It takes buying to move stocks up, but they can fall of their own weight. GE lost more than 2/3 of its value in as many months as it took years to rise. In October 2008 the new low of MACD-Histogram identified the point of the maximum power of bears. In area B the stock rallied into its value zone, between the two moving averages, and MACD rose above zero, ‘breaking the back of the bear.’ In 2009 GE broke support and fell to a new bear market low – but take a look at MACD-Histogram. This indicator is only slightly below zero, much more shallow than it was in October. The moment it ticks up, turning the Impulse system blue, it will complete a bullish divergence, flashing a powerful buy signal.I use an indicator used MACD XOver, included in all Elder-disks, to identify the level at which that change of color would occur. It tells me that GE must close above $8.20 this week for the signal to occur.
The purpose of this post is to open up a discussion about where we are in the market cycle.
* What are your arguments for being bullish or bearish?
* How will you recognize the bottom?
* Which stocks ddo you suggest putting on the shopping list?
* Which stocks ddo you suggest putting on the shopping list?
I look forward to a discussion that benefots us all. Contrary opinions and arguments are welcome - as long as they are presented in a civil and collegial fashion.
Alex
Alex,
ReplyDeleteThank you very much for initiating a blog on this topic. To my mind, one of the most difficult long-term trading tasks in 2009 will be to recognize the bottom in time. This blog can help us to accomplish this task. I hope many Spikers and SpikeTrade Members will participate in this discussion.
Q: WHAT ARE YOUR ARGUMENTS FOR BEING BULLISH OR BEARISH?
A: Not only the weekly chart needs to meet the criteria of a bottom (divergences, retested bottoms that hold, etc.), but also the monthly chart needs to show signs of a bottom. My argument for being bearish on the primary trend: the monthly S&P500 chart is bearish. (Please see my yesterday’s blog below http://spiketradeblog.blogspot.com/2009/02/bearish-monthly-s-by-rodryk-s.html#links).
Q: HOW WILL YOU RECOGNIZE THE BOTTOM?
A: The weekly and monthly chart need to show at least some similarities to the 2002/03 bottom simultaneously. Analyses regarding the weekly charts, like yours (http://www.spiketrade.com/members/spikespeak/?id=182)
or Grant’s (http://spiketradeblog.blogspot.com/search/label/2002) are paramount in this process.
Q: WHICH STOCKS DO YOU SUGGEST PUTTING ON THE SHOPPING LIST?
A: In anticipation of the market bottom to happen “at some time” in 2009 , four weeks ago I rearranged my watchlist. It now includes almost only stocks of the NASDAQ100 which are a member of a fundamentally praticularly strong sector and which are fundamentally particularly strong.
Why NASDAQ100? Because I noticed that it behaves much bullisher than other indexes. For instance, compared to the S&P500, its RS started increasing in Jan2009 and is going through the roof right now.
Why do I want stocks from particularly fundamentally strong sectors? Because I read and I believe that a stock’s price movement is determined by 50% by the market’s movement and 30% by the sector’s movement. Only 20% are accounted to the individual stock. And I believe that in the long run, fundamentals do count.
Why do I want stocks which are fundamentally strong? Because, once the bottom becomes history, these stocks are ready to begin a long-term uptrend. - It’s like picking players for a world soccer/football/basketball/baseball team: I would choose the best teams and recruit the best players from those teams to set up a “world team”. Is it a perfect prodecure? No, it isn’t. But it is a pragmatic one that certainly will get 80% of the best players in only 20% of the time that I would need to screen all teams in the world.
To be more precise, the NASDAQ100 stocks had to meet the following criteria four weeks ago: Investors’s Business Daily (IBD) “stock’s fundamental rating” equal/higher than 85% and “group’s fundamental rating” equal/higher than 85%. Some interesting examples in my watchlist are: ADBE, ADSK, FMCN, HOLX, ISRG and JNPR. All these examples had also an EPS rating equal/above 85% and a SMR rating of “A” (SMR stands for sales growth, profit margins and return on equity).
Rodryk
Alex & Rodryk,
ReplyDeleteAll right, now we get down to naming names. I like it. While I think we go down further before we bottom, I'll share some ideas on my watch list.
I'm interested in 3 types of stocks: 1) Those now trading above their 200 DEMA. They are the leaders in this funky market; give them a little bull move and they'll be rockets. 2) Stocks like CAT, GE, CNH (my fav) and ASH that are forming massive bullish divergences in their weekly MACD-H. And, 3) stocks from companies that build stuff--basic materials, engineering; and companies involved with growing crops and raising critters--fertilizers, ADM, etc., and commodities in particular.
The first because the way out of this economic mess will be on the back of major public works projects (not the financial institutions, they're finished as economic engines). For the first time in decades, fixing pot holes will be more important economically than buying designer jeans.
