Thursday, December 31, 2009

Some More Intermediate Term Red Flags

The Investor Intelligence (investment advisors)bearish % stands at about 15%. This is the lowest bearish % reading since early 1987. That doesn't in and of itself mean the market will fall apart, but realize that this rally since March has gotten very mature and shifted opinion back to historic extremes of optimism and speculation by some measures.

The AAII (American Assoc. Individual Investors) showed a large jump in bullish % and a large drop in bearish % this week. It puts the bearish % at about a 3 year low and more than 2 standard deviations away from the 1 year mean. So this again shows that the shift in opinion about the markets has come nearly full circle since March.

The last couple weeks the total ratio of bullish opening transactions to bearish opening transactions in the options market has reached a point higher than any since early in 2000. This shows that bullish speculation (or possibly smart $ hedging) is historically high in the options market.

Also, NYSE short interest has remained very low at around 3% since late 2008 but has dropped off a bit further to 2.8 as of the this month. Again, the low short interest % shows that there is not much fuel for short covering and certainly not excessive bearish bets on downside in the underlying issues.

These are all longer time frame (several months or more) indications, so when I look at them together, I believe that winds of change are coming at least for a sharp correction in the coming month or 2.

On the flip side long term cash data remains a bit mixed and most large scale economic opinion surveys remain low which may be a contrary indication. I will note that those types of surveys have tended to rebound in optimism much more after prior historical recessions. So how that factors into what the markets will do I'm not sure. My take is that things are not significantly better (and almost certainly worse) in an economic sense than they were a year ago.

That whole analysis is not something I have much leg to stand on though. I will say that the main measure I have been following on a fundamental basis is the debt/GDP ratio and the total credit outstanding (large scale view of money supply). This year, after decades of credit expansion, the credit volume has started to turn down. Of course I can't know when it will end, but view this as the main economic phenomenon of importance.

Tuesday, December 29, 2009

An Aside

True Intent of Health Care Reform

I typically don't get into much outside the market in this blog, but I thought I'd pass the above link on. Unfortunately I don't have anything to offer regarding this issue, but it is my general belief that the less we know, the more we will be taken advantage of and the less collective will there will be to resist what we find to be "wrong" for lack of a better word. So I just offer this as food for thought.

The above article is a reasonable example of the Dialectic process in action - directed fostering of opposing extremes (thesis vs. antithesis) followed by inducing conflict between extremes with the end goal of creating a new middle ground (synthesis).

New SDS Trade - Short Term

Click on Chart to Enlarge

60 min stochastics is coming down off a bearish divergence with price.

Click on Chart to Enlarge

NYSE TICK showing a bearish divergence today indicating potential waning in the bullishness of large scale program trading.

Click on Chart to Enlarge

The S&P 500 cash and the Nasdaq Composite (COMPQ) formed nice doji's today at the upper bollinger bands. I have not shown the bollinger bands here, but one thing of note is that while the S&P is at new rally highs the upper bollinger band is not. This is a type of divergence that shows up some times at turns. Of course if the move up continues, then that band will probably move to new highs soon.

Mean reversion models that I follow were very overbought last week, but there was no sign of loss in momentum until today. There are a plethora of intermediate term red flags going up as well, and the overall picture is similar (or more excessive optimism) than all the prior substantial pullbacks during this rally.


New Blog Trade:

Buy SDS tomorrow/Tuesday with a limit order of 34.50. I am not posting a stop on this initially.

Monday, December 28, 2009

Cancel the TBT Trade Order For Now


Earlier today I had posted a limit order to buy TBT, an inverse Treasury Bond ETF. This was based off of analysis posted previously. However, today's session gives me pause enough to pull the orders for now, but no significant change in the larger outlook.

The chart above shows that the yield on the 30 year Treasury Bond broke above the neck line of the reverse head and shoulders pattern. However, today a nice looking doji formed and the daily RSI is oversold. Signals are mixed in that the ADX/DMI just signaled a new downtrend as the ADX rose above 20. So at this point I am expecting a bounce in bond prices before any potential trade.

There is also more to this whole issue that I haven't got into. But in brief, bonds prices have moved inversely to stock prices for the last few years. However, in recent months that correlation has started to wane significantly. At this point though, there is still a general inverse movement. On a longer-term basis, I think it is most likely for both stocks and bonds to turn down. That would probably confound many people. Also, it would likely be interpreted initially that the market fears inflation due to the demand for higher yields. But a study of the scarce historic deflationary periods would suggest that it is more likely fear of default of the underlying debt. In this case most likely foreign governments beginning to unload long term US bonds onto the open market while prices are still modestly high.

If that were to occur I can only presume it will build into a selling panic which will spike yields (hammer down bond prices) substantially. For those looking for income investing, there may be a good opportunity to purchase bonds at higher yields, but of course you need to make your own judgement on the prospects of our government defaulting on its debt given the mounting deficits and all that.

So for now the bond market is the main one I am looking at for a possible trade.

New Guidelines

With the new layout for the blog I am suggesting to basically look at the account as divided into 4 equal parts.

-25% will be devoted to each intermediate term stock index trade.
-25% will be devoted to each short-term stock index trade.
-25% will be devoted to any other market that may be tradable.
-25% will be in cash at all times.

In general the intermediate-term trades will be either 1x or 2x ETF's meaning they will have equal or double the volatility of the market in general.

The short-term trades will generally be 2x ETF's but occasionally may be a 3x ETF. This decision will take into account the current market volatility, among other considerations.

The other markets that I follow in depth are gold, oil, the Euro/USD currency pair, and Treasury bonds, and grains. So there may not always be a trade suggested here, but when opportunities arise, this will be how to take advantage of them.

My goal is to suggest long-only trades. So that means that I will typically suggest an inverse ETF rather than shorting the standard ETF. However, if there is a good reason I may suggest shorting at times. If that does not work for you, then just pass on those trades.

Most short-term trades will not have a suggested stop loss, because as I've said many times, this hurts the long-term performance of the trading strategy I employ for these. The intermediate term trades will typically have a stop loss. So the initial stop and subsequent modifications will be posted in the upper right hand portion of the blog homepage.

Sunday, December 27, 2009

New Blog Trading Layout

As I start typing this I am not sure what all I want/need to get into. But in the spirit of New Year's resolutions and all, I have decided to make some changes with the organization and layout of the blog that I considered doing in some fashion before, but never did. These are things that I believe will help to improve the blog overall and take advantage of more opportunities.

Blog trades have typically been short-term in nature (about 5 days hold), however, the market dynamics began changing significantly this spring as volatility continually pushed lower and the market began to trend more so than mean revert. Markets are designed to go up, and in downtrends price movement is typically volatile and not trendy. However, in major uptrends price trends more, is less volatile, and it makes more sense to hold for longer periods in the direction of the trend. But as the market pushes higher (and has been for several months) it is my perspective that the downside risk is becoming very substantial relative to upside potential. This has made me shift my trading time frame a bit in really only looking to "top pick" a major reversal.

