Friday, January 29, 2010

New Short-Term Trade

Click on Chart to Enlarge

The weakest of the major indexes the last couple days has been the Nasdaq. The chart above shows that there is a strong bullish divergence on the RSI and MACD on the QQQQ. It is even more pronounced but a little weird looking on the other indexes. But this continues to suggest we should see at least a brief rebound and enough to push the market to short-term overbought levels. If that occurs it may be a fantastic opportunity to reverse into a bearish trade.

New Trade:

Buy UWM with a market order today. The current price is 27.07 which will be the blog entry price. Place a GTC sell stop at 26.31 after entry.

New Trade Order

I will follow this later with charts, etc.

New Trade Order:

Place a GTC stop order to buy UNG at 9.57. If filled place a GTC sell stop at 9.20 after entry. So for clarification, the order will not trigger unless prices rises to 9.57 or above.

UNG is a natural gas ETF. This trade looks to take advantage of a new leg up in natural gas prices.

Wednesday, January 27, 2010

Bullish Divergence at Support

The chart above is an hourly chart of SPY. Some of the subtleties of the recent decline suggest to me that it may be an "impulsive" decline in Elliott Wave terms. This means it occurred in 5 waves. But more importantly it should give us some key guidelines as far as how high any subsequent rebound could go and suggests that there will indeed be more downside below today's low.

First the RSI at the bottom of the chart shows a nice bullish divergence which suggests we should see a rebound. The gray box on the chart is equal in time to the recent decline. In this case if the recent move down was a 5 wave move (1 or A) then the next wave should be less than a 61.8% retracement and should not end until it takes at least as much time as the decline took. That doesn't mean it can't go below today's low though, because in either a "running" correction or a triangle that could occur but we should expect sideways to up movement over the next week in this case.

Also, from a mean reversion standpoint, the short-term indicators I track suggest we are very likely to see a rebound imminently. Additionally, I have shown before a common pattern that after an important high is made, the market will quickly retrace the last leg up, and then typically bounce or retrace that decline by about 50%. So that is also in play here as today's low touched the late Nov low. So on that basis, a rebound here would fit that common pattern. Also, that decline was much faster (about 5 days) compared to almost 2 months for that last leg up. So this is the type of price confirmation that I have always harped on about seeing at a trend change.

Also, a couple weeks back I posted about the ascending triangle on the Nasdaq and also about what to expect after the thrust out of the triangle completes. And I noted that often you will see the market return to the breakout level of the triangle before the apex of the trendlines is reached from a time perspective. So you can see on the chart above that the move back down to the breakout came right at the apex of those trendlines.

And as absurd as it sounds (but I've said it before) whenever the top of the recent advance is in place, I think it is likely the market will retrace all the way back to/near the July lows in about 1/4 to 1/3 of the time as that advance took to form. So that would mean about 2 months or less and we could down 20% or so. So, as long as there are no new highs in the indexes, I want to maintain the intermediate term trade even on sharp rebounds as long as we see lower lows coming soon.

As some side notes, GRU was stopped out today. I will be looking at GRU, DBA, and JJG as possible retries on this trade, but if prices go much lower, then some of the rational for that trade will have waned. On another note, the US Dollar index rebounded the last couple days and closed over its 200 day moving average. This could lead to some add on buying from a technical perspective. So I will also be following it as a possible trade.

Bottom line, expect a short term rebound in stocks and considerable weakness after that.

Tuesday, January 26, 2010

Waiting for the FOMC Meeting Tomorrow - 2 Good Set-Ups

Deciding just to wait on the next overbought short-term signal or a strong bullish divergence to take a new trade. There were a lot of bullish short-term bullish signals triggered by last Friday. But the bounce on Monday was weaker than would be expected as far as breadth and advancing volume for Friday to be a lasting low. I suspect the market will hold up today and maybe/probably into tomorrow but almost certainly will become overbought at a lower high which is usually a sign that there is at least another leg down to undercut the recent low.

Also there is an FOMC announcement tomorrow. And as I always note on these, there has been a very consistent tendency for the market to gap up and typically rise prior to the announcement. But the best bet is usually to trade against any strong reaction to the news if the market becomes either short-term overbought or oversold around or after the announcement.

In this case that would be either....

1) strength today and into tomorrow giving us an overbought short-term signal to initiate a bearish trade

2) a sell off tomorrow or into Wednesday creating a nice bullish technical divergence on the hourly charts (MACD), and right in a region of prior support, giving us an oversold signal to initiate a bullish short-term trade

I'll update tomorrow.

Sunday, January 24, 2010

Weekly Divergences Suggesting a Major Trend Change is Occurring

Click on Any Chart to Enlarge

This week the major indexes formed bearish MACD crosses (the Russell 2000 didn't quite). This is coming off of a bearish divergence in the weekly MACD as well. You can see from the trendlines on the chart that weekly divergences on the MACD tend to lead to big moves - major trend changes.
This is the McClellan summation index. This is analagous to a cumulative TICK indicator. It sums the raw McClellan oscillator over some period. This is a measure of breadth. It will smooth out and highlight times when advancing issues or declining issues dominate and whether the market is making subsequent higher peaks on higher or lower peaks in breadth. The chart shows a huge bearish divergence in the summation of breadth. The angle and time frame of the divergence are consistent with past major trend changes. Several of those are highlighted on the chart.
This chart shows the % of stocks above the 150 day MA. While there is nothing magic about that average, keeps this data on a few different averages, and I am just showing this one because it is a longer term average. The point here is again to note the sharp divergence that is occurring now relative to the October highs. This means that despite the market making higher highs, fewer stocks are holding up technically on the new highs. Bottom line is that fewer stocks are making the gains, which is not sustainable. Again, this often happens at major market turns as shown on the chart.

