Signs of Price Confirmation of a Trend Reversal in Russel 2000

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The chart above is the Russell 2000 index which is a more small cap growth index. I have put some figures on the chart showing that the recent decline has completely retraced the last leg up in less time than it took to form. Also, it is about 1% away from being larger than the June-July decline of 11.2%. That decline took a month, and so far this decline has only taken 2 weeks. So if prices fall further next week, that will make the decline both larger and faster than any decline since the March low.

The S&P is at 1035 right now and needs to drop to 1020 to completely retrace the corresponding leg up. But it has the entire next week to do so and still take less time than the move up. From a candlestick perspective, there is no sign that the decline has bottomed yet even shorter term. The bears are owning the close, volatility is expanding, minor gap ups have been filled and closed below, and the next support is at the 1020 low on the S&P 500. So I think it is likely that level will be undercut next week. I may consider a bullish short-term trade after that level is undercut, but will require at least a one day reversal candlestick to consider it.

So price action has started to confirm a trend shift to the downside. From my interpretation of the likely pattern and sentiment, I believe the decline is likely to retrace the entire July-Oct advance in less time than it took to form. That is a lot more downside, and justification for holding even the leveraged inverse ETF's for that duration in my mind. Definitely trailing stops will have to be adjusted on the way down. But for the current SPXU trade, the entry was on the day of the high, so if this does end up being a major reversal, all those small stop outs trying to catch the reversal will likely be completely regained and then quite a bit more as well.

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This chart is XHB which is the main homebuilding ETF. It looks like a head and shoulders top with a textbook target around 11.75, though I have put some dashed lines at open gaps near that level as potential chart support. I continue to believe that home building and real estate (probably commercial) will be leaders to the downside as the market turns down and especially if/when credit problems resurface.

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This chart is AIG. There are any number of financials that will look similar to this but I chose this one because of its high profile. One of the most powerful signals using bollinger bands are when price has been range bound but then breaks one direction and closes outside the bands several times in a short period of time. If the bands expand (move in opposite directions) as this occurs, then that is often a great signal of a powerful new trend. In this case I have highlighted past times on the chart where the same thing happened. Charts such as this could be shorted or purchase OTM put options with a couple months till expiration hoping for a major vertical type decline in the stock.

If you wait until major news has come out on the stock, you are probably too late for a great shorting opportunity - take the early hints from the charts like above.

I don't keep track and post results of issues like this, because I give no specific trades on them for the blog, and am usually not even trading them myself. So, do your own due diligence or leave a comment if there is something else you'd like to see on the blog, but anything I post like this, I consider tradable.

SPXU Stop Adjustment

Modify the GTC sell stop on the open SPXU trade to 42.95.

From some looking back at similar set-ups on the McClellan Oscillator, Sentimentrader.com suggested that today would be important in that if the market continued lower, that would suggest a weak market vulnerable and likely to experience further declines before a substantial rally. The converse would be likely as well - strength begetting future strength.

As I type the market is down significantly, so at this point I will just move the stop and hope for further weakness to benefit this trade.

Limit Order for SPXU

Don't have much time right now.

Short-term is very oversold but looks to have made an intermediate top in stocks. I expect some significant rebound attempt somewhere in the next couple percent down.

Place a day only limit order of 47.00 to potentially sell SPXU today on further weakness.

We'll look to re-enter at some point if conditions are right.

SPXU Stop Adjustment

Modify the GTC sell stop order on the open SPXU trade to 42.00 which should lock in 2-3% gain.

Quick Update

The market seems to actually be behaving differently on this pullback than in prior ones the last few months, unable to muster strength where it has immediately in recent months. So, I would say the odds are good for a continued pullback. Also, from a candlestick perspective, bears have been able to dominate the close in recent sessions showing no sign of a reversal yet.

The 50 day MA is about 1.4% below current prices and may be an area of support. Also an unfilled gap up is still present about 2% below current levels. For those that are short/inverse, you may want to consider setting some limit orders to sell part of the position at a price corresponding to the 50 day MA on the S&P 500. For the open blog trades, I am not going to do that just yet, because of my goal the last few months of eventually getting in a large degree market turn with limited risk. I want to see how today closes and if the market will end up retracing the Oct rally in less time than it took to form over the next few days. So barring a classic reversal candlestick, I will be holding the trade.