Tops are hard to pick. They are lazy and round. Bottoms are much different, with climactic spikes and sharp "V" rebounds. So this spring as the market began to maintain upward momentum despite sentiment conditions that would have marked tops in the prior downtrend, I began to feel that focusing only on one time frame (short-term) was not ideal, but I never made a major change in blog organization to really clearly communicate this and better take advantage of it. So for the last 4 months I really have been in the situation of trying to top pick and not post trades taking advantage of the still prevailing uptrend. In retrospect, I have managed to get us in inverse trades right near every short-term top, they have all eventually given way to new highs and resulted in several stop outs.

So to cut to the chase, I am going to change the format to include both an intermediate term time frame trading section on stock indexes in addition to the short term trades that this blog was really built around. Also, I will include a section aimed at trading other asset classes. I can think of several times this year that I saw a very good opportunity in something like gold, oil, US dollar, or treasury bonds, but did not post a trade on it because it was not part of the modus operandi. In this new format I believe it will be possible to post a trade based off of an intermediate term outlook (say the market is topping) and maintain that trade, but continue to buy dips in the uptrend as long as conditions look OK, all with everybody understanding what is going on and not feel like all their eggs are in one basket, particularly if they disagree with my perspective.

With this new layout, I will not be posting stops nearly as often, but getting back to exiting purely off of indicators and controlling risk via % allocation to the trade and the leverage of the fund/ETF used in the trade.

I will go into specifics in the next post on the new layout. As a general rule though, you never want to risk more than about 2% of your account value of a given trade. Risk even less if your account is substantial like $20,000 or more, and aim to keep risk at about 0.5% if your account is upwards of $100,000. If your account is smaller then you could risk a little more per trade but not too much. Also, in that case, I would focus on the intermediate term trades until your account is larger (especially if you pay more than a couple dollars in commission per trade).

Also there is a new trade listed on the blog site right now, but I haven't had the time to post the details. So until, I get more time to post, you may want to check the blog website.

Thursday, December 24, 2009

Probable Trade Christmas Eve

Based on the market indicators from Sentimentrader.com, sentiment made a dramatic bullish jump today. The trade set-up from today did not materialize, but I will probably be posting a new trade tomorrow at some point.

If there is indicated a sizeable gap up, then I will probably suggest a trade on the open. If not, I may wait until the middle of the day, but I think action needs to be taken pretty soon here.

On this trade I will probably not suggest a stop loss, so review the basic money management for trades without stop losses. Also please keep in mind that those suggestions were all based on using 2x ETF's, but recently I have been suggesting the 3x due primarily an expected sharp and large move down. So if the trade is on SPXU then please adjust those suggestions down by 1/3, and of course err on the side of being conservative.

Wednesday, December 23, 2009

Heads Up on Possible Trade

I'm just making a heads up post here because I may post a trade at any time today. I was wanting to see a gap up and then sell off for a possible new trade entry, and we got a modest gap today and are selling off modestly now. Volume will probably be lackluster due to Holiday trade, but there may be enough to make a decent reversal.

The only thing I haven't decided is whether I will post a recommended stop on this one. If I don't, then expect to take an approximate 25-33% short weighting relative to account value. So for example you could put 25% of the account into SH or short SPY. But if the trade is on SPXU which is 3 times as volatile, then you would need to bump that down to 8-10% of account value.

For those who do their own trading, but just use the blog for analysis purposes, then I would use a basic 60 minute chart with a MACD and go short/inverse if there is a bearish cross. Then the stop would go above the day's high. You may want to give a cushion of about 1% above the days high as well.

A few chart will follow.

Tuesday, December 22, 2009

Position Trade Ideas

Hopefully everyone is gearing down for a good Holiday. And hopefully some more success on blog trades will be in the near future.

The short-term trading environment has been more difficult from my perspective during this recent tight range. It would not be too bad if going very short-term, but I don't think that is a very good approach for this blog.

So a few markets/funds I'm looking at for some longer holds are.......

-EUO in the event of a nice looking pullback
-TBT (inverse bond fund to benefit from rising Treasury yields)
-GRU or DBA, GRU is a grain ETF heavily weighted to wheat and DBA is a corn, wheat, soybeans, and sugar ETF. Wheat is really what I'm after though.
-still keeping open for any good entry on a stock index ETF, but with a multi week or month hold

I don't know that I will post any new blog prior to Christmas, but I may get a post out here or there.

Sunday, December 20, 2009

An Inference on Interest Rates and Bonds; Euro/Dollar Analysis

I am going to briefly go into some intermarket relationships on bonds, stocks, and interest rates here. This may turn into an actionable trade soon, but it also may be important to consider for those with variable rate mortgages or significant treasury bond investments.

The chart below shows the yield on the Ten Year Treasury Note. As demand for government debt falls so will the price paid for the notes. This means that the note will have a higher yield because of the lower price paid by the investor. Conceptually the investor is demanding a higher rate of return because of higher perceived risk or because of other factors. In this case the investment is in government debt, and so the fear would be that the government cannot meet its debt obligation. Yields often peak in inflationary environments as debt investors (bond buyers) demand to keep up with the rate of inflation.

Typically people view stocks and interest rates as advancing together which means that stocks will move contra cyclically to bond prices. That has historically been most common. However, in the Great Depression in our country and in other comparable economic situations, there came a time when both stock and bond prices declined in tandem. In that case the fear of default as well as forced redemption for income, drove prices of bonds way down which sent yields sky-rocketing.

Now there are various classes and grades of bond quality with government bonds (Treasuries) typically considered the most safe with the least risk of default. So theoretically if demand were to drop off for treasuries (which it has been drastically from foreign debt buyers) that would put pressure on bond prices and drive up yields. If there came a legitimate panic or fear of default on government debt, that would really wipe out demand for Treasuries and drive yields up.

I am bring in this up because of the obvious fundamental concern in the Treasury market right now. The government is piling up debt obligations. Foreign demand for Treasuries has been down hard for a while now, but the Fed as our Central Bank ends up being forced to buy all the bonds and take it on its balance sheet. In turn they have returned the favor by instituting programs and policies that devalue our currency. But it is a fine line to walk, and there is a free market in bonds outside the Fed.

Click on Chart to Enlarge

So here we see on this chart of the Ten Year Note that yields dropped dramatically last fall. That means demand for Treasuries was very high, a so called flight to quality. Since then yields have been rising and the chart formation is looking like a possible inverse head and shoulders pattern, though not confirmed with a breakout of the neckline yet. If this pattern were to confirm it would suggest yields rising up to the 6% area by standard measurement. That would mean a somewhat dramatic drop off in demand for US debt.

Also in support of higher yields are the weekly MACD chart showing a bullish cross at a higher low last week. And the wave pattern is such that there have been 2 strong/fast moves up off the lows followed by shallower slower corrections. The first and second correction have significant alternation in price and time. If the above expanding pattern were forming, it suggests a dramatic increase in yields coming. The wave pattern would also be consistent with the larger chart formation.