Now this chart shows advancing volume divided by advancing issues. Whenever the ratio of the two has been very low, this has typically been at significant tops. So there is relatively less volume flowing into advancing stocks. I keep track of this ratio regularly, but I never really look at the declining volume divided by declining issues. So I did this, and the chart actually turned out very similar. Less volume flowing into declining issues at tops. So this prompted me to think that total volume was just low relative to the advancing issues. So I that is basically what I am showing in the next chart.

This chart I actually flipped the ratio (now issues/volume) because it is more visible this way. So, the first thing to note is that there seems to be a seasonal pattern to the ratio as you would expect. Total volume drops around the holidays, so particularly around Christmas/New Year's we would expect to see this ratio increase because volume drops. However, we can also see in August 2008 that the ratio spiked and this also occurred at a top prior to a large decline. And looking back at other market tops, while not as extreme, tops have tended to occur as the volume becomes relatively low in this ratio.

I do not subscribe to so I don't have access to the longer term charts. I will try to get some more background data on this to see how consistent it is in other market environments.

So the message seems clear from this and also from sentiment/contrarian data that I've shown, that this is probably a major trend change. I think it most likely this will put us in a new bear market (if we define that as a 20%+ decline prior to new highs). The bigger question I have is whether the market makes new bear lows or not.

As a side note, a volume by price chart shows that the area of heaviest volume traded beneath the market is 850-900 on the S&P. So if the market does form a major turn, a simple look at price and volume support and resistance would suggest the June 2009 high (950ish) and July 2009 low (870ish) as well as the noted volume support at 850-900 would suggest that the 850-950 broad range would be a reasonable expectation for the decline. If it gets that far, of course we'll have to reassess at that point on whether there is more in store or not.

Friday, January 22, 2010

New Intermediate Term Trade

I am posting a new intermediate-term trade here based on the weekly technicals and sentiment which I have discussed ad nauseum.

New Trade:

Buy DXD with a market order. 30.48 is blog entry price. Place a GTC sell stop at 28.00 after entry. If anyone still had a buy stop at 29.00 then that's good, you are already in and just use this post for the stop placement.

I will still be looking for a possible short term bullish trade next week if things look right. But the larger picture tells me to take this intermediate term trade.

UWM Stopped Out

For those who got in UWM already, it has hit the stop point. What we area seeing today is continued weakness where basically every other time since March that similar conditions occurred, the market rebounded immediately. So this is a clue that the correction will probably be deeper like the Oct/Nov one, or possibly even quite a bit more than that.

So for those who did not take that trade, I would not suggest taking it at this point, as the rationale for it is now fading.

Corn, Soybeans, Wheat

Click on Charts to Enlarge

The charts above (from top down) are corn, soybeans, and wheat. The GRU trade that is active right now is weighted 47% wheat, 36% corn, and 18% soybeans. What I am showing in the charts are explosive moves off of major lows, that have now come back down to the breakout area and are flushing out stops. Any reversal back above the red dashed lines would be strong evidence of a false breakdown, and indeed it was just a stop cleaner upper.

Also the markets above are basically range bound and are showing oversold oscillators, and some with modest bullish divergence. So the safest trade would be to put the stop below the major low area from Oct/Nov, but the really high reward to risk ratio will come from picking a reversal candlestick and then placing the stop right under it and then hopefully catching a nice move up.

These markets may actually be in a good long term buying position due to seasonal and long term cycles, so I will consider that in the management of this trade.

New Short-Term Trade - UWM

Click on Chart to Enlarge

The short-term models for trades are oversold and seem to be finding some buying interest. The hourly technicals are more oversold than any time since November. While I still maintain that this market is topping, this looks like a good short-term bullish opportunity. The chart above is UWM which is a Russell 2000 2x bull fund, and this will be the trading vehicle for this trade.

New Trade:

Buy UWM today with a market order. Current price is 28.75 which is the blog entry price. Place a GTC sell stop at 28.13 immediately after entry.

For detailed info to follow this weekend.

Thursday, January 21, 2010

New Trade - GRU Grain ETF

Click on Chart to Enlarge

I have posted before that I have been keeping an eye on wheat and grains. It looks like GRU which is heavily weighted toward wheat may be giving a nice short-term opportunity here.

It formed a hammer reversal yesterday with oversold technicals and reversing off of minor support. The tail on the hammer makes a clear stop point with a pretty good risk to reward ratio. The RSI(5) will be my indicator for exit.

New Trade:

Buy GRU today with a market order. Current price is 5.21. Place a GTC sell stop at 5.04 after entry.

A Brief Look at GOOG (Google)

Click on Chart to Enlarge

Google reports earnings after the close today. So I just wanted to put a little info up on GOOG because like AAPL I would think this is a sell time for GOOG. The chart above shows GOOG has formed a bearish weekly reversal candlestick at prior resistance and has closed back under that level. Also a bearish MACD weekly cross has formed, which may mean a much larger pause of this uptrend. If you pull up a daily chart, the recent decline has shown a large increase in volume. Often that is said to be bearish, but I don't know that it is really. But it does seem to me that GOOG will either be continuing to form a base or possible entering a larger decline.

