Monday, May 4, 2009

Housing and Financials Signaling a Top Here???

Click on Chart to Enlarge

First off a couple blog related things......

For anyone that has used the "subscribe by email" feed, my experience is that when I put my own email in there, I do not get the blog updates until the next day, which doesn't do much good for trading purposes. So if anyone knows how to change that or if they have a similar experience let me know to try to figure out how to get it faster.

Also, the "subscribe in a reader" seems to work very nicely as it is simple to do, and every time you use the reader and hit refresh, you will be assured of the latest posts. So that may be the best option out of these two.

Also, I am not really interested in using Twitter on the blog, but occasionally I will have a comment to make that I don't feel justifies a whole post, so I have been and will continue to put those in the "comments" section under the most recent post. Anything important regarding trade management I will always put in a separate post though.

Now to the chart.......I have spent some limited time this weekend trying to look for clues as to what the most likely next direction for the market is because this past week or two has raised some possibility from my perspective for a significant further rally based on the price pattern. However, that does not really match well with the sentiment picture which has been on par (for a couple weeks) with significant imminent market peaks of the past.

I have looked at several things but just used one chart because it is loaded with potential market education. In short, the banking index $BKX is badly lagging the S&P 500 on this recent move to new rally highs. This has been a uniform occurence during bear market rallies during this bear. This would indicate stocks are likely to fall. Also, the total put/call ratio (index and equity) tends to be a leading indicator of future price at turns in that it will form divergences. Right now, that measure is showing a bearish divergence. That is largely because the index option put/call ratio has been rising on this recent rally. That measure is often a smart money indicator as they prepare for near term volatility to increase.

Lastly for this post, the housing index, XHB, is showing a minor non-confirmation the last couple days as it has fallen and is several percent off the highs of last week. More importantly, the chart is showing a compelling pattern both short and longer term that are suggestive of potentially severe weakness the next couple months. The chart above has the notes, but I will add a few here. First, the larger pattern looks like a large upward ABC "flat" pattern since the November lows. The rules associated with this pattern are......

1) waves B and C each have to take equal or more time than wave A.......check

2) if wave B takes substantially more time than wave A, wave C will most likely take about half the time of (A+B).......that is about dead on for the recent high this week.

3) wave B has to retrace more than 61.8% of wave A.....check (in this case since wave B is almost exactly the same size as wave A, then wave C should be almost the exact same size as well, hence the name "flat" due to the double bottom and double top appearance).

4)and here is the biggie.....after the pattern is over, price should retrace wave C in equal or less time than it took to form.

So if this is a flat pattern, then price should drop severely over the next 2 months. The technical indicators and candlestick patterns are both confirming a potential top here as well, so things look strong in support of this case.

So if I had to pick a direction for the market in the near term and intermediate term, I would say "down" from all this evidence.........possibly a major top in the forming. But bank related news, etc. may trump any other factors over the next couple weeks, so I am not extremely confident. Also, Friday looked like it is forming a continuation head and shoulders bottom on the very short term charts. So maybe we will get a gap up and/or test of Thursday's high even if the high does hold.

No comments:

Post a Comment