I will start with Ciena to demonstrate how Technical Analysis is useful and especially for explanations why prices day to day act the way they do.
So lets start with the trade I made. As I don't have the best Broker shorting specific stocks are not an option as they don't have the inventory of them. So I use inverse ETF for indexes / commodities or Put Options for stocks.
Why did I purchase my Put Option on Oct 5th?
Well the technicals told me to. (Not shown but accessible here )
First sell signal was a MACD cross over. this happens when the MACD line crosses below the signal line.
This indicates momentum has reversed.
Second sell signal is that the Slow stochastics broke below the 80 level after been embedded for a few weeks. This indicates that momentum has shifted and the stock is overbought.
Now comes the confirmation, the sell volume started to pick up. The first day should be signal enough to turn short on this given the fundamentals.
Speaking of fundamentals an announcement that they were taking on more debt started to complete collapse. One could argue that the stock may not have rolled over if that announcement was not made. I agree and honestly expected a longer timeframe for the pull back we have seen however the sell signals gave an appropriate entry. Entering long at that point would be foolish and the probably with following fundamentals only is that you are shooting blind for entry and exits as you are not paying attention to the current price action.
Regardless look at how POWERFUL moving averages can be. Since this type of action happens so often it is again foolish to cast moving averages as witchcraft or voodoo.
Lets see what happen. At the 20 MA a gap down occurred the following day on strong volume (confirmation of the move, since "smart money" was willing to be on the short side of the market). A logical place to stop would be the 200 MA. That day we broke below it however last part of the day we see that it just managed to close above it and where did it bounce off? The 50 MA almost perfectly. Now part of trend analysis is that pierced trend lines will generally break down. That means that on the day we pierced the 200 MA the damage was down and since there was strong volume on the move one should look for a shorting opportunity. That came on the marginal up day that follow which is expected since 200 MA is a powerful trend line. Now other people state that the best way to break a moving average or trend line is a gap on strong volume. Look where the gap started right on the 50 MA and the break down continued to the downside. As of now, there is very litter support under this stock, the purple line at 12.50ish is a triangle I have drawn in and I am looking for a possible bounce off that.
Now the over all markets
I have been pretty bearish and I can't claim that this is going to be the massive breakdown I believe is coming (similar to flash crash) however, what is happening is the same as the Ciena stock. The MACD has crossed over today, the ADX appears that is will cross this week, the Slow stoch appears as if it will fall below the 80 level this week. These, of course, do not have to signal anything however when 3-4 signals are screaming sell plus volume behind this move was strong then you have to take a step back as say .... should I be going long? if you don't believe the markets are going to crash then stay neutral until things stabilize.
Two things to note however, Monday night there was a mini flash crash on SPY ETF which is one of the most traded stocks. This ETF in less than a minute dropped 10%..... This type of action doesn't make sense in an efficient market. Of course the price quickly came back and 50 billion worth of trades was canceled. This brings another question, does canceled trades make sense in a "free market"? That discussion I will leave for a article I am planning on writing.
Second thing to note is the POMO which are Fed bond purchases. These happen on Monday , Wednesday and Friday. Last Friday the markets looked like they were about to roll over and Monday was one of the largest POMO purchases in recent months at 6.3 billion "free money" in the system. This, of course, pumped the market up. Today there was no purchases and look what happened. Tomorrow there is bond purchases so I 100% expect a rally tomorrow unless the invisible hand finally over powers this unsustainable rally. I think a bounce is likely and I will at the end of the day hopefully pick up some shorts as thursday I expect another day like today. The big line to watch is the 20 MA breaks below that virtually promise a test of the 200/50 MA exactly like Ciena's case. Stay tuned for this bumpy ride. I am currently sitting mostly in cash as I didn't get any entries today, a Gap down in HOD by passed my buy limit.
Last note is mining stocks, they rally hard and get crushed hard. One of my favorite stocks SBB is down 18% in 3 days. This is obviously due to gold dropping 30+ dollars as the USD has rallied. Which as everyone the USD suppression due to the POMOs have been the reason markets and commodities are rallying. Looking for a top in this market will provide an amazing entry to gold / silver plays in the future however this could be days, weeks, months away.
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