Thursday, April 30, 2009

High Volume Doji on the NYSE and Trend Analysis

Click on Chart to Enlarge

Tonight's chart is pretty loaded with notes because I wanted to make it as educational as possible for those interested in technical analysis.  

It is best to just look through the chart and read the notes, but I wanted to talk about a couple indicators because they are less common and I rarely show them.  Indicators like stochastics and RSI, and to a lesser extent MACD are oscillators and are most effective in markets trading in a range, not trending markets.  Also bollinger bands are typically most effective as a trading instrument when the market is range bound as well.  Less commonly looked at are trend identifying indicators.  

The simplest trend based study is the moving average and that is probably the simplest way to gauge the current market.  However, there are some more exotic studies that aim to identify trending markets.  The two studies above and below the price chart are trend indicators.  The top one is the Directional Movement Index (DMI).  A trend is said to be present when the black ADX line is above 20 and rising.  Somewhat surprisingly this indicator has not indicated a trending enviroment at this point though that could change pretty soon I think.  The bottom indicator is the Aroon Indicator which also aims to identify trending conditions.  This indicator is showing a trend with decent strength currently.  So we have some mixed signals from these two indicators it seems.

The most interesting part of the chart (for me) is the candlestick pattern in relation to the bollinger bands and the January and February highs.  Thursday's session formed a classic doji candlestick in the NYSE cash index.  The upper shadow was long and pierced the upper bollinger band, but reversed to close below the band.  Volume increased from yesterday which shows an intense struggle at the current level.  This candle pattern is more reliable as a signifcant reversal if there is confirmation the following day (a down day tomorrow).

As I said a couple weeks ago, I keep focusing on the bearish evidence because the real money gauges of sentiment are on par with major market turns in the past.  Price has chopped around more since those extremes have registered, but prices have held up pretty well.  When price "ignores" these types of extremes I think it means those betting against the trend need to be careful.  Late last September the market was in a place where it "should" have been able to rebound, but it didn't for more than a couple days at a time and continued on into a panic phase.  While the emotions at tops and bottoms are different, it may be possible for an analgous upside blow off if prices are able to overcome this week's highs, so I think caution is warranted for bears with the potential catalyst of bank stress test results and so on.  If the current levels are convincingly exceeded, there is no obvious chart based resistance until the mid 900's on the S&P 500.  

I will post tomorrow in regards to exiting (or holding....maybe) the current BGZ trade.

Mini Market Update

Today is proving to be an interesting day.  For anyone who trades individual stocks or who is into candlesticks, I would look at the energy sector for short entry before the close.  Some charts that looked like good bearish formations are XTO, CAM, XLE, COG, OIH, among others.

Also watch QQQQ for a potential shooting star candlestick at the close, and also QID for a high volume hammer candlestick.

This move to new highs for the rally has rattled the bears hard, and I'll admit that I'm uncomfortable currently as far as near term outlook.  One interesting thing today is that Yahoo Finance has a headline today on their news stories saying "Dow 10,000 by the end of the year?"  On March 6th, the day of the bear market low to date, there was a story in the headlines about how even though the market had fallen so much, many analysts were suggesting it could fall farther and they had been wrong all year about calling "a bottom".....thanks for the timely warning.  While I don't put a lot of weight on things like this, these types of Mr. Obvious stories have tended to show up around significant turns.

Now while I think the best bet is still some short-term downside, I think we need to be careful with bearish bets if the market doesn't respond quickly with some downside.  A market that is ignoring typical extreme readings can be a dangerous one.  With the stress test news due out next week, I think short-term traders need to be out of any bearish trades by Friday's close this week or have stops in above this week's highs in the indexes.

On the trading front, I may adjust the limit order for tomorrow depending how the rest of today goes, but expect to be out by tomorrow's close.  For anyone that wants to put a stop in, a stop on BGZ at 42.00 should be "safe" as far as allowing downside into tomorrow without much risk of getting stopped out.

Wednesday, April 29, 2009

Looks Like a Good Bearish Set-up

Click on Chart to Enlarge

Today's chart is a little bit loaded, but the bottom line is that I think this bearish set-up is the best one from a charting standpoint that we have seen yet in this rally. The chart notes are self explanatory so look at the chart for those. Since the market is currently in a solid trend, divergent oscillator indicators will help show a weakening trend, but watching key moving averages will be the simplest and maybe safest way to get confirmation of a potential trend reversal. I would watch the 21 day EMA or 20 day simple MA for a close below it.

There has been a very consistent tendency for the market to give back FOMC day gains over the next 2 to 3 days if it gaps up and then closes 1% higher or more like it did today. The current sell order for BGZ is based on the fill of today's gap up. Hopefully that occurs by Friday for a nice quick trade.

As a side note, QQQQ and XLK (tech fund) showed bearish? shooting star type candles and lagged the other indexes today. XLF (financials) were well off from making a new rally high, and that is a non-confirmation that has occurred at intermediate tops with frequency during this bear market.

While I think things are set up for a larger decline, I am suggesting to use a limit order of 47.68 until Friday to hopefully sell BGZ before the upcoming bank stress test results next week.


New BGZ Trade

While the short-term model is not in the overbought region currently, it is working its way back there, and now that the market has made a new high, the model is showing a bearish divergence with the last overbought signal.

The hourly chart and 90 min chart are showing nice reversal candlesticks on the 2:00/2:30-3:30 ET time frame. Also the 60 min stochastics is just turning up to overbought territory. The tendency has been so consistent for FOMC day gains to be largely or completely given back over the next 1 to 3 days, that I don't see any reason not to enter a bearish trade here.

New Trade Recommendation

Buy BGZ ASAP with a market order. The current price is 44.90 which I will use for the blog entry price.


Equity Put/Call Ratio Starting to Turn Higher

Click on Chart to Enlarge

I justed wanted to show an updated chart of the equity put/call ratio with some moving averages that I had shown a couple weeks ago.

The averages look like they are starting to turn up, but it would be better to see them both point higher to signal a market top.

Today is a regularly scheduled FED meeting. The tendency in recent months has been for the market to gap up and move higher during the day on these days. However, those big moves have created great short-term bearish set-ups as well. The market is set for a gap up today, and I will likely wait until the afternoon before potentially suggesting a new trade entry.

Tuesday, April 28, 2009

OEX Put/Call Ratio Hits an Extreme

Just a quick post tonight......

