Wednesday, September 3, 2014

Bearish Engulfing Pattern in QQQ Could Mark a Top

QQQ Bearish Engulfing Pattern Could Be a Market Top
Click on Chart to Enlarge

Today both the QQQ and SPY formed bearish engulfing candlestick patterns.  These are top reversal patterns, and should be considered significant if there is a technical overbought condition, a failed breakout on a chart, or a bearish divergence.

Currently, there is a triple time frame (weekly, daily, hourly, and even 15 min) bearish divergence on the MACD of the QQQ chart with other massive divergences in breadth, volatility, and put/call ratios.

So my current suggestion here is that you completely exit all index long positions on the US stock indexes.  This has the technical and sentiment back drop for a potential major high, and we are entering the seasonally weak period of Sept/Oct, which should just be an additional factor for the trader to understand here in terms of market dynamics.

Short positions could be established on a break of today's low, with an initial profit target of 1:1 with a stop above today's high.  So since this has the possibility for a big move down, you only exit 1/3 or 1/2 the position at the initial profit target.  And another option is to just hold the whole position with a stop adjustment mechanism and allow the market to go however far it will until we get a legitimate bottom reversal signal.  The pros to the first strategy is a higher win or breakeven rate, but a probably lower expectation given the quality of the set-up.  The second scenario likely has a lower win rate but a higher overall profit expectation in my opinion.

Tuesday, August 26, 2014

Lowest Volume in SPY in Over 2 Years - More Topping Signs

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While it could be argued that we are in the summer doldrums and that is why volume is low, I don't know that it can rationalize the fact that SPY traded its lowest volume INCLUDING holiday trade, in over 2 years, except for Christmas Eve 2013.  Very interesting.  Seems like the market is just whispering...a couple very narrow range doji candlesticks right at new all time highs, and with the Dow 30 joining in today with another new all time high. 

This does not seem to me a good sign for bullish market action going forward.  Be warned here - in my opinion - that this market continues to display sign after sign of topping with divergences in every category of market analysis that I track - price, volume, put/call volume, volatility, breath.

This weekend's CoT report will be of interest in that both the S&P 500 and Dow 30 made new highs by today, and Friday's report will reflect data through today/Tuesday.  That report has not flagged any major smart money selling here recently, so it will be interesting to see how they respond to the new highs.  Of note though, as the lats bull market topped, the typical contrary nature of the CoT positions was not consistent, and so it would only be a possible confirming indicator to me of what is already obvious from my standpoint.....that stocks are likely very near to a significant high here.

PS - the chart above was posted shortly after close, and after volume numbers were finalized the reading changed.  The chart above showed that volume was the lowest in over 2 years, but the final number is a bit higher than Christmas eve 2013.

Monday, August 25, 2014

Lowest Non Holiday NYSE Volume in a Couple Years

Interestingly today, the S&P 500 made a new all time high, hit the round number mark of 2000, and SPY opened with a gap up, and yet the NYSE volume dropped to the lowest level in over 2 years - excluding holiday trade.  I'm sure that arguments can be made regarding what this means, but my opinion is that if buy programs are not kicking in here, then I kind of doubt that the market will hold up well at this level.

Click on Chart to Enlarge

This chart shows a 3 year history of daily New Highs - New Lows on the NYSE.  Of note here is that while we are at 2000 on the S&P 500 and new all time highs, the NH-NL is at a comparatively paltry 316.  The closest precedent I see on this chart is the first couple days of May 2012, in which the S&P 500 did NOT make a new high, but some indexes did, and the NH-NL topped right about where it is now and then stocks corrected about 10% the next 5 weeks.

So possibly we see some continued advance and the Dow makes a new all time high, and the Russell 2000 pushes higher and we see this number expands.  But currently, the reality is that stock averages are making higher highs with fewer stocks actually making higher highs.  This is classic topping action as far as I can tell.  Breadth deteriorates over a drawn out time frame, and finally the rally fizzles out.  Time will tell here, but I would look at this current market point as a significant resistance level that currently does not appear will be surmounted in the short term.

Today also formed a narrow range doji candlestick on SPY.  This could be an abandoned baby candlestick if stocks gap down tomorrow and move further to the downside.  For now, there is a quality shorting set-up on the hourly time frame from my perspective.

Sunday, August 24, 2014

Stock Market Internal Sentiment Update

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A couple days ago I had posted similar charts to these showing that while price was moving higher the last couple days, we were not seeing internal market indicators continue the same trend.

Above we see SPY with a MACD below where the MACD has fallen a bit as price moved higher.  There is nothing here that smacks of a significant reversal in my opinion, but it does look like a significant divergence is still forming on this time frame.  Given the daily and weekly time frame MACD indicators are in a bearish divergence, this shorter time frame signal may be of significance.

The NYSE Tick indicator on the hourly chart has also weakened the last several sessions.  A cross of the moving average below 0 could lead to some follow through to the downside.  Again this indicator is still suggesting that any higher highs from here without expanding breadth could be a continued divergence building.

The VIX on the hourly time frame is still well above the summer lows, maintaining the larger scale volatility divergence that is so consistently present at significant market turns.

The bottom chart is a daily chart of the total put/call ratio with a moving average and some deviation bands.  The current average is not below the lower band, but is close to it, suggesting that we keep alert for a move outside the lower band.  That would be a higher quality signal that the rally was near peaking.  Again of note here is that the moving average is well above its lows from the winter, but with prices now at new all time highs.  So again this could be viewed as a large scale bearish divergence with fear (in the forms of put trading action) increasing and forming a rising trend while prices are mustering some modestly higher highs.

