Tuesday, September 29, 2009

OEX Put/Call Spike

Today the OEX put/call ratio (for those unfamiliar, this is a typically smart money gauge as traders buy index puts as hedges, etc) spiked to the highest level I can recall in quite some time. I didn't go back through all the data, but it has been over a year at least since the ratio was at that level. The ratio came in at 2.20. In the past the real big spikes have tended to occur right at significant short to intermediate term peaks in stocks.

This high reading has pushed the 5 day ratio of the OEX P/C average to a higher level than any since the bear market began in Oct 2007. Also, this has caused the spread between the equity (dumb money) put/call ratio and the OEX (smart money) to widen to corresponding levels. While the absolute values of the ratios are not very extreme compared to bull market history, I think they are notable.

Just maintain the open trades as is until further notice.

Monday, September 28, 2009

Equity Put/Call Averages and US Dollar Index

Click on Chart to Enlarge

The chart above I have shown several times in the past. It is simply a 21 and 34 day moving average of the daily equity only put/call ratio which is a good contrary indicator to follow. The way I use the chart above is pretty simple. When the shorter-term average crosses above the longer average and they point upward, that could be thought of as a "sell signal" for the market. Almost always I have found that this particular set-up occurs after a intermediate term high has been made. That is it tends to lag price a bit. That makes sense because the equity only options have a solid history of being reactionary rather than precautionary.

As of Thursday's data, the averages had crossed and both pointed up. They have flattened back out a bit the last 2 sessions. Based on some other data it seems that a reasonable expectation would be for at least another marginal push to new highs before an intermediate term top. Personally I have a rule of thumb that I don't try to catch "the last wave" so to speak when the table is set in the opposite direction. However, I do tend to take every opportunity at catching the first move in a new trend because they tend to be explosive with very high reward/risk ratios.

Click on Chart to Enlarge

This chart is a weekly chart of the US Dollar index as of last week's close. I have circled a few similar candlesticks in past data. It is a type of hammer candlestick with a long tail and a small real body that closes in the upper quarter of the range. It is not the textbook hammer candle because of the little upper shadow, but with a close above the open in the upper part of the range, it probably makes little difference. I like these candles on weekly charts for attempting trend reversal trades (particularly bottoming trades).

The MACD above is about as oversold as it has ever gotten, and is starting to flatten out indicating waning momentum. The EUO trade from Friday is a bullish dollar fund and has a similar nice hammer candle. While I realize most people following the blog may not be too into currencies, the valuation of the dollar means everything in terms of the mending of our economy and reduction of debt.

Maintain the current stop on EUO until there is some sense of direction this week. Despite the solid gains in stocks today, the dollar gained. This may be a hint at underlying buying interest in the dollar, so it would not be surprising to see further gains this week without a substantial retracement of the move off last week's low.

Friday, September 25, 2009

New EUO Trade

Click on Chart to Enlarge

The chart above is UUP which is the main US dollar bull ETF I follow. I have made several posts in recent months on the sentiment and possible Elliott wave patterns forming in the EURO and USD. The main message I have been sending is that I am looking at establishing a longer term "trade" on a bullish dollar fund. The first 2 attempts were stopped out at the initial stop for a loss, and the dollar has continued lower since then.

Looking at the chart of UUP above it is easy to see the downtrend. The thing I wanted to point out here is the recent sizeable gap down this week. It has since been retraced with no substantial downside after the gap. Whenever this type of thing occurs, a chart reader should be alert to the gap being an exhaustion gap. This is a type of gap that occurs as a "blow-off" or capitulation before a significant trend reversal. Given the bearish sentiment, the hammer reversal at the low, the quick gap fill, and break of the minor trend line shown in green, I am certainly willing to enter a trade again.

So I am going to post a new trade here on EUO which is a 2x bullish $ ETF. The current price is 17.93 which will be the blog entry price. 17.54 will be the initial stop.

The goal is to catch a major bottom and gradually move a stop up under support as the advance occurs. For any one that needs a little more confirmation of a new uptrend, you could use 18.09 as a buy stop, but use the same sell stop after entry. That will make the risk/reward ratio less favorable, but probably decrease the likelihood of a losing trade.

