Dear Friend,
I have been trading for about 11 years. I remember when I first started I went on an information gathering campaign so that I may discover whether or not technical analysis really works. I remember having some confusion about how to draw a basic trendline. Do you draw it over the highs of prices or the lows? I also remember going back and forth (waffling, if you will) about whether or not the MACD is a legitimate indicator, and whether or not it truly works. I eventually came to the conclusion that it does work, sometimes. But in order for it to be effective, it must be combined with other indicators and other analysis.
By the way, that photo you see perched up there on the right hand corner of this editorial is not of me. It is of none other than Richard D. Wyckoff. Wyckoff came up with a form of market analysis known as the Wyckoff Method. You probably have not heard of it unless you are a seasoned trader. It is in my opinion one of the best, if not the best way to look at the market for beginners and experts alike. Wyckoff teaches a method that lets you get a good appreciation and understanding of how to truly watch markets. It is a system and a way to frame your analysis of every market move based on supply and demand. I put the photo up there because part of my analysis today takes a principle he relied on.
Anyway, I went off topic there a bit. I will discuss the S&P500 and the Nikkei in a second, but I wrote the two preceding paragraphs to point out simply that technical analysis does work, and that it is much to your advantage to use it and to continue to learn to use it as best you can. It definitely puts the odds in your favor and helps take the emotion out of trading.
The question really is though, how complex does market analysis really need to be? In my opinion it is always better to keep the analysis more simple than complex. In a typical day, look at all the analysis that is going on over the world about the markets and individual stocks. A lot of the commentary is of fundamental nature. Millions of analysts write their research reports and make their predictions, and millions more try to figure out where the S&P 500 is going through their economic analysis. So many millions and millions of people, making so many predictions and analysis all fixated on every tick mark of the S&P500.
But in the final analysis, how are you going to make your decisions about what the market will do next? Which report will you base your decision on? A fundamental one or a technical one? From bloomberg or CNBC? From your sister or your brother? or perhaps by you yourself? But how good are you at understanding market timing and analysis?
So many questions, and so little time… The point I am trying to make here is that market analysis does not need to be extremely complex. All you need to do is learn to watch the market and make a judgment of what it will do next, based on what it is telling you it wants to do. At this very moment there are thousands if not millions of analysts on TV and internet message boards and basically everywhere making judgements about what the market will do next. Is it in a bear or bull, what will it do next… ?
And here I sit in this quiet little room with nothing but a quiet little price chart of the S&P500, that has the price bars and the volume on it. My ears are deaf to all those screams from the trading floor, all those emotionally tainted comments on network business TV and all those comments from friends and family members about what the market will do next.
In an interview about Jesse Livermoore, I remember the author saying that Livermoore had his own quiet trading room with his assistants and he did not permit them to talk at all throughout the trading day. This was in order to avoid breaking his concentration. So it seems he was really separated from ‘outside market influences’. I suspect this is one of the traits required for long term success in trading matters. Perhaps it is also a necessity to know what you are doing :razz:, when it comes to trading and the market. And my God… there are so many things that are to be known to survive in this business…
On that note, I will procrastinate no longer and jump right in to a brief analysis of the S&P500 (my take, out of millions of others).
And so below we have a price chart of the S&P500 plotted against the NYSE volume. The chart is a daily price chart.
Remember what I said about simplicity? Well, the thing that should instantly jump out at you from looking at this chart is what is known as a classic Wyckoff Jump Over the Creek with volume, and then subsequent classic retest of the creek level.
The CREEK and ICE are labeled on the chart. Wyckoff referred to price resistance as the ‘creek’ level and price support as the ‘ice’ level. Those two levels on the chart identify a trading range or cause building. Two possible things can happen from this trading range, either a breakout or a breakdown. The S&P has chosen to break out from it obviously as seen in the chart…
But, is it a valid breakout?
To answer that question requires that you look at volume, in this case the daily NYSE Volume plotted against the S&P daily chart. That breakout price bar in the beginning of November 2004 was on 1.782 billion shares. If you compare this volume against all other price swings going back to early 2004 you will be able to verify that the breakout was valid. It was a confirmed breakout in terms of volume and price spread (wide price spread).