Click on Chart to Enlarge

This chart shows the Put/Call open interest ratio for the next 3 months of options. This shows that the put open interest ratio has fallen sharply recently and is at a yearly low. So this may be overly optimistic here. There is a large amount of front month out of the money call open interest compared to puts, so it seems that the bet is that GOOG will move up on earnings. Don't read too much into this though.

Other relevant info is the short interest ratio (days to cover is 2.8). That is not a large amount but enough to give a little add on buying if it moves up on earnings. Over the course of weeks or months, though that is not significant short interest to fuel much buying. And it probably wouldn't really trigger a short-covering rally unless GOOG makes a new rally high.

The analysts rating GOOG a buy are 32 to 0 sell ratings. There are 5 holds. So there is not significant prospect of analysts upgrades boosting prices any time soon here.

So my take is that GOOG is overbought on a weekly time frame and it doesn't have much fuel for further forced buying from the options or short interest data. Also, technically it doesn't look like it has bottomed or consolidated on a daily time frame yet. So, I wouldn't count on GOOG taking off on this earnings period.

Exit SDS and TLT with a market order

I am going to post exits on SDS and TLT. The current price of SDS is 34.69 and TLT is at 92.10, both for modest gains (34.11 and 89.26 entries).

Seeing as I am looking for an intermediate term trade entry on the indexes, I considered "rolling" SDS over to that column, but I will leave that up to any one else on their own. A stop could go either at breakeven and hope for the best, or place it corresponding to the recent market highs.

Anyway, I will try to stay patient and see either some support broken or a bounce to a lower high, before taking a new trade.

Wednesday, January 20, 2010

Move Stop on TLT

Move GTC sell stop on TLT to 89.50 which puts the trade at a small profit. From a charting perspective the next level to watch is 92.35-92.50 where there is a window and an unfilled gap. I don't see reason to rush out of it today, so let's just move the stop up and then see what the next day or two bring.

On the stock indexes there is obviously major chop happening. It is a rangy mess. I haven't seen any solid candlestick reversal on the daily charts or weekly charts yet. No changes or new trades here at this time.

Tuesday, January 19, 2010

Follow Up on AAPL

Click on Chart to Enlarge

I thought I'd give a little more info on AAPL. First off the prior post was not a suggestion to short it. Often times after a big run a good short will turn up, but that is not my focus here. It is simply that most traders and investors have a much harder time knowing when to sell than when to buy. So looking at this stock it looks to me like a time to sell if you own it.

Earnings is coming up next Monday I believe. So entering into it now could be bumpy. But I wanted to give a little background on the sentiment backdrop and see the likelihood of a big move on earnings.

First the stock has basically held support at the breakout, particularly after a move up today. The volume seems very weak on the breakout, particularly considering it has just moved to new all time highs. So bulls still have control, but I view it as quite suspect.

The chart above (from SchaeffersResearch) shows a rush into near expiration put options last week. From a contrarian point of view that would seem bullish.

Click on Chart to Enlarge

This chart shows the open February open interest of calls and puts. So most of the puts are at strikes at or just below the most recent base area, and within range of being in the money if AAPL were to fall 10-20% in the next few weeks. However, the chart above doesn't show strikes above $200 and I don't know why. Because call open interest is heavy right at the money and just out of the money as shown in the chain below. So, I don't know why Schaeffer's is not showing all that in the chart as well. Factoring this in, it appears the heavier bets are actually on the call side here which would not be as bullish as the pictures above may paint.

Click on Chart to Enlarge

Now probably of more immediate importance is the short interest situation on AAPL. The short interest ratio (days to cover) is only 0.9. So that means that all the short shares could be bought back very quickly. That is one key metric for seeing whether a stock has explosive potential on earnings. If there is a lot of short interest and the stock has great earnings, and particularly if this pushes it to all time highs, then the shorts will have to cover or get killed. So that can make for a big move up. Not so in this case. Also, only 1.8% of the float is short which is small as well.

Looking at analyst ratings can also be a way to gauge sentiment and factor into the direction of the stock over the course of time. If many analysts rate the stock a hold or sell, then an upgrade will typically cause the stock to advance on the news. However in AAPL's case, the buys and strong buys best the sells and strong sells 36 to 1. Almost all the buys are strong buys. So there is not much risk of an upgrade boosting the shares, but there may be a much higher risk of a downgrade dropping the shares.

So to sum up, the sentiment backdrop looks skewed to the optimistic side (which you would expect in this case). But this actually may be a hindrance to the stock because of lack of structural fuel for a further rally. It is typical for AAPL to move 5-10% on earnings, but I don't see particular risk of a real big move up on the earnings. But price is the bottom line, and until it does something wrong like close back below the breakout point of the base, then I certainly can't say with any conviction that it is topping right here.

Monday, January 18, 2010

Apple Monthly Charts and Daily Charts - A Sell

Click on Chart to Enlarge

The chart above is a long term (lifetime) chart of AAPL. Apple is certainly a bell weather stock. As far as products and innovation go, I think we all know AAPL is top of the line, and its stock is now making new highs after the recent bear market.

But does that extraordinary strength mean that you should buy it? Well from a technical analysis standpoint, there is no way I'd buy this here. In fact, this looks like a perfect time to unload every last drop of AAPL. Even the best companies falter at times. And the higher they fly and the more institutions and big investors that join in along the way, the more fuel for declines and the longer it takes to unload those shares. Also, consider whether you get dividends during a period of poor stock performance. In this case you don't as the trade off for outperforming shares is often lack of yield.

