SPY Analysis

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The chart above is SPY with a 50 day MA and some dashed horizontal lines at recent unfilled gaps. I would expect the current rally to at least fill the recent large gap down before reversing to the downside. The recent sell off triggered some signals that would suggest a 1-2 week minimum decent rally. So I think the rally may be likely to push back toward the prior gap down from March 10th.

The VIX/VXV ratio poked up to about 1.09 last week which suggests at least a short-term low based off of past data.

The NYSE McClellan Oscillator got reasonably oversold this past week, however, at basically every other significant low in this bull market, it showed a minor or major bullish divergence before a lasting rally. It did not show any divergence yet on this decline. So we may expect at a minimum another push to the lows or lower with some improved breadth before a sustained advance.

The inability of the market to add gains to the gap ups at the end of this past week, also may be indication that the selling hasn't run its course yet even in the short term.

US Dollar Index Technical Set-Up Very Bullish

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The chart above is the US Dollar Index. It shows a retest of the November low. Remember in November the QE II was announced. And it was presumed that such an event should be bearish for the dollar because it is inflationary. However, the market rallied in typical contrarian fashion.

The technical set-up shows a running bullish divergence on the daily MACD. The prior bullish divergences are highlighted on the chart as well. Also the RSI (10) shown is at a second and stronger divergence on this minor dip to new lows. The last couple significant bottoms in the dollar showed a similar set-up where at the price low, the RSI (10) could not even touch the oversold 30 level.

The current decline also looks like a possible ending diagonal type movement which is an explosive chart pattern that should retrace to the beginning of the pattern (January high in this case) in about 1/2 of the time of the decline, or even faster.

This suggests serious strength in the US Dollar and serious weakness in commodities beginning very soon if this signal is of similar caliber to the last two like it. Sentiment and real money commitment of traders data suggest a bullish move ahead also.

Stocks and Commodities

Stocks have confirmed a likely intermediate and possibly a major high. The current decline has lasted longer than any since the July low. This suggests a higher order top has occurred than any since that time. Expect continued intermediate term downside, though a breather rally could occur at any time here.

I have posted for the last couple months that commodities were topping. As is the case often times, once it is, you don't have lots of time to get out of the way before the market has proven it to you. Expect continued intermediate to longer term (1+ yrs) downside.

The recent news driven rally of oil is likely a last gasp that drew dumb money in and will ultimately lead to a lengthy sell off in oil and commodities. As seen in the chart below, large speculators, the big money that drives trends, have gone record net long oil. And the commercial hedgers are record net short. This goes back decades longer than the chart shows. It is a new record. Yet oil is off the all time highs substantially. This indicates a huge build up of long positions that will have to be sold off and open interest will have to contract dramatically before price is stable. Based off the data, my suggestion is that oil will decline below the 2008/2009 lows prior to the next bull market.

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I continue to view cash in US dollars as a reasonable investment for the next few years. It has not heated up yet, and that does surprise me a bit with the weakness in commodities, but I think we will have to see that at some point, particularly as oil weakens. It is the way the markets are fundamentally linked.

Exit the Recent SPXU Trade

I am recommending exiting the current SPXU trade. The current price is 17.35.

Brief Update

Friday the stock indexes poked below support and reversed to close higher and above the support. That occurred as the S&P 500 touched the 50 day moving average and then reversed higher. I have talked about his before, but there are often false reversals at key moving average levels like the 50 day MA when a new trend has begun. I believe that there is algorithmic trading triggered to buy at those moving averages which at first touch causes the reversal. However, it may just be a short term blip rather than a legit reversal. In a case like this, I personally don't give the reversal as much credibility as I may normally.

So what we saw today was the S&P gap lower and move below Friday's low. This may be an indication of a new downtrend. A failed bullish set-up may be a harbinger of a larger bearish trend. Now, the hourly chart may show some bullish divergence soon, and could still result in a rebound, but an acceleration down from here probably indicates the intermediate trend is confidently down.

