 | For Alphadawggby Woodshedder on February 4th, 2008 at 8:43 pm |
Alpha, I’m having a hard time quantifying my belief that the 50 day will continue to provide resistance throughout February.
I urge you to look at DOW charts, going back to the 70s.
Specifically, note how the DOW trades in relation to the 50 day, once it gets beneath it. You’ll note there are times, like during the 70’s bears, that the 50 day is resistance for many many months.
Other times, the DOW pierces the 50 day, makes a couple of stabs at regaining it, and then dives back below it for a sustained period. This pattern is more characteristic of the 80’s and 90’s corrections.
Most importantly, after trading above the 50 day for an extended period, say several months or more, if the DOW breaks beneath the average, and does not regain it within a month or so, it typically stays depressed beneath it for months. And this pattern goes for the other indexes as well. This is the pattern I am working with to guide my analysis.
So as we look at the current DOW chart, we see that it is making a stab at the 50 day. In order for it to regain and hold the 50 day at this point, it will almost have to make a V bottom. As this is unlikely, I feel it is probable for the 50 day to hold as resistance. Lets say that the DOW trades down or sideways from here for another ~10 days, (the latest rally has lasted 9 days) and then runs back up at the average, spending another ~10 days in that process. I believe that to be a realistic scenario, and that would place the DOW taking a stab at crossing the 50 day in late February or early March.
Most importantly is my belief that once the index attempts to regain the 50 day and can’t, it unleashes a set of events that has played out over and over the same way throughout history. They are thus: The 50 day becomes resistance. The index again tests the average, fails, and begins to fall faster, which eventually pulls the moving average down faster. Once the moving average is in a steep downtrend (the current 50 day is almost flat on the DOW) it is easy for the index to consolidate and then overcome the moving average.
Anyway, take it for what its worth as it is rather unscientific. I could define some parameters, create some operational definitions, and probably wind up with an average amount of days the index spends beneath the 50 day based on X variables or conditions. Right now I don’t have the time to make those calculations.
I’m curious as to whether you see what I’m seeing as it is entirely possible that I’m only seeing what I want to see, and missing, conciously or not, other very important data.
Wood-
No doubt you have taken the time to do your research. Very interesting information.
Let me tell you what, at times, my problems have been with putting too much faith in charts and moving averages…
First of all, we have to make the assumption that the charts we are looking at represent a true picture of the market. My contention is that they don’t. They represent the price action of stocks, or indexes…in the past.
But, assuming that charts do represent an accurate picture of the market (which is forward looking), the second assumption we have to make is that the past price action will duplicate itself over and over, regardless of the events. The price action somehow replicates itself over and over as long as it looks like it did in the past and exhibits the same patterns.
Again, I have a hard time with this idea because the prices in the past are a result of different things going on in the market at different times that are not necessarily even related to what is going on now. It’s just too subjective an analysis—even down to the way trendlines get drawn.
For an analysis to be valid, in my mind, it has to be valid for all markets, and all securities.
For example, how do you know that the chart of AAPL’s price will always bounce off the 50-day and go up, whereas the chart of RIMM usually blows through the 50 day on a downturn, but blasts off support back up to the 50 day, where it meets resistance. Again, this type of analysis can get very subjective and there is no standard that one can go by.
My belief is that I do much better looking at the factors that affect supply/demand rather than analyzing price action and drawing conclusions from some very subjective measures.
February 4th, 2008 at 10:36 pmdamn, level 5
ZING!
February 5th, 2008 at 12:46 amAlpha, your mention of AAPL and RIMM is a red herring.
I was speaking specifically of the 50 day average and the DOW.
Although there is certainly loads of research showing a moving average crossover system to work on all markets, beating buy and hold.
We certainly are all free to use what we feel works best for us. Often, it is only our perception that it works or doesn’t work that makes the difference between profits and losses.
Never forget that the market of stocks is not really just affected by supply and demand, but rather the foibles of human beings. So we don’t have to expect the price action to do the same thing over and over, but we know that humans behave the same way over and over. This relationship between supply and demand and human psychology is represented in charts.
What objective measures do you use to assess the factors affecting supply and demand?
February 5th, 2008 at 5:06 amWood-
All good points.
Perhaps, we are not all that far apart.
My method, using the P&F charts to guage supply / demand, looks at prices in a different format from a bar chart of candlestick chart.
Both bar charts and P&F charts look at prices, but the P&F charts leave the volatility out of the equation, so to speak. They are not necessarily updated everyday like bar charts, which show volatility. Only when prices reach certain levels. By factoring out the everyday “noise”, which can certainly cause a lot of emotion in the market, the result is that you see a clearer picture of supply demand, based on prices moving to and from certain levels. At least in theory. It’s an interesting angle and way of looking at things.
Granted there is some subjectivity involved with P&F charts in determining the “box size”, i.e. the incremental value that represents 1 box or unit of change. Also the dampening factor or filter, is based on the number of boxes you assign to signal a “reversal” in prices.
Everything has trade offs. Like you indicated, “We certainly are all free to use what we feel works best for us. Often, it is only our perception that it works or doesn’t work that makes the difference between profits and losses.”
Thanks for the discussion. It helped me think things through.
February 5th, 2008 at 2:02 pm