Reading Ambiguity in Charts

OK, it’s Saturday. Time for my “look at long term charts” and time to use “weekly tick marks”. What is my “overall context” to set my attitude for the next few weeks? The filter through which to interpret the “news flow”? The background on which to project the “daily” price charts?



This is a 1 decade, weekly tick mark, chart of the SPY fund that tracks the S&P 500 largest companies in America. It’s a good general purpose barometer of “bull vs bear” rising vs falling markets. You can see that prices hang above the orange line in bull markets, below them in bear markets, returning to ‘kiss’ the 40 week (200 days, as it’s a 5 day work week) or 60 week lines in rising markets, but sometimes only to the 20 week (100 day) line in bear markets

At the start of a bull run, prices tend to pull up away from the lower Bollinger Band. In a bear market, they pull down from the top one.

At a top, like in ’07, we get a ‘failure to advance’ where “higher lows” turn into ‘flat from one to the next’ and ‘higher highs’ do the same. A “rolling sideways” for 9 months or so. (We also see something like that as a ‘pause’ after a long run up in 04, then the rise resumes). Note, too, that at those times the Bollinger Bands go sideways. Just flat. MACD will be ‘red on top’ and ‘pointed down’.

At each of those times, RSI has been ‘near 80’ and starts to drop. In the ’04 case, to just a touch below 50, then the run upward resumes. In ’07, the RSI indicator “surfs down” to ever “lower highs” and keeps on going all the way to 20 at the bottom of the crash. At the ’07 – ’08 transition, MACD crosses the zero line into ‘negative’ territory and gives the last “Bail Now!” call before the plunge of 08. Note too that DMI was “red on top’ then with ADX (the black line) rising sharply.

So, what is this chart saying about now?

The Right Hand Edge

At the right hand edge of the chart, things are always harder to “read” than in the middle….

Bollinger Bands are sideways flat. So we have lost momentum. Is it a “top” or is it a “pause”? Only time will tell. This is an ambiguous time, and so you get ambiguous signals. But that tells you to use added caution…

From the start of 2011 to now, we have “failure to advance”. Highs and lows of about equal size. Typically that means a ‘fall’ soon, but we don’t yet have a ‘catalyst’ to make the fall happen. It can mean “pausing”. Again, an ambiguous interpretation.

RSI is just back from a dip below 50 (so looks very similar to both the “pause” and the “crash” preambles…) MACD, too, is largely indistinguishable. It’s above zero, but has “red on top” and is headed down. It also has the little “bulge” at the end that usually precedes a reversal to the upside in one of those long wobbly rises. But that also precedes the “whipsaw” just before a plunge (as in that, roughly, August month of 07; where MACD just hopped to ‘blue on top’ long enough to get folks suckered in, then plunged into early ’08.

Does DMI help us? The ADX line is headed toward 20 ish, so low trend and Slow Stochastic would work better (or shifting to a faster time scale – yet for a long term chart / view; that’s just saying that the long term trend is flat so look elsewhere for trend… not very useful for interpreting long term point of view… even if useful for trading a faster time scale). We have just come off a “blue on top” little mountain. So we are in the “ambiguous time” between trends. Will a new blue mountain form? Or a new red one? Or none at all as we have “chop” like in ’05 – ’06, where the market generally worked higher, but did it in short choppy bumps. Mid ’06 being about the same value at the bottom as start of ’05 was, both at about that zero line. You make or lose money then entirely based on entry at a bottom ONLY and exit at a top ONLY. Either you trade that “ripple” or you would be just as well served simply sitting out from the start of ’05 for the next 1 1/2 years, then catching that bottom dip. (Not exactly easy, but not that hard either, just swap to a faster chart and catch those crossovers.)

All in all, right now is an “ambiguous” time on the chart. Makes sense given that we have mixed economic data (profit is OK but employment sucks. That can’t last long… and the government can’t stop spending nor taxing, that will kill things eventually… And in 3 weeks we “hit the budget wall”.)

So I can see why right now the markets would ‘go sideways’ and have ‘trend’ depend on what happens in a few weeks.

Do other indicators help any? What about a faster “one year daily interval” chart?

SPY 1 yr d RSI SlSt MACD

SPY 1 yr d RSI SlSt MACD

On this time scale, it is easier to see that we’ve “bottomed” at about 1275 a couple of times (last month Mid-June and Mid-March) and that the tops have been at about 1350 ( Feb while April is a bit below then above at the end; May runs right along that line, then we drop on ‘failure to advance’ only to ramp back up to 1350 again right now).

Range bound.

It needs to break out of that range, one way or the other, to have significant trend. Otherwise we’re just “swing trades” in that range. (Which make money for swing traders, but don’t do squat for investors…)

We can see that the SMA lines are “weaving”, not in the nice “stack” we had at the early part of the year when trend was upward. The stack is “inverted” with fastest 20 day gold line on the bottom, slowest 60 day red line on top. An “inverted stack” to me is a very bad omen.

At a top, I expect prices to go flat, then fall below a weaving SMA stack. Up until end of June we had all that. Then they ought to ‘return to the SMA stack from below’ (which was the ‘counter trend rally’ where I just made my lunch money for this trip…)


Prices went right on through the SMA stack and are now above it. As a “sideways roller” you expect that, but not as a ‘topping rollover’. Again, and ambiguous behavior. Not willing to drop and roll over. Not trending up either, and not yet in a ‘regular rolling’ movement. The “chop” is not regular enough to predict well. A “news driven market” based on the headlines this week.

