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Tuesday, July 8, 2008

How to Spot the Next Tradable Rally

I’m a Bear… but not a Perma-Bear. Someday I will become a Bull again. But above all else, I am a Trader. Consequently, while being a Bear, I still look for and trade rallies from the long side.

The forces are gathering for a just such a tradable rally. On signs of strength I will start to ease out of my shorts and start easing into some small long positions.

Patience around these levels is absolutely paramount. One more cathartic rinse downwards to trigger stops and to clear out the last weak longs is still possible. Only a close above 1260, quickly followed by a clsoe above 1270 on the S&P 500 can unleash a short covering squeeze.

Below are just some of the indicators that I’m currently watching:

When the percent of stocks above their 50 day simple moving average rises above 80%, a tradable top in the S&P 500 (SPX, grey) quickly follows.

When the percent of stocks above their 50 day simple moving average falls below 20%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as equities are in an uptrend, as defined by the index being above it’s 200 day simple moving average.

When the percent of stocks above their 50 day simple moving average falls below 10%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as volatility as measured by the VIX (bottom, grey) has spiked to 30.

Buy signals that result in the greatest return are those accompanied by at least a 100% increase in the VIX from its previous level.

When the percent of stocks above their 200 day simple moving average rises above 80%, a tradable top in the S&P 500 (SPX, grey) quickly follows. This one works particularly well when there is a divergence. For example, if the S&P 500 continues to rise, but the percent of stocks above their 200 day simple moving average starts to drop, exit long positions or go short on the first sign of weakness in equities.

When the percent of stocks above their 200 day simple moving average falls below 20% or 10%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as volatility as measured by the VIX (bottom, grey) has spiked to 30.

Obviously relying on a number of very different indicators will increase the quality of your signals. Use one or two in isolation at your own risk.

15 comments:

Anonymous said...

where do you go to watch the percent of stocks and their 200 and 50 day moving averages %'s?
Thanks for the help.

Anonymous said...

come on......someone help me out here!!!!!!

Anonymous said...

I too believe there is gonna be a rally soon. I'd just like to try and time it better than in the past!

Ben Bittrolff said...

"where do you go to watch the percent of stocks and their 200 and 50 day moving averages %'s?
Thanks for the help."

Depends. You want it in real time? Then it'll cost you something fierce.

End of day? www.StockCharts.com

Anonymous said...

Thanks..I'll take a look......R

Anonymous said...

Ben:

wow. a lot of options on stockcharts. Can you narrow it down for me a bit? Do you go to market view? point me in the right direction please.......Thanks again...R

Anonymous said...

come on, Ben....Where's the love?

Ben Bittrolff said...

"come on, Ben....Where's the love?"

When the market moves, this Ninja ain't got no time for love. Love is for Bulltards.

The site should be user friendly. You can do it. I know you can.

Anonymous said...

Anonymous:

"The Financial Ninja is a collection of my thoughts and opinions about current economic and market conditions. These are not buy and sell recommendations. Use your head and do your own research. This is a forum to stimulate discussion and debate."

Use your head and do your own research. The Financial Ninja is a great starting point for ideas but if you want hand-holding for entries and exits, look elsewhere.

-Mike J.

p.s. thanks for the indicators, Ben. Personally, I don't think the "VIX over 30" will be as good a tradable bottom indicator this time around. I've heard "the VIX is still low" trumpeted all over mainstream financial news outlets and think you'll either get (a) a decent bear market rally without a spike in the VIX or that (b) the VIX will spike and stay elevated in a prolonged sell-off.

Ben Bittrolff said...

Mike J,

"I've heard "the VIX is still low" trumpeted all over mainstream financial news outlets and think you'll either get (a) a decent bear market rally without a spike in the VIX or that (b) the VIX will spike and stay elevated in a prolonged sell-off."

Agreed. One of my theories is that now that the initial shock has worn off, further declines in this Bear Market can happen inspite of a lower VIX as people now EXPECT the market and the economy to deteriorate.

Notabull said...

http://blogs.wsj.com/marketbeat/2008/07/08/capitulation-nation/

Everyone now watching VIX!!!!!

Anonymous said...

Ben - Holy smokes -- I had no idea you could do that with stockcharts.com!!!

Man, this opens up a huge window of exploration.

Thanks!

-Peruser

Anonymous said...

Ben,

Really enjoy your blog. With respect to this topic, check out the Bloomberg video interview with Michael Steinhardt.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aPVJgUXie2lo

wcringan said...

What you are looking for is here.

http://stockcharts.com/symsearch/index.html?S&P

William.

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