Welcome to the TFC Commodity Trading Forum.
Please feel welcome to join in on these informative ongoing discussions about trading futures and commodities.

The Trading Forum is intended for the open discussion of commodities trading. The management of this Forum does not agree or disagree with the ideas exchanged, and does not exert editorial control over the message posted herein. Read and post at your own risk. The risk of loss in trading or commodities can be substantial. We discourage the use of this Forum to promote trading that is acknowledged to be risky. Please note: many links from the Forum lead to pages on other web sites. We cannot take responsibility for nor endorse the information presented on those sites.

TFC Commodity Trading Forum

Current Market Conditions

Clare White, CMT, Optionetics.com
March 10, 2011

The broad-based market rally since September 2010 has had one moderate decline in late November that resulted in renewed demand keeping the intermediate-term uptrend intact. Momentum indicators confirmed the bullish price movement on weekly charts to the point that no new information was being provided. It’s conditions like these that can make a technician complacent if they are not assessing other tools along with their standard set.

The flattening of both weekly and daily momentum indicators during the uptrend hinted at some unusually persistent bullish bias in the form of minor swings and moderately up closes. Volume was weakening during a portion of the move, but could be attributable to the holiday period. It was only after the new year that volume divergences could be given more weight. A view of various weekly and daily charts appears after setting the tone in the current environment.

Fundamental Considerations

While I rarely comment on the fundamental backdrop, the Fed’s quantitative easing [QE] clearly seems to have played a role in the Fall-Winter advance and is expected to continue to June 2011. For more on the impact of Permanent Open Market Operations [POMO], see Tom McClellan’s Chart in Focus dated 10/29/10 by navigating to the Learning Center from www.mcoscillator.com. Although the potential for QE3 has only lightly been discussed to this point, it seems recent declines may make the topic rise to the surface.

And now to really deviate from the norm, it’s my opinion that the Fed cannot consider QE3 until a more permanent budget is put in place and the debt ceiling is raised, assuming it’s raised. I imagine Mr. Bernanke is cringing as Middle East uncertainty and weakness in Europe diminish the short-term impact of POMO at a time when it would help the markets hear about continued market support. Unfortunately the whole situation has interfered with the markets going wherever they need to go to reflect true free market movement.

Traders and investors are left to wonder if portfolio protection is warranted in this sustained advance where time and volatility eat away at put premiums. On the other hand, the longer it takes for the market to be allowed to correct, the worse it may be. Implied volatility [IV] levels have increased pretty strongly in the short-term (VIX close at 21.88 is up 39% in a month), so those seeking protection want to keep in mind the impact of IVs that can once again decline. That said; the VIX spent only a couple of weeks below the 20 level in 2009.

Momentum Shortfalls

On a weekly basis both the longer-term rate of change (ROC: 34 weeks with a 21-week simple moving average) and standard MACD (12, 26, 9) provided little warning that volatility would exert some downward pressure on the market. Figure 1 provides both of these indicators on the weekly chart for SPY, the exchange trade fund that tracks the S&P 500 Index®, as of Wednesday March 9th. The chart also includes two upward trending regressions channels with construction dates of 7/24/09 – 2/5/10 for the slower ascent and 9/10/10 – 11/30/10 for the recent, faster ascent.

Although the ROC has moved downwards, it remains suggestive of a minor corrective move for the time being. Similarly, a MACD crossover may occur in the short-term; however, Figure 1 includes periods of sideways movement for MACD during sustained uptrends. One key that traders need to keep in mind is that price itself comes first and foremost, and its trend assessed through objective, then subjective measures.

On a weekly basis price is approaching support at the lower regression channel line on both channels. The long-term nature of both channels suggests a stronger area of support, but do remain subjective. Declining momentum that is only approaching a signal area makes assessment of the support level difficult. It is not uncommon for oscillators to provide limited information during initial changes in trend, so focus on price action first, then other tools that may provide more insight.

Figure 1 Weekly Chart of SPY with Regression Channels & Momentum (3/9/11)

Figure 2 provides a more clear view of the weekly chart with the current regression channel, along with my preferred momentum tool, RSI applying techniques developed by Andrew Cardwell. Bullish and bearish ranges have been included at 40-80 and 20-60, respectively, along with a zero line. The lowest panel provides volume which is important secondary data.