SPXU Trade Exit

I am recommending exiting the open SPXU trade today before the close. The current price is 46.86 up from 44.44 at entry for a 5.5% gain.

There are too many red flags going up for me to consider a bullish trade right now. Hopefully a solid new opportunity will present itself next week one way or the other.

Thursday, September 24, 2009

New SPXU Trade

I don't have time for details on this one. A bearish engulfing formed yesterday in the major indexes.

New SPXU Trade:

Place a "day only" limit order of 44.50 to buy SPXU today. Place a GTC sell stop at 42.50 immediately after entry if filled. Please refer to the money management section if there is any question of how many shares to buy for your account size, etc.

Tuesday, September 22, 2009

SPXU Stopped Out

The breakeven stop on SPXU was hit this morning.

There is an FOMC announcement tomorrow, so typically there are modest moves going into the announcement. It will probably be tomorrow before considering any new trade.

Monday, September 21, 2009

Stop Movement on SPXU

After the gap this morning, and a retrospectively ideal entry on the trade Friday, I am suggesting placing a breakeven stop loss to remove the risk on this trade.

SPXU Follow-Up Action:

Modify the current GTC sell stop to 43.65 (breakeven) until further notice.

Thursday, September 17, 2009

New SPXU Trade

Click on Chart to Enlarge

First off, I am posting a new trade for tomorrow.

Place a day only limit order of 45.00 to buy SPXU. Use 43.11 as a stop loss immediately after entry and for position sizing. In the money management post refer to "Trades WITH a Stop Loss" for this one. That post will give the info on guidelines for position sizing relative to account value. This trade will be the type where there will be either a quick stop out or a quick opportunity to move a stop to breakeven or take a partial position off for a gain and trail a stop for the rest.

Some brief analysis is on the chart above. Short-term model has been overbought for about 3 days and is just coming down from that area now. The major factor in deciding to make this trade is the candlestick pattern confirming the obvious short-term overbought conditions. There is a near perfect looking doji pattern visible on the SPXU chart. Across the board today, the indexes (and the USD index) showed nice dojis which is a classic reversal pattern. For more technical background on this pattern refer to this prior post.

This basic pattern is probably my favorite for intermediate term time frame trading. I consider it a doji/hammer/harami. The reason I like it so much is that it seems to combine the psychological climate of all those candlestick patterns into a clear cut trade entry. The longer tail on the doji gives enough evidence of reversal that I have no "fear" of placing a stop just a penny below/above the respective low/high. But the reward relative to risk is still very, very good.

I am not going into any pattern type analysis today. ElliottWave.com reported recently that the bullish opinion on the Daily Sentiment Index (a market opinion poll) recently hit 90%. Even at the bull market peak it was only 88 or 89. For those of you reading this who are into contrarian type analysis, maybe you have those times when you out-contrarian yourself because you read other contrarian blogs, services, etc. There are those out there who leave blog comments about how everyone is expecting a top here, etc, etc. But they don't really provide any concrete data with the comment. Don't overthink it. The DSI readings and survey readings in recent months on the dollar and stocks show without a shadow of a doubt that the general bullishness on stocks and bearishness on the buck are way in excess of the opposing crowd.

These are longer term signals, but if you are wondering a lot about whether to reduce equity exposure, etc for the longer term, then my suggestion is to stop wondering and do some serious planning and executing of that plan. Maybe the March low was a generational low (which I still don't think), but even so, with excessive optimism in the midst of the price range of last fall's crash, and the historical facts that major bear market bottoms tend to have major retracement of the moves off the lows or more lethargic range bound conditions for an extended period, I personally am not worried about "missing the boat." I can rethink my longer term view several moons from now if the market starts to become excessively pessimistic without making new lows.

Click on Chart to Enlarge

The chart is the US dollar index showing the doji today after a steady but completely un-explosive grind down the last 2 weeks. Sentiment continues to hover near super extreme bearishness despite the lack of much further downside prior to the last couple weeks.

