If you are short the DIAMONDS Trust Series 1 (DIA) — as I have been since August — or are looking to pick a bottom to get long, the market first must demonstrate three conditions.
The first thing to look at is the trend. Combining an eight-period exponential moving average (EMA), Tim Tillson’s T3 formula, first published in the Journal of Combinational Theory, is a good place to start. The T8 has pointed down since mid-June. Before exiting a short or entering a long position, you need to wait until the trend turns positive. As we see in “Waiting on a trend,” the T8 has begun to flatten its downward spiral.
The DIA needs to exhibit continued support at or near the 80.00 level, corresponding to 8,000 in the Dow, where it has found support for eight weeks. A weekly close below this level would signal much lower prices and a possible trip to the 63-65 area.
If momentum bottoms in February and March, which could be indicated by the Stochastic/RSI turning positive, we can expect a one-to-three-month rally bouncing off the current support.
If the market rallies from its current support level, the EMA will turn up and our criteria will have been met. If the DIA crashes through support, forget about buying for now. Only buy when the trend is up, momentum oscillators turn higher and the market is well-supported. A trader may have to wait for these three conditions to be met, but in this case, patience will pay off.
Steve Karnish is a former commodity trading advisor and educator. Reach him at firstname.lastname@example.org.