Now I am not so much making a prediction here, but more of an observation and inference about the psychology that would accompany the price movement. The psychology would be a decreased confidence in US government debt. The result would be higher interest rates and falling bond prices. This would likely drive mortgage rates up substantially and create further havoc in the housing market. If the move up is so sharp and large as projected above, then there will probably be some serious issues in lesser quality debt.

So the consideration would be whether one should get locked into a fixed mortgage rate and reduce bond investments in favor of cash.

Click on Chart to Enlarge

Now to change gears. The chart above is from FXCM forex brokerage and shows the long and short positioning of their clientele in the Euro/Dollar pair. They are a retail/non-bank brokerage, and thus heavily one sided positioning should be expected to be a contrary indicator. The chart above shows that during almost the entirety of the March to Dec Euro rally, there clientele was net short the Euro and often heavily so. So they were wrong the entire way up. Now we have seen a dramatic decline in the Euro, and suddenly there is a sustained shift to net long the Euro. This is the kind of signal that accompanies a major trend change. It really is amazing when you think about it.

Anyway, this indicates a larger trend shift and to expect a stronger dollar and weaker Euro ahead.
Click on Chart to Enlarge

On a shorter term note though, the FXE Euro ETF showed a doji on the fill of a major gap on the chart. Additionally the daily RSI became oversold. This would argue for a bounce or consolidation before the Euro moves lower. Due to the intermarket correlation, that would be a boost for stocks, but that correlation is starting to break a little, and with light Holiday trading moves may be muted.

So my perspective is that if you are long the US dollar (UUP, EUO, etc) then there are probably substantial gains ahead, but expect a pause in the momentum. Interestingly, wheat and natural gas prices have been correlating mostly positive with the dollar whereas commodities in general move inversely to the dollar. That may be an interesting dynamic of the underlying carry trade on the dollar in that the borrowed dollars may have been used to short wheat and natural gas which were in major bear markets until recent months. So the unwind in the carry trade may be rippling down to those markets. That is somewhat speculative, but the correlations fit, and would argue favoring those commodities relative to others if the dollar continues its rise.

Saturday, December 19, 2009

Loads of Charts

I am posting several more charts today than normal. Hopefully they are helpful in focusing on what to look for in the coming days and weeks from a technical perspective.

Click on Chart to Enlarge

Above is the S&P 500 ETF, SPY. From a historical perspective this 2 legged advance (a leg being defined as complete when the market fails to make a new high within a calendar month) is one of the largest % gains ever and is mature from a time standpoint as well. So on that basis, expect this market to be topping soon. The bigger question is whether this will be a major high, or just an intermediate top which gives way to new market highs. From looking at charts of stocks commodities and interest rates, I would think that if this is not a major high, then the next leg up will be a major inflationary move. Because of that I will be tracking gold, grain, energy, and inverse bond (long interest rate) ETFs as any pullback develops, because that would be they way to play the next move. From a historical perspective expect any coming correction to be 10-15% and possibly sharp (possible bottom in late January or early Feb). Hopefully the size and speed of the decline will give good info on whether it is a major top or just an intermediate top.

Click on Chart to Enlarge

This chart is a daily chart of SPY. The market has been consistently cycling around options expiration ever since the March bottom. Pullbacks have been frequent in the 2 weeks following OpEx. This past Friday was expiration Friday, so that puts us in the window for a pullback. However, there are generally positive currents in this time frame seasonally, so I'm not sure what to expect on that basis.

Click on Chart to Enlarge

This chart is the XLP consumer staple ETF. This is a nice example on a weekly time frame of a bearish engulfing pattern with range (high to low) expansion. Price is under resistance, and the MACD is close to making a bearish cross. This ETF has been so steady that if this is topping, I would think that it implies significant market weakness ahead, but that is somewhat speculative.

On a daily time frame XLP is showing a great example of what I would like to see on SPY to confirm a downside break. Notice the bollinger bands were narrow the last couple weeks and then price made a close below the lower bollinger bands as they expanded. That was followed by a second close below the bands. This type of bollinger band configuration is typical of a volatility breakout and will often lead to sharp moves down.

Click on Chart to Enlarge

This chart is the Retail Holders ETF, RTH. Again this is a nice example of a bearish engulfing candlestick with range expansion on a weekly time frame. The MACD is also very close to crossing down. So the XLP and RTH ETF's are suggesting downside ahead, so that may be a clue to what the broad market will do.

Click on Chart to Enlarge

This chart is the Dow ETF, DIA. Last week the weekly RSI became overbought for the first time since late in the last bull market. The MACD is very stretched/overbought and could cross down in a week or two. However, there is no divergence which tends to be the most reliable topping signal. This week formed a bearish engulfing pattern which is a top reversal pattern, however the range was small and so does not look too imposing. So the two most likely things here are a major top now or a pullback for a few weeks followed by another move to new highs that forms a bearish divergence on the MACD and a major top then.

Click on Chart to Enlarge

This is a daily chart of the Nasdaq 100 ETF, QQQQ. Technically it looks divergent and maybe topping on that basis. However, it also is forming a classic ascending triangle which statistically is more likely to break to the upside. However, I would certainly wait for an upside break if considering a bullish trade on this. The pink dashed line on the chart would be like a failed pattern point of recognition. If price falls below there, then expect a significant decline back toward or below the Nov lows. So this looks bullish, but is not confirmed yet.

As a brief aside the dollar index made a doji on Friday and may be due for a pullback. I will go into more detail on this in next post. It really does look like a new uptrend even on the weekly chart of the Dollar Index, so I can't really suggest selling if you are in a dollar bull fund, but expect at least a brief consolidation for a week or two.

Thursday, December 17, 2009

More Detail on the S&P 500

Click on Chart to Enlarge

This chart is basically an updated version of one I've shown a few times recently. I've added a little time price comparison analysis looking at what I have labeled as waves "a" and "g" up since July. As of now, from high to low "g" is exactly 50% of "a" and they are exactly the same time from low to high. So that's not too exciting I guess, but the more you see harmonic relationships in markets the more it seems akin to our species spider's web.

On a shorter term time frame, the wave "g" also looks to be at or almost at maximum complexity and may be finished. A close below the low of the recent range (say 1084) would be a good sign that a larger correction is unfolding. And a retracement of wave g in less time than it took to form, likely means that a very large degree correction has begun.

Click on Chart to Enlarge

Now this chart is the Euro/US Dollar again. The reason I'm showing it here is because this is the type of move that you see at major trend changes (it looks kind of like the upside down version of the advance off the March lows in the Euro). I have said several times that when this upward phase in stocks ends, I expect the last several months of price gains to be lost in a just a few weeks. Notice that the Euro lost all the gains since August in the last 2 weeks. This is why I have been so persistent in trying to catch a potential top in stocks and why I have been trying it with the 3x leveraged fund. I expect stocks to follow suit at some point and drop a quick 10% or so (back to August highs or lower), which would be 30+% in SPXU assuming entering around current levels. And that initial 10% may be only the first part of a significantly larger decline over the next few months.

