Follow Up On the Dow

In an earlier post, I showed a chart of the Dow (DIA) and commented that the index looked like it was nearing a short-term bottom. One indicator I referenced was the Bollinger Band Width (BB Width) and I pointed out that it showed a reading of 15, the highest since July of this year. Well now the BB width indicator on the DIA chart is clocking in above the 25 mark, approximately 10 points above it's most recent high reading. So what does this mean? For starters, it says that we're most likely even closer to a short-term bottom. The BB width is a dynamic volatility indicator, similar to the VIX or the Average True Range. Generally, a high reading on the VIX, ATR or BB width will signal extreme volatility which is quite often an early signal of capitulation or a bottom (or a top in bull markets).

The nice thing about the BB width is that it is computed for the individual instrument (stock, bond, currency, etc.) as opposed to the VIX, which is a general volatility index that represents the entire market. For this reason, a reading of 25 on the Dow will be high but that same reading may not be high on a different stock or index. You have to compare the levels for each individual security, which is nice because you can use it in conjunction with other indicators to formulate buy/sell signals. Currently, the BB width on the Dow is a screaming buy, but we'll just have to wait and see how it plays out. Good luck out there.

TLT

Dow Down and Dollar Up

It's a bit counter intuitive, but it's what's happening right now. The best trade that I've seen lately is to short stock indexes and go long the dollar, particularly the Eur/Usd pair. The Eur/Usd has been trending nicely which has offered numerous opportunities to hop on board. Most recently, the rally to the 50 day moving average offered a great point to jump on board.

Judging by the above daily chart of the Eur/Usd, the rally in the dollar will likely stall soon. This happens; markets tend to snap back pretty quickly when they move as fast as they've been moving lately. I would at least wait for the price to fall back closer to the 10 day moving average (the aqua blue line) before taking a position.

As for the Dow, the chart pretty much says it all.

The Dow has blown through the short term support and looks to be in a free fall motion. Although it looks bad, and I will certainly be staying bearish for a while, the dow seems to be close to a bullish counter-trend rally. Take a look at the BB Width indicator at the bottom of the chart. It has moved all the way up to the 15 mark, which indicates that a near term bottom is either here or close. Notice that the last time the BB width was 15 was back in July.

Personally, I'll be looking for short-term counter rallies in order to load up on dollars and short stocks. The fed cutting rates at the up coming fed meeting would be an excellent catalyst to get a good counter trend rally which should provide some nice low risk entry opportunities. Good luck out there.

TLT