Today the OEX put/call ratio was 1.53. This is a very high reading. This ratio is best used as a non contrary indicator (it is a "smart money" gauge), and it has pinpointed some significant turns during this bear market. The only 2 trading days this year where the ratio exceeded today's were January 27th and January 7th. Both of those basically marked tradable tops and were horrible times to initiate or hold bullish trades.

Also, SMH, the semiconductor holders index ETF, closed below the 20 day moving average today. That may be a leading sign of where the Nasdaq is headed in short order.

Because of the implied weakness in the S&P 500 right now in addition to the technical set-up and the above mentioned OEX data, I may suggest re-entering a bearish trade tomorrow. This will be a little bit different type of trade because the exit would not be a strictly short-term exit. When the markets are in a strong, tight trend of some duration like they are now, small counter trend moves will be enough to trigger short-term extremes. That will almost undoubtedly leave the bigger portion of potential downside on the table if exited strictly with the signals I normally use.

For new traders (or those with little short-term trading experience), if getting stopped out a few times in a row (though with only a small net loss the last few trades in our case) affects you psychologically enough to scare you out of entering the next trade, then the market has done its job on you, and you will often miss a move you "knew" was coming. That is not the end of the world because you don't need to catch every move, but sometimes it leads to "chasing" a move already well under way by the time boldness re-surfaces. Wider stops with a little longer time frame can be one solution. Another is to do what I've suggested the last few trades, which is quickly reduce risk after entry, but be willing to keep getting back in until you catch a large/sharp move in your direction.

Expect a new trade suggestion tomorrow.


SDS Stopped Out

The SDS trade was stopped out at 65.48 for about 0.5% gain. Anyone trading off the blog recommendations likely would have got in at a better price than the 65.15 posted entry. So hopefully your gain is a little bit bigger than that.

The market continues to chop around here, and is certainly doing its job of wearing down short-term traders on both sides of the market I'm sure. About the only thing I feel I can say for sure, is that the uptrend is weakening. Because of that, I am going to stay focused on looking for good bearish trade entries. I have my doubts that another solid overbought signal will come before the market falters a bit, but we'll see.

Because there has been no short-term indicator exit signal on this trade yet, I would be willing to re-enter at a better price later today or maybe tomorrow. So I am going to suggest using a limit order to potentially re-enter if the market approaches the recent highs.....

New Trade Recommendation

Place a "day only" limit order to buy BGZ at 45.56 or better.


SDS Stop Placement

While things are not oversold yet on a short-term time frame, we have gotten a significant move down that should let us place a loose stop loss on SDS with hopes of more downside over the next several days or couple weeks.

Place a GTC stop loss at 65.48 on SDS until further notice.

Monday, April 27, 2009

VIX Nearing a TSF Sell Signal

Click on Chart to Enlarge

The chart above is the daily VIX with a 63 period Time Series Forecast (TSF) study overlaid. I mentioned this indicator in January when looking for a sell signal, because the indicator has been very good for market timing purposes in this bear market. Even from January to March 2009 when the VIX was range bound, this indicator did a good job in marking the turns.

This study is used like a moving average. Basically a buy or sell signal comes when price moves from one side of the line and closes on the other side. So in this case, since the VIX moves the opposite direction as the market generally, a VIX close above the line would be a sell signal. So it is very simple to use. For confirmation you could wait for a second close above the line rather than just one.
I bring this chart up today because I have been watching it, and there is a chance that the VIX could rise this afternoon and close above the TSF line.

SDS Trade Management

Click on Chart to Enlarge

The chart above pretty much explains expectations and trade management for this week. Since we look set for a large gap down, we should be able to move in a breakeven stop pretty quickly, and hopefully catch the move I was looking for last week on the BGZ trade.

In the next day or so, I hope to get a post up looking at some specific outperforming stocks and show what to look for typically on entering those types of stocks. Eventually when the bear market is over (or if it already has reached its low, which I don't think so yet), it will be important to understand when to buy growth stocks from a charting perspective.

Friday, April 24, 2009

A Quick Contrarian Update

Click on Chart to Enlarge

I will probably get another post out later into the weekend if any there are any new indicator extremes to look at, but I wanted to just throw a few things out for now, and show the chart above which is actually as of last week but I didn't get around to showing it.

Last week (trading week ending April 17th) set an all time high in buy to open calls across all US exchanges. To translate.....a buy to open call is a pure directional call option trade that will profit if the market rises. So more than any other time, people are thinking the market will rise from here. That should be a good contrary indicator in and of itself.

However, if buy to open puts rose at the same rate, then you could argue that you aren't really seeing a bullish bias, but just an increase in option buying activity in general. That where the chart above comes in. The put buying didn't even come close to a new record. The chart above shows calls minus puts. So the spikes on the chart are times when call buying to open greatly exceeded put buying to open. Just a quick look at the chart will show what a good contrary indicator this is when it gets really extreme.

Other things of note.....

This morning discussed some recent data showing that legal corporate insider trading is showing the heaviest selling since the peak of the last bull market. Also, insider buying has dried up to the lowest level in years. There are apparently different ways of measuring this type of data, but the indicator used on the site also shows corporate buying at levels corresponding to every peak in the bear market thus far.

Apparently a huge amounts of money are flowing into emerging market ETF's in the last 7 weeks. Obviously this is bullish while it lasts, but the question is whether this should be viewed like Rydex fund a contrary signal typically.

Also, it has been a while since I've talked about an Commitment of Traders data, but the latest data shows that large speculators have the largest net long Nasdaq mini futures position since the bull market peak. This group of traders on this particular contract has a good history as a contrary indicator. The previous bear market high in this data was late Sept. and early Oct. last year. On the same note, large commercial traders have a good history in this contract of being a non contrary indicator. The are net short the same contract to the greatest degree of the bear market. They have basically the greatest net short exposure since the bull market peak. So the "smart guys" are getting short, and the "dumb guys" are getting long to the extreme right now.

The evidence is definitely compelling for a significant pullback very soon. We'll see what next week brings.


New SDS Trade

As indicated earlier today, the short-term model is basically overbought. Also intraday cumulative TICK levels are pushing into solidly overbought levels, even in this uptrend. Additionally there is a Gartley type pattern in the Dow which looks appealing. It may be necessary to place a stop above last week's high relatively soon in this trade, and that is the price level I would use to determine position size if that is important to your money management scheme. While it doesn't always feel right to get back in repeatedly after getting stopped out, that is the game the market plays.