The RSI shows a massive divergence on this break to new highs. The MACD also shows a major divergence. If you bring up a DMI/ADX chart you can see that the trend peaked in 2007 and now the DMI is back near trendless territory. The break to new highs in AAPL stock in 1991 is most technically reminiscent of the current break to new highs. Not a good time to hold. Better things to do with your money, even if it's nothing.

Click on Chart to Enlarge

Now this chart is further warning, and should be understood by those who have studied buying breakouts and are familiar with Investor's Business Daily methods of analyzing bases and breakouts on growth stocks. This chart is a daily chart showing the last few months of action.

First and most importantly, the volume on the break to new highs out of this base was absolutely pathetic for a break out. That is a HUGE red flag there. THERE WAS NO BIG MONEY PARTICIPATION ON THIS BREAKOUT!!!!!!! Think of it this way, the big money is unloading to anyone else who is buying right now.

Secondly, the base is a double bottom base pattern that doesn't undercut the first bottom during the second bottom. This is noted as a common faulty base pattern which will lead to more frequent failed breakouts.

Next the horizontal green line is the breakout level. Most successful breakouts will NOT close back below this level after the breakout. Often you will see a retest of that level as support before a move higher, but usually the breakout is held on a closing basis. On Friday, that level was lost on a closing basis after a weak % gain on the breakout. As far as what to expect when a breakout fails......often there will be a fast move down to undercut the low of the failed base at a minimum. So $185 looks likely on this over the next few weeks. Longer term it looks like it will be more than that though.

So, part of my reason in bringing up these charts is that these bell weather stocks often give you major clues about what the broad market will do. If AAPL is showing strong technical signs of a long term pullback, what do you think stocks as a whole will be doing?

Also for those doing their own investing, it pays to train yourself to think sensibly and understand the psychology of what is happening. For instance if I told you that I thought AAPL would go up 50% is that exciting or worth chasing? Well at the 2003 lows AAPL was trading for $7 a share. It is up 30 fold or 3000% since then. So does a 1/2 fold or 50% increase really mean much? It is important to put things in perspective and to see whether the amount of attention and excitement you or the crowd feel about the investment is really proportional to the situation.

For instance in 2008 when oil was flying high and had gone up about 150% or so since 2007, and some prominent analysts made news by setting targets for oil at a 50% gain, that generated a lot of excitement and made headlines on the finance web sites. Well oil was up about 1500% since the late 90's. 50%....big deal. As it turns out, those projections were off and oil topped out right about then. So there is a contrary opinion and crowd psychology lesson in there that anyone without any investing experience ought to be able to understand if you think about it.

So obviously I don't have a crystal ball here, but this doesn't really look that complicated. If I owned AAPL (which I don't), I would sell on all time frames. And if I didn't own it, I wouldn't even think of buying it right now, and only would consider it if it formed a good base after dropping below $185.

Sunday, January 17, 2010

Weekly Bearish Engulfing in the CRB Commodity Index

Click on Chart to Enlarge

The chart above is the CRB commodity index and shows a large rising wedge which is usually a bearish continuation pattern. Also, this week formed a bearish engulfing pattern while overbought (weekly stochastics, etc). A chart of crude oil looks similar. I'd say it's time to let loose any commodity or natural resource stocks on an intermediate term time frame.

Some particular stocks that stand out are FMC, AGU, ZEUS, STLD, CAM, COG, GOLD, ABX. Related is the XLB ETF which formed a dark cloud cover candlestick pattern this week.

Stay posted for a new intermediate term trade early next week.

Saturday, January 16, 2010

Video Update

There are a bunch of sentiment related charts packed into these videos. I wanted to try to let everybody see a large portion of what I'm looking at and why I think there is a lot of risk in the market right now. This is geared more toward the intermediate to longer term view of things.

Friday, January 15, 2010

Probable Trade Entry Today

I have a post ready to go out with a new intermediate term trade, but I am waiting to post to hope for a modestly better entry or added confirmation of weakness be breaking the current low of the day.

Also, the TLT trade is nearing the RSI(5) overbought but there yet. I don't see any chart resistance until the gap at 92.40ish.

Stay posted.

Tuesday, January 12, 2010

Need Further Declines For Confirmation of a Top

Click on Chart to Enlarge

This post is just to update a few recent posts. The chart above is the Dow ($INDU). This continues to look like and behave like an ending diagonal pattern. One feature of this pattern that is often present is called a "throw-over" where the final push up spikes above the trendline of the prior highs in the formation. That happened yesterday and then today is one of the stronger down days of late providing some initial evidence that the ending diagonal hypothesis may be legit.

The problem with most simple pattern analysis is lack of definitive rules and logic in the form of "if-then" confirmations. So in this case, I would say...."IF the above pattern is an ending diagonal, THEN point 4 must be broken below in less time than 5 took to form AND the whole pattern must be retraced in less time than it took to form." So right now, we don't even have the initial confirmation of a break of point 4. But the sentiment and technical environment certainly support the possibility that this will occur.

On a separate note, the TLT trade gapped in our favor today. For those adept with technical indicators, you can exit if/when the RSI(5) becomes overbought. I don't have a really good gauge of how high this could go in the event this little rally builds legs. But I will either post an outright exit when that RSI gets overbought, or suggest holding and trailing a stop up under support.

