Some More Intermediate Term Red Flags

The Investor Intelligence (investment advisors)bearish % stands at about 15%. This is the lowest bearish % reading since early 1987. That doesn't in and of itself mean the market will fall apart, but realize that this rally since March has gotten very mature and shifted opinion back to historic extremes of optimism and speculation by some measures.

The AAII (American Assoc. Individual Investors) showed a large jump in bullish % and a large drop in bearish % this week. It puts the bearish % at about a 3 year low and more than 2 standard deviations away from the 1 year mean. So this again shows that the shift in opinion about the markets has come nearly full circle since March.

The last couple weeks the total ratio of bullish opening transactions to bearish opening transactions in the options market has reached a point higher than any since early in 2000. This shows that bullish speculation (or possibly smart $ hedging) is historically high in the options market.

Also, NYSE short interest has remained very low at around 3% since late 2008 but has dropped off a bit further to 2.8 as of the this month. Again, the low short interest % shows that there is not much fuel for short covering and certainly not excessive bearish bets on downside in the underlying issues.

These are all longer time frame (several months or more) indications, so when I look at them together, I believe that winds of change are coming at least for a sharp correction in the coming month or 2.

On the flip side long term cash data remains a bit mixed and most large scale economic opinion surveys remain low which may be a contrary indication. I will note that those types of surveys have tended to rebound in optimism much more after prior historical recessions. So how that factors into what the markets will do I'm not sure. My take is that things are not significantly better (and almost certainly worse) in an economic sense than they were a year ago.

That whole analysis is not something I have much leg to stand on though. I will say that the main measure I have been following on a fundamental basis is the debt/GDP ratio and the total credit outstanding (large scale view of money supply). This year, after decades of credit expansion, the credit volume has started to turn down. Of course I can't know when it will end, but view this as the main economic phenomenon of importance.

An Aside

True Intent of Health Care Reform

I typically don't get into much outside the market in this blog, but I thought I'd pass the above link on. Unfortunately I don't have anything to offer regarding this issue, but it is my general belief that the less we know, the more we will be taken advantage of and the less collective will there will be to resist what we find to be "wrong" for lack of a better word. So I just offer this as food for thought.

The above article is a reasonable example of the Dialectic process in action - directed fostering of opposing extremes (thesis vs. antithesis) followed by inducing conflict between extremes with the end goal of creating a new middle ground (synthesis).

New SDS Trade - Short Term

Click on Chart to Enlarge

60 min stochastics is coming down off a bearish divergence with price.

Click on Chart to Enlarge

NYSE TICK showing a bearish divergence today indicating potential waning in the bullishness of large scale program trading.

Click on Chart to Enlarge

The S&P 500 cash and the Nasdaq Composite (COMPQ) formed nice doji's today at the upper bollinger bands. I have not shown the bollinger bands here, but one thing of note is that while the S&P is at new rally highs the upper bollinger band is not. This is a type of divergence that shows up some times at turns. Of course if the move up continues, then that band will probably move to new highs soon.

Mean reversion models that I follow were very overbought last week, but there was no sign of loss in momentum until today. There are a plethora of intermediate term red flags going up as well, and the overall picture is similar (or more excessive optimism) than all the prior substantial pullbacks during this rally.


New Blog Trade:

Buy SDS tomorrow/Tuesday with a limit order of 34.50. I am not posting a stop on this initially.

Cancel the TBT Trade Order For Now

Earlier today I had posted a limit order to buy TBT, an inverse Treasury Bond ETF. This was based off of analysis posted previously. However, today's session gives me pause enough to pull the orders for now, but no significant change in the larger outlook.

The chart above shows that the yield on the 30 year Treasury Bond broke above the neck line of the reverse head and shoulders pattern. However, today a nice looking doji formed and the daily RSI is oversold. Signals are mixed in that the ADX/DMI just signaled a new downtrend as the ADX rose above 20. So at this point I am expecting a bounce in bond prices before any potential trade.

There is also more to this whole issue that I haven't got into. But in brief, bonds prices have moved inversely to stock prices for the last few years. However, in recent months that correlation has started to wane significantly. At this point though, there is still a general inverse movement. On a longer-term basis, I think it is most likely for both stocks and bonds to turn down. That would probably confound many people. Also, it would likely be interpreted initially that the market fears inflation due to the demand for higher yields. But a study of the scarce historic deflationary periods would suggest that it is more likely fear of default of the underlying debt. In this case most likely foreign governments beginning to unload long term US bonds onto the open market while prices are still modestly high.

If that were to occur I can only presume it will build into a selling panic which will spike yields (hammer down bond prices) substantially. For those looking for income investing, there may be a good opportunity to purchase bonds at higher yields, but of course you need to make your own judgement on the prospects of our government defaulting on its debt given the mounting deficits and all that.

