Analytical Toolbox: Market Outlook & Classic Timing
November 20, 2008
Last week’s article was written Wednesday evening and started with this:
“Volatility in the US equities markets has come down quite a bit …”
The article was likely posted during Thursday’s market session right around the time the Dow was making a 900 point swing upwards. Of course that was just after the 310 point decline it experienced. You have to love it when an analysis comes together; however, this wasn’t one of those times. When I began writing a Market Outlook I was so nervous with the prospect of something like that happening, but in then end, the trader in me has to chuckle.
When completing an analysis or reading someone else’s view, remember that there are no guarantees that current conditions will remain intact and, more important, that no one knows what the nest day’s trading will bring. The best you can do is:
- Remain aware of current conditions,
- Try to put the odds in your favor with the information you have,
- Recognize things can change and with all of this in mind,
- Manage your risk.
Current Conditions
That brings us to this week’s analysis. As of Wednesday’s close, the broad market indexes continue longer-term and intermediate term bearish moves. Updated charts from last week include:
- ® Index SPDR (SPY) Monthly Chart
- Dow Jones Industrials (DJ) Cash Index Monthly Chart
- SPY Weekly Chart
- Nasdaq 100 Index ETF (QQQQ) Daily Chart
The monthly charts for SPY and DJ-Cash should serve as reminders that traders generally wish to catch a portion of a trend, not predict a reversal. If you feel you’ve arrived too late to the bearish party, beware the temptation to be among the first to arrive at a bullish party.
Figure 1 displays a monthly line chart for SPY with three-month and twelve-month Exponential Moving Averages (EMA), along with two momentum indicators. These include MACD (12, 26, 9) and the RSI (14) with bullish and bearish ranges (See the July Analytical Toolbox article series on Andrew Cardwell for more information on the ranges included in this article). The price picture has hardly changed since last week and momentum remains strongly bearish as viewed by both MACD and RSI.
The DJ-Cash Index is also in a steep decline with RSI momentum confirming the downside move, as seen in Figure 2. Aside from providing a remainder about maintaining good money management and risk management practices, it seems there’s little to discuss about the chart. Neither exits nor entries need to be an all or nothing proposition, unless perhaps you’re facing Friday expiration.
Figure 1: SPY Line Bar Chart
Figure 2: DJ-Cash Monthly Line Chart
The weekly bar chart for SPY in Figure 3 displays a break below the wide, sideways trading mentioned last week. Price approached the middle regression line but failed to reach it (bearish). Technicians may argue a bullish wedge may be forming, but currently the information favors bearish conditions on an intermediate basis.
Figure 3: SPY Weekly Bar Chart
The last figure displays a daily bar chart for QQQQ with the middle regression line serving as resistance for last week’s upward move. Using regression channel principles, price is expected to continue downward toward the lower regression line which is at approximately 24-25. Short-term momentum has once again turned negative supporting such a move.
Traders will want to monitor momentum and volume (consider Volume with a moving average line or On Balance Volume) as price moves towards this level. Similar tools can be used as price moves towards any of the regression channel lines. A move below the channel could be accompanied by an accelerated downward move. Given current conditions, significant momentum would likely be required for any upside moves above the channel.
Figure 4: QQQQ Daily Bar Chart
The long-term, intermediate and short-term views for the broad markets displayed by ETF and futures proxies are all bearish. Be sure to employ good money management and risk management practices when entering new positions.
To access other articles written by Clare White, please click here.
Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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