Also, for US Dollar bulls, today looks like a real nice chance to get in with low risk. It looks like today will be a 2nd consecutive long-tailed reversal candlestick at the lower bollinger band. You could buy (UUP, EUO, short FXE, etc) with a stop a penny below the lows of today. But I am not posting a trade on this.

Monday, January 11, 2010

A Few Loose Ends/Updates

Click on Chart to Enlarge

Last week I highlighted a possible bullish flag pattern in the US Dollar Index. Today's decline breaks that pattern. However, If the uptrend remains in force, then it should find support at the lower bollinger band where it is right now. Also, the RSI(5) is oversold and that will typically lead to a bounce in a nice trend. The recent move up in the US dollar has caused some early signs of excess speculation which is has led now to a pullback. In 2008 we saw a similar thing, which led to a sharp, brief pullback and then much more continuation of the uptrend. So my take is that this is a buying area for an uptrend continuation, but any substantial further declines from this point, could change my mind.

Click on Chart to Enlarge

About 3 weeks ago I highlighted the above ascending triangle in the QQQQ. It did break to the upside obviously. And so I wanted to just highlight where it is now. The pink lines show the widest leg of the triangle and that leg projected up from the breakout point. That is the first target, and it has been met and seems to be forming resistance around that level. The next target would be around where the move up from the end of the triangle equals the move up prior to the triangle.

If the uptrend is to remain intact in stocks, expect QQQQ to be able to hold above the breakout level as a support level. Another more subtle note is that the thrust out of a triangle like this will typically end a good bit before apex of the trendlines. The often there is a move back down to the breakout area within that apex time frame as well. That is still a week or more off yet, but at this point, I think that would be the most likely outcome. But there is options expiration this week also and that has bolstered stock consistently since the March lows.

If there is a late day sell-off today, the stock indexes could form solid bearish reversal candlesticks which may justify an earlier entry into an intermediate term inverse ETF trade, but it is too early to tell right now.

Saturday, January 9, 2010

Potential Gartley Top in the XLF

Click on Chart to Enlarge

I was looking at some charts and thought I'd pass along some notes on this one. The chart is XLF which is the primary financial sector ETF. I have posted several times in the past about the Gartley pattern and this chart above is looking like a nice one developing. The basics in this case are a downtrend followed by an ABC type retracement where A retraces to the 61.8% level and the C wave retraces to the 78.6% level of the downtrend.

Now there are other factors I find that really increase the odds that the potential Gartley is legit and will lead to a reversal.

-the B wave should not be shallow (should be 61.8% or more of wave A)
-the B wave should take longer than wave A
-if B take a lot longer than A, then C should take about half the time of A+B (basically like a standard Elliott Wave "flat" pattern)

In the chart above all those elements are basically in place. Also, it is nice to see the major indexes, technical indicators, and candlestick/reversal bar patterns confirm at the reversal level.

In that regard we have an extremely excess bullish market bias (more hopefully to follow in a video) which supports a bias toward topping patterns. Also the chart above shows price trapped in a sideways range for the last 4-5 months. This is when oscillators work their best. The RSI above the chart shows it is the most overbought in that time frame, and is at a lower high than the last very overbought reading suggesting a possible shift in longer term trend. Then on a shorter term note, there was a textbook Harami candlestick pattern on Friday. This is a classic reversal pattern. However, it is not high reliability for major reversal. But if Monday should form a solid black/red candlestick, and especially if it managed to close all the way below Thursday's big white candlestick low, then the reliability should be considered to be high.

Another subtlety is that you generally don't want to see the end points of the various waves form a perfect parallel channel. In this case the C wave should end below or above the upper trend line. So far it is still below. Then I have also posed a possible Elliott wave suggestion to complete the move. In this case wave C should be expected to be a 5 wave pattern. But because of the Harami and other technical factors, I would expect it to end at a lower high (truncation) than wave 3.

So the point of this is that yes XLF may be a nice short right now, but even more so, I look for key sectors or stocks to tip the hand at what to expect from the broad market. For instance if the darlings of the street like AAPL and GOOG would happen to be forming picture perfect long term reversal patterns, then you better expect that the market will be headed down along with those stocks. When the market leading/high relative strength stocks turn down that is a clue that a significant bull run is over. In the case of XLF or XHB (financials and housing) non confirmations and reversal patterns may be a sign that the market still sees trouble in those sectors, and that the general market is weakening and about to turn down.

Now I am really hoping to get a video made covering a whole bunch of charts because I feel it is important right now. In case I don't get that video up to show all the evidence, the summary is "get the heck out of stocks." Of course you all have to make your own decisions, but that is my opinion on both an intermediate term time frame (several weeks to a few months) and it looks like probably for even longer term (several months to a year or more). At the very least I think if one believes the worst is behind, then wait until a legit correction of 10% or more and put some money in at that point if it still looks like a "normal" correction when we get there. Even bull markets typically experience 10%+ corrections along the way every year or so, and we are 10 months in without one.

Also, Technology and Health Care are two of a handful of sectors which Rydex data suggest have gotten "too much" money flowing that way. I plan to show those charts and others for those whom it may benefit.

Friday, January 8, 2010

New TLT Trade

No time for details right now, but TLT (30 year bond ETF) appears to be forming a hammer reversal today with nice divergence on both daily and hourly charts.