So in summary here, I think that the major bullish run off the recent low is mostly done and we are more likely to experience more overlapping price action from here and possibly a significant top reversal process here around the 2000 level on the S&P 500.  It seems very likely to me that early this week price will move up to 2000 on the S&P 500.

Thursday, August 21, 2014

LB Puts

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Today I purchased a couple contracts of LB Sept 62.50 put options on LB, Limited Brands.  Typically I like to purchase a longer amount of time, but on this trade I am looking at a potentially competed rising wedge in LB, in conjunction with a short term overbought general market with some hourly time frame divergences.  I am setting a limit order of just over 100% gain to exit the trade, which may only take a 3-4% move down over the coming week.

I entered the trade in the afternoon for 0.95 per contract.  I am setting a limit order of 2.00 to exit, GTC.

The charts above are weekly, daily, and hourly.  The weekly stochastics is in the overbought position below the recent bull market high.  The daily stochastics is in the overbought position.  And the hourly momentum shows a bearish divergence between the current highs and the highs last week.

The chart pattern appears to be a rising wedge and contracting triangle.  The current move has over thrown the upper boundary of the wedge, and from a charting standpoint, this is the type of action often seen at the end of a pattern.

It is interesting to note the key points in the pattern.  In the current move up over the last month, the sales report came out and led to a gap up in the stock on 8-7-14.  Then today, earnings was released, and there was very mild movement to the upside in conjunction with the hourly chart divergence.  So it seems that the price driver to the upside has probably already occurred, and now the last weak move on earnings may be an exhaustion point.

Particularly with the broad market appearing to be on the verge of a consolidation or pullback for at least a few days, I believe this stock has the ability to decline back into the $60 region within the next few weeks.

This trade example is for learning purposes only.  And being an out of the money option trade, if the trade does not go as planned, it will result in 100% loss of capital.  So I have that factored into my trade size here.  I only purchased a couple contracts, and can stand to lose the whole amount within my money management plan.

Hourly Time Frame Bearish Divergences on SPY - The Current Rally Appears to Be Losing Steam

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These charts are hourly charts, the top one being SPY with a MACD study underneath.  We can see a nice directional advance the last 2 weeks, but now for the first time in the rally, the MACD is not confirming higher highs with price.  So on this short term time frame we are seeing the initial stages of loss of momentum and a potential top development.

The second chart down shows an hourly chart of the NYSE TICK Index, which is a short term measure of breadth in the market.  Again, we see here that the TICK peaked a couple days ago, and the last 2 days prices have been advancing with no increase in the TICK, and TICK currently at a lower peak.  Again, this is a sign that the real directional phase of this rally is waning.

The third chart down is SPY again with a volume and moving average of volume overlay.  Of note here is that the moving average of the volume is also rising to a lower peak and is showing divergence the last couple days.  The interpretation is basically the same, but the thing I find most interesting is that yesterday and again today SPY is hitting fresh all time highs.  And so if there is weakening volume on the breakout, then I question whether the trading algorithms are collectively going to buy the breakout to any substantial level if the first two days at new highs are not attracting larger volume and price movement.  

The bottom chart is the VIX an an hourly basis.  We do see the VIX hitting fresh lows today for the rally, but only modestly so, and in comparison to the VIX low in June and July, the VIX is at a higher level still having a longer term non-confirmation of the price trend at new highs.

So given what I have recently noted regarding the tendency in recent years for swift rebounds the first 2 weeks after a bottom with elevated equity put/call ratios above 1.0, all the above signs would indicate that we could be near the high of the initial rebound.  I don't expect a sharp topping process here, but let's continue to track this 2000 level on SPX for signs of longer term topping or reversal.

Tuesday, August 19, 2014

How Far Is This Current Stock Market Rally Likely to Go?

In a recent post I highlighted the rise in the equity put/call ratio to above 1.0 and suggested that we would see at least slightly lower lows followed by an inevitable swift rally with most of the gains in the first 2 weeks of the rally.

Well here we are now and it appears that so far things are playing out very much as suggested/expected.  Today will market the 8th day of the current rally off the 8-7-14 low.  And it definitely has been a swift and directional advance.  So now that we are in the time frame of where we may expect things to slow down or for a possible larger scale top to complete, let's look at some more details.....

This list shows all equity put/call readings greater than or equal to 1.0 since CBOE data available in 2003.  I had suggested that the Aug 2007 and June 2011 instances were the most technically similar in recent years with overbought and divergence conditions on the weekly time frame already being in place.

If we replicated the rally from June 2011 low to the July 2011 high, it would put SPY at about 204.00 this week to next week.  But again it may be more sensible to correct for volatility and to understand the tendency for final highs or secondary rallies to double top or fail to exceed an old top.  From a simple chart based standpoint as opposed to measuring in percent terms, the rally off Aug 2007 lows made a slightly higher high for the bull market, basically double topping then declining.  Off the June 2011 low, the rally was more brief and failed slightly below the prior high from May 2011.

So as we now see the QQQ at a new high, and the other indexes still lagging with concurrent divergences still present, I believe it is sensible to expect this move to stall near or slightly above the recent all time highs in SPY.

If prices decline below the recent low from Aug 7th, I think that would be a sign of broad market weakness.  So that could be a line in the sand to watch depending on your holdings and time frame.