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Thursday, July 08, 2004
Good evening friends,
Market Recap
As we expected, there was more selling on Wall Street after last night's earnings warnings and the announcement today from home land security that terrorist attacks are probable before the Olympic Games this summer. The Dow lost -68 points today and closed below its 200 SMA. The NASDAQ was down -30 points and the S&P 500 was down 10 points. All three of these indices closed at the lows of the day. The only good news to report is that these indexes are over sold and due for a small bounce.
I do not expect anything more than a small bounce, because the markets are in sad shape. I do not see any catalyst to turn it around. With rates on the rise, terrorist threats, uncertainty about the election, high oil prices, slowing job growth, and disappointing earnings (only meeting expectations / missing and warning / lowering guidance), there is just no reason to own stocks right now. The market is feeling the pain. Cash is king and has been for months. The NASDAQ is down -3% YTD. We could have stayed in cash all year without a single trade and still be outperforming the market.
Becoming Bearish
I am rapidly turning bearish at this point, but as far as shorting goes, the markets are oversold so I would not short anything just yet. I will most likely be shorting the next strength up to resistance levels. If the Dow closes tomorrow below its 200 SMA, then I will be updating the short list daily starting next week, and I will concentrate more on the short side rather than the long side. Again, it will depend on where the Dow closes. Currently the Dow is just a shade below its 200 SMA, the NASDAQ is already below its 200 SMA, and the S&P is above its 200 SMA. The market is still neutral, and it is hard to commit to one or the other (long or short) when the indices are on opposites sides of their respective 200 SMAs.
The Traders Index (TRIN)
Continuing with our series on indicators, TRIN is one of the best stock market indicators I know of. It can be used to gauge when major rallies or declines are ready to reverse. This important indicator measures the intensity of optimism from the dominant market group whether it is the Bulls or Bears. Excessive optimism from either group can be associated with market tops or bottoms. In other words, if Bulls are optimistic that the market will go up, this is reflected in a lower TRIN reading.
This means that TRIN moves inversely to the market. A low TRIN indicates that the Bulls are getting overly bullish; the rally is over done and is near a top. The lower the TRIN reading is, the higher the chance of a market reversal. You would consider closing your long positions on this signal. Just the opposite holds true for the Bears. A high TRIN indicates that Bears are overly optimistic. When Bears are optimistic that the market will go down, then the TRIN reading will be high because too much volume goes into the declining stocks. This signals the market is nearing a bottom and you would consider covering your short positions.
TRIN is calculated using the number of advancing and declining stocks and the volume in both groups. TRIN compares the relationship between the ratio of advancing and declining stocks with the ratio of advancing and declining volume. TRIN will fall when the volume of advancing stocks is disproportionately high compared to the number of advancing stocks. TRIN will rise when the volume in declining stocks is disproportionately high to the number of declining stocks.
TRIN can change sharply from day to day, and it is best smoothed by using an average like the 13 EMA. This will filter out the daily swings and give you a more accurate trading signal.
TRIN gives its strongest signals when there is a divergence between TRIN and price.
When the market rises but TRIN traces a lower peak, it is signaling the Bulls are running out of steam. A bearish divergence between TRIN and price is a strong sell signal. Just the opposite when markets fall.
The herd is emotional and short term oriented. When they act on their feelings, buying or selling gets over done in either direction. When this happens, TRIN will signal when a reversal is near. Most of the time, it is after the last of the herd sells the bottom or buys the top. Has this ever happened to you? Just when you can not take your stock going down any more and you finally sell it, the stock then reverses and moves up. It has happened to all of us, but now that you know about TRIN, this may help you from selling at the exact bottom or buying the top in the rush to get in that hot stock at any price.
OTC BB Watch List
- AVCA: Still going up and still looking good. Up over 15% since breakout above 2.00
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