New Blog Trade:

Buy TLT today with a market order or Monday with a limit order of 89.50. Place a GTC stop at 88.40 immediately after entry. Current price is 89.26 which will be the blog entry price.

FYI - this does not change the longer term outlook I have for bonds as posted previously.

EUO Trade Set-Up (Bull Flag in the USD Index)

Click on Chart to Enlarge

The chart above is the US Dollar index. It looks to be forming what is called a "flag" pattern. There is a strong advance off the lows which is the "flagpole" and then there is a downward sloping little parallelogram which is the flag. If price breaks above the upper trendline of the flag, I will almost certainly be posting a trade on EUO which is a 2x US dollar bull fund. As an idea of a price target for this pattern you project the flagpole up from the bottom of the flag. So that would be a nice move. In this case I think using a trailing type of stop would be best and keep an eye for divergence on RSI and MACD for exiting if price advances further.

Click on Chart to Enlarge

The chart above is the USD/CAD (US/Canadian currency pair). As of right now it is forming a type of Gartley pattern off of what could be a very significant low. While there is not much history on the chart, the explosive advance from Oct-Nov and subsequent slower retracement have broken the pattern of fast downward moves and slow upward moves for many months. So this is a good chart to take away that simple logic from. Of course maybe price won't move up from here, but I think it will.

For entering such a reversal pattern, you can look for candlestick patterns that indicate a bottom with a stop just below the reversal candlestick, or you can just enter and place a stop below the low of the entire pattern (lowest point on chart). Also, as a more conservative approach would be to wait for a break of the downtrend line (green line) and then enter with a stop below the most recent swing low or other nearby support.

As a side note the USD/CHF (US/Swiss Franc) pair is also looking to form a nice flag pattern, so there are several avenues to take advantage of potential further USD gains. UUP and EUO are dollar index ETFs; FXC, and FXF are the Canadian and Swiss Franc ETFs, respectively.

Thursday, January 7, 2010

Another Intermediate Term Red Flag From AAII Data

This morning showed the updated AAII survey numbers and the % allocations amongst various asset classes as of Decemeber. The bearish % in the survey remains very low relative to the 1 year mean. Usually the market pauses or declines after such a reading. Often times it takes 1-3 months for the % to flip flop to the other extreme.

Also noted was a large increase in allocation to stocks and a decrease in cash holdings. This data is used in contrarian fashion (the individuals are collectively "dumb money"). The snippet below is from today's morning comment:

Individuals' allocation to the stock market rose more than 15%, one of the largest one-month increases in the 22-year history of the survey. Their current 64% allocation to stocks is at the highest level since October 2007.

Meanwhile, their allocation to Cash fell to only 18%. While we're splitting hairs here (it dropped to 19% several times), the current allocation is the lowest since August 2000.

Oct 2007 was the peak of the recent bull market. And August 2000 was just after the peak of that bull market, but right before the Dow and S&P really fell apart in 2000-2001.

There are other surveys, etc that gather data on household investment exposure which are more comprehensive, but this survey has been a good contrary indicator for many years, so it is probably instructive at this point to do the opposite of what the typical individual is doing. So that means selling/reducing stock holdings and raising cash levels.

On another note, yesterday highlighted some data from the Rydex fund family which again is used as a contrary indication when it reaches extreme levels. It showed that the ratio of bullish Nasdaq 100 funds to bearish funds, as well as the leveraged bull/bear ratio for the Nasdaq 100 was at an 8 year high or more. Again this is an intermediate red flag and shows that this "dumb money" group is betting very heavily on tech stocks and is also quite bullish the stock market.

So while I have been saying for a couple months that I think a sharp correction will be coming in stocks (and obviously it hasn't yet), these continued red flags only add to the evidence for that. Also the S&P is only up 2% since mid-November, so it seems a bit over zealous for such increasing and extreme bullishness despite very modest gains over the last couple months.

Wednesday, January 6, 2010

New Intermediate Term Trade Order

I am going to post trade orders for a new intermediate-term trade. The stage is set, but there is obviously no indication from price yet that the current leg up is done. As for the ending diagonal pattern suggested in the Dow a day or two ago, it either is not a an ending diagonal, OR the pattern is not complete yet. Since yesterday and today have been pretty narrow range days, that could still be the case.

In short, dumb money measures show extreme confidence in this uptrend continuing, and smart money measures show a low level of confidence. The indexes are overbought on both daily and weekly time frames. We are entering a period of negative seasonality beginning today and going for the next few weeks. There are several indicators that I have shown or discussed recently to suggest that the market is showing signs of excessive speculation even on a long term basis, so now it is just a matter of price giving a little confirmation to the downside to take the trade.

New Blog Trade:

Place a stop order to buy DXD at 29.00. This order will not be filled unless the Dow falls a bit and DXD rises to 29.00.

Tuesday, January 5, 2010

Miscellaneous Resources

I thought I'd make a post briefly showing some resources for charting, etc. for those of you who may find it useful.

There are several good free charting programs. Your broker will always have a charting package free of charge, so that is the first place to start if you like the package. However, here a a few that are quite good and are free if you want to explore....

1) - This is very good because it is free and gives you the ability to save multiple templates and indicators and gives real time data for most everything except cash indexes and TICK data which are delayed. They even have real time currency pair data which is nice. These are made by Worden Bros, which are the makers of the popular Telechart software. I don't like the "look" of this package that much, but the data more than makes up for that.

