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Archive for July 8th, 2008

I meant to post about this last night but just ran out of time due to me being sick all day, but the T2108 indicator from Worden went down to 8% yesterday – a very good sign for a bounce. For those that don’t know anything about this indicator, it is a calculation of the percent of stocks above a 40-day moving average.

  • Dave over at TheTradingDigest has been talking about this for a while and has a simple system you can follow once it gets below 15 – definitely a very interesting system.
  • Rob over at Quantifiableedges has talked about the T2108 in the past and today had an excellent post on the T2116 which looks at stocks making 2 standard deviations below a 40-day moving average – basically it shows extremes in selloffs. Btw, if you’re not getting his newsletter you’re really missing out (I have no affliation with Rob other than we are both Celtics fans and write blogs about the market).

Bottom line is that just about every indicator was showing the market extremely oversold. I was already long going into today as the everything has been oversold for quite a while – more than 5 days – so I was just hoping that we’d see a reversal. That we did – and a pretty good one. Now, the question is what happens from here – I would expect:

  • Up a bit more tomorrow with the exception of those equities that shot off like a rocket.
  • Some retracement over the next few days.
  • After the retracement, a move higher.

Obviously this may not play out – but on a probability-basis, this has historically had an 80-100% chance of working. So that’s what I’m going to play.

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Well, my TREND1 and MOMO1 strategies have really been taking it on the chin the past few days – this is to be expected as they are so heavily in commodities. But looking at a few charts, I think we might see a reversal – OIL has an RSI of around 7, DIG is even lower at around 3. But what really has me interested tonight is a chart I created of the Bullish Percent Index for the components of XLE. It is now down to about 3% – near a historic low. Usually this means you’ll get a reversal. Here’s a chart:

And here’s the corresponding chart from Stockcharts.com of their $BPENER symbol:

Pretty damn compelling in my mind – I’ll be looking at going long DIG in the morning and possibly XLE, XES and/or XOP – all the charts look about the same.

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I like the folks over at Bespoke, but today they committed one of the great sins in statistics – mistaking correlation for causation:

“While fund raising statistics suggest that Barack Obama has strong support in the Wall Street community, the performance of the stock market in relation to Mr. Obama’s popularity suggests that investors may have a different view.  In the chart below we show the S&P 500 (red line) versus the price of the Intrade futures contract for Barack Obama to become president (blue line).”

Clearly what they’re trying to say here is that Obama futures are predictive of the S&P 500.  This, of course, is showing correlation, not causation.  I could find any number of charts which shows the same thing.  For instance, a chart of oil.

Leaving off the problem of relying on data from Intrade (which has been shown to be responsive to events rather than predictive) I could see the right-wing blogs picking this up as “see, some great market (because the Bespoke guys are great) economists are saying that Obama is causing the stock market to sell off!” – which, in any multi-factoral environment, is pretty obviously false. We don’t have to look far for other possibilities – sub-prime, war in Iraq, price of oil.

I don’t really care if you’re for McCain or Republicans in general, or for Obama or Democrats in general – what I can’t stand is stuff like this.  This isn’t the first time I’ve seen this, and it won’t be the last – this same sort of thing was written about by the Stock Chartist a few weeks back.

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