On a purely indicator outlook the market is basically short-term oversold, and we should expect a bounce today or tomorrow if the market continues its trend. Inability to do so, particularly if there is acceleration to the downside (i.e. the market makes a larger 1 day decline than any since Oct 1st) would be another sign of changing tides. Since today is set for a decent gap down as I type, today should be telling at modest to large gaps at oversold levels in an uptrend (especially this one) tend to be bought almost immediately from the open.

My own perspective is that this is a very dangerous time to be long for anything but buy and hold (forever) investors.

While I don't have time for more detail right now, I believe the current situation is that the higher the market goes the more the bulls think they are correct, and oddly it may seem, the bears firmly believe they are correct as well despite higher prices and such a big rally. So both sides are confident. When confidence is high, pain tolerance and allowance for slippage against positions is high because of belief that the position is solid but needs some room to work. I think this likely means that the odds of increasing volatility are good.

UUP Charts (unleveraged version of EUO)

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This chart is a UUP daily chart which is a bullish US dollar ETF, and is the one I reference most often on the blog. I have put some notes on the chart showing some a potential breakout of a falling wedge. This particular pattern is typically a very explosive chart pattern. It often ends a larger down trend and can signal major trend change. Also it is ideal for call options, because the rate of advance after a breakout is usually about 3 times as fast as the prior decline.

So, for trading purposes I am once again hoping to catch a major reversal on the dollar. There have been a few similar trades that have been stopped out over the last few months, and it is a similar situation here where I am hoping for a quick advance to get the stop up to breakeven and then let it run.

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This is just an hourly chart of UUP showing the breakout in closer detail. Usually a real breakout from this type of wedge will not have price fall back into the wedge, though it may consolidate above the trendline (in the yellow area).

Also I wanted to post a couple links to recent things I've read regarding the dollar to show two sides of the sentiment and realization of what is/may be occurring.

This first link is from Karl Denninger showing what I would presume to be the smart money acting on the reality of the credit situation in our monetary sytem.

http://market-ticker.denninger.net/archives/1539-Possible-Credit-Dislocation-Be-Warned.html

The following are links to the Web Bot Project, which I do think is a very interesting project, but really can't agree that the collective conscious should be expected to get major financial turns right. My inclination is that this is a good contrarian signal that the dollar may be bottoming, but we'll see.

Web Bot Project, Further Comments

New EUO Trade

No time for details on this right now.

New EUO Trade

Buy EUO with a market order today before the close or tomorrow morning. Current price is 17.48. Place a GTC sell stop at 17.10 immediately after entry.

Move SPXU Stop to Breakeven

Just in the few minutes since my last post, the market has fallen further with explosive velocity. My perspective is that this is probably a game changer and the trend will continue down (maybe significantly from here, or as a secondary possibility this could be a mini capitulation before a move to new highs.

In the first case I wouldn't expect the stop to be hit, so there's no reason not to put it in. In the second, I would expect it to get hit and have to re-evaluate if there is a good reason to re-enter soon after.

If your entry was 41.00 or less on the current SPXU trade, then modify your GTC sell stop to breakeven.

Stop Adjustment on SPXU

There was a failed morning rally attempt today and an undercut of recent lows. Because of shorter term indicators and intermediate term outlook, I am going to take this opportunity to decrease the risk on the SPXU trade. The original stop was 39.30, but the new stop is....(wait for it.....)

SPXU Stop Adjustment

Modify the GTC sell stop on the current SPXU trade so that it is now 40.34.


The next open gap support below current levels is at about 105.80 on SPY which is a little less than 2% below current levels. The next open gap support below that is at 104.00ish. Those may be levels to take partial profits if the market continues down further. I will just adjust the stop level down until there is a compelling reason to exit the trade. For various reasons, I think there could be a very sharp and large decline within the next several weeks, so I may err on the side of allowing the trade to continue running if it starts off well. I will try to get the stop to breakeven as soon as is reasonable though.