2) - This service has great charts, but they are delayed unless you get a paying subscription. There are a lot of indicators available, and the real hit is the ability to create ratio charts, and to chart other data than just price. So you can chart put/call ratios, exchange volume, breadth, etc. and apply indicators to those as well. I really like the look and functionality of Also, there is a great deal of explanation of indicators available in the "Chart School" section of the website. John Murphy of technical analysis fame is the headliner/creator here, and the content is good as you would expect.

3) - Prophet charts are my personal favorite in terms of functionality and looks. However, the free Java charts offer limited indicators with no Fibonacci stuff or even text notes. Scottrade and OptionsXpress used to have Prophet charts as their package but now have others that are far inferior from my perspective.

Now the "My Favorite Sites" section of the blog has links to several other things worth exploring. There are candlestick and technical indicator screeners available for free from Also Schaeffers and both have excellent screening capability. Schaeffers is especially useful for screening via their methodology. You can screen for short interest, put/call open interest, analyst buy/sell ratings, technicals, etc.

As far as brokers go, it depends on what you want. But for most small accounts, the less you pay in commissions the better and is the main thing I would look for. I have used Interactive Brokers for several years and their commissions are as low as I know of for retail traders. But they are geared toward professionals and will charge a monthly fee of about $10 I believe if you don't rack up $30 in commissions a month. But $10 is small considering the amount you blow on a couple trades a month at other brokers. Commissions for stocks and options will typically be $1 per buy or sell (per contract for options).

Also for the analytical type, you can download price data from most of the major search engines (Yahoo, Google, etc) and then export it to Excel to then do some of your own analysis. Sites like offer lots of data related to options (put/call ratios, open interest, etc) which you often can download.

Monday, January 4, 2010

Possible Ending Diagonal in the Dow

Click on Chart to Enlarge

The chart above shows a 60 min chart of the Dow. It looks like an ending diagonal at this point, and the hourly technical indicators support that because they have strong divergences as seen in the MACD. I will probably be posting a new intermediate term trade soon, but I will wait for the hourly MACD to cross down or a break of 10425 on the Dow whichever comes first. Of course neither may come.

Something felt weird and looked weird on the charts today. Such a large gap up and a rush to new highs in a very overbought market seems to me like a capitulation move. There was a bearish engulfing pattern Thursday. Then the gap up today opened back nearly up at Thursday's high. For a safe trade, wait until Thursday's lows are taken out, and then short with a stop above the recent (today's) high.

Click on Chart to Enlarge

This is the Dow on a daily time frame. One key component of ending diagonal patterns is that the pattern tends to oscillate around the wave 2-4 or 0-B trendline in Elliott Wave parlance. In the chart above you can see it oscillate nicely around a possible such trendline.

So why bring this up? Well if it is an ending diagonal there will be an explosive move down, probably beginning tomorrow. The move should retrace back to around 10,200 on the Dow within a week or two. Ending Diagonals completely retrace the whole terminal pattern in about half the time, and often less, of the terminal rise. Also, these patterns complete larger patterns, so often the decline after such a pattern will retrace a good bit of a larger formation.

So if there is an explosive move back below the beginning of the terminal, it should just be the start of a larger correction.

Sunday, January 3, 2010

Laying Out Major Cycles in 2010

I have touched on some of the major cycles at play in the equity markets before, but I wanted to take a bit of time to make an educated projection on when they may come into play this year.

This chart from Sentiment's Edge Blog show average yearly returns and risk/reward profiles for each year of the decade since 1928. While this is note a big enough sample size to draw much conclusions from, the basic pattern is weakness in the first few years of the decade. The year sending in "0" have a negative average return (and the worst of all ten years) and greater risk than reward on average.

Click on Chart to Enlarge

The chart above shows the S&P 500 as the top graph and a "real" inflation adjusted S&P below to more clearly highlight the dips. The chart shows the 4 year cycle in stocks, also called the Presidential cycle because it is thought to be the result of our political calendar, and there are consistent sub-cycles within each 4 year term. Note that there is a very consistent tendency for major lows to be put in place every 4 years, typically the 2nd year of every term.

Click on Chart to Enlarge

This chart adds to the end of the last chart and shows the 1998, 2002, and 2006 lows. Then the last vertical blue line is shown in the middle of 2010 this year which would be the expected time frame for the next 4 year low.

Click on Chart to Enlarge

This chart shows both an average year in the markets and an average 2nd year of a presidential term. The average year shows that most gains come from November through April and the seasonally weak time is Sept-Oct, with many years showing corrections in the autumn months.

It is not too dis-similar for the 2nd year of the presidential term but the returns are worse, with sharper and larger corrections in the fall that typically take the return negative on the year. That sharp correction in the autumn of the 2nd year of the term would be the typical 4 year cycle low.

So putting these charts together.....the 4 year cycle tells us to expect a sharp correction this year, and the 2nd year annual sub cycle suggests that it would be expected in the autumn or summer.

Now I will also say that there will be differing opinions on when a cycle bottomed, etc. Some argue that the 2006 low was not a 4 year cycle bottom, but rather that the bottom was extended to January 2008. And I have seen some suggest that the March 2009 low was a 4 year cycle bottom.

Click on Chart to Enlarge

The chart above shows several years of data with overlying 40 week cycles. This is also called the 9 month cycle. While the 4 year cycle seems to be clearly non-organic (caused by political events), it is not clear (at least to me) that the 40 week cycle is non-organic. There are different speculations to why this cycle exists, but I couldn't tell you anything definitive.

