Thursday, February 26, 2009

"Close" to a Bottom?

I am not going to post any charts tonight because nothing is very new from last time. In brief, my suspicion is that we are relatively close to a significant/tradable bottom from a time standpoint (maybe a week or so, or less). However, as has been the case for the better part of the last year, even if you "know" a bottom will happen soon, price may not be so close to a bottom.

There are many reliable indicators from market breadth and sentiment surveys and fund flows that are showing extreme pessimism right now, however some of the most reliable indicators, which are the put/call ratios, are glaringly absent from the list. In fact, despite the S&P 500 barely 2% above the key Nov low and the Dow several percent below that low, the equity put/call ratios have been 0.65, 0.64, and 0.65 the last 3 days. Those are ridiculously low and are more on par with excessive complacency (not feeling the need for put protection). I would be very surprised if we make a significant bottom without those ratios jumping up a good bit.

What I think is most likely is a break of the Nov lows in the S&P 500 with a move down to the 650-730 range, followed by another "sideways" consolidation for a few weeks. The initial upward thrust off a bottom tends to be very strong, and I will want to try to catch some of that move if possible on one of the next trades.

As for the current SDS blog trade, any sharp decline tomorrow will likely trigger an exit signal, so just be aware of that possibility.


Wednesday, February 25, 2009

New SDS Trade

This post will be brief because I am not feeling well. (Also if you got two of this post, this one is correct. I had mistakenly typed the wrong price of SDS in the prior post.)

The short-term model for the S&P is overbought as of this morning (due to yesterday's action). I think the probability is high that the Nov lows will be taken out (maybe significantly) before the market can make a solid rebound. With that said.....


Buy SDS today with a "market" order. The current price is 94.15 which I will use for the blog entry price.


Monday, February 23, 2009

Potential Trade if Nov Lows are Broken

Click on Chart to Enlarge

The chart above is the S&P 500 as of about 3:00 ET Monday. It is ever so slightly above the November lows of 741. I think at this point the likeihood is high that those lows will be violated before any meaningful advance. On the flip side, a break of those lows will likely bring a lot of the "retest" crowd back into the market and could be a very explosive short-term move which I would be interested in trading. So for the near future, I am going to switch to short-term bullish mode and look for signs that this decline is over. A 35 point advance from its lowest point (or a $3.50 advance in SPY) would likely indicate that this phase of the decline is over. A significant gap down tomorrow morning would also be a potential indication of exhaustion.

If the Nov lows are broken today or tomorrow, then I will almost certainly recommend a trade on the blog. I would probably suggest QLD as the fund to trade. But let me make clear that this would be only a short-term trade, NOT NOT NOT a trade to get "stuck" in for any reason. It would be counter to the larger trend which is extremely negative over the next few months in my opinion. For that reason, any beginning trader should probably not even try to trade it.

I believe that any large advance off the recent or near-future lows, should be the best opportunity we will see for a while to short the markets or buy inverse funds. Also, this would be the time to either buy, or scale into, index put options in my opinion.

We'll see what happens.


Several Indicators Suggest Some Short-Term Gains are Ahead

Click on Chart to Enlarge

There are a lot of things I could look at for today's post, but since I'm getting a late start at this post and the conclusion wouldn't change by adding more analysis, I thought I'd just show some unique indicators that I made that I have never seen anyone else use. I value independent thought in market analysis. The tried and true indicators will be great guides, but I think there is some value in looking at a market from at least a slightly different perspective than most everybody else. It helps to avoid "group think" to some extent maybe.

The chart above is a chart of a 21 day running cumulative gap %. So the blue line is the sum of all the gap ups and gap downs for about the last month of trading. This chart is used as a contrary indicator. If there has been a large percentage of gapping down over the last month, that would indicate a bottom may be near. In the chart above, the current reading as of last Friday was just over -8%. That is in the range of past extremes. In fact, the -8% mark has been a kind of magic number as every time it has been reached since the beginning of this bear market, the next day has been positive (typically substantially positive) every time. That would suggest today should be a positive today, with likelihood of at least a bit more short-term gains ahead.