On a very short-term time frame the market is nearly oversold. Watching how it responds to any oversold conditions is one clue in determining whether the decline will continue on or not. Typically at intermediate time frame tops, the market persists in declining a bit despite short-term oversold readings. This has been the case in gold and the Euro of late. I'll be watching for it in stocks as well. In a recent post I said

"The Euro is coming down off a strongly technical divergent new high and is at moving average support now. Continuation of the move down, especially with an acceleration, likely means a larger trend change (up US dollar, down Euro) for a period of months or more."

I have said that before about stocks as well. The difference is that stocks never showed an acceleration down after becoming oversold. But looking at the Euro above, you see it has and should be a sign of a very significant top.

For those that got stopped out on the recent SPXU trade, you may want to get back in now with a stop at 36.00. Also, you could look at buying SH which is an unleveraged 1x inverse to the S&P or also to shorting SPY if you can get the shares. Either way, I will get us back in to take advantage of the move, but I'm just saying this because if you imagine yourself in the position of not getting in near the highs, then look at the Euro chart above or a chart of gold, you can see that there often is not an ideal bounce to get short/inverse on, just minor pushes up which get hammered. So I prefer to keep firing away near the highs with relatively small risk of account value per trade when using stops. For those that are still in SPXU, I'd keep the stop at 36.00 GTC. I will update as appropriate for those still holding.

The market does not make it easy to get in good at major reversals. The initial break of a new trend is very large and explosive. The initial explosive move often is just ending as most people realize that a new trend is beginning. After that initial move, markets then meander more slowly in opposition to the new trend. So the unfortunate situation that often happens if you don't get in near the top in this case, is by the time you are convinced a new trend has begun and you get short, the market will likely be bottoming out for several weeks and move against you for some time, and maybe force you out, only to then resume the new trend. We don't want to be those guys, so I'll stick with my guns here and view this as a trend change point and be willing to go short/inverse on a new trade even if the market is short-term oversold at that time but everything looks set on the longer time frame. I'm looking for a close below the lower bollinger band on the S&P with the bands expanding on that close. If another good opportunity comes before then I'll take it, but otherwise the next blog trade will probably be on such a break and will feel different than most other trades.

Blog Stop Hit on SPXU

The Blog stop point was hit today by a few pennies. However, some of you may have placed the stop lower or moved the stop to 36.00 as suggested if your entry price was lower. So the trade will be a stop out at 36.40 for record keeping purposes, but I will still update on the trade because I assume at least a couple people may still be holding.

I wish I had more to offer on the stock market right now, but I really don't.

Several sector ETF's made bearish candlesticks today (engulfing, doji, little shooting stars). But in looking through a bunch of charts, there were quite a number of stocks that made solid gains. With the FOMC meeting, I am less inclined to put much weight on candlesticks.

The daily technical indicators on the S&P continue to diverge and implicate weakness. But when the divergences go on and on, it can lull you to sleep. The continuing divergence shows continuing loss of upward price momentum. At some point, that is likely to lead to a sharp decline, probably sharper than normal. The weekly MACD is flattened and almost ready to cross down with any down week.

Click on Chart to Enlarge

On a qualitative level, I still think it most likely that the above 7-legged upward correction off the July lows is lazily completing. However, just from a basic price logic standpoint, the alternate scenario is that this consolidation is a middle phase which should lead to another advance on par with other recent upward legs. Watching the price and bollinger bands should identify the direction of any coming breakout/breakdown.

Bottom line: as long as there is no close above the rally highs thus far, I view this as a topping process. I will be willing to enter (short/inverse) on modest weakness in the event of a break to the downside.

Monday, December 14, 2009

Quick Update

The market is moving in what I think is a little unusual fashion. Almost everybody thinks it's going to breakout to the upside from blogs I've read, etc. I will agree that it looks more like that to me as well, due to a sideways consolidation under the recent highs. On the other hand, the subtleties of price movement seem weak in that the market has not been able to retrace the recent little decline in less time than it took to form.

There have now been 4 doji type days in a row on the SPY ETF. That also seems weird, especially in the middle of a range. There is an FOMC announcement tomorrow afternoon. The OEX put/call ratio was high today (smart traders seeing downside risk), which may be just due to the potential volatility from the FOMC tomorrow. The bollinger bands on the daily chart are squeezed very tight. It seems like the market is waiting on something pivotal to drive it one way or the other. I'm not sure what it is.

There has been a strong tendency the last few years for the market to advance on the FOMC day. Also, it has been common for a gap up on the open. Additionally, the December options expirations week has been the most consistently positive for the last few decades. On top of that, there is generally positive seasonal tendencies for the next few weeks. These factors would suggest that we may be more likely to break to the upside from the recent range.

I would like to give the maximum room on the current SPXU trade, so I will just leave the stop as is. For those who got in around 36.69, I would really consider having the stop at 36.00 to allow the market to fluctuate in the recent range and only get stopped if it makes a new high. But don't move the stop down if it increases your risk beyond the initially planned amount.

Click on Chart to Enlarge

The US dollar index has shown the type of price confirmation that typically leads to a significant trend reversal. It has completely retraced the last significant swing move down in less time than the decline took to form.

However, the stock market has not reacted much. I was expecting the inverse correlation to hold more tightly, and in retrospect, I may have decided on the wrong market to pursue for blog trades when persisting in the attempt to catch a major reversal in stocks and the dollar. However, at some point we may see a sharp move in stocks to reflect some of what is going on in this inter-market relationship.

Friday, December 11, 2009

Quick Update

The short-term S&P model is just touching overbought right now. I am feeling uncomfortable in the current trade, but I think this justifies continuing to hold objectively.

There have been so many gaps in recent weeks that there have not been much chance for these short-term overbought or oversold signals to occur (gaps don't factor into it much). And the rest of the time has been very choppy in between.

As a little side note, the QQQQ may form a bearish engulfing today if there is no further strength today in the market. That again would be support for holding the trade.

Wednesday, December 9, 2009

A Couple Signs We May Be On The Right Track

Click on Chart to Enlarge

The Euro has come down rather hard the past week, and has closed below the lower bollinger band as the bands are expanding following a consolidation. These signals from bollinger bands tend to be the best direction signals. So further decline in the Euro and gains in the dollar may be in store, which should help our active blog trades.

Click on Chart to Enlarge

This chart is USO the primary oil ETF. Now notice the bollinger band action here. Price consolidating and now breaking several days in a row to close below the bands. Now this won't continue forever, but as long as that lower band is pointing down, this could drop very sharply.

Since commodities are trading inversely to the dollar it may not be any further evidence by posting this chart, but realize the intermarket relationships. They are saying the same thing, and seem to be taking a break from the inflation trade.

Click on Chart to Enlarge

This chart above is GLD the main gold ETF. Price has followed through to the downside to the tune of roughly 10% in 4 days. That is bigger and more explosive a decline than any since the recent bear market in gold. I am definitely viewing this market as having made a significant top, probably even shortable at the current levels.

