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Markets Sketching Out a Tradable Low

Posted By Barry Ritholtz On June 13, 2006 @ 11:35 am In Investing,Markets,Psychology,RR&A,Technical Analysis,Trading | Comments Disabled

NOTE:  This Trading alert was originally posted at Ritholtz Research & Analytics [1] on 06.13.06 – 11:34:58 am EDT; An email went out to subscribers alerting them shortly there after.

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner — after the call, but in the correct chronological location on the blog.

2006-06-13-RRA.pdf    06.13.06 – 11:34:58

Markets Sketching Out a Tradable Low
Special Trading Report: June 13, 2006

Over the past few weeks, the markets have given many participants false hope of a trading bottom. Most long side trades have consistently been losing trades.

Given the way several technical factors have lined up recently, however, we feel that the markets have reached an extreme that gives traders the opportunity for a profitable, long-side trade. This should be only a 3-6 week hold.

What are the Technical Signals?

Three elements have given us buy signals at once: The Put Call ratio, the Bull/Bear ratio, and the percentage of stocks above their 200 day moving average. (See charts on pages 2 and 3). We also note that the average length of selling stampedes imply this sell off should run its course by this week. Note also that last Thursday’s record volume on the NYSE is also supportive that the selling is ending.

None of these indicators are a magic bullet by themselves, but together they imply we are at a point where the downside is somewhat limited and the upside – at least for a few weeks – is potentially rewarding. We rarely get an ideal entry, and I would like to see the Arms Index move even lower. But perfection is rare, and so we make entries when is good (but not necessarily perfect) opportunities arise.

Purchases
The way to enter these positions is to scale into purchases over the next several sessions. We don’t want to try to pick the very bottom, and instead would rather balance the risk of being wrong with the reward of a timely entry.

Traders can make buys of indexes in 3 parts: 1/3 today, 1/3 tomorrow, 1/3 Thursday. The indices I like the best here are the larger cap stocks where defensive money may flow. The Dow (DIA), the S&P 500 (SPY), the Nasdaq 100 (QQQQ).

 

 

Index Symbol Entry levels Stop Loss Upside target
  Dow Industrials   DIA   106.75-110   105.75    114
  Nasdaq 100   QQQQ   36.50-38.75   34.50   40.50
  S&P 500   SPY      123.50-125   120    130

 

Our longer term view remains unchanged

This does not change our longer-term view that the highs for this cyclical bull market were likely made on May 11th, and that the economy in the United States will slow appreciably as the year progresses. We put the possibility of a recession beginning late 2006 or early 2007 as slightly better than even money.

Several times a year, we make a short term “opportunistic trade.” It is for more aggressive portfolios, who can implement a trading plan, using stop losses. Note that short term taxes take a big bite, and depending upon your tax bracket, it may be preferable to do these trades in the tax advantaged accounts.

>

Percentage of NYSE stocks over 200 day moving average
click for larger graphs
Percent_above_200_day [2]

Put Call Ratio

Put_call_ratio [3]

 

Big NYSE Volume Spike on Sell off
Nyse_volume_spike [4]

Too Many Bears
Too_many_bears [5]

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SOURCES:

Put Call ratio, Michael Panzner, Collins Stewart Securities

NYSE volume, StockCharts.com

Percentage of stocks below 200 Day Moving Average provided courtesy of DecisionPoint.com

Bull Bear ratio, American Association of Individual Investors

 


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URLs in this post:

[1] Ritholtz Research & Analytics: http://www.ritholtz.com/site/

[2] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/percent_above_200_day.png

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/put_call_ratio.png

[4] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/nyse_volume_spike.png

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/too_many_bears.png

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