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Don’t Be Fooled, It’s Still Looking Bearish

Posted by Debbie on Nov 18th, 2008

Macquarie Group Limited (ASX: MQG), which is comprised of the Banking Group and Non-Banking Group, has closed at $20.6 yesterday. Since last December and the high price posted at $82.6, the stock has lost 75% of its value.

After a one-week rebound occurred in late October and early November when it jumped from $27 to $35 (almost +30%), the stock plunged back to unprecedented low levels. The long-term downtrend remains in place, built by the higher lows posted in last December, May and August (points A, B and C on the chart). There is also a medium-term downtrend since the high of August (point C) and goes through the highs of September (point D) and November (point E). This is the immediate resistance line for the price

20081118b Don’t Be Fooled, It’s Still Looking Bearish
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On the downside, several indicators argue that a further fall may be possible. Based on the 14-day Relative Strength Index (RSI), the stock is not oversold. The MACD has also curved downward and crossed below its signal line last week, on November 12. It’s a bearish signal.

In complement, we can also use the indicator VHF. The Vertical Horizontal Filter (VHF) determines whether prices are in a trending phase or a congestion phase. Typically, the VHF compares the sum of a one period rate-of-change to the range between high and low prices over the specified period.

The problem for many trading systems is their inability to determine if a trending or trading range market is at hand. Trend-following indicators such as MACD and moving averages, tend to be whipsawed as markets enter a non-trending congestion phase. On the other hand, the oscillators which perform well during trading range markets tend to overreact to price pull-backs during trending markets. The VHF indicator attempts to remedy this by measuring the “trendiness” of a market.

There are three ways to use the VHF indicator:

1) The VHF values above or below certain levels indicate the degree of trending. The higher the VHF, the higher the degree of trending.

2) The direction of the VHF can be used to determine whether a trending or congestion phase is developing. Rising VHF indicates a developing trend whereas falling VHF indicates that prices may be entering a congestion phase.

3) The VHF as a contrarian type indicator. Expect congestion to follow high VHF values. Low VHF values may indicate a trending phase will soon follow.

Here it is interesting to note that the VHF has started to rise the same day the MACD triggered its bearish signal. It means that it has confirmed the generation last week of a bearish trend which duration may depend on the level of overselling in the market. A VHF rise above 40 would indicate that the trend is near its end.

In this scenario we can expect a lower move before a potential congestion phase and eventually a rebound. A target of $19.7 is possible as it corresponds to 4% further decline, which is the objective for the broad S&P/ASX 200 before it reaches its main support level.

This article is written by Gabriel Andre from Money Morning. Money morning is a website that aims to give you intelligent and enjoyable commentary on the most important financial stories of the day, and tell you how to profit from them.