August 18th, 2009

Did the Earth Shake Today?

What you see above is today’s minute-by-minute values of the S&P 500 Index. There’s no error; all of the decline today took place within the first 15 minutes of trading. The gap down represented less of a change in trend or momentum than an instantaneous revaluation of US stocks based on what happened in overseas markets, especially China, overnight and in the early morning.

Athough we tend to think the Index reflects the health of the market (I have often said the the market represents an average 50% of a stock’s price movement), today’s abrupt repricing of US equities in response to the action of world markets as reflected by the Index may not be telling the whole story. For example, here are the same minute-by-minute charts for some of the favorite momentum stocks in yesterday’s spreadsheet list:

  • VRX (Valeant Pharmaceuticals)
  • CRI (Carter’s Inc)
  • SXCI (SXC Health)
  • NVEC (NVE Corp)
  • CKSW (Clicksoftware)
  • CREE (Cree Inc)
  • KIRK (Kirkland’s)
  • LFT (Longtop Financial Technologies)
  • VNDA (Vanda Pharmaceitucals)

There was a dash for the exits in the first 15-30 minutes (fueled, I suspect, by the desparate and unconscionable alarmists at CNBC) but then sanity returned and many stocks recovered nicely. Was there a tectonic shift under the footings of the recovery? I don’t believe so … not yet. A couple of weeks ago (see “Difference Between Correction/Consolidation and Reversal” of August 7), I wrote:

“Today, the Index bounced up against what could potentially be the top of what we might later understand to be the traders’ remorse correction or consolidation. The market might straddle the 300-day MA like it straddled the 200-day. It could end back at 950 just about the time that a traffic jam is created as the 4 moving averages converge with the neckline. That could be around Labor Day or mid-September and could be a glorious day because it would technically mark the true beginning of the Next Bull Market…..As the bears begin playing their dirges at the death of the bull market, look to see what sort of pattern the Index is making before selling all your stocks, buckling up and reaching for air masks. This plane isn’t going down yet; I hope it won’t land for quite a while.”

Anticipating this mornings dive doesn’t make it feel any less painful. Even though the market took a beating in early morning trading, I believe it’s still tracking along the 300-day moving average heading towards that 950 convergence around Labor Day. In addition, As uncomfortable as it feels, I’m sticking to that game plan unless and until I find that the 950 support level is broken.

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  • Piazzi

    Hi Guru,

    a question on your Mas, if you don't mind. how did you come to numbers 50-100-200-300

    what was the reson behind thos particular numbers?

  • Guru

    Nothing mysterious about them. I wanted a test for consistency of price momentum over the long run. I didn't want more than four (unlike Guppy who uses 10).

    You may remember, I original had used 60-, 90-, 180- and 300-day MAs but found that they conflicted with traditional measures. The "Golden Triangle" is defined as the 50- crossing above the 200-day. A traditional MACD is the 50-day crossing the 100-day. A traditional market timing measure is the Index crossing the 200-day.

    When I tested them against my MITI data, I found that the results were almost identical between what I had been using and the traditional uses so I became converted.

    My own twist to the traditional indicators is that I monitor all 4 simultaneous rather than just two as described above.

    As recently described, the new challenge is to have them all turning up; the 300-day hasn't yet and won't until early 2010.

  • Piazzi

    thanks,

    yes, I do remember you were using 60, 90, 180, 300

    and I agree with you that a positive alignment is more important than just the n param fed into the equation.

    regards,

    piazzi

    markettime.blogspot.com

  • Anonymous

    Guru,
    If I apply your chart to EEM, it looks like EEM is ahead of SPX..

    Do you think EEM will bounce off 50 MA or fall through it & hit 300 MA?? thx!!

  • Guru

    You're right. The EEM looks like it's leading the S&P. It hugged it's 300-DMA and moved above it. I hope it's a model that our markets will follow starting around Labor Day.

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