SPY is a ‘stock ticker’ that is the S&P 500 largest stocks in America by market capitalization. (price x number of shares outstanding). Basically, “the big boys”. It captures most of the best company performance in the economy, as in economics “size matters”. So much so that, depending on which years you choose, 65%-75% (or more!) of all investment managers fail to beat the S&P 500. This has lead to a whole industry of “index investing”. So you can buy the whole S&P 500 if you buy SPY.
Right now is a challenging time in the markets, so I’m going to examine 3 charts of SPY (and about a dozen different indicators) so we can see what is going on. Along the way, we’ll also see how to read charts better and get an idea what the different kinds of indicators are that you can use. There are many charting services, but I use the free charts from “Bigcharts.com”.
http://bigcharts.marketwatch.com “advanced charts” selection. You can pick various chart options off the panel on the left hand side.
Remember that you can click on a chart for a larger sized one to look at (Mac Safari users can “Ctrl-click”) and realize that you don’t need even half of all these indicators to make decent choices and decisions.
My Basic Chart – 1 year daily, RSI, MACD, DMI, SMA 3-25
I usually start with this chart. Most of the time it tells me all I need to know.
On Bigcharts, down at the bottom of the options panel under “chart style”, there is a choice of chart size. I usually pick the medium or large size. Also I select the “candlestick” price display. OHLC tells the same thing in a slightly different way. (Open High Low Close – so it has a leading tick that is the price at the open, a high and low range to the line, and a trailing tick for the closing price. Candlestick has the same info, but with a wide part for the open and close, and with red vs black for direction the price moved that day)
To this price information, I usually add a Simple Moving Average set (or SMA Stack) with moving averages for 25, 50 and 75 day periods. Under “indicators” you pick SMA (3 – line) and fill in 25. It makes the 50 and 75 as 2 and 3 times the base number.
So look at price. Get a feel for how any ticker ‘behaves’. Does it jump wildly? Bounce up but dribble down? Overall, does it rise from lower left to upper right? (A good thing, called “alpha” or tendency to gain price). Or does it tend to ‘roll up and down’ flat and going nowhere? Good for trading, not so good for long term investing.
Notice that at bottoms, the price bars tend to be longer while at tops they tend to become small and compressed. Sometimes turning into little plus signs or dashes.
Then look at the SMA Stack. Price on top, then 25, 50 and 75 in order is a stock rising in value. Price will tend to periodically drop back to the stack as a time to buy. In dropping stocks, it’s 75 over 50 over 25 over price, and when price returns to the stack, that’s time to sell or short. When the SMA stack has the lines weaving, the stock is rolling sideways and is for trading (the stack also weaves at transitions from one trend to another – tops and bottoms, when it’s also a ‘trade fast’ not a ‘own long term’…) and price will tend to range each side of the weave.
Relative Strength Indicator. Tells you how this stock is doing relative to it’s typical behaviour. (There is another kind of ‘relative strength’ some folks use that measures a ticker against the general market, this one is not that one.)
RSI tends to reach ‘near 80’ when a hot stock is running out of gas, and near 20 when a falling trend is nearing exhaustion. It often indicates several days in advance. It’s the “Set The Trigger” warning. In flat rollers, it wanders from about 35 to 65 or so. On a bottom reversal it’s often best to wait for the slightly higher ‘dip’ in RSI that comes just after the ‘near 20’ before buying in.
Moving Average Convergence Divergence. Look at those SMA lines. Notice how they come together at a top or a bottom, but move apart at a strong run (up or down). MACD measures that gap between the SMA lines (but using it’s own averaging interval) and makes it easier to “Mind The Gap”. It comes with 2 colored lines and a black histogram. They tell you the same thing. The “blue line on top” means the stock is going up while ‘red line on top’ means it’s headed down. The distance between the two gives the black bars, with above zero the same as ‘blue on top’ and below zero the same as ‘red on top’.