Regardless, this cycle is not something to look at rigidly, but rather that there is a tendency for significant lows to occur every 40 weeks on average. Small deviations are normal (i.e. 37 weeks or 44 weeks, etc). Also, there does appear to be a half-period harmonic of this cycle in that minor lows tend to occur at roughly 20 week intervals. There are computer programs that can filter through data and tell you whether or not there are "cycles" that occur with regularity compared to random distribution, and the 40 week cycle appears to be one for whatever reason. And beyond that, it has been recognized for some time, and is factored into the collective conscious of the markets. It often pays to stay abreast of those types of things.

Click on Chart to Enlarge

In this chart I have continued the 40 week cycle on from the previous chart. I suppose one could argue about what the dates are, but from the past history and from what I've looked at as resources, I think what I have here is the best way to look at it. This would then suggest that the next 40 week cycle bottom is due this spring, around March/April.

With the market overbought on a weekly time frame from a technical perspective, and sentiment clearly overly bullish, the idea of a turn down into this spring makes sense. Also, the positive seasonality of the Christmas/New Year time begins to wane this week.

Saturday, January 2, 2010

From Extreme Fear to Excessive Optimism (At the Same Price Level)

In this post I wanted to take a little walk back in time to try to get a grasp on the psychology of the market, and retain a longer term time perspective. I think many mistakes are made out of lack of a long term time perspective both in general and in this case in market outlook.

Basically I want to take everyone through the market action and psychology since the Oct 2008 crash lows. But to get started, the first chart shows a more recent view of the market which looks like a short to intermediate term high is in place.

Click on Chart to Enlarge

The chart above shows 2 successive bearish engulfing patterns after the recent brief break above the tight range over the last month. I feel good about the current short-term trade, and will consider rolling it into the intermediate time frame section or posting a separate trade in that area soon.

The question arises any time a high is in place, of what degree is the high or how long the correction will be. We just have to take it one step at a time, but the first thing to look for is whether the last leg up is retraced in less time than it took to form. Then is the correction larger and faster than any other correction against the entire rally? If so then a large correction of the March-December advance is likely underway. Then if the market would happen to retrace the entire move up since July in less time than it took to form, we would be pretty certain that another major bear phase is underway.

Click on Chart to Enlarge

Looking back to Oct. 2008, we witnessed a crash of historic proportions. On Sept 29 2008, the market fell 7% to a new 52 week low. Looking at past historical comparisons, the norm was for a modest bounce then a modest undercut of the crash low over the next 1-2 weeks before stabilizing or rebounding further. Out of the handful of times that had happened before, most times the market was trading higher a week later and some were major lows.

What happened was that the market managed a miniscule bounce before plunging another 25% over the next week or so. That was worse than any of the historical comparisons with the closest being a major decline in 1931 during the Great Depression.

Since that point my view has been that the failure of the market to rebound from such a crash is a sign of long term weakness. The chart above has several notes regarding the market action since that crash. The initial reaction from the Oct 10 2008 low was the most explosive rally of the bear market. New phases of market psychology typically begin with very explosive and often relatively brief thrusts counter to the prior trend.

While the Oct 2008 lows did not hold as bear market lows, I think it is reasonable to view the shift and recovery of market psychology as beginning at that point. If that is the case, then I believe the market is at a point of extreme risk at the current level. Since that time I see 7 major price legs formed (though not confirmed the current one is over) which is almost always the maximum number of legs/waves of a correction before the prior trend resumes.

Pattern analysis is inherently subjective, so I don't put too much emphasis on it. Without specific rules, I don't think pattern analysis has much value. But when coupled with historically consistent logical concepts regarding price velocity and trend direction, I believe it can be quite useful.

Click on Chart to Enlarge

This final chart contains some pattern labeling and more importantly some blue boxes showing a 1 to 0.618 time ratio. This past week marked a possible important time point for a major pattern completion when staying with the idea that Oct 2008 marked the end of the prior downtrend.

The simplest and most objective take away from this chart are the green and red dashed lines. The green line shows the market retracing the June-July decline and breaking of a minor trendline in much less time than the June-July decline took to form (about half the time). This is the type of price action that you see at the start of new patterns or psychological phases. Also back in Nov 2008 the market retraced a major rally from late Oct to early Nov in equal time and broke the base trend line (red dashed line) in that time frame as well.

Since July 2009, it has been the norm for the market to retrace all downward corrections in less time than the correction took to form. When we see this change, we are likely in the midst of another sizeable correction. So in this light, I am viewing the Nov low as the defining point for any coming correction. If the market moves back below there in less time than it has taken to rally to the recent highs, then we are back in bear market mode for a while.

Also as an interesting point of psychology, the crash last fall really began with the Lehman Bros ordeal in mid September. Prices made a sharp rebound, but when that level was breached, the bottom fell out of the market into Oct. As of this past week, things have come full circle as price has moved back to the Lehman Bros mini crash low. At that point in Sept 2008 there were many signs of excessive pessimism and fear. Now, we are back at the same price levels with a complete flip flop in perspective. Optimism and complacency abound in the real money measures of market sentiment as well as surveys, etc.

If the market is able to exceed that Lehman crash level, then the charts and underlying psychology are such that the next major point of inflection is not till 1265 on the S&P. I have a very hard time seeing that happen before a significant correction takes place.