Click on Chart to Enlarge

This chart is the sum of the volume of SDS, QID, and DXD which are the 2X inverse index ETF's for the S&P, Nasdaq, and Dow respectively. I created this indicator last July and have found it to be useful in the same way as following put/call ratios. In fact, the reason I made the indicator was because during the decline of June and July 08, there was very little increase in put/call ratios, yet it was obvious that the market was bottoming, and these inverse ETFs were showing the highest volume in their history. This indicated that investors were using these funds as hedges (and speculative vehicles) in similar manner to put options.

The current readings are on par with past bottoms, though the Oct/Nov bottoms last year showed substantial further increases in volume. I view the current market situation as similar to last September. This indicator is reaching the same levels as mid September last year before a sharp 2 day rally followed by the "crash" into October.

In the interest of time, that is all for today's post. The conclusion from many indicators would suggest a short (couple days to 2 weeks) market rally starting today. After that I think a more vertical decline will ensue.

For trading purposes just maintain the limit order to buy BGZ at 67.50 until further instructions are given.


Thursday, February 19, 2009

SPY and Bollinger Bands

Click on Chart to Enlarge

First off, the price of BGZ at 12:30 ET today (the time I said I would use for an exit price) was 77.75 up from 73.63 at entry for a 5.5% gain. Depending on when anyone was able to exit from the time I made the post to the close today, the gain may have been from about 3% to 8%. If unable to exit today, just place a market order tonight to sell it first thing tomorrow.

I wanted to give a little rationale for exiting this trade since my goal is to get into a BGZ trade to hold for a few weeks. When the market is on the verge of a major move there are often multiple whipsaws before it finally takes off. When a major move starts, you should see price be able to accelerate in the direction of the new trend. That has not happened, so it would seem likely to me that another whipsaw move will occur before the market can continue lower. As it stands right now, on any rally followed by a break below the most recent minor low, the potential exists for a dramatic vertical type decline to begin.

The chart above is SPY with standard bollinger bands overlaid which are +/- 2 standard deviations of the last 20 days' average price. The light blue boxes on the chart show times during this bear market when SPY closed 2 or more consecutive days below the lower band on a breakout from a horizontal channel in the bands. Today is the 3rd consecutive close below the lower band. In the prior instances there were 2 to 4 closes below the band followed by a very sharp 1-2 day rally that typically topped near the highs of the second price bar before the most recent close below the band. Currently that would put the S&P at about 820 in the next couple days if the same pattern occurs again now.

Taken together with the recent studies I have referenced and the oversold short-term conditions, this bollinger band pattern would suggest a move back near the top of the recent large gap down (82.75 on SPY) in the 2 or 3 days. If such a move does not occur by the middle of next week, I will begin looking for a decent re-entry into BGZ on a breakout to the downside.


BGZ Trade Exit

I am recommending exiting (selling) the current 1/2 BGZ trade today ASAP (with a market order). I will use the 12:30 ET price of BGZ for the blog exit price, which currently is about a 3%

As indicated in the most recent post, keep GTC limit orders in place to buy BGZ at 67.50, but this time with a normal dollar amount instead of a half-sized amount.

In addition to the gap filling study I referenced yesterday, whenever there has been a down day (like yesterday) right after a <10% up issues day (like Tuesday) the next 4 days showed a positive return every time (8 out of 8) with an average return of 6.1%. That would put us right up into the same area as the 3% gap down occurred. So there are two studies showing an extremely consistent tendency for prices to move back to that area. With the short-term model oversold, I don't want to sit through a big market advance on this trade.


Wednesday, February 18, 2009

Short-Term Update and BGZ Trade Modification

Click on Chart to Enlarge

The chart above is SPY (S&P 500 ETF). There are several notes on the chart with some potential short-term bullish implication. First, the green line represents the previously unfilled gap up from November 24th. That gap is now finally filled. Major gaps like that often will provide at least temporary support in a case like this.

