Oil has recovered every time at the 200-d m.a. Is this a buying opportunity?

We see five opportunities in the past two years at this long term moving average.

Take the trade (buy options if you want leverage or use futures contracts). What ever you do, sell a small loss and move on if it doesn’t work. Investing is that simple.

Taking trades with a favorable risk to reward ratio. It seems to me that a long position would be ideal even if I am wrong because the reward could take us back towards $80. I am looking at a 2-3 point loss for a possible 10 point gain (minimum 3-to-1 odds with a possible 5-to-1 pay out).

Cut all losses short if the trade fails! (In December 04, crude cut the 200-d m.a. sharply only to recover).

It’s not about being right or wrong; it’s about being able to push the odds in your favor, take the trade and follow the rules. If it doesn’t work – OH WELL! Move on!

Piranha

I posted up a chart looking at the relationship between the NASDAQ and crude oil contracts a couple months back in an entry titled “Can the NASDAQ – Crude Oil Index predict Bulls & Bears”.

The combo index highlighted the relationship of the two indexes and actually told us on a higher level when and where the market was making rallies or starting major down trends over the past 10 years. Visit the link above for a further description of the actual combo index.

As this year moves on, I have noticed that the combo index continues to reach new multi-year lows while traveling below its 200-d moving average. Recently, it started to move north but still lives beneath the moving average and long term trend-line or resistance. I am still wondering if this index is useful and if it can confirm a sustainable rally if it crosses back above the 200-d m.a. and multi-year resistance line.

While reviewing the three year chart, I noticed the spikes in October and was wondering if it will do the same this year since the action is starting to resemble previous years (post bubble burst era). Whatever the case, it will be very interesting to see many indicators move to the positive side simultaneously all confirming a possible rally towards the end of this year. The Stock Trader’s almanac states that mid-term election year lows usually peak 50% higher in the following 6-12 months. We are now in a mid-term election year and several indicators look to be hitting bottoms with an urge to move higher.

So I ask:
Will the NASDAQ be 50% higher in six to twelve month from this year’s bottom?

Only time will tell and I will not know the answer until my most important indicators give me the green light signal to buy heavy on the long side!

Piranha

Need I say more?

The NASDAQ is getting slammed below the recent up-trending support line as it trades below the June low (intraday action). If the NASDAQ closes below the June low, the attempted rally would be completely erased. Looking at the NH-NL ratio for the NASDAQ, we can see how new lows are rocketing higher as new highs are plummeting to almost nothing today. New lows use the number scale to the left of the chart while new highs use the number scale to the right of the chart.

Crude oil is also up over 2.5% as it broke above the resistance level of $75 a barrel. The daily chart highlights the break above the trading zone between $70 and $75. I told you to cover all “long” losing positions last night or positions that were turning against you with a slight gain. I will be very interested to see how the afternoon finishes and will update the day’s action on the daily screen tonight with all interactive charts telling the story in real time.

Piranha

As many of you know, I have had a lot of time on my hands as the market has been trading in volatile patterns with a downward bias. The majority of my money has been parked on the sideline since mid-May with the exception of a few open option contracts (longer term plays). I have not made a trade in five weeks since the start of my vacation in late May and I have become very bored. It’s been tough writing nightly market analysis but I am doing my best to locate possible short setups, consistently monitor the mechanical screen and follow the few market leaders (I prefer to call them stocks with the best RS ratings and charts as no true leaders exist right now).

Using this free time, I have been comparing certain market indexes with other benchmarks that I have been following over the past 6-12 months. Two of these include the NASDAQ and crude oil (light contracts). Two charts are loaded to this blog post:

• The first chart is a combination index that I created myself using Stockcharts.com advanced tools. It combines the average close of both the NASDAQ and crude oil contracts over the past 10 years with a 200-d moving average. As you can see, the progression of this chart has called every major up-trend and downtrend before it was about to happen. The gray line on the chart represents the actual close of the NASDAQ index over the past 10 years (this line varies from the combo index). The only major divergence between the combo index I created and the actual price of the NASDAQ is during the past 18 months (since crude has gone wild). The combo index continues to trade downward as the NASDAQ trades sideways to slightly upward.

• The second chart compares the action among the NASDAQ and crude oil over the past 10 years without any special combination effect. As you can see here, both entities have been trending higher over the past 18 months. This is very different from the combo index in the first chart.

So how would I use this combo index?

It is a long term outlook index that seems qualified and prepared to call the next major up-trend for the NASDAQ. To do this, the combo line must cross back above the 200-d moving average with strength and consistency. It has not stayed above the 200-d m.a. for long periods of time since 2003, the most recent “up-trending bullish market”. Prior to 2003, we have not seen a true bull market up-trend with this combo index above the 200-d m.a. since 1997-1999. From mid 2000 on, the combo index has spent much of its time below the 200-d m.a. and we all know how the market has behaved since March 2000.

So, to answer a question I received about a recent comment on a blog post: yes, I do believe that crude oil must cool off before we can sustain a major bull rally and this combo index may prove my theory correct if it continues to trade accordingly. But then again, it is only a theory and I am not into predictions.

Enjoy the combo index.