A Discounted View

Over the past year, investors have been lulled into a complacent state by the exceptional returns in the market accompanied by low volatility in price action. However, as of Tuesday the S&P 500 (SPX) experienced its largest recent one-day drop of -1.09%. Daily Perspective On the daily chart today’s drop in SPX is clearly defined as it deviates from the uptrend that has formed since the beginning of 2018. While we navigate through earnings season, the gap-down in SPX represents a meaningful difference in sentiment among market participants relative to the rest of January. As constituents of SPX continue reporting earnings, expectations are being repriced into the index. In the meantime, there are some noticeable developments on the daily chart . For example, the gap lower was so pronounced that the daily Relative Strength Index (RSI) finally closed below its overbought level which SPX had maintained throughout all of January 2018. At the very least this sign...

During a market downturn the VIX is a commonly referenced indicator. The value of the VIX is derived from the price of out-of-the-money S&P 500 (SPX) put options and will increase as SPX declines. Given this behavior in the VIX, it can be used as a valuable trading tool  on its own and in combination with other indexes or indicators . For example, one of the most common strategies  is buying put options on the SPX when prices begin to top or decline. In other words, the VIX can be used for a simple equity market hedging strategy . This buying of SPX put options will cause the implied volatility to rise, resulting in higher premiums for the options. Since the VIX measures implied volatility of SPX index options, it will move inversely with the SPX. That is, as prices fall there is more put option buying which results in higher VIX levels. Not only does VIX increase as SPX declines, but it also has a tendency to increase more quickly the faster and farther the S...

Candlestick charts can offer a unique perspective for charting market direction and sentiment. Developed in Japan, these charts represent price action with a figure that looks like a candle. That is, the price depiction has a body and one or two wicks. The body of a candle can either be open or closed representing either a higher or lower close for the specified time period, respectively. Open candles are represented with a light color and closed candles are displayed with a darker color. The extremes of the body represent the open and the close which can sometimes coincide with the high or low for the time period being analyzed. In such a case, there would be no wick, or straight line extension, from the candlestick. Otherwise, the wicks represent the high or low for the specified time period. Candlestick charting offers an easy way to quickly assess the market trend . Thomas Bulkowski identified one particular pattern  that can be used to identify a possible end of a trend a...

At the moment, there may be some bullish divergence  emerging in the daily chart of the S&P 500 (SPX) and Russell 2000 (RUT). Divergence between a price and an oscillator can be a reliable harbinger of future price moves. Since the beginning of 2016 SPX has been in a strong, sustained downtrend. However, a pivot low was formed in the middle of January and now it appears as though another price pivot could be establishing itself in the beginning half of February. Granted, the price action year to date has formed a series of lower-lows which is often interpreted as a bearish sign. Yet, when there is bullish divergence in a price-based indicator it often leads to a swift reversal of prior price action. For example, in the chart below it can be seen how the price trend of SPX has diverged from that of two of its oscillators. That is, the oscillators have formed potential higher-highs since the beginning of 2016. This could be indicative of impending bullish price action in the...

“You always want to be with the predominant trend. My metric for everything that I look at is the 200-day moving average.” – Paul Tudor Jones Being able to determine the market’s primary trend will put the odds in your favor to properly position your portfolio for future events. There are many ways to accurately identify a trend, however using the 200-day moving average* is one of the simplest yet most effective strategies. In fact, most Trend Following firms employ trading strategies that take an entry and, possibly, an exit based on a specified percentage close above or below the 200-day moving average, respectively. Moreover, the 200-day moving average can be an effective trading signal for all markets since Trend Followers are typically registered as Commodity Trading Advisors (CTA’s) that have exposure to equities, fixed income, currencies, as well as commodities. Additionally, the 200-day moving average has been an effective signal throughout many market cycles. One s...

“All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.” – Jesse Livermore Trend Following is built upon the premise that trends exist in the markets.  These trends can be identified using specific criteria.  Traders can employ a systematic process, discretionary process, or a combination of those two trading processes.  Predicting price trends is nearly impossible and, as leading behavioral economists report, an “illusion” (CFA Institute). Further, consider the observations of Linda Raschke, a stocks and futures trader featured in The New Market Wizards: “In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future.  Mark that word – Nobody! Thus, the successful trader does not base moves on what supposedly will happen but reacts instead to what...

After the August 2015 sell-off the broad-based indexes found support and pivoted higher before month-end. However, by the latter half of September 2015 more selling pressure came into the market pushing the price of the S&P 500 Index (SPX) down to a near retest of its August 2015 lows while moving the value of the Russell 2000 Index (RUT) to new lows.  Even though the price action of these two indexes differed, the behavior of each respective Moving Average Convergence Divergence (MACD) Indicator was the same. Specifically, both MACD’s formed a higher low in late September 2015 after the August 2015 low was formed. Given the aforementioned similarities, MACD conveyed a powerful underlying message. In the case of RUT we observe that divergence formed between the lows of the price and the lows of the MACD lines. That is, as RUT formed a lower-low by the end of September 2015 its MACD was making a higher-low which is indicative of future price strength. MACD is categorized as a ...