Once the correlation is established between the market and a particular news event, it tends to stay that way for some time.
You can determine when the correlation is broken, by the fact that – let’s say that oil goes up another dollar, but the market doesn’t react to that. Or it goes up $5, and all of a sudden, instead of going down, the market does the complete opposite. It goes up, or something like that. Then you realize, at some point in the future, that correlation will be broken.
Another correlation, another news item, will take its place. That is why you have to perk your ears up and listen to the news. See if the market went down, or the market went up, based on such-and-such. All of a sudden, there is a new correlation in the market.
It’s not just negative news items that sends the market down. It’s also positive news items that sends the market up. For example, if there is a trend of higher productivity, higher GDP, less job claims and unemployment claims, and there’s a greater number of new jobs being created. Then there’s a correlation between positive economic news, and those tend to send the stock market higher.
If you know that there is potential for the market to move higher, based on the technical analysis that we’ve done, and there’s a jobs report or there is a GDP report coming up – you can sometimes get ahead of that news, and plan your trades a little bit further in advance.
That’s a very interesting correlation. There is a correlation with the news. After this decline in the market, and the credit crunch, I think the bottom was down in here. The Bear-Sterns debacle happened, so the market really sold off on that. Then it recovered and went up again.
That was the climax of the correlation, right there. That was the high point of the credit crunch; the Bear-Sterns takeover by J.P. Morgan. The shares of the stock were decimated. They were down to almost nothing. It was like $2 a share, and it was really bad.
Those kinds of news events are catastrophic. If you know that is probably the end of that, and all the bad news coming out – there might be more bad news coming out, but that was the biggest of all the bad news items that came out. At that point, if you took a look at this chart, if you took a look at the VIX, you may have seen some sort of momentum-building for a rally to the upside, especially now that the news is out.
If you are interested in plugging that into the formula, using your technical analysis, using your support and resistance points, and keeping an eye on the news just to see what the market is reacting to, or perceiving to be reacting to – it does help you time your entrances into the market. Especially when you get into Module 11, when we actually go into individual stock pocks.
That is something to keep an eye on. It’s very interesting. It’s happened for years and years; at least 20 years, since I’ve been following the market. There is always some justification or some reason why the market down, and a correlation is established. A relationship is established.
Here, during this down period, it was the credit crunch. In this down period, it’s oil. Who knows what it’s going to be in another couple of months? It will always fixate on something.
Let’s delve a little bit deeper into technical analysis, as far as indicators go. I’ll be honest with you – I’m not a big fan of moving averages. Price has its place. The majority of indicators that are being used by other traders have to do with the manipulation of price.
I do have one moving average. This is the only moving average that I use. That is the 200-day moving average. I don’t find it particularly helpful, except to determine the very long-term trends. On a weekly chart, the 200-period moving average is way below the current market. On a daily chart, we’re below the 200-day moving average.
It gives you a general idea of the trend, but you can see that the trend was going up here. Even though the market was falling, the moving average was still rising. It didn’t top out until the market had bottomed. Then it started going down.
It’s a real lagging indicator. I think price, in general, is not the best indicator. Not only that, but it’s not the best method of determining the highest probability of future movements of the market.
The reason for that is that prices really just – it’s kind of a picture of the current state of the market. It has no value to help you determine what the probability of future prices are going to be. The reason for that is because prices move up and down based on what people are buying and selling, and feeling comfortable with the level at which they are buying and selling.
What we really need to do is take a look at volume and one other indicator that is not smooth. The problem I have with smooth indicators, like this MACD down here – I do have the MACD up. To tell you the truth, I don’t even look at it. The MACD is simply a Moving Average Convergence-Divergence. There is a center line, and then there are two moving averages. They take the difference of the two moving averages to determine some sort of trend line.
I have it down here, but I really don’t look at it that much. All these indicators, the Castix, MACD, just about any of the studies that you could bring up – in here, there is lots of stuff you can do. You can do the 200-day moving average, and the 50-day moving average. They have something called Bolinger Bands, which may be helpful at times.
Bolinger Bands just give you what the standard deviation moves of a market are. On the lower line, is one standard deviation to the downside. The higher bands is one standard deviation to the upside. Maybe it’s two standard deviations. I don’t know how it’s set up, here.
Generally, what will happen is that you can make a determination. “Well, it’s very close to the upside.” These things can be helpful. I put up different patterns and studies. To be honest, I don’t really rely on them at all, because they are lagging indicators. They don’t help me determine what the potential or the probabilities of future prices are going to be.
I don’t use them. I use two other indicators that are not really indicators. Actually, what they are – they measure the internal strength of the market. I have found these to be much more useful than any other tool I have ever used.
These two tools include the majority of the breadth, which is the number of advancing and declining issues in the New York Stock Exchange, as well as the difference in the up-volume and down-volume of the New York Stock Exchange. I’ll bring these two charts up for you in just a second.