Value of Perfect Information

Last December, we published a special way to use the $TICK to help you make money in the market.   Since what you are going to see, is a strategy about using a 1 minute chart, you will need real time data.   This can come from trading software provided by Schwab StreetSmart Pro (or other competitors) which is provided for their subscribers.

FYI … Below is the beginning portion of the “How-To analyze the TICK” posting above.   If you like it, click on the  link and it will take you to the original page: Convert Market Noise to Profit

How to convert “market noise” into profitable trading data that can make you money …

This chart shows the 1 minute $TICK with large up and down gray bars.  Most investors ignore this chart and data because it looks like nothing but noise.  But it isn’t … it can be magical data if you do the right thing with the data.

If you look below at the second and third chart, you will see what we mean, and how you can convert this data into powerful trading data …

Click on this link to go to the original study …
http://www.stocktiming.com/Stock_Investing_Course/convert-market-noise-to-profit.html

Is there bad news just around the corner ???

Technical analyst agree that a falling wedge pattern is a bullish pattern.  As a pattern, its bullishness just stays dormant until the breakout occurs.

It is a great pattern for technicians because its failure rate is only 10% which means it has an accuracy level of 90%.

So why are we discussing this pattern today?

Because there is now such a pattern … a nice, two and half month long pattern.

That’s the good news, now for the not so good news …

The pattern is showing up on the VIX (Volatility Index).    As you know, the VIX is often regarded as the Fear Index and the VIX moves in the opposite direction of the stock market.

Therefore, this normally positive news pattern has some very negative implications attached to it.    Technically, for this particular pattern, the maximum run time before the breakout is during the third week of February.   However, that is when the apex of the resistance and support lines is formed.

The reality is that these patterns always breakout before the apex.   Seldom is that breakout longer than seven-eights (distance) into the pattern which would be about February 8th.

The beginning timeline for a probability increase of a breakout starts after being two-thirds into the pattern … and that date was January 23rd.    So now, we are in the breakout window area where the probability for a breakout will increase as time moves toward February 8th.

Bottom line … market risk levels will now start to increase as we move forward.
(FYI: This chart is one of three VIX charts that are updated daily in Section 4 of our StockTiming.com Standard subscriber site.)

This is part of a new Study we have been conducting.   What is important on this chart are the peak levels of Positive stocks reached on October 27th, and the peak level of Negative stocks reached on November 23rd.

Look these two dates up on your index charts and see the relevance.

BOTH were peak movement days and marked a turnaround point in the market either at the very same time or within just a few hours of the next day.   The peak levels are over 180, and as these levels approach,  they occur quickly and with spiking action.  Yesterday, this proprietary indicator went up to 147, so one should be on alert for the possibility of reaching turnaround spike levels soon.  (Full details about the report and data are found on our www.StockTiming.com Standard site today.)

Are there Mixed signals coming from the market?

Jesse Livermore stated a very simple concept back in the 1930′s.    He said that the market was all about money flows.   If the money flowing into the market was net positive, then the market would move higher … and, if the money flowing out of the market was net negative, then the market would move lower.

So, let’s look at out Long Term Liquidity chart today (Posted and updated Daily on www.StockTiming.com) As of the close yesterday, the Inflowing Liquidity levels were in low Expansion territory and rising slowly.   So, Livermore would conclude that there was a positive bias to the market … one where the positive bias would continue as long as the Inflowing Liquidity levels continued to trend up, and remain in Expansion territory.   See the next chart …

Yesterday, the S&P 500, DJI, NASDAQ, Russell 2000, and the NYSE all closed a little higher.   If all of these indexes went up, then surely the VIX should have closed a little lower, but that didn’t happen … it closed slightly higher.   Since the VIX is often referred to as the fear index, it was suggesting that the market still wasn’t convinced yet.

Now, imagine that the market is made up of two different stock groups.   One group is the “broad market” where the trend of what the majority of stocks is doing can be measured.

The other group is something we will call the Super Leader Stock Action.   This group is a representation of the changing numbers of stocks with very high strength levels.   If the number of stocks with very high strength kept increasing from day to day, then they would pull the rest of the market up as time went on and as their numbers increased.   Since the very strong stocks represent what investors feel are the best stocks to invest in, their conclusion must be that future profit conditions for these stocks will improve, otherwise they would not invest in them.