I could not give what I feel is a perfectly sensible interpretation of what pattern is occurring here, but I still view it as completing a large degree correction of a new major uptrend. I would fully support using any candlestick reversal pattern to initiate bullish trades on the dollar with a stop right below the pattern. It may take a few tries yet, but to catch what may be a huge move up, it is worth it. As a side note the vertical blue lines show the most recent times that the oscillator above the chart was oversold and then rose back above 30. They were good enough signals to enter on the next bullish candle and then be able to move a stop to breakeven or better after a week or two. The difference with a major bottom is that price will likely explode more vertically upward off the bottom when it happens.

Thursday, September 10, 2009

Longer Term Cycles and Demographics Revisited

Today's post will be a big picture type post and discuss some major cyclical tendencies and how that relates to the market and economy.

The first thing I wanted to touch on are the longer term reliable cycles that show up in the markets. I don't use typical "cycle" type analysis in my trading, partly because I have never seen anything that I really think is objective and increases the bottom line. But I love to learn and read new ideas, so anybody that feels they have good sources for shorter term cycles, please drop me a comment with a link or book name etc.

Here are some of the most reliable cycles affecting the market on longer term (investing) horizons:

1) The Annual Cycle - stocks consistently show weakness and actually negative returns on average in September and October. This is one that I don't know much about the "why" it happens, though I have read some places that some laws regarding taxes on equities, etc may be the driving force behind this annual period of stock weakness. In the same way that the Christmas/New Year season (January effect, Santa Claus rally, etc) is stronger than average, the Sept-Oct period is consistently weaker.

2) The Decennial/Decade Cycle - Since there are less decades than years, this cycle has less data to draw from but still shows consistent tendencies. The basic pattern is that the middle years of a decade are the strongest for stocks, with the x5 year having a very strong tendency to be positive. The majority of bull market tops come in the x6 and x7 years. The other major tendencies are for weakness in the early years of the decade - x0 x1 and x2. Also, the x2 year tends to be the most common year for major bear cycles to bottom. Your guess is as good as mine as to why these tendencies exist.

3) The 4 Year/Presidential Cycle - This cycle has been remarkable for basically the last century. There is a very strong tendency for major corrections to occur and bottom about every 4 years. When relating this to a 4 year Presidential term, those corrections occur notably during the 2nd year of the term. Then the 3rd and 4th year of the term tend to be much stronger.

Just as recent history examples, in 1998 the Long Term Capital Management fund blow up happened with the sharpest correction in several years for stocks. This also occurred in the fall of the year. Then in Oct 2002 the tech bear bottom (also the fall). Then in May-July 2006 the most fear provoking correction of the 2003-early 2007 period occurred prior to the topping process in the second half of 2007. So, 2010 is the next "due" date for this cycle and will be Obama's second year. Some chalk this cycle up to the tendency for new administrations to quickly enact major policy changes early in their term. In typical govt. fashion, this amounts to major expenditures. And certainly in the last decade or so, the govt. spending/debt has been ballooning. Anyway, most people chalk this tendency up to some market reaction to new administration policies.

4) The Spending Wave/Lifetime Cycle - I became familiar with this cycle via Harry Dent's work. You can check out hsdent.com or his books for more info. Anyway, their main research is in the field of demographics and its relation to the markets. This is all very factual data that can be attained from government censuses and surveys and other data. Basically people move through predictable stages of life with predictable peaks and valleys in debt, earnings, spending, etc. Also, census data can tell you how many people are hitting these stages during giving periods of time.

So everyone knows about the baby boomers which is the largest segment of the population in our country. Well, they have been in their peak years of production and spending this decade, and based on averages would be projected to peak in consumer spending this year. (The data seems to indicate that it was probably last year or late 2007). These long trends of increasing earning and spending are now turning down as there is not an equally large population segment behind the baby boomers to continue their trend. So many of them will be retiring and will be gradually decreasing spending, decreasing net earnings, and eventually become an increasing social cost via Social Security, etc.

In our particular point in time, this baby boom also resulted in a major housing boom as they hit their peak home buying years in the middle of this decade (around 42 yoa). Unfortunately, sound lending was thrown out the window during this time, and it has led to a corresponding debt bubble (both in housing and also in consumer credit) of historic proportions. Anyway, there is every reason to believe that downturn of baby boomer spending and, in fact, major pressure to pay down debt, will drastically reduce consumer spending and corporate earnings for years to come. Since the money being paid down is to banks, and is fiat money/credit, the only question is how big the default will be and how many lenders will go down because of it. But that money/credit is definitely not going to be there for other major economic sectors.