The light blue line represents last Friday's closing price before Tuesday's large gap down. In the last post I had mentioned that >2% gap downs tend to have prices close above the opening price of the gap down within 3 or 4 days. Today I saw a similar historical study looking at 3% or greater gap downs (like Tuesday). There were 12 instances of this in the last 20 years or so. In every case except the Crash of 1987 (market lost 25% in one day), prices came back up to the closing price of the day before the gap down within 6 days. The average was 3 days.

This would suggest a strong possibility of prices rising to 82.76 or higher on SPY within the next few days. I will show the corresponding price levels for BGZ in a moment. As I mentioned last post, this would suggest having a little patience with entering the second half of the BGZ trade until prices can work back into that gap.

The final note on the chart is that today marked the second consecutive close below the lower bollinger band on SPY. When this occurs after a channeling price movement with declining volatility, it often is a breakout move to the downside. I am not suggesting that the market will continue down the next few days, but I would take this as an indication that a downtrend is beginning.

Click on Chart to Enlarge

This chart is a 30 minute chart of BGZ. The green line represents the closing price the day before the 3% gap down. That price is roughly 67.50. The study above would suggest that BGZ may fall down to this price level in the next few days. If it does, that would be where we would want to enter the second half-trade on BGZ. The pink horizontal channel represents the "breakout" zone on BGZ which I would expect to be re-tested over the next few days at a bare minimum.

In addition to the info above, the short-term S&P 500 model is oversold, suggesting short-term downside may be limited. Also, several of my own indicators looking at gaps, put/call ratios, and inverse ETF volumes, have moved to statistical extremes within the last few days. Taken together, I think a decent little rally is likely in the next few days. But I would use that as an opportunity to enter bearish trades. With that in mind.......

Here is a slightly modified recommendation for entering the second half-trade on BGZ:

Place a GTC limit order to buy BGZ (half the dollar amount typically devoted to a trade) at 67.50 instead of 69.00 which was suggested in the last recommendation.


Tuesday, February 17, 2009

BGZ Trade Update

The limit order of 73.63 should have been filled today on BGZ if it was present before 3:30 ET. Now, since I had suggested only putting in a half-sized trade, my plan is to put instructions for another half size trade over the next several days, and then use that average price for the blog trade entry price.

I read a historical study today before the close looking at times when the up issues ratio (stocks closing higher/total stocks on exchange) was less than 10% like today. If the market gapped down the next day then buying at the open and holding for 2 days averaged a 5.4% return (using SPY for the trade). There were 6 instances of this occurence in the last 15 years, all of which were positive. The 2 day return is negative if the market gaps up the next day (tomorrow in our case).

So what does this mean? For short-term traders, buying the open on a gap down in SPY tomorrow, may be a good trade for a 2 day hold (sell at Thursday's close). For the current blog BGZ trade, it would suggest having some patience on entering the second half-trade on BGZ if the market gaps down tomorrow.

So my suggestion is this for anyone still looking to add to the BGZ trade:

Place a limit order to buy BGZ (half the normal $ amount devoted to a trade) at 69.00 and hold that order GTC through the end of the week.

That should give the market room to rebound a bit and maybe get filled on the order with a short, sharp rebound. If the short-term model would happen to become overbought before that order is filled, I will post with entry instructions to use in place of those above.

As a side note, today's large decline makes in very unlikely, in my mind, that the scenario I showed in the weekend chart will occur. It would take a huge rebound to get back up to 875ish on the S&P 500.


BGZ Trade Entry and Update

This morning the markets gapped way down. This gap down caused BGZ to gap up sharply to 73.63 at the open. That is the entry price I will use for blog purposes. However, it may not have been possible to place a buy stop order at 72.00 this morning, so I am going to try to follow up over the next week for an additional quality entry on BGZ, but I will not track that on the blog.