DMI+, DMI-, ADX
DMI+ is a blue line. It shows the strength of any positive movement of price. DMI- is a red line. It shows strength of any down movements. ADX is the black line and just gives an indication of overall strength of movements in any direction.
You want ‘blue on top’ to be in a stock and ‘red on top’ means get out. When ADX is over about 25, the MACD indicator gives pretty good ‘trend trade’ signals. When ADX is below about 20, then Slow Stochastic is better for faster “swing trades” indications. I often watch for blue on top crossing over black as an early indication of a positive run ending. Then when black inflects down it’s usually time to leave the trade. You can do the same thing with red on top for ‘time to enter’. When all three are down around 10 or less it’s starting to be a dead money stock without much action.
So take a minute to look at that chart and look for patterns. What happens together with various tops and bottoms of prices.
Also note that you could make a 2 year chart for more context, or a 6 month or even a 3 month chart to ‘zoom in’ for easier reading. This is done under the ‘time frame’ button on Bigcharts. Further, there is a ‘compare to’ button that lets you add other tickers to compare what’s moving more.
My Read Right Now
This is a live chart, so what I describe now will slowly move to the left hand side of the chart and in a year be gone.
For now, I see prices a bit ‘squeezed small’ like a top, and with the SMA stack ‘weaving’. Price goes about the same above as below the weave. We’re not going anywhere much, and right now we’re likely to drop back to the SMA stack. There is a small chance were at a place like back in mid-March where a very strong run higher was about to become a steady cruise higher. It’s hard to tell a ‘transition to cruise’ from a ‘roll over down’ until you are in it a while. So I’m willing to trade out and then back in if the cruise resumes.
RSI has the bottom dips “stairsteps up” but with very shallow steps higher. We are coming off a bottom but into more of a flat rolling stage and not much ‘steam’ higher. The present top is about on the trend line of prior tops so it’s likely we’re headed for a ‘dip’ soon.
MACD is ‘blue on top’ but at the end of a run, with blue turning flat. Sometimes it will do this, then continue the run, but once it crosses over red we’re most likely headed down. In very strongly running stocks, the MACD can ‘weave’ in a steady run higher, but the price chart would make that clear and you would know not to trade out then… MACD is also above zero, so the general trend of prices is higher, just not very fast and probably not soon. The black MACD Histogram is approaching zero (we’ve inflected from our peak rate of gain toward zero) and is likely to cross to negative ‘soon’.
Overall, MACD says to be ready to trade out.
ADX is roughly flat at about 20. We’re not picking up speed, nor are we losing it much. Just a very slow trend mostly sideways. DMI+ (the blue line) is on top, but not very strong at 25. DMI- (the red line) is on the bottom, but also pretty tepid at about 18. They both have a tiny ‘kink” toward each other, so might be giving an early indication of change soon. When things are trending, the ADX line will often have an inflection down at the top or bottom of the trend. When that happens a bit after a crossing of the blue line to below the black, it’s usually time to lighting positions. Look at the end of April, entry into May for an example of that.
So with just this chart we can already see that there is a very weak positive trend to the market, but it’s mostly a flat roller sideways, and this is a time where the odds are greatest that it will roll down next. At a minimum, put stop loss orders in place. Start watching the charts more often. Technically, with ‘blue on top’, it’s saying to ‘stay in’ but DMI is a slow indicator and often lags by a few days.
The Volume Chart
Sometimes useful for picking up confirmation on trends, or looking for conflicts of trend. You want to see volume increase on up days and fade on down days. Notice that at major market bottoms volume will spike up, while at tops volume fades to low…
Price and Bollinger Bands
OK, on the price section I’ve added Bollinger Bands (those very skinny red lines each side of the price bars). These are at one standard deviation of recent price movements away from the trend. During trends, price tends to track along the line. In flat rollers, it tends to bounce off the lines after touching. When price pulls away from the Bollinger Band line, it usually means a reversal of direction is headed your way. This chart is saying “be ready to be out” as price has pulled away from the upper line.