RSI is in the ‘roller’ or ‘chop’ configuration. Ranging each side of 50 and about half way to each of 20 and 80. ADX (not on this chart) is in an ambiguous ‘low 20s’ where either MACD or Slow Stochastic are OK (or equally wrong…)

MACD is ‘below zero’ so negative by the blue line has crossed to above zero and it is IS “blue on top” (not surprising given the recent fast spike up). Yet Slow Stochastic is “high turning lower” and says this run is ending, fast traders step out.

Given the “range trading” nature and that we are at the upper end of the range, I’m sitting out and “waiting for trend, or someone like him”…

So this is what an ambiguous market looks like, and how the indicators can tell you it is ambiguous (even if not giving clear trend indications).

So I remember the dictum to “Think in cash. -E.M.Smith” and have gone largely to cash while I have a “bit of a think”… and wait for trend (or at least predictable rolling sideways) to show up.

Mostly I’ll likely be trading non-US-stock things for a while. Base Metals, precious metals, maybe some energy commodities. (Need to make my ticket home ;-)

SPY 6 mo d July 2011

SPY 6 mo d July 2011

This is a 6 mos daily tickmark close up view.

Starting at the bottom, DMI is still “blue on top” but as a slow indicator, will not tell you much about ‘what is to come’ and is mostly telling you ‘it has been up’ (but you can see that in the price trend).

Williams %R has an “above 50” “be in” indication, but the top line is starting to decay back toward 50 (see end of April / start of May for a model / example ). While we don’t KNOW it will do the same this time, that pattern is what we are watching for. IFF it happens, be out (for now, just watch FOR it to happen…) The ADX line at about 22 is modest trend strength, but ambiguous as to MACD vs Slow Stochastic being the more reliable indicator. (Below 20: Slow Stochastic, over 25: MACD).

In some ways, volume is the more informative. Notice the big volume spikes on bottoms? That Mid-March spike, for example? Also the broader ‘rise’ in the middle of June. Now look at the ‘top’ at the end of April, start of May. Volume drops off going into it. Similar low volume in Mid-February at that top. What is volume doing now? Notice that “eye” of “white space” under the moving average of volume ‘trend line’ where it drops to about 150? Not as low as the “near 100” of the earlier tops, but not too far off, either. Also notice that the black lines are shorter than the red lines on each side. “Down volume” is stronger than “up volume”. The stock markets are a volume seeking mechanism (brokers and market makers make commissions on the volume sold, not the up / down direction…) and “upside volume” is fading while “downside volume” is building. Not ‘definitive’, but a hint. We could see an attempt at more “upside”, or we might just see this thing head down to create some volume. The “complication” here is that the low volume happened on a US Holiday. Near holidays, volume fades anyway. So we have a possible “bogus” low volume reading.

Finally, look at the ‘price bars’ on each daily price range. VERY long at bottoms (high price volatility during the day) and very small “squished up” look at tops (low price volatility during that day). Notice that the last three ‘up days’ (prior to the Friday ‘close down’) were very small price ranges, with two of them almost looking like a star. Thin lines of min and max range poking out of an ‘open price vs close price’ box that is more narrow. Looking a bit “squished” like the price bars in early April or mid February near those ‘local tops’.

So, based on those price bars and volume action, I’d be worried that this otherwise “ambiguous” set of readings will resolve to the downside.

Live Charts

We’ll see as the market develops next week.

Here is a live chart so you can watch what happens over time:

SPY 6 Month Daily with Volume,  W%R, and DMI

SPY 6 Month Daily with Volume, W%R, and DMI

SPY 6 month daily with RSI, MACD, Slow Stochastic

SPY 6 month daily with RSI, MACD, Slow Stochastic

So this is what I do when charts are “ambiguous”. Move ever more to cash, to faster trading charts, and watch a broader set of indicators a bit more closely…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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3 Responses to Reading Ambiguity in Charts

  1. Tim Clark says:

    I expect a bump up when the Europeans get some resolution to the PIGS situation, and another following whatever asinine deal comes out of conman-gress. Which comes first? Regardless, frundamentals point to a bad black October. I will be watching your reports closely.

  2. E.M.Smith says:

    IFF I were to “expect at” he markets… I’d expect a drop now of modest degree, a rise on some Eurozone and/or US debt “fix”, then an October Surprise drop of significance as “The Folks” express their distaste for “the deal”…

    You can see a similar thing writ small (so far) in the way Australia announced a Carbon Tax of some $23/ton and rising 2.5%/ year until 2015… and their stock market opened some 1.26 % or so down on the news. Have not yet checked the final numbers (morning coffee now…) but will shortly.

    The Aus Government thinks it is doing A Good Thing and folks are voting with their wallets. ( I’ve no money in Australia as I was expecting this outcome. I’ll not be putting any more in until I see how this stabilizes / if it stabilizes. Looking at EWZ we see it’s gone quite dead relative to SPY on the Sovereign Risk from their new government – it used to be one of my favorite ‘hot tickers’…) I’ll likely make a posting out of it once more data is in hand.

    At any rate, watching what governments do in their stupidity and political fervor gives a pretty clear idea what “folks with brains and money think” when the market opens… So if a “debt deal” gets done, I’d expect a “pop and drop” on the “news flash then actual content” cycle…

    “Let the charts be your guide. -E.M.Smith”

  3. TIM CLARK says:

    Buy the rumor, sell the fact. Old truism from the CBOT pit trade.

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