So here is a new trade recommendation....

Buy SDS today ASAP with a market order before the close. The current price is 65.15 which I will use for the entry price.


BGZ Stopped Out, New Trade Setting-Up

The BGZ trade was stopped out at 46.64 earlier today for a 4.29% loss. Hindsight is 20/20 and a little frustrating in this case, but small losses is the name of the game.

However, the short-term model for the S&P 500 is back approaching overbought, with the potential for the first overbought signal at a lower high than the previous signal since the March lows. So, a new trade may be signaled this afternoon. SDS or DXD will likely be the fund suggested.

I am still preferring to look for bearish set-ups based on intermediate term indicators suggesting excessive optimism. Also, the recent price activity where it has been 4 days trying to regain the losses of 1 day is indicative of a weakening up trend.


Thursday, April 23, 2009

Leading Stocks Hit Earnings Season

Click on Chart to Enlarge

I didn't have really anything important to cover today, but I wanted to see if the RSS feed is working OK.

This week and next week are the peak of earnings season and it will be interesting to see how some leading stocks, and the markets in general respond. Earnings reports can generate big moves in individual stocks, and sometimes that info can be useful in assessing the market direction. Of particular interest this week are stocks like AAPL and AMZN which both have been very strong for several months and both have made major gains since the January earnings report. AAPL gapped up today, and it looks like AMZN will gap up tomorrow.

What I am wondering is if these gaps will be exhaustion type moves. Huge gaps off of oversold conditions can often be breakaway gaps which lead to major gains in the following months. But modest or large gaps after a big run up in the stock as it heads into earnings are classic for exhaustion gaps. One thing to watch closely is if the price completely fills the gap in just a few days time, indicating little follow through buying (or actually selling) right after the news is out.

The chart above is, AMZN. The stock is up about 100% in the last 5 months and has had a steady run higher since its January earnings period. The stochastics is glaringly divergent on the recent new highs already indicating waning momentum. Also, the decline off the bull market highs appears to be a pretty ideal expanding triangle. The most common Fibonacci relationship (if there is one) in an expanding triangle is that wave E is 2.618 times wave A on a percentage basis. That is about perfect in this case (wave E is -62%ish and wave A is -24%ish).

Also, large expanding patterns like this are most common as a first phase of a very large complex correction, so the pattern is appearing in the correct place. This is useful to know, because the E wave is so powerful that the post triangular thrust after an expansion like this, will usually not retrace the E wave completely. Since the stock is not far from the beginning of wave E, that would suggest that the rally should be ending soon.

While I don't plan on trading this, I will be watching AAPL and AMZN in coming days to see if these moves look like exhaustions and any gains on earnings are imemdaitely given back. If so, and the leaders start to give back some gains, I think we could more concretely count on some market downside in the coming few weeks.

As for the current BGZ trade, the short-term model is neutral and the 60 min stochastics is about mid range. So, when the next oversold signal comes, will be the time to evaluate a longer hold or not. From several aspects, I would still think some weakness in coming sessions is most likely.

I Added an RSS Feed Option....

So I set up the Feedburner option on the blog so that hopefully anyone can see if that enables them to have the blog posts auto emailed when updated or maybe get it via text message.

Let me know if this works for what you guys need or if there is anything else to do. I am no expert in this area, so if there is anything else I could do as far as getting posts out, let me know, if you are wise in such matters.


Wednesday, April 22, 2009

Lessons From Today's Trades......

Ok now that there is a temporary reprieve from the madness.....

Just for clarification, and I'm sure regular followers understand this, the goal with the BGZ trade is for a longer than "normal" holding period compared to the usual trades I post. This is because it appears the market is in the process of forming an intermediate term top, so that getting bearish at these levels offers a good reward on risk for the inverse trades. I have only done this type of trade a few times on the blog (Jan and Feb this year as it looked like things were topping - and this time). Normally I would have suggested an exit Monday before the close, but since I think the S&P has a real good shot at dropping below 800 in the next week or so, I want to try to hold a little longer.

So the choices (in my mind) were to keep the stop on BGZ at 47.20 (Friday's low in BGZ) and risk a nearly 3% loss, and then having potentially the same type of situation on whether to re-enter or not, OR to just create a break-even trade and then again decide on re-entering if stopped out. I know I don't psychologically like taking a loss when a trade was nicely positive, so I chose the breakeven route for the blog.

From my experience with this type of situation, I think that getting stopped out breakeven and re-entering can actually and TRULY be better in similar situations because you could potentially re-enter with a bigger position size since you now have a well-defined stop point which is higher than the original. So, now if the trade continues in your favor, you could end up making more money than the initial trade because of your better risk/reward, hence bigger position size.

Also, since BGZ went straight up even after my post, I again changed the re-entry price to 48.73 which seems to be a fair price based on the comments.

Looking ahead to tomorrow, if you got stopped out and didn't re-enter before the close then either go with a market order in the morning or use a limit order of 50.81 (today's BGZ high) in case of a significant gap. In this case, if using a market order, I would say only use about 90% of the normal amount devoted to a trade in case of a gap getting you in too far from an ideal price and you have a larger risk per share.


BGZ Stopped Out??

My data shows that the low at 3:13 ET on BGZ was exactly 46.65. There are still 25 mintues until close as I type this, but in short if anyone was stopped out, I would suggest getting back in BGZ before the close today. If anyone got stopped out please post a comment (even if anonymous) and let me know, as I am interested to see if that little dip did fill the orders across the board.

The rationale here is that the 60 minute stochastics is overbought at a lower high than the lat overbought signal. Also, prices immediately reversed after QQQQ briefly exceeded Friday's high. This has set-up a divergence in the short-term model which is a good bit lower than last Thursday and Friday. Bearish reversal candle sticks formed on the 2:30-3:30 ET candle across the board. Also the Dow and S&P are not that close to making a new high, so that sets up a non-confirmation type situation potentially.

Anyway, I will post the trade as a stop out and then a new trade with the entry at 48.40 where BGZ is at the time of this typing.


BGZ Trade Update

Unless the market turns south almost immediately, it looks very likely that the BGZ trade will be stopped out at breakeven. However, given everything I've covered the last couple weeks, I would still be interested in getting back in the trade at the next short-term overbought signal, if it is at a lower high than last Friday's.