SMA 3-100 stack
On this chart, I’ve changed the SMA stack to be 50, 100, and 150 days. This gives a slower indication of what’s going on that’s better for longer term investors but less suited to traders. Basically it’s oriented toward keeping you in (or out) longer and trading less often. So in April / May we had price crash right through the SMA stack and it didn’t even react with a ‘crossover’ of the SMA lines until well after the fact. But right now it’s saying that you are in a down trend. 150 day over 100 day over 50 day. But with something of a weave to it, so not a strong trend. Tuning up what numbers to use for your SMA selection is a bit of a personal decision, but I like the shorter faster setting better. It nags me more to get out on reversals.
You can choose a plain old volume, all in black, but I like the Volume+ better. It has red on down days and black on up days. Volume spikes on panic down days, fades at market tops. Look at the first weeks of April. Notice how there are a couple of white blobs between the volume and the volume average line? I call that “spooky eyes” and it usually means to watch out for a big drop soon. Spikes like on those two big spikes in May are usually good trade days for short term buy and flip operations. Notice that at the start of this month we have an ‘eye’ and generally low volume. Makes me a bit nervous.
Goes very high on crash days (see that spike in the middle) and very low near tops. Kind of like it is now… It can also go low during steady up runs, like in mid-May, so best used in the context of other indicators.
You want to sell options when the volatility is spiked up (you get payed for the volatility premium) and you want to buy options when the volatility is low (you don’t pay much for a volatility premium). For most folks this will just mean it’s a decent time to buy ‘protective puts’ just before a top rolls over and turns into a drop.
Twitchy compared to MACD. During strong runs, like in May, it tend to peg at an end and wobble sideways. During more flat rolling phases, like now, it tends to call the trade pretty good. Right now it’s rolled downward and is saying to trade out. The odd thing about Slow Stochastic is that when it is saying to be afraid and trade out, it has “blue on top”. Backwards, IMHO.
A bit of finesse: It’s almost at 50 and price still hasn’t fallen. A bit odd. Might mean we’re just going to pause at the SMA stack before beginning a nice bull run higher. Usually just means that the plunge has not begun yet. My read is that we’re probably in between those two just a little. A mild downturn ‘soon’ but with the depth on the trend line connecting the prior dips.
Williams %R, Momentum and Rate Of Change – ROC
By now you may have noticed that we often get the same information from different indicators. You don’t really need to look at them al, but sometimes one speaks to you better than another. On this chart we have Williams %R. I find that the shape of it is roughly the same as Slow Stochastic and that it has ‘zero crossings’ about when MACD has a crossover. Sometimes I use it just to avoid needing both of the others on one chart. Sometimes I use it just because it’s blue and I like blue ;-)
I’ve put the PSAR indicator on this chart. Parabolic Stop and Reversal. It’s those red dots on the price chart. Supposed to tell you where to set stop loss orders (or ‘buy if touched’ going the other way). Sometimes it’s helpful, sometimes not so much. In a choppy twitchy stock, it will whipsaw you in and out for nothing. In a large well behaved ETF like SPY, it works fairly well.
I’ve also gone to an SMA stack of just 2 lines of 100 and 200 days. Gives a more clear indication of “time to be out” when they are crossed over, but did it some time after the exact market peak. OK for folks investing over months to years time frames, but way too slow for traders.
Fairly easy to read, just had a midline crossover that says “be out”. Sometimes the jumpiness as it wanders in a trend can be distracting. I like it as a confirmation on MACD, and sometimes it gives a warning just a bit quicker…
Momentum and Rate Of Change – ROC
I’ve put both of these on here and will discuss them together. ROC is more downward twitchy. I like it for a nag about risk and maybe I ought to be getting out, but it also keeps you out of some good runs. Momentum is more ‘balanced’ and tends to keep you on the right side of the market, but reacts a bit late for ‘get out’ calls. So with W%R Saying get out, and ROC saying get out, that Momentum is saying ‘weak trend not so sure’ starts to look more like a slower ‘get out’…
You can use the same charts, read the same way, on tickers for bonds, currencies, commodities. There are some quirks. Like Gold has the gold fix done in London in the dead of night (from my time zone) so that chart often jumps dramatically on the open. Hard to predict and react properly.