The next thing the S&P did was trend above the creek (now converted into support or ICE since it successfully broke through it) on some follow through price action. But then, what did it do after that? It did a retest of the ICE level at about 1165. This retest is classic wyckoff and is one of the lowest risk entry points available in any market, stock or other index. But before you clap your hands, realize that the retest must be analyzed volume-wise with respect to the previous price swing highs that made up the creek level…
In late January 2005, a retest was attempted and it was done with maximum volume of 1.610 billion shares. That was about 10% less, relative to the breakout price bar, and thus, in my analysis I conclude that this was a successful retest, and opens up the potential for the S&P to resume its uptrend and eventually attempt to take out the 1215 late December 2004 swing high.
That retesting action happens with pretty high probability. In my experience you can expect such retests to occur 9 out of 10 times. It is the normal action of the market.
So what is my take? Well based on all the information I have available to me today, I believe the S&P will power higher, resuming its uptrend and have a good shot at taking out the 1215 December 2004 swing highs.
Now on to the next chart. It is of the Japanese Nikkei.
I previously created a mini video report on this index which also has IShare tracking shares (symbol EWJ). In that report I stated that I believe the Nikkei is at a significant bottom formation and is likely set up to make a sustained breakout move above its reverse head and shoulders neckline of 12,000.
I still believe that is the case.
Here is my latest chart:
Note the green colored arrow points to what is known as a double inside day (quarterly price bar is colored in blue). Many times, these double inside days preceed big price moves in either the up or down direction.
Note that again I have drawn the neckline of the reverse head and shoulders.
I believe that an explosive breakout still awaits the Japanese Nikkei index and that we are soon approaching that point. A decisive move above 11,600 would be early indication, that the boat has been set in motion. In the little chart inset, note that the index has formed somewhat of a messy downward slanting flag pattern, a bullish pattern. It is now perched right up on the edge of the downtrendline that makes up the flag. The flag is a bit messy, but nevertheless seems valid. Let me put it this way, I would rather see a messy down slanted flag then an upslanting wedge pattern.
I am going to stick my neck out here and say again that I think the Nikkei will be a headliner soon, perhaps before the end of the first quarter of this year. This could be a huge, dare I say it, longer term buy opportunity… that will only be truly recognized years later.
And finally, I would probably be remiss without a brief mention of google. Clearly, they are the 12 cylinder engine of the internet.. I use their search engine all the time and I love it. I also use their new email service ‘gmail‘, and I love that even more. It is in fact the best email application (web based) that I have ever used. And I get a whole gigabyte of storage! wow. That is real value being offered for free. I can see them dominating the web based email market within a year or two. Right at this moment you can be sure that yahoo and microsoft are scrambling, to redesign their web based email networks. Email is such a powerful application and will probably do wonders for google’s bottom line as we head deep into 2005. Intriguingly, google still officially has their gmail email service in beta, offering current users the ability to send ‘gmail invites’ to others.. perhaps they will leave it in beta for quite some time? This gives gmail a higher perceived value and maybe even will grow the user base faster than if they had done a regular release of the service. What I love about google is that they get back to basics. Within the email application there are no banner ads, no loud flashing icons, in fact there are almost no images at all. The only thing that occasionally shows up is their google adwords text advertisements and the are damn useful too! What a concept.. useful advertising.. I was writing an email to some family members about empanadas, a south americna specialty food, and sure enough there was a relevant ad for some companies selling this rare food item… that is genious in my book, and I clicked on the ad too! Adding .05 pennies to google’s earnings release… 😛 . But the bottom line is they design web pages that are clean and pleasing to look at. They design them for readers, and for those that seek information. Hmmm, kind of what I am doing here at Trading Top 100 Forum… 🙂
Anyway, the google chart shows indeed that the breakout GOOG did over its CREEK is valid based on volume. However, it remains to be seen whether or not this price bar will be an upthrust. Upthrusts do not necessarily mean bearish ending price action. When they occur, they do show that short sellers are blasted out of the stock and new longs are sucked in as well. The key now will be to see how GOOG reacts and to its ICE or new support level at 200. If it breaks back down inside there then it would indicate that it was indeed an upthrust, and that more cause building between 165 and 200 is necessary before a real breakout. On the other hand, if we hold 200 and the retest is on relatively lighter volume, GOOG could be setting up for a run. For now, things are inconclusive. Lastly, it should be mentioned that the high of today will eventually be retested given the extraordinary volume that came in today.
Ok thats it for today…
Sincerely,
Thomas
P.S. It may be some time before my next post. I have some personal business that will delay me from adding to this site. How long? I don’t know yet. I suspect though that by the time I am back the S&P will be hitting new all time highs.
Peace.
Im out…