The second because most of the world's population is still undeveloped, but wanting to develop. The first thing undeveloped folks need is animal protein; but highly nutritious cereal protein will work, so demand for fertilizers and related stuff will be serious. I'm not a real fan of Jim Rogers, but I think he's right when he says that the next fortunes will be made in commodities and related companies.
I qualify long term bullish chart as where major indexs are above their 200 dma and those dmas are rising. On weeklies the prices are above their 10 and 20 week emas and both emas are rising and 10ema is above 20 ema. Of course that signifies a multi year bull market but it misses quite an intial move which can be traded not invested.
ReplyDeleteAlso leadership need to emerge and usually it should not be the leaders which lead us last time, so far no sign of leadership except few spread out stocks here and there. I think its really hard to identify the bottom, bottom will be identified only after the fact so trading at bottom and not investing is a good idea.
Alex, Kerry, Rodryk, Grant, Sid...et al...
ReplyDeleteI was wondering what the next step in my trading education would be. Now I know! I'll get to work on my comments. Thanks for being out there!
Clark
dear all,
ReplyDeleteI did my homework by scanning to whole broad market index, identified the bottoming process is still on going. It seems some stock such as GE, DIS, CAT, FDX, NKE are tracing false break with signing bullish divergences. the bottom will be completed if the weekly impulse turn blue (MACD H tick up)and confirming by daily chart.
Rudy
Rodryk,
ReplyDeleteIs it REALLY necessary to exist a bullish divergence on the monthly (or weekly) charts in order to have a bottom? You are all looking at the previous bottom in 2003, but... there was no monthly bullish divergence in 1974 for example. Or in 1987.
Valeriu,
ReplyDeleteYour question is very good, thanks. – Comparing the current situation to any previous experience, such as the 2002/03 bottom, is a dangerous exercise. Every moment is unique and therefore not 100% comparable to previous moments. And THIS market bottom is a historic one. Therefore: no, of course it is not REALLY necessary to see a bullish divergence on the monthly chart. For instance, a V-shaped bottom on the monthly chart is an alternative to a long and painful reversal process.
But as this bear market is extreme, I believe that MANY factors have to come together to make buyers become dominant over the panicking sellers. Buyers’ confidence is shattered, therefore, I do not believe that the bottom will occur while on the monthly chart EMAs are declining, the gradient of the MACD lines is highly negative and the MACD histogram is marking a new low. All the mentioned characteristics are the ingredients of a bear market. I believe that the monthly chart needs to show at least SOME sort of a reversal.
Rodryk
Rodryk & Valeriu,
ReplyDeleteI think that the necessary to look at bull div on monthly or weekly, it's depends on your time horison and what target you want to hunt, a Big Elephant or a Fat Rabbit. If you are just short term swing trader, it's not necessary to wait for completed bull div on monthly chart. it just need to make strategic decision on weekly chart. The more timeframes you look at it, the more confuse you are.
Rudy
Rudy,
ReplyDeleteI agree with you that for trading purposes the time horizon is key, that too many timeframes can be confusing and that for swing trading and shorter holding periods the monthly chart is irrelevant. If, however, the question is (and this is the way I understand Alex' set of questions) when this bear market finds finally an end and a "bottom bottom bottom" then I believe that this will not occur only on the weekly chart but both on the weekly AND the monthly and w/o "cross currents" between the two charts. Let's see...
Rodryk
Thanks for your insightful comments and perspectives everyone. It is interesting how the "3 types of stocks" that Grant identifies rise to the top when using a scan that I have relied on over the years which looks for stocks that meet these criteria :
ReplyDelete1. the highest EPS (5yr) consistency.
2. Price/sales < 1.5
3. >150mil. market cap.
4. Best 1 yr price performance.
This comes from O'Shaughnessy's extensive study on "What works on Wall Street." It finds a group stocks that are debt free, growing and somewhat undiscovered but with a winning record. Tomorrow's blue chips if you will. From this group then I look for weekly bullish divergences of stocks that also fit the criteria that Grant identified.
Hi Alex and all-
ReplyDeleteI've been thinking about this statement, "It takes buying to move stocks up, but they can fall of their own weight," as well as the nature of a classic bullish divergence.
Is it too simplistic to define the A, B, C parts like this:
A = Smart longs jumping out(selling) and smart shorts jumping in(shorting).
B = Dumb longs jumping in(buying) and smart shorts jumping out (covering).
C = All longs - new and old...but dumb, jumping out and dumb (latest) shorts getting trapped and eventually covering.
This then leaves the stock ready to rise from pure new and smart buyers.
So it seems we're near the last stage while at the same time so far away due buyers being so gun shy in terms of confidence and the dumb (latest shorts) thinking they're invincible.
