The Sunny Side of the Street

TECHNICAL ANALYSIS EDUCATION: EXPLAINED AND DECIPHERED FOR NEW AND VETERAN TECHNICAL ANALYSTS ALIKE.
 

SUNDAY EVENING - Nov 16, 2003
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Figure 2: QQQ 1 minute

Figure 3: QQQ Weekly

Friday's intraday chart showed a nice short play, just like the good ole days.  The market actually picked a direction and stayed with it.  This move was suggested in my commentary of the previous day, when I said the doji of the day previous was calling for a move of size, and that I am still looking for a correction down to the bottom of the Sunny_Bands.  Congratulations to any that took the play!

On the daily chart, price first touched the top Sunny_Band and then followed through by moving all the way down to the midline of the Sunny_Band.  Now the question is begged, will it bounce off the midline (as it would in a true bull market) or will there be follow-through to the downside?

Looking at the weekly chart can give us somewhat of a clue.  If you click on the weekly chart in Figure 3 to enlarge it you can clearly see the magenta trendline I have drawn underneath the rising prices.  That is a nice steady growth line; the slope is not so steep as to hint of over exuberance, and it is a growth rate that can be maintained.  Friday's prices almost touched that line, but not quite--so that leaves a little room for further drop.  Again, this brings us to the question of whether prices will bounce or dip beneath the line and begin retesting the line from the other side.

You can also see in Figure 3 that I have drawn a horizontal line at what I think is the main Attractor on the weekly QQQs: 33.00.  That's where I think price will go in a retest and then bounce from there.  Markets don't just go straight up forever, they take nips and tucks to make their stairstepping rise.

On an enlargement of Figure 3, we can see the line better--Figure 4. On that

Figure 4: Enlarged QQQ weekly

chart you can also see that price has stayed in the upper half of the Sunny_Band for many, many weeks now.  And, if you add the indicator RSI, you now get a

Figure 5: Enlarged QQQ weekly with RSI

hint of what is more likely.  The RSI shows a slight divergence with price on this weekly chart.  That calls for a reversal of direction in most technical work, and that's what I am expecting to see for a few days to a few weeks.  I don't expect anything awful, just a mild correction to take the steam off.  And, I'm expecting it to work its way down to the 33 line of Attraction, which is also just about where the Sunny_Band midline is. 

Without taking up room with another chart, let me just tell you as further evidence that the same divergence is evident in the daily chart.  So logic would tell us that a move further down could be expected.

Figure 6: EMini daily showing the same trendline

In Figure 6 you can see that the EMini is exhibiting the same behavior as the QQQ, with the trendline being approached and the RSI in slight divergence.  The major Attractor on the EMini is at 1040, which is only 9 points down from Friday's close.  It wouldn't take much to make that little bit of a drop, and take the RSI down to the lower bound.  Doing so would relieve the pressure and give the markets a chance to run back upward with some strength.

The same configuration, with Sunny_Bands and RSI, divergence and all is also on the chart of the Dow, so this observation further strengthens my view.

Now, that said, the Dow is doing its level best to reach for 10,000 again.  The last time the Dow was playing around 10,000 was in May of 2002, nearly a year and a half ago.  That's a pretty long time actually and it looks like ultimately that is its goal.  So, as I said before, I'm not expecting any deep or dangerous setbacks, but just a mild correction.

One more confirmation, in Figure 1 you can see an indicator with a yellow and a green line crossing.  This is the Sunny_DMA Histogram, and on all three of these markets it is in sell position.

It's the weekend--so don't forget to check the stock picks for the week.

Keep your senses about you and use strict discipline in trading.  Trading is a risky business.
 

Attractor:  a level to which prices seem to be drawn, like a magnet.  Usually these are lines of support or resistance from previous highs and lows, but can also be an important level on an indicator, or the edge of a Sunny_Band.

PHW:  Potential Hourly Wage.  A term coined by Sunny to examine whether trading for a living is really worth it when compared to the minimum wage standard.  Before considering a trading system to be a success, it should pass the PHW test.

RSI:  Relative Strength Index (TradeStation function)

SDMA:  Sunny's Dynamic Moving Average (proprietary)

Shooting Star: A candlestick pattern discussed further under Reference, Candlesticks.

SDMA_Hst:  Sunny's Dynamic Moving Average presented in a histogram format where the line representing the difference between the two SDMA lines turns from red to green when the two SDMA lines cross each other (the difference is zero).  The yellow line is an average of the histogram line.

Sunny_Band:  Sunny's Dynamic Moving Average plus 1.5 ATR and minus 1.5 ATR, creating a band on either side of the SDMA.

Vehicles:  Trading symbols.  IBM is an equity vehicle; SPU03 is the SP futures contract that expires in Sept of 2003; @ES.D is the EMini; mutual funds are vehicles; gold is a trading vehicle; etc.

This commentary is meant only for EDUCATIONAL PURPOSES. It is to help you see how a Technical Analyst reads the signs in the markets. 

Stay sharp and on your toes.  Moves can reverse on a dime, anytime.  Let the market speak to you.  If the market is going down, by golly ignore my commentary from the night before and know that the market is going down.

RULES OF THUMB:

0.  I keep the chart in Figure 1a on each day's commentary simply to illustrate how much in tandem the 4 indexes I watch actually are.  For this reason, I don't always comment on every index.  Analysis of one speaks highly for the same analysis for each of the other indexes.

1.  When price is pushing the upper Sunny_Bands upward and then eases off and moves back toward the midline, it's time to take profits.  If it starts moving up and pushing on the Sunny_Bands again, it's time to get back in.  Likewise, if the market is pushing down on the lower Sunny_Band and eases off to move back to the midline, it's time to take profits from the short play.

2.  Divergence of the RSI and price is another good time to take profits and wait for a breakout of price before taking a position.

3.  When the exchange puts in curbs or trading halts on a large move down, it usually (not always) stops the downward motion.  After the market reopens is a good time to take profits from your short position.

4.  The market can't go nowhere forever.  Eventually, who knows how long it will be, there will have to be a breakout-- one direction or the other.

5.  This commentary is for educational purposes only, and is meant only to teach readers about my indicators, other technical indicators, and how I read them.

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While it may be true that a picture is worth a thousand words, it is definitely not true that a picture deserves a thousand words.