So for now the bond market is the main one I am looking at for a possible trade.

New Guidelines

With the new layout for the blog I am suggesting to basically look at the account as divided into 4 equal parts.

-25% will be devoted to each intermediate term stock index trade.
-25% will be devoted to each short-term stock index trade.
-25% will be devoted to any other market that may be tradable.
-25% will be in cash at all times.

In general the intermediate-term trades will be either 1x or 2x ETF's meaning they will have equal or double the volatility of the market in general.

The short-term trades will generally be 2x ETF's but occasionally may be a 3x ETF. This decision will take into account the current market volatility, among other considerations.

The other markets that I follow in depth are gold, oil, the Euro/USD currency pair, and Treasury bonds, and grains. So there may not always be a trade suggested here, but when opportunities arise, this will be how to take advantage of them.

My goal is to suggest long-only trades. So that means that I will typically suggest an inverse ETF rather than shorting the standard ETF. However, if there is a good reason I may suggest shorting at times. If that does not work for you, then just pass on those trades.

Most short-term trades will not have a suggested stop loss, because as I've said many times, this hurts the long-term performance of the trading strategy I employ for these. The intermediate term trades will typically have a stop loss. So the initial stop and subsequent modifications will be posted in the upper right hand portion of the blog homepage.

New Blog Trading Layout

As I start typing this I am not sure what all I want/need to get into. But in the spirit of New Year's resolutions and all, I have decided to make some changes with the organization and layout of the blog that I considered doing in some fashion before, but never did. These are things that I believe will help to improve the blog overall and take advantage of more opportunities.

Blog trades have typically been short-term in nature (about 5 days hold), however, the market dynamics began changing significantly this spring as volatility continually pushed lower and the market began to trend more so than mean revert. Markets are designed to go up, and in downtrends price movement is typically volatile and not trendy. However, in major uptrends price trends more, is less volatile, and it makes more sense to hold for longer periods in the direction of the trend. But as the market pushes higher (and has been for several months) it is my perspective that the downside risk is becoming very substantial relative to upside potential. This has made me shift my trading time frame a bit in really only looking to "top pick" a major reversal.

Tops are hard to pick. They are lazy and round. Bottoms are much different, with climactic spikes and sharp "V" rebounds. So this spring as the market began to maintain upward momentum despite sentiment conditions that would have marked tops in the prior downtrend, I began to feel that focusing only on one time frame (short-term) was not ideal, but I never made a major change in blog organization to really clearly communicate this and better take advantage of it. So for the last 4 months I really have been in the situation of trying to top pick and not post trades taking advantage of the still prevailing uptrend. In retrospect, I have managed to get us in inverse trades right near every short-term top, they have all eventually given way to new highs and resulted in several stop outs.

So to cut to the chase, I am going to change the format to include both an intermediate term time frame trading section on stock indexes in addition to the short term trades that this blog was really built around. Also, I will include a section aimed at trading other asset classes. I can think of several times this year that I saw a very good opportunity in something like gold, oil, US dollar, or treasury bonds, but did not post a trade on it because it was not part of the modus operandi. In this new format I believe it will be possible to post a trade based off of an intermediate term outlook (say the market is topping) and maintain that trade, but continue to buy dips in the uptrend as long as conditions look OK, all with everybody understanding what is going on and not feel like all their eggs are in one basket, particularly if they disagree with my perspective.

With this new layout, I will not be posting stops nearly as often, but getting back to exiting purely off of indicators and controlling risk via % allocation to the trade and the leverage of the fund/ETF used in the trade.

I will go into specifics in the next post on the new layout. As a general rule though, you never want to risk more than about 2% of your account value of a given trade. Risk even less if your account is substantial like $20,000 or more, and aim to keep risk at about 0.5% if your account is upwards of $100,000. If your account is smaller then you could risk a little more per trade but not too much. Also, in that case, I would focus on the intermediate term trades until your account is larger (especially if you pay more than a couple dollars in commission per trade).

Also there is a new trade listed on the blog site right now, but I haven't had the time to post the details. So until, I get more time to post, you may want to check the blog website.

Probable Trade Christmas Eve

Based on the market indicators from Sentimentrader.com, sentiment made a dramatic bullish jump today. The trade set-up from today did not materialize, but I will probably be posting a new trade tomorrow at some point.

If there is indicated a sizeable gap up, then I will probably suggest a trade on the open. If not, I may wait until the middle of the day, but I think action needs to be taken pretty soon here.

On this trade I will probably not suggest a stop loss, so review the basic money management for trades without stop losses. Also please keep in mind that those suggestions were all based on using 2x ETF's, but recently I have been suggesting the 3x due primarily an expected sharp and large move down. So if the trade is on SPXU then please adjust those suggestions down by 1/3, and of course err on the side of being conservative.