What's happening right now in gold reminds me of the first week or 2 after the top in oil last year. Everyone was still in bull mode and looking at the pullback as a nice dip to buy. And successful timing strategies looking at volatility, etc. seemed to be giving a buy signal. But then it didn't manage to bounce much, and just continued to slide. I think this might end up the same...with not even a real nice bounce for a while. But also realize that right now all the markets are moving in lock step or inverse. So it doesn't make a lot of sense to try to trade several major asset classes as diversification. It's all the same trade right now.

Tuesday, December 8, 2009

5th Failure to Hold Closing Above Oct Highs in S&P 500

On the most recent SPXU trade, the only people who told me they got in the trade either got in on Friday morning or were still in it from the prior attempt. So on a pragmatic basis, I am treating the trade as still active. The average price of those who told me they were in the trade is about 37.30. I will leave the blog entry price the same at 37.90, and have suggested using the initial stop of 36.40 at this point. Despite fear of another stop out, I think it should be in place because once either the bull or the bear tree gets completely chopped down, I think the market will move strongly the other direction. With the successive doji, bearish engulfing, and spinning top candlesticks, it looks like bears are winning, especially now that there is another close below 1100 on the S&P.

Click on Chart to Enlarge

The chart above shows the 5 closes back below the Oct high after it was exceeded last month. This choppy battle will lead to a significant directional move soon in my opinion.

Click on Chart to Enlarge

This chart is an hourly chart of SPY showing 3 little island top formations. Every time the market gets back above 1100 ( 3 sizable gap ups) it has had sizable gap downs back to the lower end (or below) of the preceding range. I can't see this type of mess lasting much longer.

Click on Chart to Enlarge

The dollar index showed a bit of follow through after managing to close 2 days in row above the 50 day MA. It made another big gain against the Euro today. Further gains in the dollar will put pressure on stocks.

Click on Chart to Enlarge

The chart from Sentimentrader.com shows that large speculators are extremely net long on commodities. The chart above weights equally to the CRB index (which is heavily weighted to energy). We see that they are almost back to the same level as at the commodity bubble peak last year. This shows excessive speculation across the commodity board.

As I said several months ago, the freebee money lent by the Fed to large institutions is not going back into economically productive loans. The Fed has been lending at 0% interest to these large banking institutions. But they then across the board raise consumer credit card rates to 29.99%. Also, while I don't have anything to post here, I don't think that business lending is all too great either. So where is the money going? Obviously into speculation on stocks and inflation sensitive issues like commodities and the US dollar carry trade.

So maybe those banks are making out on paper right now in these areas. But how much leverage are they putting up in the futures and forex market? Are they going to be out of those contracts while they are still in the green? If this gamble goes bad for banks at large and they don't get while the gettin's good.........

US Dollar, Gold, SPXU

Gold looks to have started a correction rather than a simple pullback. So expect prices to head basically lower for a month or 2. Longer term I'm not sure whether this is a major top or just the top of the first breakout move to much higher highs. Often when commodities break to new all time highs, they advance substantially and relatively quickly (say 80-100% in a year or so). This doesn't always happen, but that would be about average historically. So it will probably be several months before we could have a good idea of whether that could be playing out or not. However, the implication for the stock market intermediate term outlook is that stocks will likely pullback if gold does, as the inflationary theme is driving assets up in tandem right now.

For those who may be new to reading the blog, the point of the chart above is that typically markets move up in trends punctuated by relatively similar corrections in price and time. When you see a counter trend move that is larger (about 1.2x as large) and faster than several other corrections that already took place, it is likely that a larger degree move has begun in the counter trend direction.

The Euro is coming down off a strongly technical divergent new high and is at moving average support now. Continuation of the move down, especially with an acceleration, likely means a larger trend change (up US dollar, down Euro) for a period of months or more.

The Aussie/US dollar may be forming a head and shoulders topping pattern, but is coming down off a strong divergence at the most recent high in any case. Again it is near moving average support which should be watched. The Aussie dollar is a big beneficiary of the US dollar carry trade because the interest rate is much higher on the Aussie dollar. I've been constantly bringing up the US dollar in this blog because basically all stocks and commodities are moving inversely to the US dollar. If/when the carry trade starts to be taken off, expect it to be volatile and to drive stock and commodities down, probably sharply. My expectation based off of technical chart analysis and sentiment data is that such a move up in the USD is likely to be happening sooner rather than later. But so far there has been nothing lasting.

The US$/Yen made a big break below the lows from the recent bear market but then made a sharp reversal back above that level. Again for those that read the post on Natural Gas I made a week or two ago, remember the pattern: a long down trend that then shows the longest red candlestick of the whole move as it nears or breaks support. Expect it to be exhausting itself before reversing higher. In this case, there was a nice hammer reversal and a sharp move back up. Sentiment on the Yen is very bullish (see chart below) and smart commercial traders are as net short the Yen as they have been at any time in several years. If the USD holds above the horizontal line on the chart above, it may be a double bottom type chart pattern which could imply significant gains in the US dollar ahead.


The only comments I got on the most recent SPXU trade were people who entered and were still in the trade. So I am going to just treat the trade as still active with a stop at 36.40. The S&P 500 has been oscillating around the 1100 and change level for a while and has formed a third short-term island top with this morning's gap down. I think the break will be down from here, but most indicators are neutral.

Monday, December 7, 2009

A Look at Longer Term Cash Data


Click on Charts to Enlarge

The two charts above are from Sentimentrader.com. The top chart shows the percentage of mutual funds' assets in cash. It is back down below 4% now. That level was the lowest reached at bull market tops over the last several decades. What is also interesting is that despite one of the greatest stock bear markets in history, the cash % only jumped to 6% at the bear market lows this year when it easily surpassed 10% several times in decades past.

These types of data tend to be long term signals. A high cash percentage means that funds have lots of cash to buy assets like stocks. We are seeing the opposite of that now - historically low cash levels. Also, I wonder if the lack of a comparable spike in the cash percentage during this recent bear market isn't indicative of a lingering optimism towards stocks and solid evidence that the bear market psychology has not run its course yet. Anyway, I certainly would not consider adding or buying stocks on a long term basis right now personally.

The lower chart shows cash in retail (individuals, non-professionals) money market funds. Again cash levels will swell as individuals see risk, which usually happens near bottoms. And cash levels fall as markets rise and they see no need to leave money sitting in these accounts. Cash levels did swell to a significant high at this year's bear market lows. As a percentage of the S&P market capitalization, it hit about 15%. However, that has fallen substantially in recent months. After similar instances in the past the market was sideways for extended periods of time.

From these charts it seems most sensible to maintain a sideways to down outlook for stocks into next year at least. I think that most intermediate term sentiment data toward the market suggests the same. Technically the trend is still up and price is still above key moving averages. But it's too late to come to the party now in my opinion. There will likely be opportunity to buy at lower levels in the coming year(s).

Friday, December 4, 2009

Request - Most Recent SPXU Trade

I didn't get the post out yesterday for the new trade until about 10 or 15 min before the close, which realistically would not give most people a chance to enter unless you were able to do it immediately. Now there was a large gap up this morning that would have stopped out that trade (insert curse words here).....

