Monday, July 6, 2015

SPY Bounce at 200 Day Moving Average - Probably Temporary

Click on Chart to Enlarge

Last week the SPY etf rebounded off the 200 day simple MA.  Now today it came back down and touched again.  And buying came in after the open to hold the close above the average.  Also note that the long term bull market trendline (in red) is right in the same area as the 200 day MA.

It has been a while since I discussed this phenomenon extensively so I will link to a post I made in 2011 which showed a very similar chart set-up.  You can go back through your charts and see the resultant action.

Basically what happens at key moving averages in stocks or indexes - I believe - is that there are many trading algorithms that use those averages as data points for initiating trades.  And so in this case you have price moving down, and it touches the average.  But every time it touches, the program trading kicks in and starts to initiate buying.  This is because the market is in an uptrend, and the weight of the automated trading is on the buy side.

And sometimes that buying is very strong and prices bottom right at the average.  But other times, there is no real interest.  It just chops around until the automated trading is spent, then the trend continues ( in this case down).

So one of the keys I have found is to look at the action after the moving average is touched.  If you go back to Feb 1st 2015, you will see the type of action that unfolds with strong buying followed by a gap up, and a formation of a lasting low.  So for a bullish reversal to hold, you will often see a close high in the range, followed by a gap up and a close above the open after the gap up.  Volume often will rise on these days as well.

Contrast this with the moving average tests where the reversals off the averages are weak, and the result is often several touches of the average.  This is what we are seeing here so far.  The gap ups last week were on weak volume, and each day price closed below the open.  Now we have a gap down (indicating still selling interest) and another test.  For a successful test from here, we would see a gap up tomorrow and a close above the open, and higher volume.

Even if price makes a modest rally for a few days, a deep retracement back to the average would seem to me to be a sure sign of a failed rebound attempt off this average.  The result would be a swift break below the 200 day MA.  It may lead to a big sell off in this case.

The yearly low is not too far below price on the SP500.  And given the we are past mid way in the year, a break of the yearly low, could trigger further selling in stocks.

My suggestion here is to short this market on a break of today's low with a stop above the rebound high from last week.  If price make a weak rally back towards last week's gap down, I would suggest a short there.

Now if we see a gap up and close above the open tomorrow with dominant buying interest (increased volume, close in upper portion of range) I will certainly respect the rally attempt until last week's low is broken.

Pete

Friday, July 3, 2015

Interesting Charts With Tradable Potential




Bearish set ups on BAC and EMN.

Bullish set up on NEM.  Look at the relative chart strength on this versus other gold stocks and GLD etf.

Thursday, July 2, 2015

Kiss of Death? or Buy Set Up.....

Click on Chart to Enlarge

This chart shows the total put/call average ratio has spiked above the standard deviation band suggesting that there is relative extreme fear in the market sentiment right now.  This condition typically precedes a significant market rally.  However, in major declines, the initial spike may be a good bit before the low is in.  So, I view this as a set-up on the long side, but really we need to see at least an hourly time frame MACD bullish divergence signal in order to consider the long side from a technical standpoint in my opinion.

Click on Chart to Enlarge

The is the SP 500 cash chart on a daily time frame.  Currently price is trapped below a couple rising support trend lines, but above the long term bull market trend lines coming up from the 2009 low and the Oct 2011 low.  Both the trend lines are running close together just below price.  So from a charting standpoint the market price currently seems destined to make a major move.  Either it will find some support soon and then move to new highs, or the long term trend line gets broken with some significant downside follow through. 

From a qualitative standpoint, price broke below the blue trend line of the rising wedge on Monday.  Now today price rose back to the level of the break of the trend line which is a point where I often see back tests complete before a continuation of the new trend (in this case down).  Also price broke the red trend line of a smaller wedge, and price now has back tested the line and closed below it.  This has occurred on successively lower NYSE volume as well, suggesting a probable weak counter trend rally.

In my opinion the market seems very likely to move back below this week's low before any possible low can occur to this decline.  Along this same line of thought, my bottom spotting algorithm has not registered a low signal yet after the new lows on Monday, and it is pretty sensitive at catching bottoms on declines of this magnitude.