For today, anyone could place a buy limit order at 73.63 on BGZ to try to get in at the same price as today's open. However, when SPY gaps down >2% there is a strong tendency for prices to close above the opening price of that gap within 3 or 4 days. That would suggest that there is a good chance to get in at 73.63 or better on BGZ sometime this week or early next week. Take a look at the following link about large gaps in SPY from the Quantifiable Edges blog


BGZ Buy Stop Order

This is just a quick post with instructions on placing orders to potentially re-enter BGZ. The futures are way down in the overnight session and flirting with the lows from last week. I had suggested placing a "buy stop" order at 72.00 on BGZ Friday, but it did not get hit. I am suggesting to place that same order again for Tuesday. However, I would only devote about half of the typical amount devoted to a trade. The reason is because we will not be selling on market strength in this case, and if the market again fails to break down, there is likely to be a strong move up for several days. So you don't want to get in at a real bad price in that case. For anyone still in the prior trade on BGZ (if you didn't exit via the blog stop loss order), just maintain your trade.

Recommendation for Tuesday 2/17/09:

Place a "buy stop" order at 72.00 for BGZ, using only half the dollar amount typically devoted to a trade.


Saturday, February 14, 2009

Expectations and New Bearish Trade Set-Up

Click on Chart to Enlarge

Last week I had said that I would revert back to short-term trading mode if the S&P 500 did not manage to fall below 800. It did not, and that prompted me to suggest placing a stop loss on BGZ to protect some of the gains we had. The stop loss was hit Friday resulting in a 4% gain, so there are no open trades on the blog right now.

The chart above is the S&P 500 as of the end of this past week. I have put several notes and lines on the chart with the most likely scenario that I think will occur. That scenario is a sharp advance next week up to 875 or beyond, followed by a very severe decline beginning after that. The reason I put these projections and expectations on the blog is because it is fundamental to the way I trade and allows trading decisions to be reduced largely to logic.

I like to create "if" -"then" type scenarios. If so and so happens, then I will make a trade......

Also, I have expectations for what "should" happen after the trade is entered, in order to confirm the likely correctness of that particular outlook.

So the logic for the coming week is.......
If the S&P 500 moves above 875 by Thursday with overbought short-term signals, then I will suggest a new trade on an inverse ETF (BGZ in this case).

Now the rest of the analysis may only interest or seem coherent to someone interested in wave theory, but there is a logical component that should be easily grasped in any case.....First, the light blue boxes (with green lines inside) surround the upward phases of market movement since October. Second, the pink lines highlight the weekly highs and lows of the downward phases during that time. Notice that the upward phases have multiple overlapping price moves, like price is moving a lot, but not getting anywhere fast. Now the downward phases don't overlap, and price is able to move in one direction for a sustained period of time.

The basic market logic is that the current trend is in the direction of the fastest and largest price moves. That still is definitely DOWN at this point. So until, we see a large and fast upward move (larger and faster than any other upward moves), then it is wise to assume the main trend is still down.

I have referenced the price pattern above as a possible "triple three" correction, which is a term from Elliot Wave theory. Without getting into details, that is the most complex corrective formation possible. So after this upward phase ends, the larger correction should end, and the market should resume a strong downward trend. Again, if this does not happen, then I will have to consider a change in perspective.

Because the potential still exists for a huge move down, if I recommend BGZ this week, then I will plan on holding it for a longer period to try to catch the big move. I will be using intermediate term models for the exit rather than short-term models. If the market follows the scenario laid out above, then we should be able to get in at a lower price than the 62.26 entry on the last BGZ trade, which will be the best of both worlds -- we already made a 4% profit on the last trade, and we get back in the new trade at a better price than the original.


Friday, February 13, 2009

BGZ Stop was Hit - Stay Posted

After yesterday's late day surge in the market and this morning's advance thus far, the 64.75 suggested stop on BGZ was hit to exit the trade for a gain of 4%. It is nice to make a gain, but the goal I have right now is to make sure to catch any big move down which would lead to a much larger gain.

The short-term models are basically neutral right now, with the Nasdaq getting toward the overbought area. Because the intermediate term models are still at or near a bearish extreme, I want to get back in BGZ at any good opportunity. Due to the potential of a huge market move today after the House vote results, I may post later today and suggest another entry or instructions to enter BGZ.