While it is a process of years and decades for this lifetime spending cycle to ebb and flow, the market is able to react very quickly to data and realization of future trends. Because of that, the market always tends to lead the actual data and fundamentals significantly because it is able to rapidly bring asset values in line with perceived value. So for the stock market, you should expect the prices to be bottoming during and before the worst economic numbers are actually showing up, and then be advancing off those panic low valuations in the face of horrible economic data. That is in part what we are seeing now, but that is also why it is important to understand both fundamentals and the human psychological component of markets. For whatever reason, the mass psychology does not move between extreme perspectives in smooth trends. There are clear oscillations up and down in the midst of larger social mood trends. That idea is a fundamental tenet of Elliott wave theory and why it can be useful in analyzing auction markets and even other social trends.

Now there are several other cycles that we could look at like shorter term business cycles (Armstrong Cycle), long term economic cycles (Kondratieff Waves), etc, etc. But I think that once we get into those there starts to be significant overlap as to the causes of the cycles - like they are all models/representations of the same concept, even if they have different time frames they look at. My personal opinion is that largely these long term economic cycles are in fact monetary cycles. As long as we have the same basic monetary system and somewhat capitalistic, free enterprise economies, there will be cycles of indebtedness and business expansion as confidence and population growth/demand occur. And that will be followed by default of some debt and the eventual waning of demand due to population variances and willingness and desire to lend and borrow.

So looking at the cycles above, I believe demographics show that we are entering a period of multi year decreased consumer spending and lower corporate earnings. So there is little or no chance of true economic growth for a little while. Also, we are entering the early years of the coming decade when most often stock have been weak. Into next year, we will be hitting what has typically been the worst time for the 4 year cycle for stock prices. We are now entering a seasonally weak period for stocks, which should give a little added weight toward defensiveness toward stocks and possibly violent resumption of a longer term downtrend in stocks and the economy.

Wednesday, September 9, 2009

S&P Update

Click on Chart to Enlarge

This chart above is from a couple weeks ago, and I am just showing it for background and because the chart below from today is an updated version of that same chart basically.

Click on Chart to Enlarge

This post will probably only interest those who are into Elliott Wave. The only change from the chart above is that the "w" and "y" were simply changed to "a" and "b". From the way I track these patterns, I would say there have been 4 completed waves and are now in a 5th. However, they all look corrective and are overlapping so I am labeling them as a developing corrective pattern (triangle or complex).

The interesting thing here is that in large triangle patterns, a smaller triangle often is the last wave of the larger triangle. So in large expanding triangles, you often see an smaller expanding triangle for the huge wave E. Also, in contracting varieties, you see a progressive dying volatility toward the apex of the triangle where a smaller contraction forms as the wave E of a larger contraction. Then BOOM, a major breakout occurs. The recent activity in gold prices seems to fit this pattern. So here we are edging up in what may be a triangular type of pattern since the volatility peak last fall. If this is wave E, then it would be most common to see a contracting triangle form for it. So it fits with the above scenario.

Another interesting thing over the last week is that I am getting a sense that some long term bears are now revising up their expectation for how far this move will go. In an odd contrarian way, that makes me feel more likely that the market won't go much further at all. It's basically like everybody is convinced that it is either a major bull market or that there has to be another wave up, etc, etc. The reverse happened at the March lows when everybody was bearish and most Elliott wave followers were just waiting for the "last wave" down before a major rally. But it never came. From my view a large part of the problem at major turns is that most Elliott wavers almost always are looking for impulse moves and want to see pretty 5's and 3's. But I think that in major corrections it is better to assume corrective patterns for the subwaves, and be very strict and sparing with interpreting anything as an impulse.

Despite the holy grail seeking mentality that pervades Elliott wave and the periodic runs of seemingly magic market precognition, for mere mortals, some simple concepts that I frequently highlight will help to pretty accurately gauge major turns shortly after the fact. The most important thing to look for is a counter trend wave that completely erases a prior wave in less time than it took to form. That actually hasn't happened on the daily chart in months.

