1/19/2009 8:04:41 PM
Welcome to the Advantage Report, this report summarizes the general market as well as the Nasdaq 100 and issues BUY or SELL signals when the conditions present themselves.
Both the SPX and NDX are now on Preliminary SELL signals.
This past week saw prices deteriorate at a quicker rate than anticipated and while the key level of 850 was broken on the SPX, we finished the week right on it. Evidence is now building that we're heading for a period of indecision and range bound action is likely. We will stay with our longs for now and only close if we get a full sell signal.
As a side note, I got a question during the week that asked why I would not take action to close the longs when I was seeing weakness in the markets. My answer is that we have a system in place that takes away any bias I may have. At the end of the day, I don't know what tomorrow will bring and while sometimes the market can give the appearance of a movement in a certain direction, it quite often is a false sign and this is why whatever system you have in place, it needs to be robust enough to handle all sorts of situations so that over the course of a year you still end up with a profit, and that's the system we have.
This leads me to another point about timing systems. Timing the market for tops and bottoms is a tricky thing, our timing system works on a confirmation basis, meaning that in order to know that a top or bottom has happened and we are now reversing, a confirmation on the opposite move is required. We do this so that we don't get bumped off on a false move. The downside is that sometimes by the time confirmation comes, the market has moved substantially against us, which minimizes the potential gain. This is often the scenario in sideways markets, and that's what we seem to have at the moment.
In back testing our system, I noticed that this scenario tends to happen for 2 to 3 months of a year, however all the performance for the rest of the year more than makes up for the poor performance during these indecisive periods. Remember, a good system is one that puts you in the right position for the big moves and keeps you there until there is a definite change. In big volatile markets this isn't easy to stomach, but in the long run it pays off very handsomely.
While this type of whipsawing price action is frustrating from a directional trading perspective, it's handy to have a part of your portfolio in a non-directional trading strategy like our Advantage Credit Spreads service. The aim there is to make a slow steady return of 5% - 10% per month regardless of market conditions. Over the last 3 months we've averaged 5.5% for each month. If you'd like more information on this: Click Here
On to the markets..
SPX Chart - Bigger Picture
Last week I mentioned how the 850 level needed to hold in order for the V bottom to maintain its integrity. Well 850 did in fact break intra week and the potential picture now is a symmetrical triangle for the medium, where we trade between 830 and 930 until a direction is chosen.
SPX Chart - Shorter Picture
In the shorter term, we broke through the key 850 level and found support around 820. We finished the week on solid volume right on 850 and with no clear indication of a direction for the week ahead.
The MACD has turned negative also, however the indecisiveness of the market means that it's possible for the market to still push higher from here.
Overseas markets are down at the moment and the S&P futures are down 1.5% at this point but the exuberance around the inauguration of Obama may reverse that when trading begins on Tuesday.
For this week, support on the SPX is at 820 and resistance is from here up to 930.
The VIX Picture
The VIX went up strongly last week as the weakness continued in the market, although fell sharply on Friday suggesting, we could get a bit of a bounce this week.
Having said that, for real strength to return to the market, we need to see the V bottom break. i.e a drop below 42.
The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place.
NDX Chart - Shorter Picture
It seems that the scenario discussed in last weeks report played out as weakness set in and pushed us down to the 1140 support point. We're now in a sideways pattern between 1140 and 1300.
The MACD is essentially flat here and basically confirms that there's not a lot of clarity on the direction in the short term.
For this week, support on the NDX is around 1140 and resistance is 1300.
Quote of the Week:
In commemoration of Martin Luther King today, here's a quote from the great man, "Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that."
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