Thursday, September 1, 2011

Dax update 31.8.2011

A strong day

Dax surged with low volume, which is not surprising. Stocks can go up with low volume, but going down needs bigger volume as you can see. Normally when the volume peaks and index falls, it has been good opportunity to buy.

Extreme sold and bought conditions are still indicating trend change. However, we need to see demand curve to gain, although supply has already turned. It is obvious that investors are still cautious to buy after such a decline in stocks and recent weak economic reports. We need to watch the demand very careful if starts to accelerate, because we still are on the edge.
 The cycle indicator, which is constructed from the previous supply and demand curves, is indicating a turning point for Dax.
We haven't seen any 20-day or 52-week new lows during last 3 days. One interesting measure to watch is the number of individual stocks performing better the actual index. In capitulation and market bottoms, the level seems to peak. Vice versa, when the market tops fewer and fewer stocks are actually performing better than the index. 31.8. we had a situation where 8 stocks performed better than the index. In the above picture, I use 10 day moving average to smoothen this indicator and better showing the trend.
In bear market, it is normal to see 52-week lows and no new highs. Actually, we haven't seen any 52-week highs recently.
Trin peaked to negative level quite strongly, which indicates investors were selling on strength. It still might be the strategy to sell on rebound. Although, strong negative TRIN might be the consequence of low volume.

It seems that investors are in wait-and-see mode. The selling has settled, but still not many buyers. Earnings report season is starting soon and we can see strong rebound. Anyway, these seems a good opportunity to be a contrarian and establish long positions to Dax. I would still remind to put stop loss to the recent market bottom level.