The major indexes had a strong week largely as a result of moves by politicians in France and Germany to reassure the world that Greece would remain within the Eurozone and promises by the central banks of the U.S., Britain, Japan and Switzerland to provide dollar funding to under-capitalized European banks. While these moves may be reassuring in the short term, the underlying problems remain and the US market will continue to be captive to events in Europe until there is a solution.

You will see below that we are introducing new trend indicators which will give a better indication of the shorter term market trends. Our former trend indicators (whch are medium term) are signalling down for all the major indexes except the DJI, but our new trend reversal indicators are contradicting the medium term indicators by signalling up for the NASDAQ and down for the DJI.

The NASDAQ Composite has formed what I am calling a quasi-head and shoulders bottom. 'Quasi' because the left shoulder is higher than the head - maybe it should be called a hunchback bottom. The index closed just above resistance at 2600 and the 50 dma but must clear the neckline at about 2670 before the pattern is completed.



The number of breakouts increased to twelve this week while the number of breakdowns fell back to just two. The increase to twelve breakouts is a positive sign, but gains were small with only Diamond Foods (DMND) gaining more than 5% after it announced a profit jump of 27% and raised revenue projections for the year.

No new features this week

Swing Trade Trend Reversal Signals

Some months ago I took a look at the reliability of William O'Neil's "Follow through day" concept and found it of little value in identifying downward trend reversals. You can read my analysis in  Do Follow Through Days Predict Downward Trend Reversal? and Follow Through Day Follow Through.  Subsequently I began work on a trend reversal system of my own and  identified a promising combination of the stochRSI and Accumulation/Distribution Line indicators which showed promise.  The value of these two indicators is that the stockRSI is price based while the Acc/Dis indicator is volume based. The idea is to use volume accumulation or distribution to confirm price action. In general, a rally without an accompanying increase in volume is weak and unlikely to be sustained and the same goes for a downturn.  (I won't go into the details of either the stochRSI or the AccDis indicator as you can read about them in the links I provided above) .  Over the summer I have continued work on this project and now have some promising results. These will be incorporated into the site in the very near future to provide swing trade trend signals for the major indexes. These will complement the existing medium term trend signals shown each day in the Market Analysis.

To overcome the volatility of the stochRSI, the literature recommends smoothing the indicator with a simple moving average (SMA). I experimented with variations on the length of the SMA but found that using an exponential moving average (EMA) gave better results.  The literature also suggests using a mid-point crossover as the buy or sell indicator while I found that a 40% upward trend crossover and 60% downward trend crossover gave a faster signal. To confirm the signal I looked for increasing accumulation distribution on an upward trend and decreasing accumulation distribution on a downward trend. This also was smoothed with an EMA to reduce day-to-day volatility. Finally, I recognized that the choice of cross over points, and the EMA lengths for both the stockRSI and AccDis, were dependent on the volatility (measured by standard deviation) of the series. The results are a model that can be applied to any time series of indexes or individual stocks.