Friday, February 20, 2009

Stocks Ready to Head down as Range Expands


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clipped from charts.barchart.com
Chart for S&P 500
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The chart above is a bar chart of the the S and P 500 index (cash). The green line is the twenty day moving average. The blue and red lines represent two standard deviations below and above the mean. When the market exceeds the red or blue line the market is overextended--oversold or overbought.

Right now, the market is oversold intraday--price below 777.00. As it a result, baring a disaster scenario, the market is likely to support at prices below this line today.

You should notice that the blue and green line are getting farther apart. Most times this indicates two things:
  • the market is likely to get more volatile
  • and, the range that the market is going to trade is expanding.
When the market range expands it becomes likely that the market is going to move up and down rapidly and the intraday trading is going to become more frenzied. This explain why markets often have violent rallies or dips that go against the trend of the market.

Right now, the blue line is sloping down at about ten points a day and is increasing--bad news. This means the market could be getting ready to make a new major move to the downside. In a scenario like this you should avoid two things.

  • First, when the market is below the blue line resist the temptation to go short. More often than not you will get killed.
  • Two, unless you are an excellent trader resist the temptation to buy the market for a position trade.
From a technical point of view the market appears to be turning down. Some people tend to think when the market gets oversold it is a sign that the market is going up. This is often true for a very short period of time. But, when a market is oversold more often than not it means the market is going to keep going in that directions until it finds a level of homeostasis.

My point. From a technical point of view the market is rolling over and weakening. When a market turns down the likelihood that it can go a lot lower increases dramatically. If the market is in a downtrend it will usually rally hard on good news and then drop right back down like a lead stone. Of course, if the market were to drop hard right this minute, it would likely bounce up nicely because it would be more than 2 standard deviations below the line---a statistical level that indicates the market has moved too far in that direction--short term.

You might also notice that the S and P has held the 800 level for months. The only exception to this was in November when it spiked down and then spiked right back above 800. This time around it has breached the 800 level and no longer is showing technical resiliency.

The market appears to be ready to go a lot lower. So it is a good time to be very cautious with your investments.

This is not an offer to buy or sell. I could be buying or selling the market at any time. The above examples are purely informational. I am not recommending anything. Buy, sell, or invest in the market at your own risk.

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