Getting stopped out is part of trading both in limiting losses and locking in a profit. So on the recent trade we locked in a profit, but it is a beginners mistake to give up on a good set-up because you don't catch a big move the first trade, or second, or third....... In fact, the market has a way of getting as many people out of the game as possible before making a really big move. So be ready to jump on the next opportunity, even if the entry price is greater than 64.75.

For anyone who will be away from the computer all day, I would place a buy "stop" order at 72.00 for BGZ for today only.

That way if the House does not pass the bill, the market will probably fall extremely fast, and we will want to be back in the trade at that point. Otherwise, then next entry will be when the short-term models become overbought.

Thursday, February 12, 2009

BGZ Stop Loss Placement

I have decided for blog purposes that the best way to play BGZ tomorrow will be to place a loose stop loss order, that will still result in a profitable trade if it gets hit due to a large gain in the stock indexes. The entry price was 62.26.

Stop Loss Recommendation....

Place a sell "stop" order at 64.75 on the current BGZ trade.

You will typically have to choose GTC (good till cancelled) or DAY only. I would just choose GTC, that way a profit is guaranteed even if things reverse over the several days. If we do get stopped out, I would definitely be looking to re-enter BGZ at the next short-term overbought signal.

The House and/or Senate are scheduled to vote on the stimulus plan tomorrow. It is widely assumed it will be passed, and I wouldn't bet against that. But it is not a certainty. What is a certainty (in my mind) is that if it does not get passed, the markets will fall very hard and fast. Even if it is passed, that does not mean that stocks will advance. Keep in mind, it is already expected to pass. The downside risk clearly is larger than upside potential in the near term. So let's just lock in a profit on BGZ and see what happens.


Wednesday, February 11, 2009

Potential Change in Strategy Later This Week

Click on Chart to Enlarge

The chart above is the S&P 500 ($SPX). Nothing has significantly changed from my perspective, but if the S&P 500 does not fall below 800 (another 4% approx.) by the end of this week, I will plan on shifting my blog trading strategy back to short-term only until things make a clean break one way or the other. The reason for this is that I would be a bit befuddled from a technical standpoint if prices do not fall almost immediately. So, an exit recommendation for BGZ tomorrow evening or mid-day Friday is possible.

Yesterday was a big decline, but prices stayed above support, and there was no follow through down today. The light blue box on the chart shows what I have previously noted as the key price levels to watch (800 and 880ish). Also, the red uptrendline from the Nov. to Jan. and Feb. lows is an important line. Prices are riding that line for the last few weeks.

Now as a side note and piece of market education....... (the main site I use for contrarian type data) has an indicator that shows what volume of calls and puts are being used to open new option positions by "smart" option traders (S&P 100/OEX options). In stocks and options there are those who consistently time the market well (and logically), and those who don't. You should pay attention to what the smart traders are doing, and typically do much the same.

The indicator as of this past weekend is showing that the smart traders are opening put options to a relatively large degree over the last couple weeks. This basically means that they expect the market to fall from here. This indicator shows that they are demanding more put protection than at any time during the entire bear market thus far. This indicator does not move to extreme levels often, but when it does, I pay attention. The last times the indicator approached current levels were right near the May 08 and August 08 market peaks which led to large declines over the next 2 months each time.


Tuesday, February 10, 2009

SDS Trade Exit

The short-term models are now oversold with today's large decline. So I am using the current price of SDS, which is 79.40, for the blog exit price. That is a nice return of 8.5% since yesterday!

I recommend exiting SDS today before the close if possible, or by using a "market" order to sell it tomorrow if unable to exit today.

There are no changes to the BGZ trade as of yet.


SDS Trade Update

The opening price of SDS yesterday was 73.18, which I will use for blog calculation purposes. From a trading standpoint, with this morning's sharp decline, it would make sense to place a stop loss at breakeven or slightly better. I will suggest an exit when the short-term model becomes oversold.

As a side note and market analysis lesson.......

This morning's price decline looks like it may get even more severe. When markets are range bound and trading with relatively low volatility, new directional moves typically start with explosive price moves. So if we see a decline larger than any day in recent weeks (say 5% or more), then that would be additional evidence that the market is indeed breaking down and very likely to fail on this rally attempt.

