Mid Day Market Thoughts 19 May 05

The US indices continue their rally started on Friday night with the NASDAQ taking the lead with 26.5pts. Calculating the volatility for the NASDAQ, it seems like the rally started on the first week of May with bullish divergences on both the MACD and 5,3,3Stochastics. So that's all well and good on the technical front. A year ago, I would have traded on those signals alone.... but as risk averse as I am, I was trying to wait for economic data to confirm the technicals.... but then, none of the numbers that came out had very significant impact. But the market rallied nevertheless, so the news is probably providing a 'floor' for the market to rally upon - but not good if I cant recognise its significance, so I had to turn to other means for confirmation. That's why I still subscribe to the usefulness of TA to understand the market's reaction to the underlying factors that I have no clue about (or have missed.... etc).

The only thing to do now is to try to find means to gauge how long and how far this rally would go. If I knew that the rally would last 10days, then there's still $$ to be made even if the market had already rallied say, seven, days. The next best thing would be to wait for mid-trend buy signals (RHs, Sequential Breaks, TypeB Divergences), but there's still a risk that the rally is so aggressive that they dont apprear, or appear too late....

The put/call ratio was actually on the high side - meaning people were buying more puts than usual. This only showed that the market has sold down enough for a rally to commence, so I can't use it to time my entries. The market internals were not giving any signs as well with new lows still beating the new highs consistently.

Then I thought that I should calculate the volatility to look for further clues. The resulting chart showed that the NASDAQ would rally when volatility peaks (& starts heading down) as the index declined, setting the stage for an upmove. Next would come the signals from the indicators I've previously mentioned, and lastly, momentum (or buying interest).

I was thinking of constructing a price acceleration indicator to filter for momentum, but am afraid that the market would have finished the short-term swing when the indicator flashed a 'buy'. Thus, sticking to the sequential breakout buy still seems like a better idea.... and on the first white high is broken (preferably indicators have crossed too).

On the singapore front, the market gapped higher from the gains of the US, but has since retreated from its high. I dont know if the participants have gotten over the lower GDP forecast but the crazy bullishness of the past months is not evident. But the other regional markets (Japan, Hong Kong & Australia) have all responded well to the US gains. I have yet to sit down to think about how I can use the SSF-stats, price, volume and timesales data of both the whole market and individual stocks to derive a sentiment indicator... but I dont know if it will be worth my while to do so since I've decided to move into options....

All in all, with the introduction of the volatility tabulations, it should now provide for a very robust trading system.