Heads Up on Possible Trade

I'm just making a heads up post here because I may post a trade at any time today. I was wanting to see a gap up and then sell off for a possible new trade entry, and we got a modest gap today and are selling off modestly now. Volume will probably be lackluster due to Holiday trade, but there may be enough to make a decent reversal.

The only thing I haven't decided is whether I will post a recommended stop on this one. If I don't, then expect to take an approximate 25-33% short weighting relative to account value. So for example you could put 25% of the account into SH or short SPY. But if the trade is on SPXU which is 3 times as volatile, then you would need to bump that down to 8-10% of account value.

For those who do their own trading, but just use the blog for analysis purposes, then I would use a basic 60 minute chart with a MACD and go short/inverse if there is a bearish cross. Then the stop would go above the day's high. You may want to give a cushion of about 1% above the days high as well.

A few chart will follow.

Position Trade Ideas

Hopefully everyone is gearing down for a good Holiday. And hopefully some more success on blog trades will be in the near future.

The short-term trading environment has been more difficult from my perspective during this recent tight range. It would not be too bad if going very short-term, but I don't think that is a very good approach for this blog.

So a few markets/funds I'm looking at for some longer holds are.......

-EUO in the event of a nice looking pullback
-TBT (inverse bond fund to benefit from rising Treasury yields)
-GRU or DBA, GRU is a grain ETF heavily weighted to wheat and DBA is a corn, wheat, soybeans, and sugar ETF. Wheat is really what I'm after though.
-still keeping open for any good entry on a stock index ETF, but with a multi week or month hold

I don't know that I will post any new blog prior to Christmas, but I may get a post out here or there.

An Inference on Interest Rates and Bonds; Euro/Dollar Analysis

I am going to briefly go into some intermarket relationships on bonds, stocks, and interest rates here. This may turn into an actionable trade soon, but it also may be important to consider for those with variable rate mortgages or significant treasury bond investments.

The chart below shows the yield on the Ten Year Treasury Note. As demand for government debt falls so will the price paid for the notes. This means that the note will have a higher yield because of the lower price paid by the investor. Conceptually the investor is demanding a higher rate of return because of higher perceived risk or because of other factors. In this case the investment is in government debt, and so the fear would be that the government cannot meet its debt obligation. Yields often peak in inflationary environments as debt investors (bond buyers) demand to keep up with the rate of inflation.

Typically people view stocks and interest rates as advancing together which means that stocks will move contra cyclically to bond prices. That has historically been most common. However, in the Great Depression in our country and in other comparable economic situations, there came a time when both stock and bond prices declined in tandem. In that case the fear of default as well as forced redemption for income, drove prices of bonds way down which sent yields sky-rocketing.

Now there are various classes and grades of bond quality with government bonds (Treasuries) typically considered the most safe with the least risk of default. So theoretically if demand were to drop off for treasuries (which it has been drastically from foreign debt buyers) that would put pressure on bond prices and drive up yields. If there came a legitimate panic or fear of default on government debt, that would really wipe out demand for Treasuries and drive yields up.

I am bring in this up because of the obvious fundamental concern in the Treasury market right now. The government is piling up debt obligations. Foreign demand for Treasuries has been down hard for a while now, but the Fed as our Central Bank ends up being forced to buy all the bonds and take it on its balance sheet. In turn they have returned the favor by instituting programs and policies that devalue our currency. But it is a fine line to walk, and there is a free market in bonds outside the Fed.

Click on Chart to Enlarge

So here we see on this chart of the Ten Year Note that yields dropped dramatically last fall. That means demand for Treasuries was very high, a so called flight to quality. Since then yields have been rising and the chart formation is looking like a possible inverse head and shoulders pattern, though not confirmed with a breakout of the neckline yet. If this pattern were to confirm it would suggest yields rising up to the 6% area by standard measurement. That would mean a somewhat dramatic drop off in demand for US debt.

Also in support of higher yields are the weekly MACD chart showing a bullish cross at a higher low last week. And the wave pattern is such that there have been 2 strong/fast moves up off the lows followed by shallower slower corrections. The first and second correction have significant alternation in price and time. If the above expanding pattern were forming, it suggests a dramatic increase in yields coming. The wave pattern would also be consistent with the larger chart formation.

Now I am not so much making a prediction here, but more of an observation and inference about the psychology that would accompany the price movement. The psychology would be a decreased confidence in US government debt. The result would be higher interest rates and falling bond prices. This would likely drive mortgage rates up substantially and create further havoc in the housing market. If the move up is so sharp and large as projected above, then there will probably be some serious issues in lesser quality debt.

So the consideration would be whether one should get locked into a fixed mortgage rate and reduce bond investments in favor of cash.