As a quick discussion of Cardwell’s bullish & bearish ranges, Mr. Cardwell noted that RSI moved to different levels during bullish and bearish moves when using the default setting of 14. When markets are in a sustained uptrend you expect RSI to move between 40 and 80 as corrections and continued advances occur. The 40, 50, 60 and 80 areas may serve as support and resistance for RSI along the way providing another tool for confirming price action. Unfortunately with an RSI that is moving more sideways than from support to resistance (even the 60 to 80 level), it does not provide the additional insight sought.

Figure 2 Weekly Chart of SPY with Regression Channel, Volume & RSI (3/9/11)


Volume is a leading indicator that can warn traders when a trend is losing steam. Figure 2 shows how the 10-week simple moving average (SMA) has trended downward since the July 2nd 2010 low, making the advance suspicious. Unfortunately a major problem is that a suspicious trend can break contrarian traders if they are not focused on price trend or keeping stops tight.

Although daily price action can be too short-term and noisy for intermediate traders, particularly if you use discretionary measures, it can also serve as a first alert regarding more important trend changes. In Figures 1 & 2 momentum is providing limited additional information on the strength of the current trend, while volume simply continues to diverge—somewhat of a status quo right now.

Daily Charts

Bringing the view down to the daily level provides more warning about the current price action. Figure 3 is a daily chart for the indicators in Figure 1. It includes regression channels for the same construction dates, along with ROC and MACD. In this view price has recently broken down below the middle regression channel line with expectations for price to continue downward to the lower channel line. In the event this occurs, SPY will break down below its weekly channel.

Figure 3 Daily Chart of SPY with Regression Channels & Momentum (3/9/11)

Trend changes will appear on the shorter-term chart and are suggestive of normal price oscillation within a trend or an alert to more intermediate term changes. Figure 3 Includes an ROC that has been diverging since early January, but more recently it broke down below its 21-day SMA. Today’s price action has ROC bounded by support below at 1 and resistance above at the SMA. A break down below 1 will be negative for both the short-term and intermediate term picture since this favors a bearish move to the lower channel line (daily) and as a result, out of the weekly channel.

MACD has also provided an earlier cross as expected; however it is now moving to the zero line. Today’s price action should display a widening of the distance between the MACD and its signal line. More importantly (for me) Figure 4 provides RSI movement since mid-February between the 50 and 60 level, with today’s close sending it convincingly below the 50 level for the first time since November. With the daily momentum indicator bearish and moving towards 40, it’s possible this decline is different than the November interruption. Only time will tell—a turn tomorrow and movement back above 50 would be a positive development for the trend. The point is, at the current levels it’s providing important information.

Figure 4 Daily Chart of SPY with Regression Channel, Volume & RSI (3/9/11)

Before moving on to a couple of pure price charts and objective trends, note the volume bars have increased on down days and decreased on up or moderate days. The weekly chart appeared to have low volume with two days left in the week, providing limited information.

Monitoring Pure Price Action

Figure 5 is another daily chart with the ProfitSource Daily Trend Filter (DTF). The long sustained up move was interrupted in November and today’s bar is similarly red (not seen here). There are five price gaps circled, with the red highlighted displaying a filled gap right before the red DTF bars. Last Thursday’s gap also filled quickly, but there is an important difference. Today’s price action included a gap downward which provides a case for the bears on an intermediate-term basis.

While I wanted to provide some current information on the markets this environment has provided a nice opportunity to highlight times when you’re standard tools may lead you to complacency. When you feel your chart assessments suggests nothing new, consider moving down and up a time frame to assess the relative shorter and longer time frames for important alerts and confirmations.

Figure 5 Daily Chart of SPY Price & Volume

When there is even less certainty than usual, I like to wrap things up with an objective few of the current trend. I do this by changing a bar chart to a line chart to minimize the noise and adding the 20-day, 50-day and 200-day SMAs. This view identifies a short-term trend that is sideways, and an intermediate term and long term trend that is up. As of today, the short term trend turned downwards and the intermediate term trend turned sideways. The long term trend remains bullish.

Figure 6 Daily Chart of SPY with Objective Simple Moving Averages (3/9/11)

Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site