The short-term model is working its way back toward the overbought region, as are standard technical indicators like stochastics (60 min chart, 30 min is already overbought). So blog followers may want to check back in the last hour of the trading day, as I may post a trade if the current trade gets stopped, but things look suitable for re-entry.


Tuesday, April 21, 2009

Trading Intra Day Reversal Bars

Click on Chart to Enlarge

I don't usually get into real short-term type set-ups on the blog, but I thought I'd post today about a good way to trade intra day reversal bars (like hammer candlesticks). This method can be applied to all time frames, but the chart above is a 30 min chart of BGZ.

The basic set-up is a reversal bar during a common reversal time during the day. 1:00 to 1:30 ET is a very common intraday reversal time. The reversal bar above is the 12:30 to 1:00 time frame. It is nice to see this accompanied by an oversold stochastics on that time frame as well.

The trigger price that is used as required confirmation of the trade is a tick above the high of the bar prior to the reversal bar. (With experience in recognizing and trading only quality reversal bars, you can exit immediately with no required confirmation, which will help your risk/reward ratio). Then a stop loss is placed a tick below the low of the reversal bar. As an additional loss mitigation strategy, I find that exiting if any following bar closes below the real body of the reversal candle will get you out of failure prone trades with a significantly smaller loss than planned by the stop loss. I have found that the great majority of good trades take off in your direction immediately, so it is just best to have a defined stop, but to use that secondary exit to keep your loss even smaller. That could as much as double your reward to risk ratio over time if you exit with the small loss instead of waiting for the stop to hit. So in this case, you would wait for the 1:00 to 1:30 bar to close before considering that early exit.

While with experience, an indicator based exit may be appropriate for this trade, I think most people would be better of just playing a numbers game with it based off of past chart reading experience. If you are going with the larger trend (200 period MA) then I would go for a 5:1 reward on risk and then exit at that point. If you go against the larger trend, then I would decrease that to 3:1. Those ratios are based off your stop loss point (the low of the reversal bar).

So hopefully some of you more active traders may find this post useful.


Monday, April 20, 2009

Sell Signal From the VIX/VXV Ratio Today

Click on Chart to Enlarge

A few days ago I had shown a chart of the VIX/VXV ratio and suggested that a close above the 20 day moving average would be consistent with past effective intermediate sell signals for the general market. That signal occurred today with the large jump in the VIX. While this indicator is still fairly young (because the 3 month volatility index, VXV, is relatively new), this signal has been a good one so far.

Click on Chart to Enlarge

For those interested in the VIX, here is an updated chart of a post I made around the New Year showing how the VIX has tended to use the 78.6% retracement level of major advances as the floor for the next move up since the 2006 VIX lows. The colored lines on the chart are 78.6% retracements of several different VIX advances on the chart. The VIX has now retraced 78.6% of the major advance off the VIX low in July 2008. Several different ways of looking at the VIX are suggestive of further increases in the VIX, so it will be interesting to see if there is any follow through over the next 1-2 weeks.

There is not too much new to cover today, and probably won't be for a little while if the market continues to drop over the next 1-2 weeks. If the market manages to make new highs (say as a blow-off top in reaction to forthcoming news on bank stress-tests, etc), then I will be back to daily tracking of important sentiment indicators.

On the trading front, my plan is to hold the BGZ trade for a potential larger gain. While I do plan to continue to post new trades at short-term extremes, at this point I don't have any interest in bullish trades until the S&P drops to the 780 level or further.

Move BGZ Stop Loss to Breakeven (46.65)

The is no need to do this before market close today, but for tomorrow modify the GTC sell stop on BGZ to 46.65 to create a stress-free, breakeven at worst trade.

Because there is a long-shot secondary pattern scenario allowing for further upside in this advance, make sure to have the stop in place GTC. But based on how things have unfolded the last few days, I seriously doubt that last week's high will be exceeded any time soon.


Stop Placement on BGZ

So far this morning, the scenario I suggested last night is playing out very well. I believe that allows us to put a protective stop in place on BGZ with basically no risk of it getting hit if the expected scenario continues to unfold. Then my plan is at the next short-term oversold signal to move the stop loss point to breakeven, so that we can attempt to hold longer because of the possibility that we got in right near a significant top.

On that note......

Place a "GTC sell stop" order at 45.40 on the current BGZ trade until any further instructions are given. This will limit the potential loss to less than 3%, which is many fold less than the potential reward % on this trade.


Sunday, April 19, 2009

Doji Candlestick Friday in the Dow and Nasdaq

Click on Chart to Enlarge

Friday marked what I think is the first really solid candlestick reversal pattern since the March lows. The Dow ($INDU) and Nasdaq ($COMPQ) showed doji candlesticks when it was all said and done. Regular blog readers may recall the March 8th post I made about doji patterns as the market formed a bottoming doji the previous trading day. A classic reversal pattern in the context of an overbought and overly optimistic market will typically make for good trade. For confirmation, we would want to see a down day tomorrow (Monday), with a secondary scenario as another very small range day (like another doji) tomorrow followed by a downer Tuesday.

Click on the chart above to read the other notes on the chart. But the take home message is that Friday was a very narrow range day compared to recent ranges over the last few months. From a historical perspective, this type of set-up has led to a negative return over the next 2 days about 60% of the time. Also, these narrow range days have shown up with relative frequency at important tops in recent months.

Also, last week I mentioned the Smart Money and Dumb Money confidence indicators from and how it was showing that the Dumb Money was showing an extreme confidence reading that has typically occured within a couple days of major down turns in this bear market. As of Friday's close the Dumb Money confidence reading was the same, but the Smart Money confidence dropped to a lower level than any other in this bear market. This has caused the spread between the Dumb and Smart money to widen to a level that has been very good at identifying market turns.

This past week the ratio of puts to calls that were bought to open by small traders (1 to 10 contracts -- and typically good to bet against) dropped to its lowest level in months. The current levels were last seen in late September 2008 and in June 2008.

While my hammering home of the bearish case may be monotonous by now, it is important to know that the current sentiment environment has consistently led to declines in this bear market, so if we don't see that begin to happen this week, then we better be more cautious with bearish trades because things will be out of the ordinary.

On the trade management front, my hope is to get immediate downside this week and move in a stop on the BGZ trade corresponding to last week's highs which would make any potential loss a small one. Then when the next oversold signal comes, I will evaluate whether to continue to hold or not.