Once I feel that we are "in the clear" as far as a failed market rally, I will post a suggested protective stop loss for the BGZ trade. No changes yet, though.


Monday, February 9, 2009

New SDS Trade

As per Friday's post, I had decided to wait until this morning to suggest a new short-term inverse ETF trade. Based off the failed rallies in this bear market, I had noted that I would prefer to see the Jan 28th highs not be exceeded, especially on a closing basis. This morning shows a significant gap down indicated and is consistent with the pattern in other failed rallies during May and Sept '08.

So I am going to track a short-term trade on the blog from this morning's open. For anyone already in the current BGZ trade, this trade does not need to be entered, but could be viewed as a completely separate trade. The time frame of this trade would typically be around 1 week.

Recommendation for those interested.....

Buy SDS at today's (Monday) open with a market order. I will use the opening price today for % return calculations.


Friday, February 6, 2009

Short-Term Overbought Again

Click on Chart to Enlarge

Click on Chart to Enlarge

Short-term breadth, momentum, and put/call ratios, are all at or very close to typically overbought extremes. We are currently at a slightly lower level than the last overbought signal from last Wednesday. I like to go with the longer term trend for short-term trades, which in this case I consider to be down. I also like to see successive overbought signals occurring at clearly lower price levels in order to enter bearish trades. Right now it is not clear that the highs from last week won't be exceeded, so I can't be sure that this signal is at a lower level yet.

The first chart above is the S&P 500. The blue circles and vertical lines indicate the 3 period RSI is over 80 while the 200 and 50 day moving averages are sloping down or flat. Several of those instances coincided with short-term overbought signals on the models I use for trades on the blog. Typically there was an immediate pullback of at least 3 days. Several instances also marked significant tops leading to major declines. Also the notes on the chart show the typical break of support after a bear market rally top, followed by very choppy rallies that barely held the highs of the initial rebound rally after breaking support. The light blue boxes outline the May and Sept. instances. We are set-up almost the exact same way right now. If the result is different this time, that would sound an alarm that maybe the market is changing character.

The next couple days will be key to see if the break above the downtrend line (blue line on yesterday's chart) from last September to this January is able to be decisively cleared or if today's close above that line will be just another whipsaw fakeout (which is my guess due to overbought extremes today).

I read a backtesting study this morning showing the short-term returns after a 1% up day the day before a Payroll Report (like today) with a gap up and higher close on the Payroll Day (like today). The three day returns are consistently negative with an average of -1.0% return. That is not a real big negative average, but the consistency coupled with short-term overbought readings makes for a pretty good bearish set-up in my mind.

Two other interesting pieces of data from today......

Despite a large up day, the volumes of the index ETF's (SPY, DIA, QQQQ) are much lower than yesterday. From past studies I have seen on this type of set-up, I believe this also has short-term bearish implications.

Also, despite the large up day today, the VIX only declined modestly and ended the day well off its morning lows forming a "hammer reversal" candlestick pattern in the process. I noted a similar occurence on the blog on Jan 2. That day marked the last real significant up day before that rally stalled and then gave way to 2 weeks of selling. See the second chart above for the VIX chart.

All in all, the short-term set-up looks pretty good for a bearish ETF trade, but I am going to hold back until we see what Monday morning brings. Any new short-term trade should be viewed completely independently of the current longer term trade on BGZ.

