Equity Update

Sentimentrader.com showed some data looking at when the market closes at a 3 month low and then makes an 85% up issues day the next day, like it did Thursday. Out of 14 instances 13 were positive 2 weeks later. Obviously that indicates a bullish short-term bias. Several of those were significant lows lasting many months or years. Some of them rolled over to new lows within 2-3 weeks. Based on pattern logic, I believe this one will roll over to new lows in a few weeks or less.

As long as there is short-term overbought indications below the 1175 area on the S&P 500, then I will want to bet against a sustained rally. I don't feel like now is a great time to start betting against it though. I'd really like to see at least some bearish divergence on the 60 min chart indicators like stochastics, RSI, MACD, etc.

Misc. Trades

For those interested in playing the anticipated bounce here are a few ideas.

EWI - an Italy ETF. This would definitely be a contrarian play, but the daily technicals look nice for a rebound.

I made a couple small purchases today in AKS (stop @ 13.00) and MYL (stop @ 18.70). I like the technical analysis and candlesticks on AKS and the steel sector is pretty oversold. SLX is a steel sector ETF also.

MYL is a biotech stock which I picked up on a screen for stocks with high short-interest (25% of float). After sharp declines stocks with high short-interest often make nice short-covering rallies.

SDS Trade Exit

I am going to post a trade exit on the open SDS trade from July here at 34.33. Pessimism is relatively high, and I feel there is likely a better chance to reload on inverse funds in the not too distant future.

SDS Trade Exit

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The S&P rose all day after the first couple minutes. On this cash chart this created a nice looking hammer candlestick. From a pure charting perspective, I really like this for a bullish set-up and long trade. The intraday low went below the Feb low possibly running some stops there. That may bring a reprieve to the selling at least short-term.

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This chart is of SPY which is the ETF that tracks the SPX. Notice the different candlestick pattern because the cash index SPX is calculated differently because not all stocks in the S&P open for trading at the same time. Some are delayed 10-15 min, so the cash index will not always look like the ETF.

SPY made a belt hold or meeting line candlestick today which is a bullish candlestick, but not one of the stronger reversals. However, since the market did not accelerate down after the big gap down and it closed above the Feb low and Friday's low, I don't want to remain in SDS for the short term.

I think the best opportunity will come with a move up into next week that fills the gap down around 112.00 as a place to short/inverse. The problem with going long here is I think the stop has to go below today's low for a swing trade. That's about $4 risk. But the flash crash closing low and that first unfilled gap are only about $4 above today's close. So the risk to reward is not that good.

I am tempted to get long here, but will just exit the SDS and see if there is a rebound and how strong it is. Then we can either short at higher levels or look to go long after a pullback to a higher low.

Place a limit order of 35.53 for tomorrow to exit the open short-term SDS trade.

Crash Warning

With a large gap down indicated this morning, I just want to suggest as I did previously that if the market goes below Friday's low, that will be out of character for a normal market - it SHOULD rebound. While probably the most likely thing is for a big gap down and then buyers come in right away or later in the day, I believe this could end up in a big single or multi day selling panic.

I want to be part of that on the downside and I believe the risk reward is reasonable to enter at the open with stops corresponding to yesterdays lows in the inverse funds. The S&P 500 right now is projected to open around 105.00 which is below Friday's low. If trading SPY short I would have a stop at 109.50ish. I personally am going to recommend a buy on SDS with a corresponding stop.

New Blog Trade:

Buy SDS at the open and then place a stop at 34.50 immediately after entry. For better or worse this will be volatile, so make sure the position size is appropriate.

SPXU Trade Exit

The open yesterday was 35.83 which is the trade exit price for SPXU.

Just a Heads Up

This post is a just-in-case post for a scenario where the market gaps down big tomorrow and doesn't appear to follow through on this rebound.

If there is a big gap down indicated tomorrow, then I would suggest removing the sell limit order on SPXU and place a stop instead at 34.85ish/Friday's low. The market/S&P 500 SHOULD hold Friday's low for at least several days. If it doesn't then I truly believe there is a chance for a "crash" type scenario.

I have looked at charts of several countries' stock indexes, and I do think a sharp rebound is most likely, but I just want to have a general plan if that doesn't take place. I may post in the AM tomorrow.

Currency Update

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The charts above show that there is extreme pessimism against the Euro, and that the smart money commercial traders have built huge long positions in the Euro. Based on these alone we have to be skeptical of any further significant gains in the US dollar versus the Euro in coming weeks. The advance has been large and swift, but looks to be ready to give back some gains.

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This chart shows that the weekly RSI on the FXE euro trust ETF is very oversold and formed a reasonable weekly reversal at support. This added to the above data could actually indicate a long trade in the Euro with a stop below this week's low in FXE.

If the Euro bounces I expect grains to gain to, as they are basing in oversold regions and coming off very negative sentiment which should be a contrary trader's time to look for long entries.