Friday, April 17, 2009

Credit Default Swaps and SPY Technical Analysis

Click on Chart to Enlarge

There's not a lot new to cover today that I haven't gone over in recent days as far as analyzing market sentiment. In my mind, everything is set for a decline on that front by comparison to past bear market highs (or even first legs up in a bull market for that matter). So today I am just going to show my analysis on the SPY chart and what has to happen to validate the pattern suggested there. First notice the divergence in the MACD as price has made new highs. While there has not been a bearish cross on the MACD yet, if there is, it is suggestive of at least a short-term top. Look back at the other divergences on the chart both bullish and bearish to note how effective such a signal has been for short-term pullbacks.

Also, from a pattern standpoint I have labeled this such that the last couple weeks is forming a contracting triangle in the form of a rising wedge. If that is indeed the case, then the market must move all the way back down to the 78.00 level in the next 2 weeks or less to confirm the possibility that a contracting triangle completed. Also, upside is very limited in this case as the "e" wave must be shorter than the "c" wave. Basically, we have to see some downward price movement the beginning of next week for this to be correct. If we don't, I will be much quicker than normal to suggest a stop placement or outright exit of BGZ because this is still a counter trend trade until proven otherwise.

Click on Chart to Enlarge

Now I wanted to just to take a look at a relatively new indicator that has just pushed into extreme territory the last day or so. The top black line is the S&P 500. The blue line is an index called the Credit Default Swap (CDS) Index. And the bottom line is a stochastic oscillator of the CDS. For a little education on this index since it is a little more exotic than most indicators, I will briefly exlain the idea behind this.

One route of investing is to buy debt. This is like a bond, which is debt that someone has and agrees to pay the investor some yield. While some of this debt is high quality, some is not. Hence junk bonds, etc. The credit default swap market is a market where someone who is invested in a debt instrument, like a junk bond, can buy a default swap that is like insurance in case of default by the debt issuer. The seller of the swap will receive the premium but is also risking having to pay the buyer the value of the swap if the issuer defaults. That is the basic concept of default swaps.

The other concept to grasp is that some debt is riskier than others and the investor will be willing to pay more for the default swap. So junk bonds will be more risky than government issued debt like treasury notes, etc. So that brings us to the CDS Index which measures the difference or spread between the credit default swaps on junk bonds and treasuries. When investors are fearful of financial demise the spread will widen. When things seems safe, the spread will tighten.

The reason I am showing this indicator is because I think it will be an important one for a while due to the state of our financial system. What we are seeing now is that spreads have tightened considerably in the last few weeks and the stochastics is in danger territory. So we now have another indicator from an entirely different type of data than I've shown recently suggesting complacency/(over?)confidence in the market.

So the bearish case is becoming more compelling by the day, yet the most important part of the case from a trading perspective is price confirmation which we have not seen yet. Because of that, any blog followers will need to be sure to follow whatever protective measures are suggested in coming days on the open BGZ trade.


Thursday, April 16, 2009

BGZ Trade Entry

The dramatic advance this afternoon has triggered several intraday extreme readings. The S&P 500 short-term model just touched overbought at 3:30 ET. While boldness doesn't always feel the best, well calculated boldness in the stock market is typically what pays.

On that account and today's earlier info post here is a new trading recommendation.....

Buy BGZ today before the close with a market order or tomorrow morning with a limit order of 48.00. The current price is 46.65 which I will use for the blog entry price.


A Few More Bearish Flags Going Up

Click on Chart to Enlarge

In recent days I have highlighted some potentially bearish (for the intermediate term) readings from the equity put/call ratio, market breadth (% stocks up and % volume up, etc.), the VIX, and the VIX/VXV ratio. Other notable excessive bullish activity I have not mentioned on the blog is evident from Rydex fund flows which are showing multiyear lows in money going into bearish funds and also very high flows into bullish funds.

One holdout area in the last few weeks has been sentiment surveys. However, things have begun to change in that regard as well. The chart above is a chart I made showing the bullish % from the Investor's Intelligence survey for the majority of this bear market. I have overlaid 1.5 standard deviation bands on the chart to help identify relative extremes in the data. First, notice that the bullish % has reached levels just beyond the January highs and is at the highest level since last May. Neither of those times were good times to be bullish. Also, note that the most recent data point is outside the upper standard deviation band. This particular survey is of investment advisors and newletters. So we see that the advisory crowd is once again starting to get bullish after the market has risen sharply. This has historically been a good contrary signal meaning we should expect stocks to level off or decline in the intermediate term.

I have not posted charts of the AAII survey because it is not showing extremes, but bullishness has jumped a good bit there as well and is on par with the highest levels of the bear market barring last May and this January which showed more bullish opinion than currently. This is my favorite survey to look at for timing purposes, and readers may remember the post I made about a day before the recent March 6 bottom showing that the survey was at an all time bearish high. Then what do you know.......the market launched a major rally almost immediately.

Click on Chart to Enlarge

This chart is a re-creation of a proprietary indicator from They have what they refer to as the buy confidence (aka Smart Money) and sell confidence (aka Dumb Money) indicators as the main chart on the home page of the site. I have reproduced the dumb money confidence in a slightly different format than on the site. As of yesterday the dumb money confidence jumped to levels rarely seen and on par with the highest levels reached at prior bear market peaks. The only times in this bear market the dumb money confidence reached this level was 4 days before the May 19th high and the day after the January 6th high. Also I have placed 2 standard deviation bands around the data. As a statistics review, 2 standard deviations should containd 95% of all data. So we know we are seeing an extreme when a reading exceeds those bands. Even if "the bear market" is over, it seems VERY likely that prices will pull back a good bit starting sometime very soon.

While I have not shown the Smart Money confidence here, it is at the lowest levels seen for the entire bear market. The last times the Smart Money confidence were this low were 3 days before the May 19th high last year, and the week after the Oct 2007 bull market high in the S&P 500. So both these indicators have been very good at zeroing in on major peaks in this bear market. Because of all the things I mentioned on the blog in recent days, I have to feel more confidence that we are days away from a significant high (if we have not seen it already).

As a side note, any new readers wanting to participate in blog trades should take look at the post I made this morning regarding exit instructions, etc. Also, "Best Posts" section of the blog has some useful posts to help get aquainted with blog methodology, money management ideas, and technical analysis, etc.

Also stay posted as the short-term model for the S&P 500 is nearing overbought, and with the weight of evidence piling up in favor of a bearish outlook, I will want to recommend a trade on this, probably BGZ, because we may be able to get in very near a major high and hold for several weeks for a large gain.