Thursday, February 5, 2009

Crunch Time

Click on Chart to Enlarge
The chart above is SPY again as of today's close. The notes on the chart above are what I believe is the best way to view the market right now. If the markets move above last week's high, that would be abnormal from a price pattern standpoint if the market is going to go much lower. If the lows around 80.00 on SPY (800 S&P 500) are broken, then it would almost certainly lead to a large decline over the next couple months.
We are in the dead center of the two important points marked, so the next fews days should be defining. Unless and until the 88.00 level on SPY is surpassed, I would not even consider exiting the current BGZ trade (cost basis a little above 62.00). If it is surpassed I would consider exiting if things do not reverse below that level within a period of a couple days.
One basic concept that I always apply when analyzing a chart is looking at the market in terms of strong, fast price moves and weaker, slooooower price moves. Almost without exception, when a market makes a major turn, it occurs with a stronger, faster move in the opposite direction than the recent price behavior. The strongest, fastest moves since late October have all been down. Also, on a shorter term time frame, the large decline from last Thursday through Monday morning took just a hair over 2 days. It has taken almost 4 days already for just over half of that decline to be retraced. That is a strong argument for the prevailing trend remaining down at this point.
The shorter term models I use for most trades on the blog are basically in neutral territory right now. The next overbought or oversold signal will likely be telling as well.

Some Thoughts on SPY Open Interest

Analysis of options market data is one of the most effective means of determining market sentiment at any given time. Commonly followed data are the ratio of the volume of puts traded relative to calls in various securities, as well as the open interest of option contracts. I like to keep an eye on the areas of heavy/maximum open interest in the options for SPY and QQQQ. Those ETF options are the primary options used for hedging by large traders.

In the Feb series of SPY options peak call open interest is at the 90 strike and a slightly lesser peak at the 88 strike. I like to look at call open interest over put open interest because I feel it will give a better idea of pure speculation on market upside. Since SPY is currently valued around 83.00, it seems there is some speculation in the options crowd that prices will move up quite a bit in the next 2 weeks. Again, the principle to follow here is to go against the crowd.

There is significant put open interest at the 80-82 strikes just below market prices. That could be a cushion for prices (and may partially explain the repeated support in that area the last week or two), but if prices do fall below 80, then the next area of peak support is at 73, though we may be approaching the March contract at that point.

As a side note on the open BGZ trade, if/when SPY is able to close below 80.00, then we should be safe to place a breakeven (or better) stop loss on the trade to largely take the emotion out of the trade and let things unfold over the next several weeks. For right now, some room needs to be allowed while the many traders/investors throw in the towel, so to speak.

Wednesday, February 4, 2009

Get Ready for Action

Click on Chart to Enlarge
Today's post is a bit of a recap of the last few weeks of action in SPY and what I would expect next.
The chart above has a few notes of what I said to expect in previous posts. The boxes on the chart are there to show the importance of time relations between phases of correction/consolidation. From the small green and red boxes on the chart, you would maybe think that I drew those after the fact, but they were my best approximation of what has been typical after bear market rallies peak and then break key support. Now if I was way off on those projections, then I would have had to reconsider my outlook and future expectations, but since they have been right on, I will continue to follow the same logic and reasoning noted in previous posts.
The large blue box and the first part of the large pink box are of equal time. Notice how the highest price (since the Nov low) was reached at equal time to the blue box. The pink box is divided into a basic golden section (1 + 0.618 = 1.618) and the right edge of the pink box (which is today) is the date at which the time of the pink box is 1.618 * the time of the blue box. I am expecting prices to start to decline sharply very soon. Those time factors are important relations in consolidations like these, especially since the 1.00 relation precisely marked the peak price of this advance.
Also, on a more anecdotal note, just about every market prediction that I have heard from pseudo-experts, and even some good technicians, have been that they expect the trading range to continue for "quite some time" or for the "foreseeable future", etc. This is classic group think in behavioral finance. For whatever reason (lack of data and knowledge of history, etc) research and surveys show that people tend to assume that what has happened recently will continue to happen well into the future. People don't anticipate change very well, especially with their money.
For the non-quantitative investor, pay attention in coming months to people at work and church, etc, and what they think about the stock market. When the general public starts panicking and talking about how bad the market is, and if they should take money out of their 401K's and put it in bonds, etc, then you can strongly anticipate the market is bottoming.
Again, my suggestion is to take protective measures NOW, before it is patently obvious what is happening. I have already suggested a trade entry on BGZ on this blog recently which could be used as a hedge for long term stock portfolios, or as a speculative trade; managing this trade is my top priority for the blog in coming weeks. Again, the best historical comparisons to the current price action of the S&P 500 suggest that the next decline is likely to be severe, but should be over by early April or before.