As I've touched on before, gap ups on monthly jobs reports like today tend to be good contrary signals in their own right. And the market is selling off dramatically since the open and this may be the final washout before a solid move down.

So my request is please post an anonymous comment if you got in yesterday (and also whether you got stopped out this morning). Also, please post a comment if you got in this morning and are still in the trade now.

If it turns out that no one got in yesterday, then it will make sense to just manage the trade from here as if it is still active, particularly since there may be those who got in this morning.

Thanks


Pete

Thursday, December 3, 2009

Bearish Engulfing/Key Reversals Today

Click on Chart to Enlarge

The major averages and most sector ETFs formed bearish engulfing patterns today. After being chopped and stopped several times in the last couple weeks, I am experiencing some emotional exhaustion in trying to play this reversal. However, looking at charts and indicators, I would say this is the best set-up out of any of the last 4 I've tried. Also, any lower close from here will be a 4th failed breakout above the Oct highs.

These choppy environments make trading with tight stops/low risk, very difficult. That is just the way it is and basically has to be that way for a market to reverse. I personally find it easier to deal with this by either not using a stop, and managing risk by devoting a certain percentage of the account (going a little more conservative than seems necessary) or fixed dollar amount to every trade or using a last ditch type of stop level so that you only get stopped if you are way off. That way you are free to exit purely off indicators and don't get whipsawed very often. There are pros and cons to both ways. The main problem with using tight stops and getting stopped out several times, is that if there is any emotional input involved in the decision making process, it is against human nature to keep "hurting" yourself or doing anything that makes you feel bad or insecure, and then you don't persist to finally catch a very large move.

Click on Chart to Enlarge

The hourly chart above shows a fresh MACD bear cross and -DI crossing above +DI in the last hour of the day. Price is just pennies above the Parabolic Stop and Reverse sell point as well. There is continuing divergence on the MACD on this time frame and without price trending up.

My sense is that this is a very significant top forming right now. However, that is a serious minority opinion. But that is fundamental to contrarian thought and investing/trading. Learn to recognize consensus thinking and then act against it at well planned times.

The size and speed of any potential decline off these levels will be the most telling aspect of what is in store on a longer term basis.

SPXU Re-entry

No time for details. This is the last try on SPXU for now.


Re-enter SPXU ASAP today. Price is 37.90. GTC sell stop at 36.40 after entry and for sizing.

Wednesday, December 2, 2009

SPXU Stopped Out and New SPXU Trade

The recent SPXU trade was stopped out at 37.00 yesterday, down from 40.33 at entry. In retrospect this was a poor trade, and I was aware of that risk on entering on a large gap down. The last 2-3 weeks have been very choppy with no real overbought or oversold readings from the short-term model I usually use for entries. However, yesterday and this morning did register some solid overbought readings, and thus far the move to new highs has failed and the breakout attempt was on weak volume.

If the market closes anywhere near where it is now, the indexes will form shooting star candles at resistance that effectively ran stops above the recent highs. So without knowing what is in store for the rest of the afternoon, we have an overbought situation with a potentially quality candlestick reversal pattern in the making, so I want to take another chance on this set-up and re-enter.

New SPXU Trade:

Buy SPXU today with a market order. Current price is 37.37 and is the blog entry price. Use a GTC sell stop at 36.67 immediately after entry. Use the position sizing guidelines here if necessary (as a general rule only risk 1-2% of account value per trade).

Monday, November 30, 2009

Gold/Oil Ratio and Pairs Trade Examples

As part of a further evaluation of the context of gold prices (and hence monetary inflation concerns and outlook for the US dollar) I decided to look a bit into how gold prices were relating to other inflation sensitive issues. Oil was the one that I thought would offer the most interesting comparison. The idea I wanted to explore was whether the ratio of gold prices to oil prices was informative on the future price action of either of the two.

After doing some charting I looked for some historical data on the ratio and found the useful chart below. It is not a truly long-term chart, but does go back several decades and shows probably a good sampling of the range that the ratio swings back and forth in.

Click on Chart to Enlarge

The chart above shows the gold/oil ratio in standard units oz/barrel. The chart goes back to about 1973. The basic range for the ratio is between about 8 and 30. The long term average from what I've read on it is about 15.

Click on Chart to Enlarge

In the chart above I used stock charts to create the ratio for the last 3 years of prices. Notice that at the top of the commodity bull last year, with energy related commodities leading the way, the ratio fell very low, below 7. So gold was cheap relative to oil on a historical basis. The first chart shows a point where the ratio got down to about 6.2 in 2005, but the reading last year was the second lowest. The difference was that in 2005 gold shot up about 60% or so over the next year after the ratio got very low. Last year gold dropped about 30% in the months after the low and then got back to around even by this year.

From what I've looked at as far as ratio extremes, I don't see much predictability as far as gold moving up or down on an absolute basis after extremes in the ratio to oil. However, the ratio does seem to help determine points at which gold or oil is likely to out or under perform the other. Like much of the data and analysis I post on the blog, this is best looked at as a ratio that will undergo mean reversion on a long term basis. This means that the average of the ratio is pretty stable not trending over a long period of time. So when the ratio gets far away from the average, it is best to look for it to return back toward the long term average than to get further away. This sets up the opportunity to play the expected performance or relative strength of one versus the other via a pairs trade when the ratio reaches extremes.

A pairs trade is going long one stock and short another in the same sector. So you are market neutral but will benefit if your long position goes down less or up more on a percentage basis than the short position. So you benefit by accurately determining the relative strength of two related issues. As an example, when the market has come way down and starts to turn up you may buy Apple stock and short and equal dollar amount of Dell because you believe that Apple will display superior relative strength to Dell in a rising market.

So back to gold and oil, you could create a pairs trade by buying gold futures or ETFs and shorting oil futures ETFs if you believe that gold will outperform on a relative basis. So in the example of July 2008, the gold/oil ratio reached a historically low extreme indicating that gold was cheap relative to oil. Even though gold dropped about 30% over the next 4 months, oil dropped 60%. So if you had a long gold-short oil pairs trade you would be up 30% between the two and 15% return on total dollars invested at that point.

On the chart above I made some brief notes showing a simple possible strategy of using a close above/below the 50 day moving average to initiate and close a pairs trade after the ratio reached an extreme point. So when the ratio is in a very low historical position you would look to buy gold and short oil. If the ratio gets very high, you would buy oil and short gold. The last year shows a couple nice trades, one in each direction, using that simple method.

Now in a statistical sense the long term mean of the ratio is about 15. The +1 +2 +3 standard deviations are around 20, 25 and 30 respectively. The point is that you probably should not look to pairs trade something when the ratio is right around the average. You want to wait for it to get extreme to give a higher success rate. Currently the ratio is about 15 which is right around the long term average so is probably not a time to try to create a pairs trade.