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The Japanese Yen looks ready to move up now. I find this interesting because Japan and the US are two of the bigger more stable economies in the world. And Japan also has low interest rates and has been victim to carry trade currency losses. So in the recent move up in the US dollar, I thought maybe the Yen would gain too. But it only now looks ready. Maybe there is some sort of rotation going on here, but it seems like for those looking to play the fundamentals of the carry trade unwind, then going long the Yen here may be the way to do it, and give the US dollar a chance to settle down now that it has risen so much the last few months.

Expecting a Rebound for 1-2 Weeks; SPXU Trade Exit Order

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Given the bearish sentiment (short to intermediate term) last week and the bullish candlestick pattern on Friday, I expect the market to rebound from this level for 1-2 weeks before continuing lower. Several sector ETF's made bullish engulfing patterns, and some made piercing patterns.

One thing to watch from a market direction/logic point of view is whether the market could retrace the last 7 day down swing in less time than it took to form. If not, then that should indicate the market is still in a larger downtrend mode. I see a few ways to view this as a pattern integrated into the larger picture, and basically they are that there is more time and probable downside before an intermediate term (multi-week) bottom should be in place.

SPXU Trade Exit Order:

Place a day only limit order of 35.00 to sell the open SPXU trade.

Quick Update

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The S&P blew through that 1110 area today and closed near the lows. By all historical comparisons, the market should have rebounded today after the open. So now we are in a situation where almost every indicator imaginable is bullish, but the market has not responded. My view is that we are likely to take out the November low before rebounding, and am open to the possibility of an outright crash over the next couple weeks.

As for strategy for exiting the open SPXU trade, it makes sense to sell right now because the market should rebound. But at the same time, that would miss the possibility of a huge gain if the market really craps off a bridge. So anyone holding this may want to do some of both......sell part at the open tomorrow, and hold some also and wait for a reversal candlestick at least before selling out.

The equity put/call ratio spiked today (0.96) to a reasonable level to anticipate a reversal. Other possible indications of a rebound are a hammer reversal in the CRB commodity index today and the failure of the US dollar index to continue up as the market fell today.

The VIX made another huge move up today, and that is 8 higher highs in the VIX since its April low. I haven't talked about this in a while, but often times there will be 12-15 higher highs (or lower lows) in the VIX before a trend change, but I would only look at this as a loose confirming/disconfirming factor.

Based on the charts and indicators and candlesticks, my expectation is that there is likely to be a low below today's low tomorrow. Tomorrow is OpEx but it could be a volatile one. We may expect a gap up, then an early morning sell-off, then a rebound later in the day. If that happens and the market closes positive, it may justify a trade exit.

Doji in SPY

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There was a gap down today and then a doji formed in SPY. Several markets made reversal candlesticks today. US dollar made a possible bearish candle, but I don't expect a true trend reversal. Oil made a bullish reversal. Stocks made a reasonable bullish reversal, helped by the S&P touching its 200 day simple moving average.

So based on historical comparison and daily oversold conditions, we should expect the market to rebound from here in a tradeable fashion. But I would absolutely have stops immediately in if going long. I personally am not interested at this point at trying to play from the long/bull side though.

Also the lower bollinger band is pointed down and it may be best to wait for it to curl up to indicate some stabilization before attempting going long if you desire to do so.

General Update - US Dollar and Stocks

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The chart above is the US Dollar index. I had mentioned a week or two back that there may be a super bullish interpretation of what is going on there from a pattern standpoint. I have put that on the chart now as it seems more likely it could be in effect. In brief, I expect some continued upwards or sideways action in the US dollar, and possibly an accelerated crash in the Euro over the coming days/weeks.

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This is a chart of the S&P 500. So far it is following relatively closely to what has happened after some comparable instances in the past. That is......a sharp rebound after the "crash", then a retest of the closing low. The futures are down as I type and so we may open weak tomorrow, at or near the recent "crash" low. But from a pattern standpoint I see the possibility that this could get bad fast. Basically, if the market closes below that 1110 level for more than a day, I think it could tank over the next couple weeks.

That being said, the daily technicals are oversold, and if this correction is part of an ongoing bull market, it should not get much, if any, bigger than it is already. On the flip side, the weekly technicals have only just started to turn down. So I think the weekly trend is likely to win out.

There are some conflicting ideas here.

1) We already crashed and the market should retest the crash low and then rebound over the coming months

2) We are in the early stages of a large new decline

I don't know for sure obviously, but use the notes on the charts as a guide to my thinking.

Expectations Post Meltdown

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Check the notes on the chart. The solid blue line is where I have the last leg up starting (Feb-May) from a pattern standpoint. If this is a new downtrend, I would expect that to be retraced in less time than it took to form. That is what the blue box represents.

The typical post crash type pattern is a volatile rally followed by a decline to and usually below the crash intraday low. The stops built below those levels get cleaned out usually before the next rally. We can be there will be stops below that low and also obviously already built below the Feb low. So I myself kind of expect that low to be taken out before the first multi week rally attempt.