So right now, the way I see it I would expect a quick poke above the recent highs, though it is not necessary. Then if that is followed by a reversal and retracement of the current move up in less time than it took to form, that would sensibly integrate into the larger pattern as a major top. If new highs continue, then I would still keep the larger context for the time being, but would view the possibility similar to early May where a contracting triangle may have formed, but it also may be forming a 7 legged pattern e.g. abc-x-abc.

Wednesday, September 2, 2009

S&P 500 Update

Click on Chart to Enlarge

The chart above is a weekly chart of the S&P 500. Some important trendlines are coming into play now. First the prior support from the bottom of the price channel last year is now just overhead. Very often old support once breached, like in the crash last fall, then becomes resistance. Also the contracting trendlines from March-July and Jan-June reached the apex last week. If the current pattern forming in the market is a type of triangle, then we should expect this upward move to be complete/completing.

Click on Chart to Enlarge

The chart is a daily chart of the S&P 500 to note some further details. Most of the notes are on the chart. For any new readers, an important concept in verifying a change in market direction is for a correction (or rally) against the current trend, to exceed the prior largest correction in % terms and in time. The most reliable way of recognizing a trendshift to the downside is for a larger and faster decline to take place in comparison to any decline in the prior advance. The notes on the chart build on this concept.

Since the move up from the Aug 17th low to the recent highs took 9 days (but most of it in 6 days), a complete retracement of that move in less time than it took to form, should be a good indication that the market will continue to correct for a while. In context of the possible patterns that are forming, if there is a swift decline below 980 this week, then I think it is very reasonable to view this major rally as complete.

The stage has arguably been set for a few months for a larger decline to begin, but price has kept pushing higher. So at this point, there is nothing to add to the recent videos and charts I posted. It is just a matter of price actually giving confirmation of a trend change as noted above.

From a big picture perspective, price action so far since the March lows is most comparable to the moves after prior bear market lows. So if the market makes new bear market lows, we will be witness to another never seen before market move, namely, the largest bear market rally ever in our markets. That is still my view. And as I've noted several times, I expect over the course of the next few years to see several instances of "never seen before" type of market action. I also will reiterate my prior view for long-term investments which is to move towards the "safest" possible cash type instruments (dollars, short-term treasury bills, possibly some gold). So everyone needs to due your own due diligence on the subject, but that is my view to take or leave. Bear markets come and go several times in a lifetime, but long-term debt manias are few a far between. And the debt manias typically take years to come down.

Tuesday, September 1, 2009

Volatility Breakout?

Click on Chart to Enlarge

The last time I mentioned the VIX I showed a similar chart with the same trendlines as this one. As of the time of this typing (3 pm ET) it seems that the VIX will likely close above those trendlines and well above the upper bollinger band.

Most often when I discuss bollinger bands it is in relation to overbought oversold extremes and looking at it as a contrary indicator. However, for those who don't use them a lot, that is only part of their use. Another way to use them is in identifying breakouts from a range. In this case when the bands are squeezed together for a while and the underlying issue is going sideways, then you see a big move close outside one of the bands, that is often the direction of a new trend.

So while expecting the VIX to fall from the upper band has worked repeatedly during this rally, I don't expect that in this case. The VIX never formed a basing area until this 25.00 level and the trendline breakout and VIX divergence with the S&P are all suggestions to me that this is a breakout move. If so, that likely means the recent high in the indexes was a longer (or simply long) lasting top.

I will try to go into more details after the close.

As follow-up notes, the recent EUO trade was stopped out. The corresponding stop point on UUP was not hit though. That is one of the frustrations with the leveraged funds in that you can't always count on the leveraged one holding the same support points as the unleveraged ones. However, the benefits come when a trend starts and the leveraged funds outperform their objective because of compounding effects. I am still bullish on the dollar and will look at a new trade on UUP or EUO very soon.

Also, if the SDS trade entered in July was not still open, I would probably be suggesting a new trade today or tomorrow, but with the short-term picture basically oversold, I need to see more follow through to better determine if this top is legit. My suspicion is that it is for several reasons, but in a trend this strong, waiting for an overbalancing type of correction where the decline off the top is larger than any other decline in the recent leg up is probably wise for establishing new position trades. Then if there is a larger and faster decline than the June-July pullback, I'd say there is a very high probability that this major advance since March is complete.