Some Fibonacci Ratios to Consider

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The chart directly above is the S&P 500 cash ($SPX). Most of the notes on the chart I have mentioned at some point in prior posts, but I thought I'd bring them all together.

The most important thing I wanted to point out is that the advance from the July lows to today is an almost perfect golden ratio relative to the March to June advance. For those who don't track Fibonacci relationships much or have never seen them "work" this won't mean anything. I have looked at so many charts and seen so many "harmonic" relationships in corrections, that I have no doubt what so ever that these ratios show up in various ways in stock prices. The especially interesting thing here is that the perfect 0.618 relationship of the March-June advance projected up from the July low, almost pinpoints the top of the gap down on 10/6/08. It is at times amazing how the relative sizes of various moves relate to create Fibonacci relationships between key psychological points in the market. Even more amazing is that a basically exact 161.8% (inverse of 0.618) extension of the January closing high to the March closing low coincides exactly at the level of that gap down as well (see chart below).

This really struck home this February when I saw a somewhat similar thing occur. Without going into the details, there were gaps in the decline last November that were at precise locations dividing the decline into Fibonacci based sections. Then the exact middle of that leg down became the apex of a contracting type pattern at 875.75ish on the S&P. I was then able to use the projection of the % decline of that November leg down, down from the apex in conjunction with another specific type of harmonic pattern to project 650-670 as the next likely bottoming range for the S&P. It bottomed at 666 and I posted a blog trade on the day of the low. The point of this is that when these things start to come together, it is possible to go on trading runs like shooting fish in a barrel, which was basically how it went from January through March of this year.

So, this all could be a waste of time and the market could go up forever or just make a muck out of anything I've talked about, but the Fibonacci ratios relative to the position of the gap are a fact regardless of what happens here, because it is all based on past price data. There is also an interesting breakdown of the July-present advance if a top happens here. I have basically put the info on the chart, but won't go into much on that, because I am just speculating on a top here.

In any case, I feel that the market is talking Fibonacci language and I'm listening.

Click on Chart to Enlarge

Bearish Reversal at Resistance

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The chart above is SPY. It shows a pink horizontal line at the gap down from Oct 6 last year. That gap was never filled as the market crashed down and is only now recovering to those levels. However, there has been resistance over the last several sessions anytime price has tried to move into or above that window.

Today saw a move to new rally highs, followed by a wicked reversal in the last hour. On a short-term basis this makes the decline today larger and way more explosive than any since the beginning of the month, and so likely spells a short-term high. Again, on an intermediate term basis the trend is up, and the real nail in the coffin will only be a larger and faster decline than any since the March lows. Divergences have been growing the last couple months, so it would not be surprising to any technical analyst for the market to top around these levels.

I may get around to putting a video showing a bunch of charts as I like to do when I feel there are way too many charts to even think about putting in a post, and the market is showing signals of significant trend changes. As a short note, small option traders made a huge jump in bullish transactions relative to bearish ones last week, despite a relatively mild gain. Equity survey bullishness jumped dramatically in the AAII and the Consensus Inc surveys. The big four surveys are showing historically high bullish opinion collectively. Rydex traders have shown the tendency to buy the dips over the last week or so, which typically happens in clusters as a run up is topping. Also the equity put/call ratio has hit very low (too bullish) levels several times in the last week or so causing the short-term average to deviate significantly away from the intermediate term average which also typically happens at important highs.

This morning Sentimentrader.com discussed signs of a buying climax this week. We'll have to see how the week closes, but this would be the reverse concept of capitulation bottoms. In climax buying you see many stocks make new 52 week highs, but then reverse to close the week below the prior week's close. Today's bearish reversal after pushing to new highs certainly increases the likelihood of the climax scenario.

Click on Chart to Enlarge

This chart is the Nasdaq Composite. It made a classic shooting star at horizontal resistance today after pushing to new highs in the morning. There was a news influence due to the Beige Book report, but a candlestick is a candlestick. The other indexes didn't show really classic candles today, but the Russell 2000 made a bearish engulfing yesterday. While I don't have stats for anyone on this, today felt like a meaningful reversal to me, partly due to the fact of the wider range and volatility compared to the recent 2 and a half week stretch.

