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Analytical Toolbox: Out of the Woods?

By Clare White, CMT, Optionetics.com | Thu May 15, 2008 3:15PM PT


The US stock market has had a challenging 2008 with the S&P 500 (SPX) down 4% for the year as of Wednesday’s close. As traders know, this is a far cry from the 13% decline registered as of mid-March, so the question for the day is: does the recent intermediate uptrend signal we’re out of the woods? Unfortunately only hindsight will provide a definitive answer to the question, but in the interim we can certainly line up a few different measures to see where they lean.

Starting with the longer-term view, Figure 1 provides a monthly chart of SPY, the S&P Depository Receipt [SPDR] for SPX. The chart includes a two regression channels, one constructed from 3-1/2 years of data and a more recent construction that includes last summer’s acceleration out of the channel. The chart also displays a four year cycle, 10-month & 40- month exponential moving averages [EMA] and three varying length momentum indicators.



Figure 1: Monthly Chart for SPY
(click here for larger image)

Price is at the lower line of the longer-term channel, but has yet to return fully return to it. Momentum has recently improved for SPY; however, it may need to strengthen more to push price upward back into the regression channel. So in the longer-term, conditions are improving but the exchange traded fund [ETF] may not be out of the woods just yet. Conditions merit a look at the shorter term picture using weekly charts.


Figures 2 & 3 provide a weekly view of SPY, the former using similar settings as the monthly chart and the latter using a couple of volume indicators. In both cases the shorter-term regression channel is omitted.



Figure 2: Weekly Chart for SPY with Momentum Indicators

Recent price movement within the channel is now more clearly seen, as is the added resistance of the 40-week EMA (200-day). The Stochastic indicator and MACD both display bullish momentum, but the +DI component of the ADX (green line) is not quite in line with the bullish move yet. Upward movement in this indicator along with a cross above the –DI may be needed to get price above the 200-day EMA and back into the channel.

The volume picture is more concerning than momentum. The recent move upward has occurred with declining volume resulting in price stalling at the lower channel line. Looking back to last summer, the vertical dotted line makes it easier to see the strong volume that accompanied the move back to the regression channel. To get more decidedly back into the channel and on a path to the middle regression line, it’s likely volume will have to similarly strengthen with momentum continuing its bullish behavior.



Figure 3: Weekly Chart for SPY with Volume Indicators

In order to get out of the woods and back into the long-term upward trending channel, it appears the ETF proxy for the S&P 500 needs to build up some more volume in the short-term. This may occur from its recent sideways movement or after a moderate price retracement. If volume increases strongly as price moves downward, momentum may follow causing a more significant decline (aka back in the woods). Watch both volume and momentum if price moves to the 10-week EMA (50-day) or the potential support line that can be drawn below the February closes.


To access other articles written by Clare White, please click here.

Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Visit the Optionetics.com Discussion Board



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