Thinly traded stocks and penny stocks can have very quirky charts. “Baskets” of stocks, like ETFS, are easiest.
You can change the chart to a 10 day hourly chart for faster trades. Mostly still reads the same. You get some interday artifacts showing up (like volume spikes on the open and near the close) and ‘fast indicators’ like Slow Stochastic can become quite frantic on a fast chart, while slower indicators like ADX / DMI can be reacting fast enough for swing trades.
10 Day Hourly Interval Volume, MACD, DMI
Here is just such a fast chart. First is a static version as of mid-day today:
OK, this is just a bizarre chart. Clearly being driven by day to day news events. Yesterday news was bad, today news is good. Lots of fast chop going back and forth.
Looking at the price bars we see them getting thin after the run up mid-day. Looks toppy. The price is generally rising lower left to upper right, but with a set of flat days in the middle and both a spike up and spike down (over 3 days) recently. We’re at the top Bollenger Band and starting to pull away from it just a bit. “At The Close” today ought to be interesting…
There are two odd volume spikes 4 days ago, one upside the other downside (and the downside is slightly larger). Today, volume has died off as the price has risen (but prices often fade down mid-day).
MACD had a crossover to the buy side at the open, but with hourly tick bars and given how fast this shot up, a ‘buy’ on that signal would have placed you in just after most of the rise.
DMI gives a similar buy signal, with DMI+ on top. But just look at the ADX strength number. About 18. Not a very convincing move.
Frankly, this looks like a bunch of floor brokers, market makers, and program traders flopping around on news flow and not much else. I’m glad I’m on the sidelines through this. If it stabilizes and goes higher next week, then we’ve most likely got a decent second leg to the run and breaking out of this trading range. More likely is some bad news and another return to our mean.
Then a ‘live version’ where you can watch the market move:
Just for fun, here is the fast twitch trader chart:
At the moment, PSAR is getting dots all over the place. Typical in a chaotic market with poor trend. Looks to me like trading with ‘stop loss’ and ‘buy if touched’ orders, or correctly predicting tomorrows news shocks, it about all that would work (and I’m not sure they would work all that well…)
Overall, with just a bit of practice per day, one or two charts, you can learn to read them pretty darned fast.
Hopefully this will help folks see what I’m doing here a bit more easily. And hopefully the charts will help folks know when to protect their positions and when to let the chips ride just a bit longer. Right now, it looks like a time to push back from the table and take a friend or spouse out to dinner on the winnings of the last couple of weeks…
If the run stabilizes with an upside breakout, you can get back on. If it continues to dash back and forth, you are preserving sanity and energy, and if it exhausts and falls, you get a great reentry.
I decided to slide our ‘time scope’ back out to very long with this 5 year weekly tick mark chart. Not on this chart is RSI that has dropped from a high down to the midline showing a strong run reaching an end. We’ll pick it up from there:
Slow Stochastic is a fast indicator, in this case on a slow chart, so it is saying we’re at a local top, but not yet inflected to the ‘get out now’ crossover.
MACD will be very slow on this time scale. It is below zero and weaving sideways. A tepid “indecisive” with a slight overall negative trend (that below zero value).
DMI is clearly “red on top” but slow indicator on a slow chart is very, well, slow. It won’t call an entry until well after the fact. We do have red crossed below black and black is slightly inflected down with blue slightly inflected up.
All in all it’s still saying ‘investors be out – traders trade fast charts and with a bear market bias’.
Risk levels are high on the long side.
Could this be the next big breakout? Sure it could. It could also be the start of a return to the August Lows. A “retest” of those lows. Given all the mixed indicators, I’m happy to let a few good news days blow past me until the trend is clear. In the mean time enjoying the day with ‘no worries’.