Click on Chart to Enlarge

Now to change gears. The chart above is from FXCM forex brokerage and shows the long and short positioning of their clientele in the Euro/Dollar pair. They are a retail/non-bank brokerage, and thus heavily one sided positioning should be expected to be a contrary indicator. The chart above shows that during almost the entirety of the March to Dec Euro rally, there clientele was net short the Euro and often heavily so. So they were wrong the entire way up. Now we have seen a dramatic decline in the Euro, and suddenly there is a sustained shift to net long the Euro. This is the kind of signal that accompanies a major trend change. It really is amazing when you think about it.

Anyway, this indicates a larger trend shift and to expect a stronger dollar and weaker Euro ahead.

Click on Chart to Enlarge

On a shorter term note though, the FXE Euro ETF showed a doji on the fill of a major gap on the chart. Additionally the daily RSI became oversold. This would argue for a bounce or consolidation before the Euro moves lower. Due to the intermarket correlation, that would be a boost for stocks, but that correlation is starting to break a little, and with light Holiday trading moves may be muted.

So my perspective is that if you are long the US dollar (UUP, EUO, etc) then there are probably substantial gains ahead, but expect a pause in the momentum. Interestingly, wheat and natural gas prices have been correlating mostly positive with the dollar whereas commodities in general move inversely to the dollar. That may be an interesting dynamic of the underlying carry trade on the dollar in that the borrowed dollars may have been used to short wheat and natural gas which were in major bear markets until recent months. So the unwind in the carry trade may be rippling down to those markets. That is somewhat speculative, but the correlations fit, and would argue favoring those commodities relative to others if the dollar continues its rise.

Loads of Charts

I am posting several more charts today than normal. Hopefully they are helpful in focusing on what to look for in the coming days and weeks from a technical perspective.

Click on Chart to Enlarge

Above is the S&P 500 ETF, SPY. From a historical perspective this 2 legged advance (a leg being defined as complete when the market fails to make a new high within a calendar month) is one of the largest % gains ever and is mature from a time standpoint as well. So on that basis, expect this market to be topping soon. The bigger question is whether this will be a major high, or just an intermediate top which gives way to new market highs. From looking at charts of stocks commodities and interest rates, I would think that if this is not a major high, then the next leg up will be a major inflationary move. Because of that I will be tracking gold, grain, energy, and inverse bond (long interest rate) ETFs as any pullback develops, because that would be they way to play the next move. From a historical perspective expect any coming correction to be 10-15% and possibly sharp (possible bottom in late January or early Feb). Hopefully the size and speed of the decline will give good info on whether it is a major top or just an intermediate top.

Click on Chart to Enlarge

This chart is a daily chart of SPY. The market has been consistently cycling around options expiration ever since the March bottom. Pullbacks have been frequent in the 2 weeks following OpEx. This past Friday was expiration Friday, so that puts us in the window for a pullback. However, there are generally positive currents in this time frame seasonally, so I'm not sure what to expect on that basis.

Click on Chart to Enlarge

This chart is the XLP consumer staple ETF. This is a nice example on a weekly time frame of a bearish engulfing pattern with range (high to low) expansion. Price is under resistance, and the MACD is close to making a bearish cross. This ETF has been so steady that if this is topping, I would think that it implies significant market weakness ahead, but that is somewhat speculative.

On a daily time frame XLP is showing a great example of what I would like to see on SPY to confirm a downside break. Notice the bollinger bands were narrow the last couple weeks and then price made a close below the lower bollinger bands as they expanded. That was followed by a second close below the bands. This type of bollinger band configuration is typical of a volatility breakout and will often lead to sharp moves down.

Click on Chart to Enlarge

This chart is the Retail Holders ETF, RTH. Again this is a nice example of a bearish engulfing candlestick with range expansion on a weekly time frame. The MACD is also very close to crossing down. So the XLP and RTH ETF's are suggesting downside ahead, so that may be a clue to what the broad market will do.

Click on Chart to Enlarge

This chart is the Dow ETF, DIA. Last week the weekly RSI became overbought for the first time since late in the last bull market. The MACD is very stretched/overbought and could cross down in a week or two. However, there is no divergence which tends to be the most reliable topping signal. This week formed a bearish engulfing pattern which is a top reversal pattern, however the range was small and so does not look too imposing. So the two most likely things here are a major top now or a pullback for a few weeks followed by another move to new highs that forms a bearish divergence on the MACD and a major top then.

Click on Chart to Enlarge

This is a daily chart of the Nasdaq 100 ETF, QQQQ. Technically it looks divergent and maybe topping on that basis. However, it also is forming a classic ascending triangle which statistically is more likely to break to the upside. However, I would certainly wait for an upside break if considering a bullish trade on this. The pink dashed line on the chart would be like a failed pattern point of recognition. If price falls below there, then expect a significant decline back toward or below the Nov lows. So this looks bullish, but is not confirmed yet.