Minor Trade Results Change

Immediately after I posted the exit recommendation yesterday for QID the market made a mini upward explosion. My inkling of that possibility was part of what prompted me to suggest getting out right away. The result of that fast rally was that it would have been nearly impossible for anyone to get out of the trade at the price I posted as the exit price yesterday. I already moved that listed exit price down a bit yesterday, but I am going to move it down a little more to more accurately reflect the actual price any blog followers woulda coulda exited at. So, I will move the exit price to 42.50 which is the midrange price from the high to low of the last hour yesterday after I posted. I have reflected this in the "closed trades" list on the blog, which now shows a 2.19% loss as opposed to a 1% loss.

For future reference, any part time traders, etc. who cannot or did not exit a trade during the day if that was my suggestion, I always suggest just placing a market order for the next morning to sell at the open. In the current market environment this will often result in getting out at a significantly different price than the posted blog exit due to high volatility and large average gap sizes. Obviously the results could benefit or hurt the results, but I am assuming that over the long run it will kind of average out if you just place a market order to sell the next morning in those cases.

In recent months I have tried to use limit orders as much as possible to avoid this issue. Also, I have tried if possible to make any recommendation changes around the ET lunch hour as that is typically the most stable price period of the market day and any one who is limited to their lunch break for making intraday order changes can hopefully check the blog and make the change during that time.

So any regular blog readers/traders just keep this post in mind if a similar situation comes up in the future. As a last note regarding this QID trade, for anyone that did not exit the trade already, exit today as late in the day as possible, as today has the looks so far of a close near the lower end of the day's range, but I don't have a crystal ball to know for sure.


Wednesday, April 15, 2009

QID Trade Exit

The short-term model is a hair from oversold as I type. On that note, cancel any other present orders and exit today before the market close. I will use the 3:00 ET price of QID for the trade exit price.

As of the time of this typing, the result on the trade would be less than 1% loss or basically a breakeven trade.


QID Trade Modification

I am not going to go into much detail right now, but I am going to suggest a change in the trade management of the open QID blog trade. In sum, this trade was/is an attempt to "pick a top" of this rally, or at least a good short-term top. However, the market has been responding weakly to overbought type readings which often indicates underlying strength. I still feel that more downside is most likely in the coming weeks, but I want to err on the side of protection right now. After a nice string of winners in a row, a small loss (if it comes to that) won't be a bad thing.

Trade Modification....

Cancel the limit order on QID and place a "sell stop" order at 41.32 in its place. This will allow the market to continue in our favor, but will limit the loss to about 4.5% if it gets stopped out.


Tuesday, April 14, 2009

Intel Set to Gap Down Wednesday Morning - What That May Mean

Click on Chart to Enlarge

Intel Corp. reported earnings after the close today and the stock traded down about 5.5% on the news. I had considered making a post today analyzing sentiment on INTC heading into earnings and suggesting that I thought it would most likely gap down. However, that type on info is not really the focus of this blog so I passed on it. What is the focus of this blog is trading short-term market moves, and INTC has proved in the past to have some potentially actionable correlations with the broader market. I have included a section of a historical study on the topic done in 2004 by in the next paragraph. The take away for me is that large gap downs in INTC are suggestive of short-term to intermediate term market weakness which would make sense with some of the overly optimistic readings showing up recently.
The table above tells us that on the day that INTC gapped down at least 5%, the S&P ended up closing the day lower than the day before 20 out of 25 times, and suffered an average loss of over 1%. The next day, the market rebounded somewhat, but still on only 7 occurrences was the S&P better off. Actually, we can see that on average, it took up to 30 days for the S&P to regain the price level it was at prior to INTC taking such a large opening hit.

One of the interesting sidelights in the data is that there is actually a negative correlation between the size of INTC’s gap down open and the future performance of the S&P 500. That means that the larger the gap, the better the S&P did over the next few days. That seems counter-intuitive at first, but when we realize that these large gaps can mark some sort of exhaustion low, it makes a little more sense. Still, counting on it marking a low is a loser’s proposition, at least statistically. If you had bought the Nasdaq 100 at the open after these large INTC gaps, the majority of trades would have been losers even if holding up to 10 days later.

Monday, April 13, 2009

More Objective Signs That Price is Stretched to the Upside

Click on Chart to Enlarge

I am posting several charts tonight, and they have notes on them, so I won't repeat those notes in the text here. In recent weeks I have been expecting the market to form a top soon. As the S&P 500 pushes toward the 880 level, the scenario I proposed from a pattern standpoint looks less likely. However, I feel it is important to remain objective and stick to quantifiable facts for determining likely market direction. From the broad spectrum of indicators out there that I follow, the indicators at optimistic extremes are growing, with a notable jump today despite muted market movement.

The chart above is the equity put/call ratio with 21 and 34 day moving averages in blue and red. Again, read the notes on the chart for detail. I would like to see the averages turn up in the next couple weeks to confirm a bearish outlook.

Click on Chart to Enlarge

The chart above is the sum of the volume of SDS, QID, and DXD which are the 2x inverse ETF's for the S&P, Nasdaq, and Dow. I have discussed this indicator before and it is used in the same way as put/call ratios. You can see from the chart that trading volume in these funds has dropped considerably the last few weeks and the recent levels are below the 2 standard deviation band. This is interpretted as complacency and lack of leveraged hedging which is typically bearish in the intermediate term.

Click on Chart to Enlarge

This chart is the VIX/VXV ratio with bollinger bands overlaid. Read the notes on the chart for detail. This indicator has been perfect so far this bear market in that it has given a signal at every important top, and every signal has worked like a charm. I am not implying that any indicator will work all the time, but as I always say, if it doesn't end up working this time, then maybe the market is changing character (aka a bull market).

I didn't post the chart of the VIX itself, but the VIX closed below its lower bollinger band Thursday. This does not happen very often. It has been an outstanding contrary signal during this bear market, but it has only happened 3 times before this time. The dates were 12/21/07, 2/26/08, and 5/15/08. All were basically 1 day from a significant high and great selling opportunity. Again, if the VIX falls below Thursday's low or closes below the bollinger band again, then that would be a warning that maybe things are changing.

The contrarian set-up here seems to be on par with past intermediate highs in this bear market, so the next couple weeks (even few days) should be important to watch for price confirmation. If the markets don't drop a good bit by next week I will be backing off on trying to pick this top for blog trades and will focus mainly on bullish trades if the market remains above the 20 day moving average.


