We had some good response to last issues do-it-yourself approach to analyzing the Dow chart so let's try it again. Ready? Study the chart below and decided for yourself if it is bullish or bearish and why:
My take is that this chart looks pretty bearish right now. The index appears to be struggling with both the 200-day MA and the 10,300 resistance level. It put in a local top at 10,390 on Sept. 8th but quickly fell back below 10,300 and has moved sideways since then. Unfortunately, the Sept. 8th top is still well below the 10,487 top that appeared in June. That means that the index is still in an intermediate term downtrend - see the "Weekly View" on our Dow Jones Gallery Page for a clearer view of this trend.
The MACD momentum indicator has rolled over and is crossing back below its signal line. The price-and-volume-based CMF indicator has just moved back below zero confirming a short-term bearish stance. Finally, the 50-day MA remains far below the 200-day MA something that requires technicians adopt a bearish bias in their analysis.
Are there any bullish signs on the chart? Well, the 50-day MA is starting to turn up and the 200-day MA continues to rise however to majority of the technical signs point lower right now.
So how'd you do? Do you agree or disagree? Even if you don't agree, it is always instructive to compare your chart reading skills with someone else's. Hopefully this has helped.
For more technical opinions, keep reading! You'll find articles by John Murphy, Richard Rhodes, Carl Swenlin, and Arthur Hill in addition to the next installment in my continuing tour of "Murphy's Laws". Enjoy!
LAW #7: LEARN THE TURNS
Law #7: Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts. - John Murphy
John pretty much covered the key points in his description of Law #7. Here's an example of what he's talking about:
First, notice that the RSI doesn't move from overbought to oversold as "wildly" as the Stochastics oscillator does - you'll rarely find an RSI reading above 90 or below 10 and your often find the RSI indicator near 50. On the other hand, the Stochastics Oscillator "loves" to swing quickly between readings below 10 and readings above 90 and it truly"hates" hanging around 50 - while it often reverses near there, it rarely stays near the center line for long.
Because the Stochastics Oscillator is so jumpy, we offer a "Slow" and a "Fast" version. The fast version is essentially the "raw" version of the oscillator. The slow version is simply the fast oscillator that has been smoothed some by running it through a Moving Average calculation. You can see on the chart above how the two lines are similar, but the "Slow STO" link is smoother.
I've added some annotations to the chart that point out one of the "Divergences" that John mentioned which warn of market turns. You can see where both of the Stochastic Oscillators put in a higher trough when AMZN was putting in a lower one. (The RSI was characteristically non-committal at the time.) Soon afterwards, the stock zoomed up 20+ percent. There's another divergence later on that same chart - see if you can spot it.
This ChartSchool article has more on Oscillators in general.
If you want an excellent book on the subject, check out Chapter 10 of John's own "Technical Analysis of the Financial Markets".
For more on the RSI, check out the book "RSI - The Complete Guide" by John Hayden.
Note: John's entire 10 Laws of Technical Trading can be found in our "ChartSchool" area under "Trading Strategies". If you missed any of my previous articles on Murphy's Laws, the ChartWatchers Archives page will take you to any of them.