Cotton Analysis

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Above is a chart of May cotton futures. I have a couple studies on there. The MACD shows a bearish divergence at the new peak of this recent leg up. The RSI has a similar and strongly angled bearish divergence. Some other interesting components of the chart are a failed breakout above the recent swing high from Feb, a bearish candlestick pattern (evening star) at the recent high, and a three push/5 wave move up since the November lows. All of these are technical findings that "fit" with a market that is, compared to historical standards, extremely overbought and set for a large decline. Watch the dashed trendline also for further confirmation.

Now the large money players from the Commitment of Traders data also paint an interesting picture that I want to go into some detail on because I think it is telling and a great example to learn from.

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The chart above shows the Commitment of Trader's data and is broken down into large speculators (funds, etc), small speculators, and commercial hedgers. The large speculators tend to follow the direction of the market and increase their long exposure as the market rises. They are trend followers. The commercials hedgers can be doing a few different things, basically all of which involve shorting as prices rise or buying when they fall.

For instance a company that grows cotton and owns cotton would short the futures to hedge against their commodity produce. If they think prices are too high, they short to hedge or profit on the decline. Now a clothing company that wants to buy cotton for its operations will buy the futures contract on dips to perceived price value areas.

As far as the cotton chart above, notice that in the current run up the large speculators maxed out their long exposure in the fall and even as prices have gone higher now, their exposure hasn't. This is probably a sign of lack of funds to follow/push it higher. So that is a type of bearish divergence. Also notice that contrary to the usual pattern, the commercial hedgers have been the only group to increase their net long over the past 4 weeks as prices broke out above the November highs. Basically this means that they are caught in a large short covering rally forced to buy back short contracts to avoid larger losses. Once they cover their shorts and the last buying fuel is expended, prices should start to fall. Then as they fall the large speculators will start to sell and take profit, and also to follow the down trend by shorting.

This will put pressure on prices in dramatic fashion, I believe, once the last forced buying occurs by commercials. Watch for a quick move back to the November highs, then followed by a more drawn out move back to below where this leg up started at the November lows.

New Trade - Short BAL

I intend to make a post explaining what is going on in commodities soon. Also, specifically I will cover cotton because I am recommending a short here on several grounds. When blow-offs like this end, the declines to follow are dramatic. So, if the high is in on cotton, we are likely set for a move back to 55 dollars on BAL or below. So the risk/reward is good.

Trade Recommendation:

Short BAL at the market open tomorrow with a GTC buy stop at 117.34 immediately after entry. If the trade is successful, it should tell us very quickly I think.

As a general rule, you can risk 2% of account value, meaning if stopped out, the account value decreases by 2%.

Natural Gas Double Bottom?

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April natural gas futures undercut the fall lows and then quickly formed a large bullish candlestick to close back above. This is a bullish reversal pattern.

Seeing as this is a double bottom type pattern, the traditional target would be an advance above the Jan 2011 highs of the same point amount as the the difference between the Jan high and the horizontal red line.

QQQQ Update

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Since the July low the longest correction in QQQQ has been 14 days. It went 9% deep. If any subsequent correction takes longer than that, it would be a possible topping sign. Obviously the market sentiment is extremely bullish and this current time and % gain is extended compared to historical instances. So a significant correction against the trend is likely soon.

The principles here are that after an extended advance, a larger and faster decline than any in the uptrend often signifies a change in trend (even though by the time it is recognized and confirmed the first leg down may be completing). Also a more time consuming and larger correction after an extended move is often a sign the trend is weakening and has reversed.

If the current correction in QQQQ were to fall from here to new lows, then it would likely be longer than the first correction of the trend in August. The chart above puts a red dashed SELL line suggesting that if the recent swing low is broken to the down side, it would likely trigger further selling.

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As of right now, the upward correction in QQQQ may be forming a bearish ABC pattern with the harmonic resistance zone at 58.42 or slightly above that into the unfilled gap down area. Also the ideal time frame to complete is early next week (the upward correction would be 1.618 the time of the initial thrust down).

I would like to see one more push up to create some divergence on the 30 min chart MACD and then look for possible selling opportunities on weakness after that. Another possibility is that the current upward move is a small rising wedge against the first thrust down. A break below the uptrend line, would be indication the wedge is complete.

An alternate view of this correction is that it may be a triangle that is completing here and should lead to a thrust up to new highs.