One interesting thing that happened around this last top is illustrated by the following chart:

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The TICK values on the Nasdaq started going wacky right the top. Those type of readings were never seen before. When that first started I was wondering if it was a harbinger of something to come because the TICK is driven buy the program trading buy and sells. It seemed like something too obvious.......but coincidence only?

As long as we stay below Thursday's highs, bet against any rally. I will continue to hold the SPXU right now, because I feel the odds are good for some further downside. There is no bullish divergence even on the hourly chart (of SPX) yet, and there is no candlestick reversal pattern.

General Market Updates

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I'm not sure exactly what happened today or what the "low" was. I'm sure some of you have read stories and know more than I do. Anyway, this is the type of thing to expect at the beginning of a major new pattern. For this reason, I would view the current highs of 1220ish as a very significant top. Of course I don't have a crystal ball, but that is my take.

Also, realize that the move down off a top will happen fast. But then it will lazily retrace the decline in much more time. So don't be surprised if soon (even now) the market finds some flooring and consolidates back up for several weeks. It's not that I am necessarily expecting that just yet, but that is the nature of these types of things.

If today's low was as low as the quotes come in at 1066ish, then this is easily the largest and fastest decline in some time, and basically confirms the start of a new pattern (down or sideways) as far as I am concerned. If the low is actually around 1085, it is still the largest fastest correction since March 2009 bear market lows. The E-mini futures show a low around 1056 which is a huge intraday loss.

The boxes on the chart above are the same size as some important declines to gauge this one against. Basically if the market makes a similar decline to January 2008 (the dark blue box), I think we can infer that a major correction or bear market is in effect.

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While I don't know how much to read into it, the trend break (lower high and now lower low) in the Shanghai Dow may have something to do with the program trading "crash" today. Whether it does or not, the Chinese market has been leading ours at turns for the last couple years, so maybe this is a clue that a new downtrend is in effect.

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Even if a new downtrend is in effect, we should probably expect a big bounce soon. The McClellan Oscillator hit a very low level today. Most often though, it seems that there is a retest or even lower low, that creates some divergence before a more lasting corrective low.

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Continued strength in the US dollar has corresponded with declining commodity prices. I had suspected that a rising wedge/triangle was forming for the last few weeks in this index, but wanted to wait for some confirmation to post it. Basically, I expect the thrust down from that wedge to go to Feb low pretty quickly. And based on common time relations, I would expect the downtrend to continue to late June or early July for this leg down.

Gold is not following the commodity indexes, and is acting like a crisis hedge as mentioned in the last post. If it makes new all time highs, it could be in a real nice bullish position. I don't have a ton to offer on gold, but I would really be looking at still playing this from the long side if at all.

I'll try to get some charts out this weekend, but for now, this decline is still accelerating down and there is no bullish divergence even on the hourly chart. So I will keep an eye on that before exiting the SPXU trade.

As for any new trade set-up, I think the best would be a bearish trade on any nice bounce, but if there is a real nice bullish candlestick after some more downside, along with confirming sentiment, then it may be worth a short-term bullish trade.

As a side note, in follow-up to what's going on in the Euro/dollar relationship, I personally wouldn't try betting against the Euro decline even though it is obviously oversold.

Also, realize that gold may be in a very strong position now. Both the US dollar and gold are moving up together. Typically there is a strong inverse relationship there. So the psychology seems to be flight to safety of gold away from paper currencies. But, since the other currencies are weaker than the US (among other factors) the US buck is going up too.

POSSIBLE Major Pattern Completion in Stocks

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The weekly charts of the major indexes are now overbought with some bearish divergence which will be significant if the weekly MACD makes a bearish cross.

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The S&P 500 (SPX and SPY) made bearish engulfing patterns on the weekly chart last week. This is a possible bearish reversal candlestick. Also, there was a multi-decade high in buying climaxes which is a new 52 week high followed by a close below the previous week's close.

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While it seems foolish to even suggest such a thing right now, I see this current high as a possible major upward pattern completion based on the continuing labeling which I have built on for the last year. I made these charts this past weekend, so it does not include the last couple days in there, but they do give a tiny bit of confirmation of this idea. Basically the market needs to decline about 11% for me to have much confidence that this bull phase is very likely done. The biggest decline since last March is 9%.

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Again this chart was made this past weekend, so it does not include the last couple days, and that may change some things. On the daily chart, the US dollar looks ready for a consolidation or decline. However, the weekly chart is not really overbought, at least on the MACD.

Based on today's advance, it looks less likely that a pattern is completing, even of a smaller degree. There is one other way that I could conceive to label this in larger context. That would put the price currently entering a VERY strong phase up in the US dollar and would actually imply some type of dramatic decline/crash in the EURO over the coming few weeks. Given some of the things going on now, that is not out of the realm of possibility, but we should know in the next couple weeks whether that has any merit.

In any case, this past summer and fall I went over ad nauseum the reasons to be positioned for, or at least anticipate, a major US dollar advance. I don't see any reason at this point to bet against the weekly and monthly uptrend of the US dollar.