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In this video, we're going to continue our discussion of technical analysis. If I wanted
to leave one thing with you, the most important thing that I could tell you - that is that
the market leaves bread crumbs. It tells you where it's been, and where it's headed. It
leaves these bread crumbs in a trail, so that you know exactly where it's going.
It's not always totally accurate. In the big picture of things, it can give you a pretty
good clue of where it's headed. I'm going to give you the two most important clues that
you probably have never, ever heard before.
Let's start out with this chart. We've been looking at the QQQs. We've looked at some
option samples for the QQQs, but I'm going to take a look at the SPY. The SPY is probably
one of the most popular traded online instruments. It's the S&P 500 ETF. It's a highly traded
vehicle. It's extremely liquid, and its options are extremely liquid as well.
If we take a look at the chart in front of you, it begins in approximately March of 1993.
It goes through 1995. It's about a two-year period that you have in front of you. In just
taking a look at this chart, you can tell, just from a quick glance, that this market
is in an uptrend. When it started, I'm not sure. This is as far back as this chart will
go, about 20 years.
There are a couple of things that are interesting about this chart, and that are obvious about
this chart. Number one is that it looks and appears to be the beginning of an uptrend,
through 1993 and 1994. There is one very important event on this chart. Can you pick it out?
If you mentioned this extremely high-volume day, in which it looks like a spinning top
was created - that spinning top is not at the top of a trend. Nor is it at the bottom
of a trend. It's actually right in the middle of a trend. The market has been going sideways
here, for several months.
All of a sudden, we get this huge volume spike, at a price of approximately $34 on the SPY.
There isn't a whole lot of action here, actually. There isn't a lot of movement here. The market
looks like it went up a little bit, it went down a little bit, and it kind of closed in
a very tight range. In fact, the open was at $33.94, and the close was at $34.05. It
was just about 11 cents difference between the open and close that day.
However, the volume was gigantic, compared to what we saw in the previous year and a
half. The volume was very, very high. That gave us somewhat of a clue that something
was different. We don't really know what was different, but something was different, on
that day, than all the previous days that preceded it.
Looking at the market is almost like being a detective. We want to try to look at patterns.
We want to try to find the behavior of a market. All the market is is math and psychology.
It's looking at the numbers, and it's looking at the psychology of the market, at the time.
This particular week happened during the week of June 1994. This high-volume week - remember,
we're on a weekly chart here - came after this huge decline in the previous week. If
you take a look at the market, you can see that it has actually declined, starting back
in January of 1994, through this period of June 27, 1994. The market of that year was
actually a down market.
All of a sudden, we have this one week, in which we get this huge up-tick in volume.
It's very interesting. It really does pay to be a detective, when it comes to looking
at the market, and analyzing the market. What happened, during that week, that maybe gave
us some clue that the market was ready to make a turn? That this volume, this high-volume
week, was significant in some way?
Let's take a look at the news, from June 27, 1994. This is from the L.A. Times. The headline
reads, "More Pessimists are Bearing Down." One of the quotes that he uses, from a Minneapolis
investment firm, says that, "We think we have moved into a bear market." This research analyst,
at this investment group, says, "We are probably in a bear market."
There was a lot of pessimism during that time. However, if we go down toward the bottom of
the article, there is a very interesting observation, by Michael Burke, from Investors Intelligence,
who tracks bull and bear sentiment, across 135 market newsletter writers. He admits that
the percentage of bullish newsletters is now only 27.2%. It's near the lowest reading since
1988.
Now, in 1988, just after the stock market crash of 1987, you remember that there was
a huge rally after 1987. It dipped a little bit back down in 1988. After that, the market
roared higher. Burke wisely concludes that, "The gloom has become so overdone that we're
getting close to a bottom in the market." While the bears point to sinking indexes like
the Dow and the NASDAQ composite, Burke notes that a lot of stocks are holding well above
their April lows, which he views as a sign of the market getting ready to turn."
Well, very interesting observation. That is exactly what happened. Interestingly enough,
after the decline from January, into this low in April, you can tell that the largest
spikes during that time, came on days in which the market rallied. Even this particular day
had quite a bit of volume, in which there was very little movement in the market. This
particular day had a very large amount of volume, in which the market hit a new low,
and then proceeded higher, for that week.