Bottom line is that a stop can clearly be placed above today's highs if shorting the indexes and there is a reasonable chance of reward of 2 or 3 times the risk even if only a similar 1-2 week pullback occurs from here. If it is something bigger, then the reward could be enormous compared to the risk of getting stopped out. While I didn't show it on the charts, there is only minor support below here in the form of common gaps until the lows earlier this month. So typically from a charting perspective you would see the market pull back and test those unfilled gap ups. Then wait to see if there is any legit bullish reversal at or above the next major support before considering a long side entry again (I'll call 1020 the next major support on the S&P 500- that's about 6% below current levels).

New SPXU Trade

No time for details other than what appears very likely to be a shooting star or northern doji today.

New Blog Trade:

Buy SPXU with a market order today before the close or tomorrow at the open. Current price is 40.80. Place a GTC sell stop at 39.30 immediately after entry. As always, use the money money management guidelines if you need to figure position size out.

Just a Heads Up

I am just putting this post out as a heads up for a possible new trade this afternoon. However, I will probably not post until the last half hour even if I do put in a new trade. The reason being is that today looks like it could form a bearish engulfing pattern on SPY and several sector ETF's, but the battle is won or lost at the close, so I want to wait as long as possible to have the best idea of whether it will close weak or not.

This is right at the fill of the gap/window from the large gap down from Oct 6 last year on SPY. Looking at the different indexes (S&P, Dow, Russell, Nasdaq) there are several charting reasons between them to act on any reversal candlestick. Also, the US dollar may be forming a bottom reversal candlestick as well.

Stop Outs

I was out of town the second half of the week last week. EUO and SPXU both got stopped out as per the posted stops.

There was a noticeable jump in optimistic sentiment last week. Surveys are quite bullish across the board. Options activity got very bullish as well from both large and small traders. Today, the OEX put/call ratio spiked up pretty high again at 1.88. So it looks like the current 2 week run is running out of steam. Basically, I'm still waiting to see if this breakout holds before considering a bullish short-term trade. If there is a classic bearish candlestick pattern this week at any time, I will still definitely attempt a new intermediate term bearish trade.

Also, I may go into more detail on this later, but for those who have stocks and long term stock investments that you are going to hold no matter what, but will consider hedging in some manner, then I would be getting hedged now as most of the crash from last fall has been retraced and optimism is running high on about every front possible. I would look to March or April expirations for put options if hedging.

New SPXU Trade

No time right now for details. Follow the regular money management rules for trades with stops for this trade but go a little cautious due to the possibility of a gap taking price a bit further than the planned stop if it gets stopped out. So maybe only use 2/3 or 3/4 of the amount dictated by the stop point.

New SPXU Trade:

Buy SPXU with a market order today (Monday) before the close. Current price is 42.62 which will be blog entry price. Place a GTC sell stop at 42.00 immediately after entry.

SPXU Stopped Out - Possible Re-Entry Today

SPXU opened at 42.43 today which stopped out the trade.

As I said in the most recent post, I still want to attempt a counter trend trade if the move to/towards new highs looks weak and results in a failed breakout. Today is looking like that so far.

For those interested in any possible new trade, check back today before the close. I will try to get any trade up within the last 30 min of the day.

For clarification, this trade, as with most recent counter trend trades, are being taken on the prospect of major trend reversals and somewhat longer holding periods compared to typical past short-term blog trades.

Thank the Media for Telling Us the Dollar is Falling

I found it interesting this week that there were some news stories relating to the demise of the US dollar and a pending dollar disaster. While they all seem logical, why are the stories coming out now? While the information in the articles may be news to you and me, is it really to the global currency market? Is it unknown to the FX market that other nations would like to diversify away from the dollar, etc? Is this the first "secret cabal" meeting that has taken place discussing such options? Surely not. If it was secret why do we know about? Was it leaked? intentionally?

Or may it be that the general mood of news consumers are now prone to feast on the "reasons" why the $ is falling? After many months of a declining US dollar index, the public seems to be coming aware of the currency market. It would maybe have been helpful if these types of stories were published near the tops of the dollar's value over the last year telling us why current valuations were unjustified. But that is never when these mass media stories come out. They always seem to come out at the end of a long trend as a rationalization for why it is happening.