As a brief aside the dollar index made a doji on Friday and may be due for a pullback. I will go into more detail on this in next post. It really does look like a new uptrend even on the weekly chart of the Dollar Index, so I can't really suggest selling if you are in a dollar bull fund, but expect at least a brief consolidation for a week or two.

More Detail on the S&P 500

Click on Chart to Enlarge

This chart is basically an updated version of one I've shown a few times recently. I've added a little time price comparison analysis looking at what I have labeled as waves "a" and "g" up since July. As of now, from high to low "g" is exactly 50% of "a" and they are exactly the same time from low to high. So that's not too exciting I guess, but the more you see harmonic relationships in markets the more it seems akin to our species spider's web.

On a shorter term time frame, the wave "g" also looks to be at or almost at maximum complexity and may be finished. A close below the low of the recent range (say 1084) would be a good sign that a larger correction is unfolding. And a retracement of wave g in less time than it took to form, likely means that a very large degree correction has begun.

Click on Chart to Enlarge

Now this chart is the Euro/US Dollar again. The reason I'm showing it here is because this is the type of move that you see at major trend changes (it looks kind of like the upside down version of the advance off the March lows in the Euro). I have said several times that when this upward phase in stocks ends, I expect the last several months of price gains to be lost in a just a few weeks. Notice that the Euro lost all the gains since August in the last 2 weeks. This is why I have been so persistent in trying to catch a potential top in stocks and why I have been trying it with the 3x leveraged fund. I expect stocks to follow suit at some point and drop a quick 10% or so (back to August highs or lower), which would be 30+% in SPXU assuming entering around current levels. And that initial 10% may be only the first part of a significantly larger decline over the next few months.

On a very short-term time frame the market is nearly oversold. Watching how it responds to any oversold conditions is one clue in determining whether the decline will continue on or not. Typically at intermediate time frame tops, the market persists in declining a bit despite short-term oversold readings. This has been the case in gold and the Euro of late. I'll be watching for it in stocks as well. In a recent post I said

"The Euro is coming down off a strongly technical divergent new high and is at moving average support now. Continuation of the move down, especially with an acceleration, likely means a larger trend change (up US dollar, down Euro) for a period of months or more."

I have said that before about stocks as well. The difference is that stocks never showed an acceleration down after becoming oversold. But looking at the Euro above, you see it has and should be a sign of a very significant top.

For those that got stopped out on the recent SPXU trade, you may want to get back in now with a stop at 36.00. Also, you could look at buying SH which is an unleveraged 1x inverse to the S&P or also to shorting SPY if you can get the shares. Either way, I will get us back in to take advantage of the move, but I'm just saying this because if you imagine yourself in the position of not getting in near the highs, then look at the Euro chart above or a chart of gold, you can see that there often is not an ideal bounce to get short/inverse on, just minor pushes up which get hammered. So I prefer to keep firing away near the highs with relatively small risk of account value per trade when using stops. For those that are still in SPXU, I'd keep the stop at 36.00 GTC. I will update as appropriate for those still holding.

The market does not make it easy to get in good at major reversals. The initial break of a new trend is very large and explosive. The initial explosive move often is just ending as most people realize that a new trend is beginning. After that initial move, markets then meander more slowly in opposition to the new trend. So the unfortunate situation that often happens if you don't get in near the top in this case, is by the time you are convinced a new trend has begun and you get short, the market will likely be bottoming out for several weeks and move against you for some time, and maybe force you out, only to then resume the new trend. We don't want to be those guys, so I'll stick with my guns here and view this as a trend change point and be willing to go short/inverse on a new trade even if the market is short-term oversold at that time but everything looks set on the longer time frame. I'm looking for a close below the lower bollinger band on the S&P with the bands expanding on that close. If another good opportunity comes before then I'll take it, but otherwise the next blog trade will probably be on such a break and will feel different than most other trades.

Blog Stop Hit on SPXU

The Blog stop point was hit today by a few pennies. However, some of you may have placed the stop lower or moved the stop to 36.00 as suggested if your entry price was lower. So the trade will be a stop out at 36.40 for record keeping purposes, but I will still update on the trade because I assume at least a couple people may still be holding.

I wish I had more to offer on the stock market right now, but I really don't.

Several sector ETF's made bearish candlesticks today (engulfing, doji, little shooting stars). But in looking through a bunch of charts, there were quite a number of stocks that made solid gains. With the FOMC meeting, I am less inclined to put much weight on candlesticks.

The daily technical indicators on the S&P continue to diverge and implicate weakness. But when the divergences go on and on, it can lull you to sleep. The continuing divergence shows continuing loss of upward price momentum. At some point, that is likely to lead to a sharp decline, probably sharper than normal. The weekly MACD is flattened and almost ready to cross down with any down week.

