Thursday, March 25, 2010

Another Reversal Candle - New Trade

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The Nasdaq formed a bearish engulfing pattern today and is the second one in a week. Considering how overbought the market is and how overly optimistic the sentiment, I think this is legit for a tradeable pullback at least. If you like trading individual stocks then there are a plethora of reversal candlesticks to choose from if you check out the screeners on the bottom right of the page. AAPL made a nice bearish engulfing today for example and many financial sector stocks and ETFs made nice shooting star reversals.

Additionally on the sentiment front, I have recently showed several charts summarizing extremes. Now the stock to bond ratio is very high as well. Insiders (smart $) are very bearish. Money managers are very/overly? bullish. Rydex traders are extremely thirsty for bullish funds. And the's smart money indicator is at the lowest confidence level since late in the last bull market. It is clear that things are overdone on an intermediate level.

New Short-Term Trade:

Buy SKF Friday with a market order. I will post the trade entry at tomorrow's opening price.

SKF is a double inverse ETF on the financial sector. The XLF financial ETF made a nice shooting star today. I will use the RSI(5) for oversold exit.

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The cash Dow and S&P made shooting stars today as well. The Dow actually is more like a doji bu with a long upper shadow.

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This chart is the US dollar index. It appears to be forming a strong directional pattern. In Elliott Wave terms the two consolidations since the uptrend began are too similar in both price and time (and form) to be part of a 5 wave sequence. So it probably will end up being a complex correction like abc-x-abc or something even more complex. The two blue boxes on the chart are both the same size and time. So it shows how the corrections are similar. Also the first 3 legs (abc) follow nearly ideal rules for a zig-zag formation, so I think the above is the best interpretation on a qualitative level.

So here is my summary of major asset classes:

US Bonds: likely headed down in a big way
Currency: US dollar headed up, Euro/related currencies down
Stocks: Topping
Commodities: ?mixed? energy probably down

Wednesday, March 24, 2010

Market Update - DIA Harami

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The stock indexes are extremely overbought on an intermediate (multi week) time frame. The McClellan oscillator is strongly divergent indicating waning breadth. There have been a couple bearish candlesticks over the last week now as well. The chart of the DIA above shows a harami formed today. At tops these don't always look spectacular because volatility is lower. At bottoms they are usually much more obvious.

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I have opined a bit before on what may come to pass in the bond market. Basically my take is that US treasury bonds are going to be very weak over the coming months/years as incessant issuance of debt starts to play out in the bond market. The pattern on the 10 and 30 year bond yields show inverse head and shoulders indicating potential major bottoms and increase in interest rates and higher yield demand. This would correspond with a large decrease in bond prices. It appears that a large consolidation in bond yields may now be complete and ready to break out. I wouldn't hang my hat in treasury bonds right now for sure.

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Because the pattern identified above may not be standard, please look at the similar basing pattern in gold last year before it went on a major run up. It is very similar and looks to have broken out today. Also the US dollar index broke to new rally highs today, after the expected consolidation.

Just to reinforce the major correlations here, stocks have moved against the US dollar index mostly for the last few years, so this would bode poorly for stocks on continued dollar strength. As I have noted several times in the past, stocks and bonds have traded inversely for the better part of the last year or two. However, I still believe there is likelihood of a decoupling of that correlation where both turn down at the same time.

Basically as has been my mantra for the last 7 months or so, I believe on an investment basis for the longer term thinkers/holders, my take is that the dollar is and will continue to be in a bull market, so keeping money in cash should offer good return. But stocks and bonds are both dangerous, though obviously stocks look so friendly right now. But the point is we are not talking about into next month here, I'm talking the next year and more.

Geneal Update on Multiple Markets

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There are a bunch of charts above which follow up on my recent comment on being bearish crude oil (and gasoline), and bullish on natural gas, soybeans, and wheat. There are seasonal tendencies which also support a potential advance in grains (like soybeans and wheat). Basically the smart commercial traders are bullish on the grains and nat gas and very bearishly positioned in oil. Surveys show generally high optimism on oil and are very bearish on the others. So from a contrary standpoint, it makes sense to go against consensus and with the smart commercials.

Sunday, March 21, 2010

SPY Bearish Engulfing

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The major indexes formed bearish top reversal patterns on Friday. This coincided with options expiration. I have shown the tendency for weakness in the couple weeks following options exp. as a consistent cycle for the past year. I don't know if this will be a lasting top or not, but I do expect a 1-2 week pullback starting very soon. The chart above shows some of the support beneath the market to watch. I'll be looking to exit the open SPXU trade on the next clear short-term oversold signal.

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Building on the same large patterns that I have suggested throughout the last 9 months, it seems to me that the move up for the last year is now probably a triple three upward correction. The last sub-pattern in these is typically a contracting triangle. So the green lines above in this chart are just a rough suggestion of what to look for to help validate or invalidate this idea.

If this is the case then it should have ramifications for what to expect on a longer term basis. This is because a huge triple three pattern is rare, and will typically occur as an "A" wave of a triangle. So this may be the first move up of a large sideways contracting triangle to continue to form over the next year or so. So it is to early to have any solid confirmation that this is the case, but I continue to think that on an investment basis, it is best to use these highs as opportunities to sell stock/s rather than jump late onto the bandwagon.

I will update on some other markets this week. But right now here is a quick summary:

-Neutral on gold
-bullish on natural gas, wheat, soybeans
-bearish on oil and gasoline

Sunday, March 14, 2010

Intermediate Term Overbought

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The charts above are in no particular order of importance. But there are a plethora of intermediate sell signals showing up. It still looks like part of a drawn out topping process, before a major consolidation/decline in the markets in general.

Thursday, March 4, 2010

Bearish Rising Wedge?

There is a strong technical bearish divergence on the hourly chart right now in the indexes. The 15 min chart shows a mini head and shoulders top as well. The pattern may be a rising wedge as well which would bode poorly for the coming 3 weeks or so in stocks.

Anyway, I am holding on the open trades right now, waiting for a short-term oversold signal before making decisions.