Likewise, the opposite should occur if the number of very strong stocks keeps decreasing day after day.    The broad market would not be able to sustain an up move if the very best, strongest stocks were in a decline.   The only way to offset that would be for the market to see increasing Liquidity Inflows day after day.    For this to happen under these circumstances, it would suggest that some group other than those who normally buy the strongest, most profitable stocks was injecting money into the market.

So, what did the trending of the broad market stocks do compared to the trending of the Super Leader Stocks (very high strength stocks) yesterday?

The good news was that the “broad market” stocks (as measured on the S&P 500) was up, positive and above a resistance line yesterday.

The bad news was that the Super Leader Stocks were declining, in negative territory, and acting divergently with the broad market stocks.

At the same time yesterday, the S&P 500, DJI, NASDAQ, Russell 2000, and the NYSE all closed a little higher.   If all of these indexes went up, then surely the VIX should have closed a little lower, but that didn’t happen … it closed slightly higher.   Since the VIX is often referred to as the fear index, it was suggesting that the market still wasn’t convinced yet.

So, both the trending of Leadership stocks and the VIX weren’t supporting the direction of Inflowing Liquidity yesterday.  That’s an obvious conflict in market conditions.   Livermore would say that as long as money flowing into the market was increasing, the market would be “driven” up.    So, it is up to the amount and consistency of Inflowing Liquidity now.

Using Relative Strength for profitable trading …

Today, we will look at two Relative Strength settings that work well together.  By the way, when you look our first chart, it says that the indicator is a C-RSI set for a 30 day time period.    The C-RSI is not complex and it is something we invented to just make deciphering the chart easier.

C-RSI Explanation:  Since the Relative Strength moves from 0 to 100, it is sometimes hard to discern if it is clearly positive or negative when looking at a chart.    For the standard RSI indicator, it turns out that a reading of 50 is neutral, so everything above it should be interpreted as positive, and everything below it should be interpreted as negative.   So, we decided to subtract a value of 50 from every RSI reading thereby making it zero based.   That means that the old value of 50 now becomes 0, so it becomes visually clear if the RSI is really positive or negative.

With that explanation, let’s move on to a chart showing what the C-RSI 30 has looked like on the NYA Index since last April.   We won’t get into C-RSI trends or divergences today, instead we will keep it simple.

First, notice the correlation between when the C-RSI is above the zero line or below it relative to the NYA’s action.   Following this one chart would have saved a lot of investors from losses in 2011.

Please see the next chart …

Sometimes you are lucky enough to have something that will improve one of your charts.  In this case, adding a C-RSI with a 9 day setting improves the value of the chart.

Take a look at the chart below … it is the same as the one above, except we added a C-RSI 9 in red.   A nine day C-RSI is faster than the 30 so it will lead the C-RSI 30.   When the 9 C-RSI goes positive while the 30 C-RSI is negative but trending higher, then the NYA is normally right behind it.  If the both turn positive at the same time, then the NYA’s move can often be a sharper, quicker up move.

There is one more thing on this chart that can be very useful, and that is the use of Bollinger Bands … which can be seen on the NYA Index.

When the NYA is above or below the Upper or Lower bands, the index or stock is normally overbought or oversold.   When outside the Bollinger Bands, the key relative to what will happen next is typically related to what is happening to the 9 and 30 C-RSI levels.   Take the time to learn and test this strategy, as it can do well for you in 2012. Marty Chenard, www.stocktiming.com

Important support levels at 1230.59 to 1227 …

Today’s graph shows the S&P 500′s action for 2011.   Our C-RSI indicator in red measures the strength of the underlying index.

I should say that it is measuring the strength of the market on this chart because the S&P 500 is regarded as the best index for depicting the condition of the economy.   The reason Institutional Investors give for this, is that they say “the S&P 500 represents the best picture of what is happening to important Sectors in our economy“.

So, let’s discuss what today’s chart is showing.   First, the C-RSI strength is showing down movement from its peak this past February.    Note the blue, down sloping line we drew, it is a resistance line showing that the S&P’s strength has not been able to rise above it … which is where you want it to be for another Bull leg up.

