Market Analysis for Sept. 25th, 2006

[Soultrader]

Couple of things that I will be watching for. The market is pulling back to the 20 period moving average and the trendline. The markets did hold at the 9/19 low around 11555 - 11560. This could be an indication for another lift towards the upside. However, couple of warning signals lie ahead. We had higher volume on the sell-off. Also take a look at the market profile chart. The 9/20 gap up and higher value placement occurred on lighter volume. The following day, we saw a sell-off for approximately 100 points. Fridays action was fairly balanced and we had a rangebound market. However, we had a lower value placement.

I will be holding an open mind for Monday. Although my bias is towards the long side, we will need to clear the overhead supply caused by profit takers. The 11555 support level will be a key level to watch. If the markets can hold above this, I will look for long setups.

[ant]

Here's another perspective that supports your long bias for Monday, 9/25...

An index divergence occurred betwen the YM and ES on Friday, 9/22. The YM made lower daily lows whereas the S&P did not. This divergence may have started to correct itself into Friday's close. In addition, the YM has formed volume divergences, and volume started to pick up to the upside. We'll see how this continues to play out on Monday after checking the Globex action...

index_div.GIF

ym.GIF

[Soultrader]

Antonio,

I know I need to get in the habit of analyzing different indexes with the YM as well. For example, the YM and ES divergence was something I totally missed. Do you think the ES leads the YM all the time? What I mean is, that the divergence information tell you that the YM should follow the ES, instead of the ES following the YM? (I hope this makes sense)

[ant]

Hi James,

I don't try to determine if one index is leading another. Basically, the index divergence is indicating a decrease in momentum in the direction the market is moving. The index divergence I pointed out is simply suggesting that the market is not as weak as the YM was indicating in the short-term. Since the market is also near a key S/R level, one might expect the market might bounce off of it and trade in the opposite direction. I use an index divergence the same way I would a divergence based on weak market internals. If I trade the ES, I am not looking at the YM for any predictive value, or vice versa. Hope this makes sense.

Antonio

[Soultrader]

Thank you Antonio. You mentioned that the index divergence is not as weak as the YM was indicating. Basically this would be adding more weight to the S&P 500 compared to the Dow? What I mean is it possible that the rest of the market is lagging and the Dow is leading indicating weakness?

Of course technically at this moment I do not see market weakness but I am curious to know because in a market top, one index may lead the other. And this information can be crucial in timing your entries. Thank you.

James

[ant]

Yes, it's possible that the rest of the market is lagging the Dow, but I don't know. If the index divergence were the opposite, i.e. the S&P made lower daily lows and the Dow did not, I would still have made the same analysis. The divergence is still indicating a possible reaction in the opposite direction.

[Soultrader]

Just added this in my book of watch lists. It will be something I will be looking for from now on.

During the trading day, I do find that the ES tends to lead the YM. For example, if the YM is testing its low; but the ES makes a new low, I would sometimes short the YM. I find the ES leading the Dow by a matter of seconds.

[ant]

Here is a longer-term index divergence that will be in the back of my mind for the trading in the coming days...

Looking at the DJ and SP, the Dow traded above the May highs, but the SP could not trade to the May highs. On a longer-term, the market is looking weak.

Divergence.GIF

[Soultrader]

Interesting. I would still be careful in holding a short bias for the bigger picture. The trendline has not yet been violated and we are seeing an ascending triangle pattern. This is the same pattern we saw in the YM a few weeks back and it then went on to rally 300 points.

However, that failed breakout on the Dow cash index does worry me. I think this week will be a very interesting week for the indexes. For the YM, any break above the May high will be explosive.

[ant]

That's an important point. Until the uptrend is broken, we should continue looking to trade on the longside. Point well-taken. Thanks.

EDIT: Soultrader, I missed your other post about the ES leading the YM. Thanks for your observation.