Click on Chart to Enlarge

On a qualitative level, I still think it most likely that the above 7-legged upward correction off the July lows is lazily completing. However, just from a basic price logic standpoint, the alternate scenario is that this consolidation is a middle phase which should lead to another advance on par with other recent upward legs. Watching the price and bollinger bands should identify the direction of any coming breakout/breakdown.

Bottom line: as long as there is no close above the rally highs thus far, I view this as a topping process. I will be willing to enter (short/inverse) on modest weakness in the event of a break to the downside.

Quick Update

The market is moving in what I think is a little unusual fashion. Almost everybody thinks it's going to breakout to the upside from blogs I've read, etc. I will agree that it looks more like that to me as well, due to a sideways consolidation under the recent highs. On the other hand, the subtleties of price movement seem weak in that the market has not been able to retrace the recent little decline in less time than it took to form.

There have now been 4 doji type days in a row on the SPY ETF. That also seems weird, especially in the middle of a range. There is an FOMC announcement tomorrow afternoon. The OEX put/call ratio was high today (smart traders seeing downside risk), which may be just due to the potential volatility from the FOMC tomorrow. The bollinger bands on the daily chart are squeezed very tight. It seems like the market is waiting on something pivotal to drive it one way or the other. I'm not sure what it is.

There has been a strong tendency the last few years for the market to advance on the FOMC day. Also, it has been common for a gap up on the open. Additionally, the December options expirations week has been the most consistently positive for the last few decades. On top of that, there is generally positive seasonal tendencies for the next few weeks. These factors would suggest that we may be more likely to break to the upside from the recent range.

I would like to give the maximum room on the current SPXU trade, so I will just leave the stop as is. For those who got in around 36.69, I would really consider having the stop at 36.00 to allow the market to fluctuate in the recent range and only get stopped if it makes a new high. But don't move the stop down if it increases your risk beyond the initially planned amount.

Click on Chart to Enlarge

The US dollar index has shown the type of price confirmation that typically leads to a significant trend reversal. It has completely retraced the last significant swing move down in less time than the decline took to form.

However, the stock market has not reacted much. I was expecting the inverse correlation to hold more tightly, and in retrospect, I may have decided on the wrong market to pursue for blog trades when persisting in the attempt to catch a major reversal in stocks and the dollar. However, at some point we may see a sharp move in stocks to reflect some of what is going on in this inter-market relationship.

Quick Update

The short-term S&P model is just touching overbought right now. I am feeling uncomfortable in the current trade, but I think this justifies continuing to hold objectively.

There have been so many gaps in recent weeks that there have not been much chance for these short-term overbought or oversold signals to occur (gaps don't factor into it much). And the rest of the time has been very choppy in between.

As a little side note, the QQQQ may form a bearish engulfing today if there is no further strength today in the market. That again would be support for holding the trade.

A Couple Signs We May Be On The Right Track

Click on Chart to Enlarge

The Euro has come down rather hard the past week, and has closed below the lower bollinger band as the bands are expanding following a consolidation. These signals from bollinger bands tend to be the best direction signals. So further decline in the Euro and gains in the dollar may be in store, which should help our active blog trades.

Click on Chart to Enlarge

This chart is USO the primary oil ETF. Now notice the bollinger band action here. Price consolidating and now breaking several days in a row to close below the bands. Now this won't continue forever, but as long as that lower band is pointing down, this could drop very sharply.

Since commodities are trading inversely to the dollar it may not be any further evidence by posting this chart, but realize the intermarket relationships. They are saying the same thing, and seem to be taking a break from the inflation trade.

Click on Chart to Enlarge

This chart above is GLD the main gold ETF. Price has followed through to the downside to the tune of roughly 10% in 4 days. That is bigger and more explosive a decline than any since the recent bear market in gold. I am definitely viewing this market as having made a significant top, probably even shortable at the current levels.

What's happening right now in gold reminds me of the first week or 2 after the top in oil last year. Everyone was still in bull mode and looking at the pullback as a nice dip to buy. And successful timing strategies looking at volatility, etc. seemed to be giving a buy signal. But then it didn't manage to bounce much, and just continued to slide. I think this might end up the same...with not even a real nice bounce for a while. But also realize that right now all the markets are moving in lock step or inverse. So it doesn't make a lot of sense to try to trade several major asset classes as diversification. It's all the same trade right now.

5th Failure to Hold Closing Above Oct Highs in S&P 500

On the most recent SPXU trade, the only people who told me they got in the trade either got in on Friday morning or were still in it from the prior attempt. So on a pragmatic basis, I am treating the trade as still active. The average price of those who told me they were in the trade is about 37.30. I will leave the blog entry price the same at 37.90, and have suggested using the initial stop of 36.40 at this point. Despite fear of another stop out, I think it should be in place because once either the bull or the bear tree gets completely chopped down, I think the market will move strongly the other direction. With the successive doji, bearish engulfing, and spinning top candlesticks, it looks like bears are winning, especially now that there is another close below 1100 on the S&P.