So the conclusion from my opinion is that stocks may be close to an intermediate term buy point, but lower lows are likely still ahead on this decline.  But given the long term trend lines just below, and the non-confirmations and rising wedge chart pattern, the possibility of a major decline (at least a legit 1 month correction and roughly ~10% decline) is very real.


Pete



Monday, June 29, 2015

Market Waking Up Now

Last post I noted how the market was lulling the crowd to sleep.  Now we obviously see it waking up.  But what direction will it go longer term?

On 6/23/15 the dual time frame VIX bollinger band set up which I have showed many times gave a sell set up.  But now a few days later the set up is reversed back to a buy set-up.  So short term I would guess stocks have a couple more days of lower lows, and then prices attempt to rebound.

Beyond that, I don't have a firm opinion at this point.  With the non-confirmation of the SP500, Dow 30, and NYSE not making new highs while the Nasdaq and Russell 2000 did, it seems sensible that stocks will experience an outright correction off the recent highs.

Today's gap down broke many trendlines with a significant gap.  That makes it hard to get in the new trend at a "good" price.  But I would say that that also increased the probability that the new trend is going to be substantial.  So if I had to pick here, I would pick that the trend will be down out of this consolidation.

However, I will alert you of buy set-ups from my trading algorithm as they unfold here on the way down.  If you are short, you could use them as scale out signals.  If you are awaiting a long opportunity, you could use it to get better timing on a potential bottom inflection point.


Pete

Tuesday, June 23, 2015

Market Lulling The Crowd Before a Trending Move

For the last 4 months, the SP 500 has oscillated about 1.5% above and below its highest point last year on 12/29/14.  

That is an extremely tight range and is likely wearing down both camps by clearing out nearby stops, filling upside breakout orders only to reverse and again clear out nearby sell stops.  So understand what is happening in terms of market dynamics.  Weak holders are being cleared out, and then the big money will be left to drive a new strong trend.

Long consolidations precede major directional moves.  That is a truism of markets.  So we will see a major directional move after this is complete.

I think it is sensible to continue to buy upside breakouts but to exit on classic candlestick reversal with bearish divergence.  

Just stay alert here with underlying strategies for both upside or downside potential breakouts in mind.  If the market shoots up, will you participate?  What type of order and stop will you use to get in and protect the position?

If stocks break lower what signal would lead to a short entry?  What level would the protective stop be at?  What order type is used for entry?

I still view this current upwards drift as a possible ending diagonal in stocks which would likely conclude with a little push higher and a final top.  But if that is not what happens, will I miss a potential big move up to follow this consolidation?  Those are questions that need solidified answers before the action unfolds.


Pete

Tuesday, June 9, 2015

1 Month Low Signal

After reviewing past similar signals to today's bottom reversal signal in the S&P 500 there is not enough of a positive forward skew for me to suggest speculating on the long side at this point. 

During the 2009-2015 bull market these signals did produce a positive skew in forward return compared to random.  These are the stats for the current bull market.

The first 3 days after the signal showed only a tiny positive skew in max gain versus max loss.

The first 2 weeks after the signal showed a ~1.5:1 max gain to max loss.

At 1 and 2 months out from the signal, the max gain was 1.7 and 1.8 times the max loss, respectively.  Given that some signals that my system flags may show or 3 times greater max gains than losses in the trade direction, there are much better opportunities to wait for.

At this point, I think a probable scenario would be for a 1-3 day rebound followed by a move to new corrective lows.  Most signals that failed to produce substantial rallies had 3 day or less rallies before topping.

Such a rebound may back test the underside of the lower boundary of the rising wedge.

These are just ideas, without a clear cut trading indication here.


Pete

Possible Bottom Reversal Day Today In Stocks - More to Follow on This

Today is likely to be flagged as a bottom reversal day in my bottom spotting system.

It is both a nice spot for a bullish reversal on the break of a trendline which ends up being a false break, but also is in a risky spot for unprotected longs with daily and weekly technical indicators down trending and the lower boundary of a rising wedge being broken.  Basically if today's low is broken to the downside, it could be a significant downside washout ahead.

I would like to do some signal performance testing on this later tonight and offer further insight for trading opportunities here.

Pete