Now unfortunately from anything I've looked at so far, I have not really found anything that gives me much insight into whether gold will go up or down from here on this basis. But the more you know how markets relate, the better investment decisions you should be able to make with more confidence, and the more opportunities you may recognize and know how to take advantage of.

Saturday, November 28, 2009

Some Charts to Help Gauge Sentiment

Click on Charts to Enlarge

This chart I often show which is the equity put/call ratio with 21 and 34 day averages. It is used as a contrarian indicator. When the ratio reaches extreme highs or lows, that can be helpful in timing market turns. But looking at the intermediate averages helps to see the longer ebb and flow of fear in the options market. Despite the senior indexes being only marginally off highs, the averages have started to trend up for the last month indicating a shift in sentiment that often accompanies a market downtrend.

This chart is from Sentimentrader.com and is a very interesting look at some of the Rydex fund data that they track. This particular study looks for times when the level of buying or selling in Rydex funds is disproportional to the price movement in the market. When there is lots of buying/inflow while the market does not really makes substantial gains (or even declines) that shows that the Rydex traders are buying the dips or are overly enthusiastic about further gains. During the rally since March when several readings like that show up in a cluster or narrow price range, it has often been at short term tops. We are seeing this again over the last 2 weeks.

This chart is also from Sentimentrader.com. It is what they call the Options Speculation Index and is a broad measure of bullish and bearish bets in the option market. It is used as a contrary indicator and excessive call activity often happens near market highs (and vice versa). This ratio looks at the ratio of calls bought to open and puts sold to open divided by puts bought to open and calls sold to open. The ratio jumped to multi year highs last week, which indicates that the options market is leveraged excessively toward the call side.

This chart is the OEX put/call ratio for 2009 so far. Unlike most put/call ratios I mention this one is a smart money indicator typically as smart traders buy puts as hedges when the market has gotten ahead of itself. In the past there have tended to be several spikes up in this ratio as a significant top approaches. The ratio spiked up on Friday again to 2.04. The intermediate averages of this ratio are also showing this group to be maintaining consistently high put exposure (on a relative basis) consistent with expectations of significant downside risk in the markets.

Another thing of note on the sentiment front is that one of the lowest bearish % readings in the Investors Intelligence survey occurred this week. This is a contrary indicator typically but is best used to time the market with the larger trend. So the question is whether we are still in a longer term bear market in which case I would find this very significant. The 200 day moving average (which is a simple way to gauge long term trend) is pointed up now though. But with several other signs of longer term excess bullish equity speculation, I think it is notable. Also the survey showed a relatively high percentage of advisers expecting a correction. Despite the contrary use of this survey, this particular aspect of the survey has in the past functioned more as a confirming indicator and there often is some pullback when there is a high percentage expecting a correction.

Most of the above measures are more significant over the time frame of a few months rather than a few days. On a short-term time frame there is some mixed data. The VIX spiked up Friday and may be slightly bullish short-term. Also there was a very low cumulative TICK reading on the Nasdaq Friday, which should be bullish as well. But most other short-term sentiment gauges are neutral.

From a charting perspective, the close below 1100 on the S&P made a third failed breakout attempt above the Oct highs. This tends to be a good reversal price pattern. But any move above the recent highs is likely to succeed in a breakout. I maintain the view that the market is in a topping process which may be complete with this most recent failed breakout on the S&P. Tops tend to be slow in the forming and take persistence to establish a successful low risk-high reward position anticipating a new downtrend.

Friday, November 27, 2009

A Look at Market Psychology of the Recent Past and Present

Click on Chart to Enlarge

I have been thinking a good bit about the action in gold the last couple months and trying to look at it from different angles. The chart above shows the CRB commodity index at bottom with wheat, oil, and gold prices above as well as some notes of what I believe the general crowd psychology was at some points in the past.

I can clearly recall news stories about third world starvation and global warming in relation to the soaring grain prices last year near the commodity peak. There was some backlash against use of food based fuels like ethanol from corn and sugar, etc. While all these things may be sensible or even true, it only helped to explain price behavior in the past. What most people do is to assume that the same trends will continue into the future. As a contrarian trader or investor, it is important to learn to recognize consensus opinion and behaviors and willingly act against them. For anybody who pays attention to this type of thing at all, I'm sure you can think back on what the buzz was near the high points of certain commodities over the last year.

Well despite the commodity index now being well off the peak, there is a resurgence of inflation fears with primary concern over monetary inflation and the death of the dollar. This has focused the commodity world's attention on gold. My take is that this could very well be just another successive inflationary peak in a longer process of fundamental deflation.

It is not clear cut to me though because when commodities break out to all time highs, they enter a very strong technical position with no overhead resistance to speak of. So maybe this is the early stages of a long and large move up in gold. But from a crowd psychology standpoint and look at measures of real money sentiment, I tend to think that it is more likely just another domino in the line.

Stocks and commodities tend to advance together over the long term in general. However, there is a key difference in psychology at extreme points between the two. When stocks advance to bubble levels the crowd is euphoric and happy about the high valuations. However, as commodity price reach bubble levels, fear takes hold. Fear of famine, shortage, etc manifest at commodity peaks while it is utter complacency at stock peaks. So the difference in psychology may be why we see stocks top out before commodities often. They are both advancing, but then as commodity prices get so high, the general climate shifts towards fear. Then stocks come down on the fear while commodities blow off to higher highs on the fear.

For those familiar with Elliott wave theory, you know it is a result of crowd psychology. So while prices may exhibit identifiable patterns, larger degree patterns will have identifiable psychological/social trends that happen with them. A correction of a larger trend in its simplest form is said to be a 3 phase move (i.e. down up down, ABC). In looking at the crowd psychology of the recent bear market and the advance since, I would say there have been 2 distinct phases thus far: a progressive fear of and recognition of deflation, and now a directed social effort to combat that and re-emerging fears of inflation. I personally expect there to be at least another reversal of the psychology back toward the deflationary side before any great buying opportunity comes in stocks. Maybe that will take the stock market to new lows, maybe not, but I expect it to take stocks down quite a bit lower than they are now.

Thursday, November 26, 2009

Heads Up Post For Friday - New SPXU Trade

Place a day only buy stop order at 39.75 on SPXU tomorrow. Use 37.00 as a GTC sell stop after entry if filled. Use money management guidelines here if guidance is needed.

For those who haven't used a buy stop here's what to do......choose "buy" and then choose "stop" from the order type (limit, market, stop, etc) choices. Then you will put 39.75 for the stop price. The trade won't be filled unless the S&P 500 drops about 2.2% tomorrow.

This post is just a heads up for tomorrow. The stock futures are down about 2% right now, and the US dollar index futures had a huge gap up to open near Wednesday's open. This is looking like a false breakdown in the dollar and corresponding failed breakout in stocks as I've talked about for the last 2 weeks or so.

So the main reason for this post is that there may be a large gap down in the stock indexes tomorrow, but with the market in the current position, it is not going to deter me from recommending a new inverse ETF trade. Granted the position size will have to be smaller because the stop loss will be wide due to the gap.