Friday, April 10, 2009

Potential Top This Week

Click on Chart to Enlarge

The chart above is SPY as of this week's close. I have drawn some lines, boxes, and notes on there to give some expectations for the next few weeks. I will go into a little detail on these points, but the main reason for these types of posts is always to create ahead of time a logical construct for potential future trades. That way, you know if your logic as applied to the markets is on track, and when it is, trades can be made with relative confidence. When things deviate from that construct, for blog purposes I make trade decisions more mechanical and try to eliminate a pattern type bias as much as possible.

The boxes on the chart are identical in time and price. So I have boxed the correction off the November lows and placed that on top of the March low to give some reference time and price points that should be good guides for this correction if this move up from March is still part of a triple three type pattern I have discussed before. The price high off the November low was made in 29 trading days. The current high is day 26 from the March 6th low. The lime green lines are the low to high projection line from Nov-Jan placed at the March low.

What I am looking for now is for the recent move up from this past Tuesday's low to be retraced in equal time or less than it took to form. Whenever price moves like that (completely erasing a wave up in less time than it took to form), you should pay attention because an important phase of market action has just completed. IF we do see this over the next week or so, then I think it is likely this rally has topped.

The pink horizontal lines are the main price support levels for this rally. I also drew the main support level from the November-January rally because it shows what has been typical in this bear market. Once the rally tops, there is a relatively quick move down to undercut recent support. Then there is a reactionary rally that peaks below the high of the overall advance, followed by more directional downward price movement. I made a post last February showing several examples of this during this bear market.

Once it appears that the rally has topped, my focus for blog trades will be almost exclusively on bearish trades, with the possible exception of a bullish trade at the support levels discussed if things follow this scenario. Basic technical indicators (short-term RSI, MACD, momentum, etc.) are starting to show bearish divergence on these recent new highs. From both a pattern and technical analysis standpoint, the table seems set for a sizeable decline, though it is hard to train yourself to think that way as the media, etc. becomes more bullish and "news" becomes more positive (or at least price responds positively to the news).

As far as blog trades go, sit tight on QID until the next oversold signal
. Also, the short-term model could be interpreted as showing a bearish divergence against price on this high, so I may suggest re-entry into BGZ as soon as Monday. I will post again if/when that is the case.

Thursday, April 9, 2009

Looking For Stocks Not Confirming New Highs in the Broad Market

Click on Chart to Enlarge

I thought I'd take a little break from the broad market averages today since it is just a little waiting game on that front now as far as blog trades go. Instead I'll talk about a subject I mentioned back in early January.

Whenever a rally in the stock market is maturing and breaks out to new highs like today, I like to look for stocks that are not confirming that breakout. These stocks may be weak and lead the market down when a correction starts again. I think this is also a sign of a market topping, when you see significant numbers of stocks failing to make new highs with the market.

There is a specific pattern that I look for when analyzing the charts and considering a trade on stocks that are not confirming the breakout. The pattern is a vertical decline off the recent highs followed by an orderly ABC type correction back up toward the highs as the broad averages break to new highs. The chart above is CAM which is an oil field service stock that I have followed for several years and traded a few times, and it is showing exactly the type of pattern I look for.

This chart is a 30 minute chart and comprised of the last few weeks of action. I will not go into detail on the chart since you can look at it yourself, but I will highlight the cluster of resistance in the 24.60 area. That is the area of the initial unfilled breakaway gap down off the high a couple weeks ago, and a high there for this pattern would complete a Gartley pattern ABC correction which I consider very aesthetically pleasing to look at from a trading standpoint.

Here's what I would look for to trade this......I would like to see one more high above today's high which shows bearish divergence on the MACD 15 or 30 minute charts. Then either enter short immediately at that point with a stop at 25.60 (above the high of the entire pattern), or wait for the green trendline (of wave C) to be broken, and enter at that point. If using the second entry strategy, you could move the stop down to the highest point of wave C to get a better potential risk and reward ratio.

For exit, the larger pattern is suggestive of a move down to the 19.00 level within about 2 weeks time, but I would try to get a minimum of 3:1 reward on risk as defined by your entry price and stop loss.

Looking Ahead on BGZ and QID

First off, I added a new feature to the blog labeled "Open Blog Trades and Standing Orders" which shows any open trade/trades and any suggested standing orders to either exit or enter the next trade. It also shows closed trades for the year, though as the list grows, I don't know if I will keep all the trades there or not. So I am hoping that the new feature will be an easy summary of trade recommendations to see immediately when looking at the blog.

Now back to business.....The markets are set for a large gap up today which will almost undoubtedly lead to last week's highs being exceeded today. Since we exited the BGZ trade yesterday, I now want to look for a good spot to get back in. Certainly if the short-term model works its way back to overbought today, then I will make another entry recommendation on BGZ. Otherwise it will be next week sometime (likely very early in the week) that I will suggest re-entry.

Now in case anyone in BGZ did not get out yesterday because they did not get the recommendation in time, it does not make much sense from my perspective to sell today after a large gap up because I believe the upside is very limited and will happen quickly. So if you are in this boat, I think patience will pay more than panic.

As for the QID trade, it will obviously undergo some drawdown on this trade, though it could still end up a small positive or near breakeven trade by the next oversold signal.

Wednesday, April 8, 2009

BGZ Trade Exit

Exit the current BGZ trade today before the close if possible. The current price is 56.50 which I will use for the blog exit price.

The short-term model is not oversold, but the small decline the last few days has been so slow and choppy, that it seems very unlikely that the short-term trend has shifted to down yet. That means I think it is more likely for another high above the recent highs to be made before a potential top is in.

Best case scenario is that there will be another high and we can get back in BGZ at a better price with a small gain already under our belt. Worst case scenario I think is that we get in BGZ at a little worse price a few weeks down the road, but closer to a potential "breakdown" point in the market.

No changes for the QID trade as the short-term model is basically neutral right now.


Tuesday, April 7, 2009

QID Trade Update

Just wanted to make a quick post with a limit order to potentially sell the current QID position and simplify the exit for part-time traders.

For Wednesday place a day only limit order of 46.90 to sell QID on further weakness tomorrow.

