Skip to main content

Yes, Virginia, it's a tradeable rally!

OK, stocks rallied this week. But does the rally have legs?

Sometimes the market rallies inexplicably. Given the bad news in economic reports this week, it looked like we might see another crash. We saw GDP come in with a 0.3% decline, a precipitous drop 3.1% drop in consumer spending, jobless claims stubbornly staying at recession-like levels, a major decline in the Chicago PMI and mixed numbers in the durable goods report.

Despite all this, stocks rose. Perhaps investors felt all the bad news was priced in and stocks were finally cheap enough to buy. I am beginning to think that we may see more buying.

Moving Average Analysis with a twist --

Below we present some statistics derived from the TradeRadar Alert HQ process. Each week we scan 7200 stocks on the NYSE, the AMEX and the NASDAQ and run a number of technical analysis screens against each one. One of the indicators I have found to be reliable this year is tracking how many stocks have their 20-day moving average above their 50-day moving average.

In the chart below, we show the results of plotting this indicator against SPY, the S&P 500 SPDR ETF.


In general, you can see that our moving average indicator follows the ups and downs of the S&P 500. In order to get more of a prediction on the direction of stock prices, let's add another moving average to the chart. When you plot the number of stocks trading above their 50-day moving average you begin to see some interesting patterns emerge.

What jumps out from the chart is that when the number of stocks trading above their 50-day moving average (the yellow line) crosses the line that tracks the number of stocks whose 20-day moving average is above their 50-day moving average (the magenta line) you will get a change in the trend of the S&P 500.

What is significant in the chart above is that the yellow line (50-day MA) has been above the magenta line (20-day MA over 50-day MA) for three weeks now. As of the most Friday, however, the yellow line made a strong move above the magenta line signaling more broad-based strength and momentum then we have seen in months.

Conclusion: the rally is real, for now --

Our moving average analysis indicates that stocks are firming and a rally seems to be in progress. Have we seen the bottom of this bear market? That is very doubtful; nevertheless, the rally that is underway seems to have enough underlying strength to be tradeable.

This combination of moving averages is reminiscent of the classic MACD (Moving Average Convergence Divergence) technical indicator and can be used in the same way.

Given that my indicator reflects action in the stock market as a whole, a way to use it is to go long index funds when the trend appears to be turning upward. For example, a week or so ago I somewhat prematurely nibbled at the ProShares Ultra S&P 500 ETF (SSO). Since then I have added a bit of the ProShares Ultra QQQ ETF (QLD).

Now that we are into November, perhaps we will be able to say "Yes, Virginia, there is a Santa Claus rally!"

Disclosure: long SSO and QLD

Comments

Anonymous said…
Thank you for sharing useful information.We want you to come up with more information so that will be helpful to everyone.



MyInvestorsPlace - trading, value,
investing, forex, stock, market, technical, analysis, systems

Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here:   https://tradingstockalerts.com/software/downloadpatch Contact us if you have questions or identify any new issues.

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional