given all my thoughts here, I do think that the DJI has begun a new uptrend, the SPX has at least ended it's downtrend, and the NDX has at least ended it's downtrend. The SPX and NDX do not look like they are trending up or down here, so there could be some consolidation until earnings actually come out. I'm keeping most trading quantities pretty small here.
none
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[madtrader]
Thu Mar 7, 7:43am PST Market
Here is my concern. I am noticing SPX forming a negative divergence on intraday RSI (30 minute chart). DJI and NDX is heading that way as well. The only thing that hasn't rolled over yet is the price momentum. When they do, it will also be the negative divergence variety. So, not a good sign for short term traders. It is understandable. Before the rally in the past few days, I was expecting QQQ to spend more time between 38% and 62% retracement levels (the retracement of the correction in new year thus far). So the up move and the speed surprised me despite the fact I thought the strength of the DJI could lift the rest of the market. So a pull back here would certainly be healthy. BTW, I am also quite a bit disturbed by the situation in middle East. I don't think the market has factor that in just yet, and when it does, it might not behave well. none.
[madtrader]
Thu Mar 7, 7:24am PST $DJI
$COMPX
Hummm. Looks like they are going to pin them right below the big resistance levels. I didn't like the big gap up at the open. It suckers people in and leave them with a bad taste in their mouth. DJI had a tough time cracking 10600 for the past week, now it's COMPX's turn to try 1900. I don't think it is going to be easy. The market is getting a bit extended here, so we could be heading for a bit of a pull back. So I am trimming half of my longs from the past few days, taking gains, however small they may be off as well and wait for a clearer picture later. sold 1/2 of my long positions |