The short-term model is nearing the oversold area, but not quite there yet. The futures are weak this evening as overseas market are falling thus far, and the kick off to earnings season was apparently not well received by the bulls. The close last Wednesday before the large gap up in the indexes last Thursday is the area being targeted by the limit order above. If things fall that low, I think the short-term model will be oversold.


Monday, April 6, 2009

Hanging Man Candlesticks

Click on Chart to Enlarge

First off, the opening price of QID this morning was 43.45 which will be the entry price for the blog trade. When I made the previous post it was about 6:30 AM ET and the futures were up about 0.5%. But the futures fell significantly after the morning news flow started, and resulted in a decent size gap down rather than a gap up.

Secondly, with how steady this uptrend has been, the short-term model is likely to become oversold rather quickly compared to during a downtrend, so any additional weakness tomorrow may lead to an exit signal.

Thirdly, IF the S&P 500 moves down below 778 over the next 2 or 3 days, then I will suggest placing a profitable stop loss order on the BGZ trade and assume the top has been made for this rally. Right now, it looks like that is possible, but it also seems possible for another push to new highs over the next week or so.

Now to the chart.....The chart above is DIA which is the standard Dow Industrials ETF. The chart shows 2 consecutive hanging man candlesticks. These occur when the market undergoes an early sell off followed by a recovery toward the opening price. The real body is small (less than half of the lower wick). Also, there should be little to no upper wick on the candle. For interested chart readers, $INDU and $SPX (the Dow and S&P cash values), today formed a classic hanging man candlestick with a black real body, which typically is considered more bearish than a white real body.

Three days ago, a shooting star type candle formed as the large gap up and early advance faltered a bit into the close and closed off the highs. So we have three potentially bearish candlesticks in a row in DIA. Also, the gap up Thursday after a strong, nearly vertical advance, has many characteristics of an exhaustion gap. What we are missing is price confirmation both in magnitude and in rate of decline to be able to have some confidence that a top of some significance has been made.

So from here, the QID trade is easy to manage....just exit at the next oversold signal from the short-term model. The BGZ trade is a little trickier, but I will make an evaluation at the next oversold signal to see whether it makes more sense to exit then and look to re-enter in coming days, or to place a stop loss somewhere and hold in anticipation of a larger move down.

QID Trade Entry

As mentioned in the previous post, the Nasdaq short-term model is overbought. The pre-market futures are indicating a modest gap up at this time, which is what would seem like the best bearish set-up at this point (gap up while overbought after a positive response to Friday's jobs report).

So I am going to recommend a short-term trade on QID at this point, which is the ultra inverse Nasdaq ETF. As discussed in recent posts, some people are in BGZ and may not be making any more trades, which is fine. But for those who want to continue to make short-term trades on top of the intermediate term (potentially) trade on BGZ, I am going to continue to look for solid spots to initiate those trades.

New Trade Recommendation......

Buy QID with a market order Monday morning. This should result in getting in very close to the opening price, which is what I will use for the trade entry price.


Friday, April 3, 2009

Updated Pattern Expectations and Probable New Short-term Blog Trade

Click on Chart to Enlarge

The chart above is SPY as of Friday's close. I have some projections and a few notes on the chart I will quickly put into words. First off, I would expect the top of this rally to occur below the pink horizontal line. That is due to the price pattern that has formed over the last few months. If that holds true, it is easy to see the potential reward is very small compared to downside risk at this point in the rally.

The solid lime green line was the pattern I drew out 2 weeks ago for expectations of a contracting triangle to form. It does not appear that a classic contracting triangle is forming at this point, but you can see that the highs and lows so far have been occuring at the expected time. Because of that, I don't think the timing of that expectation will be too far off, but I have drawn in a new projection in dotted dark green for my new expectation.

The short-term model for the Nasdaq became overbought near closing time today so that justifies a new bearish short-term blog trade at this point with QID the likely fund of choice. I will make a blog post either Sunday evening or Monday morning with instructions regarding that trade. But for right now, just expect to buy QID at the open on Monday, especially if there is a gap up on Monday.

About 2 weeks ago we saw some stalling candlestick patterns that led to a little pullback and a successful blog trade on SDS. Now that we are at new highs above those levels, it would be nice to see a solid reversal candlestick pattern to indicate that a short-term (at minimum) top has been made.

With each move higher here, I feel more confident that we are very close to a significant high in price, but I am not sure if the market will form a sharp top or if it will stall and form a failed breakout or two before heading down with more conviction.


Thursday, April 2, 2009

Quick Update

There are still 11 minutes until close as I type, but today looks like the VIX will make a hammer candlestick. I have talked about this phenomenon before where the market is overbought and there is a large up day, but the VIX makes a major reversal off the lows. I have seen this happen at tops several times.

Because of that in addition to the allllllmost overbought short-term model today, I am going to suggest entering the BGZ trade before the close today if you didn't enter on the limit orders this morning.

I will consider 54.00 as the blog entry price wince it is about the average of the limit orders this morning.

Hopefully any drawdown will not be too uncomfortable on this trade.


Quick Note and Limit Order for BGZ

This morning is set for a large gap up (around 2%) in the stock indexes. The short-term model is near overbought after yesterday's gain. With any strength after the open, last weeks highs would be exceeded. I would definitely be wanting to bet against this rally on new highs.

So I would like to see how things go in the morning and see if the short-term model will register any extreme readings before recommending a trade, but I have decided on a limit order to place to potentially buy BGZ for those of you who have very little time during the day to enter orders or check for an update on the blog. So here is the recommendation.....

Place a "day only" limit order to buy BGZ at 55.00 with half the normal dollar amount devoted to a trade and an additional limit order at 53.00 with another half-sized dollar amount.

Those orders would require the market move above last week's highs a bit and would likely result in the short-term model becoming overbought or very close to it.

To reiterate on previous posts here, this trade would be intended for a multi week holding period, though it is unlikely to hold beyond June. I think any push to new highs here may be the highest point the market reaches before making new bear market lows and then some.

Now let's say that the order gets filled and the market drops and everything goes as planned, I will still be looking for good short-term trades to make in future weeks for those of you who want to continue trading the smaller time frame type trades as well. But for those of you who may be using the "cumulative" method I had mentioned for account management for these trades, I would make this BGZ trade and just stay posted over the next few weeks for any trade management type posts on stop placement or trade exit if the market does not begin to accelerate down as expected.

I will post later today if/when the short-term model becomes overbought to suggest entry for any traders not wanting to use the above limit orders for whatever reason.