Yesterday’s close came in at a (minus) -0.08 on our C-RSI which is essentially a Neutral reading because it was so close to zero, but it also means that this is a Danger condition for the upside.

When you get this kind of reading, it is good to look at the support level of the underlying instrument being analyzed.  In this case, it is the S&P 500 and it is showing a support level range of 1230.59 to 1227.   With the current weakness in strength, the 1230.59 to 1227 support levels become something investors should keep an eye on.

www.StockTiming.com

FYI … Last Friday’s (Dec. 2nd.) comments are below for reference, and are followed by today’s (Dec. 9th) updated comments below that with the current updated chart.   See below for the current VIX number we need to avoid in order to not have trouble on Monday morning.
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December 2nd. commentary: What becomes more dangerous when it is above 26, and less dangerous when it is below 26?

The answer is the Volatility Index (the VIX) which is often called the the Fear Index.

What some investors may not be aware of, is the importance of 26 on the VIX.   It so happens that many Institutional investors initiate what are often referred to as “program trades” when the VIX rises above 26.

What is a program trade?   It is a term that describes a situation where baskets of stocks are traded all at the same time, and the event is triggered by the execution of a computer program.   Sometimes, these are block trades with a total value of over a million dollars, that are executed on the New York Stock Exchange.

The impact can cause unusual swings in volatility which carries a higher than normal exposure to risk levels for smaller investors.

Since program trades typically increase after a value of 26 on the VIX, then below 26 would be a quieter, safer place to be when trading long positions.

Take a look at the two year chart below, where you can see the correlation between the S&P and the VIX when the VIX was above or below 26.  It is not a trader’s magical tool, but it can alert an investor when he is in a territory where volatility and whipsawing can be exceptionally high.

This daily chart shows the daily movement of the VIX.  The VIX closed at 28.67 (on December 21st.) and it was below the trouble area of 30.16+ … 28.67 is still best described as a lesser Negative level.

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December 9th. commentary:  Note what happened this past Monday … the VIX moved down slightly below 26 and then bounced back up again.  As we explained last week, 26 is an important program trading level.   I drew a vertical line on Monday’s tick so you can see what happened after the VIX moved back up on Monday.

So, since Monday, the VIX moved higher until the S&P buckled yesterday.

But, if you look at the chart, something important also happened yesterday.   The November 29th. tick had an unfilled gap, and yesterday’s up movement filled that gap and then closed lower, but just above the gap’s resistance at 30.59.

When gap’s are filled, sometimes it has an effect like blowing off some of the steam leaving less pressure.   That will likely be the reaction this morning, which would mean a lower VIX.  But, it will be what happens this afternoon that will be important.  If the VIX moves back up and closes above 30.56 that will spell trouble for the markets on Monday morning.

Chart 1:  This week’s VIX Chart …

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Chart 2:  LAST week’s VIX Chart for reference …

2nd place winner Scott Cole in CNBC Million Dollar Portfolio Challenge

Interesting that a contestant who claims New Zealand as his country is in the final 20. New Zealand not an eligible country for this competition. Until he was ranked 2nd, behind the first place contestant from Redwood City, the person from New Zealand was always from Redwood City. Couple that by the fact that the 1st place contestant from Redwood City states that he has helped this person. Perhaps the city was changed to New Zealand, California (huh?!) to draw heat away from the fact that number 1 and number 2 at the time where both from Redwood City, knew each other, and one was helping the other.. oh yeah! As soon as they achieved the consecutive rank of 1 & 2, magically the Redwood City contestant is now from New Zealand, California!

CNBC I would go and get a temporary restraining order preventing you from awarding the prizes until you investigate this further… alas.. you made sure that disputes are settled only thru arbitration.. life imitating art… as in the real world a client could not take his broker to court.. only arbitration!

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The CNBC Million Dollar Porfolio Competition had a total of 523,734 contestants

The AD Line is a breadth indicator showing market participation. It is the number of advancing stocks minus the number of declining stocks. I am using a 50 day EMA (Exponential Moving Average). As can be seen on the charts, the advance in the S&P is supported by the advance in the NYADV. So a majority of the stocks are engaged in advancing that causes the AD Line to move up. Take away is that for a sustained advance in the S&P 500, one should see a continued improvement in the NYADV 50 day EMA.