Click on Chart to Enlarge

The chart above shows the 5 closes back below the Oct high after it was exceeded last month. This choppy battle will lead to a significant directional move soon in my opinion.

Click on Chart to Enlarge

This chart is an hourly chart of SPY showing 3 little island top formations. Every time the market gets back above 1100 ( 3 sizable gap ups) it has had sizable gap downs back to the lower end (or below) of the preceding range. I can't see this type of mess lasting much longer.

Click on Chart to Enlarge

The dollar index showed a bit of follow through after managing to close 2 days in row above the 50 day MA. It made another big gain against the Euro today. Further gains in the dollar will put pressure on stocks.

Click on Chart to Enlarge

The chart from Sentimentrader.com shows that large speculators are extremely net long on commodities. The chart above weights equally to the CRB index (which is heavily weighted to energy). We see that they are almost back to the same level as at the commodity bubble peak last year. This shows excessive speculation across the commodity board.

As I said several months ago, the freebee money lent by the Fed to large institutions is not going back into economically productive loans. The Fed has been lending at 0% interest to these large banking institutions. But they then across the board raise consumer credit card rates to 29.99%. Also, while I don't have anything to post here, I don't think that business lending is all too great either. So where is the money going? Obviously into speculation on stocks and inflation sensitive issues like commodities and the US dollar carry trade.

So maybe those banks are making out on paper right now in these areas. But how much leverage are they putting up in the futures and forex market? Are they going to be out of those contracts while they are still in the green? If this gamble goes bad for banks at large and they don't get while the gettin's good.........

US Dollar, Gold, SPXU

Gold looks to have started a correction rather than a simple pullback. So expect prices to head basically lower for a month or 2. Longer term I'm not sure whether this is a major top or just the top of the first breakout move to much higher highs. Often when commodities break to new all time highs, they advance substantially and relatively quickly (say 80-100% in a year or so). This doesn't always happen, but that would be about average historically. So it will probably be several months before we could have a good idea of whether that could be playing out or not. However, the implication for the stock market intermediate term outlook is that stocks will likely pullback if gold does, as the inflationary theme is driving assets up in tandem right now.

For those who may be new to reading the blog, the point of the chart above is that typically markets move up in trends punctuated by relatively similar corrections in price and time. When you see a counter trend move that is larger (about 1.2x as large) and faster than several other corrections that already took place, it is likely that a larger degree move has begun in the counter trend direction.

The Euro is coming down off a strongly technical divergent new high and is at moving average support now. Continuation of the move down, especially with an acceleration, likely means a larger trend change (up US dollar, down Euro) for a period of months or more.

The Aussie/US dollar may be forming a head and shoulders topping pattern, but is coming down off a strong divergence at the most recent high in any case. Again it is near moving average support which should be watched. The Aussie dollar is a big beneficiary of the US dollar carry trade because the interest rate is much higher on the Aussie dollar. I've been constantly bringing up the US dollar in this blog because basically all stocks and commodities are moving inversely to the US dollar. If/when the carry trade starts to be taken off, expect it to be volatile and to drive stock and commodities down, probably sharply. My expectation based off of technical chart analysis and sentiment data is that such a move up in the USD is likely to be happening sooner rather than later. But so far there has been nothing lasting.

The US$/Yen made a big break below the lows from the recent bear market but then made a sharp reversal back above that level. Again for those that read the post on Natural Gas I made a week or two ago, remember the pattern: a long down trend that then shows the longest red candlestick of the whole move as it nears or breaks support. Expect it to be exhausting itself before reversing higher. In this case, there was a nice hammer reversal and a sharp move back up. Sentiment on the Yen is very bullish (see chart below) and smart commercial traders are as net short the Yen as they have been at any time in several years. If the USD holds above the horizontal line on the chart above, it may be a double bottom type chart pattern which could imply significant gains in the US dollar ahead.


The only comments I got on the most recent SPXU trade were people who entered and were still in the trade. So I am going to just treat the trade as still active with a stop at 36.40. The S&P 500 has been oscillating around the 1100 and change level for a while and has formed a third short-term island top with this morning's gap down. I think the break will be down from here, but most indicators are neutral.

A Look at Longer Term Cash Data

Click on Charts to Enlarge

The two charts above are from Sentimentrader.com. The top chart shows the percentage of mutual funds' assets in cash. It is back down below 4% now. That level was the lowest reached at bull market tops over the last several decades. What is also interesting is that despite one of the greatest stock bear markets in history, the cash % only jumped to 6% at the bear market lows this year when it easily surpassed 10% several times in decades past.