Please correct me if I'm wrong with this reasoning as to why bullish divergences are such powerful buy signals.
Thanks,
Steve M.
Just want to point out, the general market is bearish and should be taken into consideration. Stock price is usually 75% company, 25% general market condition.
ReplyDeleteIn GE's case, market perception on GE capital is what's killing GE's stock price. 13 day force index still look bearish. EMAs still trending down. There is a saying from early 1900s, "No stock is too low to sell. Too high to buy." Also noticed there is a huge spike in buying GE puts strike 2.5 June 09 that costs $1.5 mil. Worth checking out before proceeding.
To all....
ReplyDeleteWhat a great blog for a newbie like myself to be involved with and honored to participate with such a group of professionals. I feel like I just walked through the knowledge halls of greatness in market speak and I've been at it since September of 08 with my first Traders Camp in Jan 09 w/Alex. I've been a student of every industry and for today that started at 7am this morning. I can't speak to any of you at your level but I can comment given my 62 years on this earth and a business owner. I think when it comes to recognizing the bottom without looking at a chart which will show the results of a bottom and not the foretelling of one we need to look outside our trade and look at things like; The slowing of indicators that caused this slide such as, bank defaults and subsequent government support. As the government's involvement becomes less and less we need to watch for the other indicators to slow also such as; Housing defaults and credit markets opening up and mortgage loans moving again, employment numbers slowing and maybe even beginning to reverse. We need to look at when the banks begin to stabliize and even paying down or back their TARP loans. And finally, less government to get the economy going and reduced government assistance in spending our children's future from Obama (One Big A** Mistake America) OOPS, I let out my political affaliation but this will be a sign of recovery. I tend to think a select few bank stock will be leaders on the road to recovery like GS & MS and others and certainly brick & motar for roads and bridges and electrical for our new US grid system and finally one from my sector, telecommunications since Obama is donating 6 Billion to help jum start that industry with 3 Billion in grants and not loans. I tend to agree with Grant's approach. I also agree with Valeriu's thoughts but I think we need to pay as much attention to the differences between now and the last time the market tanked because as she points out they are not the same and just maybe what is different will become a key indicator. Now I've been told my many very experienced brokers that there is absolutely no correlation between a companies stock price and the company and I think that, for the most part, as been quite evident as we have seen some companies torn to rags with Billions in the bank which makes them a great buy. So, I appreciate being here and I will continue to be a student. Thanks for all of the input, it has been great and I think all of the stocks listed here today are very well worth being on a watch list.
Later,
Gordy
"Preparing for a Bullish Market"...I think it should read "Preparing for a Bear Market Rally"...
ReplyDeleteI have been waiting for a multimonth bear market rally since January...Maybe Next Month!
I have been a super bear since November! DOW 4000! (ISH) Who knows if my crystal ball is working or not...All I know is we should have some wild bear market rallies on the way there!
What to look for? Any great company that is drastically oversold! Even the garbage is likely to rally GM & F & C to name a few...We are getting closer and closer everyday to this event getting started...Who knows it may be short lived as well! Good Luck!
I wanted to post a chart but this is the best I can do...
http://i254.photobucket.com/albums/hh81/etfremd/INDU3_9_09.jpg
Okay Here Goes the Pop! Now how long will it last? The oversold junk is up 12.5% for GM, 6.32% for F, and 38.10% for C...Amazing how it works- I follow what I learned in one of the Traders Camps from David Weiss...the bars or candles in my case are getting smaller and compressed signalling exhaustion in that direction- get ready for and explosion in the other direction...sure enough...
ReplyDeleteDear All:
ReplyDeleteEric's onset sensing of -- as he says -- present bear rally appears to be good.
What are your next steps/moves to look/wait for in order to make the appropriate decissions for taking advantage of the current market developments? I ask generally in view of Alex' initial questions, moreover, specifically in view of our own shopping list of stocks.
Thank you for this great discussion,
Andreas R.
It sure looks as though a sea change of psychology towards the market is underway. It has been interesting watching the VIX diminish in strength as this "big boat" is starting to turn around. Up to this point it's been a "traders" market but now that type of "chop" is lessening as traders are more willing to bid up and hold longer. I love the VIX...it's a good indicator along with the NH/NL to guide direcitonal trades, boost confidence in the move. These market patterns that Alex has so elequently taught have helped me see the psychology behind the madness, mania and the ashes. In his recent book he talks about the concept of "enough". I've thought a lot about that lately and how it applies to the market cycles: At the top of the market move, investors psychology was saying, "it's not enough." That quickly turned to, "it's enough", then we dropped to , "ENOUGH ALREADY!" Soon we'll cycle back up to, "Is it enough?" and then back to top and the cycle will complete. Crazy animals - we are.
ReplyDeleteSteve M