It is also interesting to me, that while the dollar has been falling, its rate of decline has been easing for several months. Why don't we see the rationale come out when prices are falling quickly in the early or middle stages of a trend? It is one of those funny things that happen when human behavior and finance mix. And it always seems the same.

My take on this is that these types of stories are indicative of how aged this dollar down trend is in people's minds any how. It will not surprise me in the least to see the US$ index stage a sizable rebound very soon, despite the secret cabals.

On a blog trading note, both SPXU and EUO are relatively close to the stop levels. It would not be surprising to see those hit early next week with at least marginal new highs in stocks and lows on the dollar. I will still be interested in taking counter trend positions in both those markets if the move to new extremes quickly closes back into the current range. If stocks break out and hold at new highs for several days and seem to find support at those levels, I actually will be thinking more bullish for the next several weeks due to the "vacuum" up to near 1200 on the S&P.

Failed Breakout at Minor Swing High Yesterday

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I just wanted to show the technical set-up today because it is a nice one for a short-term bearish trade. The 3 period RSI is a little overbought and the market failed to close above the minor swing high from late Sept.

All in all, it seems most likely that there will be limited if any upside short-term before a pullback for a few days. However, out of many sentiment indicators I follow, the short-term signals are more balanced than anything. So all I really have to go by is the technical set-up which is an intermediate uptrend, but one that may be weakening at least short-term.

Low Equity Put/Call Ratio Today - Has Meant Trouble Before

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The equity put to call ratio came in today at 0.47. This makes 4 instances in the last 2 months that it has been less than 0.50, with no occurrences since the March lows other than those 4. The other times are shown above on the chart by the vertical blue lines. What has been typical has been for modest gains or consolidation for a few days followed by short pullbacks to support areas like the most recent unfilled gap up or last swing low prior to the low reading.

The last instances of such low readings prior to these were in the last stages of the bull market basically. The last two were a few days prior to the July 2007 highs and a few days before Christmas 2007. Both made small gains for a few days followed by severe declines.

The interesting thing here is that most of these readings occurred as a rally was making fresh highs. This time the market is below recent highs. My take is that this would be negative for the market even more than the last few readings. Anyway, this reading makes me feel more confident about the current SPXU trade. Also, I think it is quite reasonable that if the general pattern is followed again, that the S&P will push to new lows below 1020 from Friday.

If you didn't get filled on the SPXU trade today, then I would suggest placing either a market order for tomorrow morning or you can use the same limit order of 44.50 and same stop of 42.50 (but may not get filled).

S&P 500 Update and Trade Set-Up for SPXU

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The chart above was made last night and does not include today's gains in the indexes. However, today's gains fit right in with the scenario on the chart comparing the current environment to that of late June. Most of the notes are on the chart and builds on my last update with a slight modification. The lack of explosiveness on the downside move does not suggest to me that the pattern forming is complete, though it may have made its highest price level.

What I think the most likely thing happening here is a contracting pattern, but it will probably not be interpreted that way by most people. The main logic is that in the labeling I have above, the "c" wave is shorter than the "a" wave. In that case, the only standard wave pattern to form would be a triangle with an "e" wave that is shorter than "c". While there is one other possibility that I think is reasonable, the most sensible to me would be that we are in a "d" wave to be followed by a bounce for wave "e". The odd thing is that the "b" wave is so small, that the "d" wave should be expected to alternate by being larger and taking longer. Because of that, I would expect this current advance to be sold and move to fresh lows in the next couple weeks. While trying to look any further than that is probably dangerous, right now things make enough sense to me to trade against this short-term rally with a stop corresponding to the highs at 1080 on the S&P.

New Trade Orders:

Place a day only limit order to buy SPXU at 44.50. Use 42.50 as a GTC stop immediately after entry and for determining position size. Please use the money management post for trades with stops if there is any question on position size.