These types of data tend to be long term signals. A high cash percentage means that funds have lots of cash to buy assets like stocks. We are seeing the opposite of that now - historically low cash levels. Also, I wonder if the lack of a comparable spike in the cash percentage during this recent bear market isn't indicative of a lingering optimism towards stocks and solid evidence that the bear market psychology has not run its course yet. Anyway, I certainly would not consider adding or buying stocks on a long term basis right now personally.

The lower chart shows cash in retail (individuals, non-professionals) money market funds. Again cash levels will swell as individuals see risk, which usually happens near bottoms. And cash levels fall as markets rise and they see no need to leave money sitting in these accounts. Cash levels did swell to a significant high at this year's bear market lows. As a percentage of the S&P market capitalization, it hit about 15%. However, that has fallen substantially in recent months. After similar instances in the past the market was sideways for extended periods of time.

From these charts it seems most sensible to maintain a sideways to down outlook for stocks into next year at least. I think that most intermediate term sentiment data toward the market suggests the same. Technically the trend is still up and price is still above key moving averages. But it's too late to come to the party now in my opinion. There will likely be opportunity to buy at lower levels in the coming year(s).

Request - Most Recent SPXU Trade

I didn't get the post out yesterday for the new trade until about 10 or 15 min before the close, which realistically would not give most people a chance to enter unless you were able to do it immediately. Now there was a large gap up this morning that would have stopped out that trade (insert curse words here).....

As I've touched on before, gap ups on monthly jobs reports like today tend to be good contrary signals in their own right. And the market is selling off dramatically since the open and this may be the final washout before a solid move down.

So my request is please post an anonymous comment if you got in yesterday (and also whether you got stopped out this morning). Also, please post a comment if you got in this morning and are still in the trade now.

If it turns out that no one got in yesterday, then it will make sense to just manage the trade from here as if it is still active, particularly since there may be those who got in this morning.

Thanks


Pete

Bearish Engulfing/Key Reversals Today

Click on Chart to Enlarge

The major averages and most sector ETFs formed bearish engulfing patterns today. After being chopped and stopped several times in the last couple weeks, I am experiencing some emotional exhaustion in trying to play this reversal. However, looking at charts and indicators, I would say this is the best set-up out of any of the last 4 I've tried. Also, any lower close from here will be a 4th failed breakout above the Oct highs.

These choppy environments make trading with tight stops/low risk, very difficult. That is just the way it is and basically has to be that way for a market to reverse. I personally find it easier to deal with this by either not using a stop, and managing risk by devoting a certain percentage of the account (going a little more conservative than seems necessary) or fixed dollar amount to every trade or using a last ditch type of stop level so that you only get stopped if you are way off. That way you are free to exit purely off indicators and don't get whipsawed very often. There are pros and cons to both ways. The main problem with using tight stops and getting stopped out several times, is that if there is any emotional input involved in the decision making process, it is against human nature to keep "hurting" yourself or doing anything that makes you feel bad or insecure, and then you don't persist to finally catch a very large move.

Click on Chart to Enlarge

The hourly chart above shows a fresh MACD bear cross and -DI crossing above +DI in the last hour of the day. Price is just pennies above the Parabolic Stop and Reverse sell point as well. There is continuing divergence on the MACD on this time frame and without price trending up.

My sense is that this is a very significant top forming right now. However, that is a serious minority opinion. But that is fundamental to contrarian thought and investing/trading. Learn to recognize consensus thinking and then act against it at well planned times.

The size and speed of any potential decline off these levels will be the most telling aspect of what is in store on a longer term basis.

SPXU Re-entry

No time for details. This is the last try on SPXU for now.


Re-enter SPXU ASAP today. Price is 37.90. GTC sell stop at 36.40 after entry and for sizing.

SPXU Stopped Out and New SPXU Trade

The recent SPXU trade was stopped out at 37.00 yesterday, down from 40.33 at entry. In retrospect this was a poor trade, and I was aware of that risk on entering on a large gap down. The last 2-3 weeks have been very choppy with no real overbought or oversold readings from the short-term model I usually use for entries. However, yesterday and this morning did register some solid overbought readings, and thus far the move to new highs has failed and the breakout attempt was on weak volume.

If the market closes anywhere near where it is now, the indexes will form shooting star candles at resistance that effectively ran stops above the recent highs. So without knowing what is in store for the rest of the afternoon, we have an overbought situation with a potentially quality candlestick reversal pattern in the making, so I want to take another chance on this set-up and re-enter.

New SPXU Trade:

Buy SPXU today with a market order. Current price is 37.37 and is the blog entry price. Use a GTC sell stop at 36.67 immediately after entry. Use the position sizing guidelines here if necessary (as a general rule only risk 1-2% of account value per trade).