For those that didn't keep up with the news on Dubai, this is the type of thing that I think will be coming to the front more and more in coming months with Dubai just the Poster Child of excess and linked to what was one of the very biggest commodity bubbles/bull markets in history. The implosion of oil prices has obviously now months later lowered income and profits so that all the debt they took on can no longer be covered. Debt service (interest payments) is drowning them. Ditto with housing. Ditto with government spending in my opinion.

I have never fear mongered on this blog (I have no reason to) and certainly am conscious not to do that after major declines because that is when people will "fall for it" and make bad investment decisions. But after a nearly 70% rally in stocks, I don't consider it fear mongering. It is a reality check on a world awash in debt from "money" that came out of the ether and, if left to substantial free market forces, will surely largely return to the ether. And yes I know the Fed is "printing" money. But if you think that the amount of printing/monetization (say a few trillion $) counter or overbalances the amount of credit (say a couple hundred trillion $) that would disappear under free market conditions via housing/real estate, financial derivatives, etc, then I think you owe it to yourself to better understand the system of our money.

So, while it may be a sucker play to sell on a large gap down, after living through the market the last several months, I have become increasingly convinced that it would/will take a major news event to really shift the psychology out of the weakening uptrend to a legit downtrend. I don't know if this is it, but I expect it to be something with regards to credit/solvency issues.

With the technical set-up such that a close below 1100 on the S&P triggers a sell due to a thrice failed breakout, and the potential for a gap down below that level tomorrow, I am not assuming this gap will be bought and the market will move quickly to new highs like has happened so often the last few months.

Wednesday, November 25, 2009

EUO Trade Stopped Out and New Trade Set-Up

Click on Chart to Enlarge

The chart above is the daily chart of the S&P 500. I have made notes showing a trade set-up that will be triggered if price closes back below 1100 without significant further upside. It is a similar set-up to the one during the June high. Check the chart for the notes. In sum though, I do feel it is worth it to get back in on the short/inverse side of this market if there is another close below 1100 in the next few days. Then the stop will be the most recent high in the market.

The EUO trade was stopped out at 16.95 (down from 17.43 at entry) on the open today as the dollar index gapped down. Thus far all my attempts to catch a significant reversal on this index have failed. However, there is an identical (but upside down) set up on this index as in the S&P, so this puke gap down in the dollar index today may be the last one before a legit advance. I don't know if a lot of detail is necessary on this, but the dollar and stock indexes have had a strong inverse correlation recently. It has not always been so historically, and major turns over the last year or so have tended to see some breakdown of the correlation between the two. So that is something I have been anticipating may happen, and is my justification for making trades both long the dollar and inverse stocks. However, there really has been no point in retrospect - the correlation has been extremely high and not broken yet. So, until I see more definite signs of a reversal, I will probably only be playing one or the other.

Click on Chart to Enlarge

This is an hourly chart of SPY showing a continuing bearish divergence on the MACD on the recent new high. The ADX system is showing no trend, but bulls in control right now. These are still the indicators I am watching, but basically another close back below 1100 on the S&P will be the sign to get back in an inverse ETF.

Tuesday, November 24, 2009

2x Inverse ETF Volume Update

Click on Chart to Enlarge

The chart above is an indicator I made based off of the sum of the Dow, S&P, and Nasdaq 2x inverse ETF funds. I have posted this before, but for those that haven't seen it the idea is that volume will spike at bottoms of corrections as traders buy these as short term hedges or speculative plays. The reverse logic of that is that volume may fall to low levels at market tops when collectively there is not much fear of downside.

Now one thing that is evident from the chart is that the volume of these funds has dropped in seasonal fashion around the Christmas holiday. That makes sense because total market volume does as well. In fact, a better way to look at this may be to divide the volume above by total exchange volume to filter out the general market influence.

Anyway, the volume has dropped as of yesterday to levels lower than any except the past 2 Christmas periods. Also, Thanksgiving last year showed a low reading which again would be expected on an absolute level. The Nov-Dec January time period tends to show greater than random gains throughout history with the days surrounding the Thanksgiving and Christmas holidays being some of the most consistently positive.

So that may account for some or all of the low reading currently, but volume also dropped to quite low levels in late Oct before a sharp pullback, so it is something to keep an eye on from a sentiment perspective.

I'll try to recreate this chart as a percentage of NYSE volume and post that chart sometime relatively soon as well.

Monday, November 23, 2009

SPXU Stopped Out

The SPXU trade was stopped out today at 37.36 down from 39.25.

I don't have any charts to post right now, but there are some very important ones to look at. I would like to get a video up but really don't know if I will. If not, then I'll post or recap some notables.

It would have been justifiable to re-enter a bearish trade prior to close today, but I held off. There was a classic reversal candlestick (shooting star/doji) in SPY today. It also filled the open gap down off the recent high. However there was a large gap up at the open today, and so there was not really a major breadth reversal in the market as all indexes closed with basically solid gains despite being well off the highs.

With the holiday week which tends to be lighter volume and more bullish than normal, I will just wait to see if there is any downside follow through to today's reversal. Basically if the market moves below last week's low, then I will suggest returning to an inverse ETF trade. That will make the stop wider and thus a smaller position size, but will decrease the likelihood of being stopped out and increase the likelihood that there will be further retracement of the recent advance.

Friday, November 20, 2009

Solid Trade Set-Up in Natural Gas




Click on Charts to Enlarge

The charts above give some details on Natural Gas. It looks to me that this market should be in a good position to move higher. It has not really moved in lock step with commodities at large over the last year. From a charting standpoint, I think this looks really good.

The top chart shows the type of advance that is likely to be the first leg up in a new bull market now followed by a modest correction against that new up trend. The second chart shows a a graph of Commitment of Traders data showing extremely high net long positions by the commercials (smart money). Also the dumb money small speculators are coming off of a very low net long position. Looking back at the data, you see that following the commercials and against the small specs is the way to go.

The third chart shows the Dec futures contract which shows a nice buy pattern. There has been a large % decline that undercut the prior contract low, and then it formed a hammer type reversal and has moved back above that prior low. Also note the large red candlestick a couple days ago. Remember that for future charting purposes. After a long downtrend, when you see the biggest red bar/candle of the entire move down, that will often be very close to a capitulation low where all rest of the selling is exhausted. A similar thing happened in early Sept and is visible on the chart.

The bottom chart shows a similar set-up in the UNG ETF. It shows a similar undercut of the prior low and rebound above. There is a nice doji and then a bullish engulfing pattern today. I bought this ETF before the close and have a stop around the 8.50 area. This is not something I will track on the blog, but I thought these charts had several good examples of key components to a good entry. The exit will be the more difficult part but in this case, I would always wait for a move up then a swing low to form at a higher level before moving the stop up. Then at that point it is a game of moving the stop up below support as price moves higher and then use an objective indicator to sell when price gets overbought.

Anyway, I thought this was worth posting and buying. If it doesn't get stopped out, I will probably make a follow up post at some point on this just to show where to move the stop and what indicators I'm following for potential exit signals.