OEX Put/Call Ratio Chart

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A reader had asked about where to find the OEX put/call ratio which I mentioned in a recent post. Each day you can find the data on CBOE.com under Daily Statistics for OEX (S&P 100) options. I typically just get the data from Sentimentrader.com which posts it in graphical form.

The image above is from Sentimentrader.com showing one of the ways they track the OEX put/call ratio. This chart is the daily raw data with standard deviation band around it to help filter out statistically meaningful data points. The highest spike on the chart just recently was the one I pointed out the other day.

While there is nothing necessarily magic, you can see that the very high spikes tend to occur at price peaks of some degree. Also, clusters of spikes tend to occur near intermediate term/multi week price peaks. To remove the "noise" they also post a chart with 5, 10, and 21 day moving averages. Also, they post a chart comparing the difference between the equity put/call ratio and the OEX ratio with the idea that a large spread between the values will occur at major inflections.

I tend to find the data more useful for market direction at market tops (OEX p/c spikes) probably due to the use of the options by smart traders to hedge in anticipation of price declines. The raw daily data doesn't seem to me to be as predictive for significant bottoms, but there are plenty of other data that meet that need.

S&P Analysis & Cancel the SSO Buy Stop Order

Click on the Chart to Enlarge

Just for clarification.....

The buy stop was not hit from the prior post. I am not suggesting carrying this over to tomorrow. Bears are clearly in control short-term based on today's candlestick. I will have to see some stabilization/divergences start to show up before considering a bullish trade. From the charts, there is not really any new support until about 100.00 on SPY. I will either need to see further declines down to support to go bullish short-term, or see a bounce to go bearish.

The chart above shows what I think is a reasonable expectation (in pink)for the next 2 weeks. The main notes are on the chart. As frequent readers may recognize from past posts, I always look to the first support (beginning of the last "wave" up) once a top has been made.

Does the market retrace to that level explosively or lethargically? If explosively (decline takes less time than the advance) then you are often witnessing a significant trend change.

Also, very often the market will provide a nice short-term trade entry as the first support is breached. That is often true even if the market moves to lower lows later.

If the market continues to decline, that will likely be coincident with some gains in the US dollar which will boost the EUO position.

While it is contrary to my trading style to be get more bearish as prices fall, there are times when markets breakout or breakdown where that is justified. After looking at many charts of select stocks and some other asset classes, today seems like a real breakdown to me. If so, I wouldn't expect a strong rally attempt until the green box noted above in the chart.

Possible SSO Trade

The short-term picture in the S&P 500 right now is basically oversold. And this is occurring in the range of chart based support 103-104 on SPY. Price has stabilized a bit this afternoon and may be forming a short-term head and shoulders bottom (5 min chart).

Because the opportunity for a low risk entry is present, I am going to post a buy stop order for a new trade on SSO. A buy stop order will not be filled unless price rises to the specified level. So, I am not suggesting entering this with a market order.

New Trade Order:

Place a "day only" buy stop order to buy SSO at 33.29. If filled, place a sell stop immediately at 32.83.


This is one of those trades that if filled will lead to a quick profit or a quick stop out. The risk vs. reward is solid if the market maintains its uptrend from here. If not, the loss will be minimal. Use "trades with stops" for calculating positions size.

Maintain the open EUO trade as EUO and SSO are inversely correlated and EUO is potentially a longer time frame trade.

Watching Some Trendlines (S&P and LQD)

This chart is the S&P 500. The base trendline from the low in March to the July lows is being tested today. Barring a significant late day rally today, the close will be below the trendline. I do view this as important to watch and have highlighted it many times in posts.

This chart is LQD which is an ETF of high quality corporate bonds. It has trended tightly since the March low following the 20 day up. This could be used as a psychological benchmark regarding market opinion and confidence in corporate debt. Notice the large bearish candle today taking price well below the moving average and the base trendline since March. I view this as an important signal in terms of risk appetite. With the dollar strengthening and some trendline red flags in stocks and corporate bonds, it seems like signs of a shift toward risk aversion.

Also, the 21 and 34 day equity put/call moving averages have both turned back up as of yesterday. This shows a potential inflection in dumb money fear. As prices fall the fear starts to increase and the equity put/call averages rise.