Tuesday, August 30, 2011

USD Update

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This chart shows the extreme length of trendlessness in the US Dollar Index. The ADX being trendless for so long is basically a basing activity setting the stage for the next strong trend. I think this will be up. Look for the ADX to turn back up above 20 with the +DI above -DI. That would indicate a new uptrend. That will likely correlate with declining commodities. So again, this view would support a top in gold close at hand.

Speaking of gold........Over the last 3 weeks as gold made some sizeable gains, the CoT data showed that large speculators did not increase long holdings, they actually fell some. So that basically means they are out of cash to devote to this trend. They are trend followers, so this should be a sign of trend exhaustion. Additionally, the "smart money" commercial hedgers did increase net long by a correspondingly small amount, when they usually go against the price trend. This basically means that the last 3 weeks have caught the smart money in a blow-off short-covering rally. However with no ability/cash for the large specs to push the trend further, I believe the message is that gold IS in its final gasp before a major correction.

As a side note, today stocks were up, bonds were up, commodities were up, AND the US Dollar was up. So all the major US asset classes were up. Usually there are some inverse correlations that keep this from being common. I have seen others mention these "all up" days before. The takeaway was that it often preceeded at least a brief drop in stocks. So while I don't have any data on this, it may be a clue that some selling may be in store after a "buy the U.S." day.

Market Now At Resistance Zone - Bearish Set-Up

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The market action is developing about perfectly for a bearish trade at these levels. I had showed that after prior waterfall declines the tendency was for the market to rally to near the high of the second candlestick prior to the low, and that we should probably expect a flat type pattern to from here. Well we now have the market forming a nice upward ABC potential pattern here which is right at the downward blue trendline which may be resistance and price just exceeded the high of the second candlestick. The retracement is right in the reversal sweet spot based on prior waterfall declines.

The fast stochastics has now had time to cycle back to overbought. When the red (%D) line goes back below 80, that has been a good indicator on the recent cycles that a high was made, and a stop could go in above the recent swing high. So that is the plan here. Instead of shorting right here, wait for a little confirmation and stochastics to turn down, then go short with a stop above the high. The target will be for a new corrective low, at which point we can initiate a trailing type strategy.

IF this happens, based off of historical corrections, it would indicate we are likely, in fact, in a bear market rather than a deep bull market correction. The market is obviously coming out of a heavily oversold condition so it is possible that it continues to rise. So waiting for the stochastics signal will help to avoid jumping here while there is no confirmation of reversal.

Friday, August 26, 2011

QLD Stopped Out

The QLD trade was stopped out at breakeven today. It looks like the next trade will be either with further upside for a few more days, in which case a short may be in order, OR after a sharp downside break out of what may be a triangle consolidation forming here, in which case we would look to go long at some point after a break of the August lows.

Thursday, August 25, 2011

SLV Update

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As noted recently, silver looks very nice on this short entry. It touched the upper wedge line, and then close back below the high from earlier in the month where we got stopped out. On this entry, we now have nice daily chart bearish divergence on the technicals, with the weekly trend weakening and soon to turn down.

Again I expect an aggressive decline here, that should proceed to the 26 level on SLV before a major rally attempt, so I will likely suggest exiting this short at the 26 level, though the overall context of the markets suggests to me that the decline will continue below that level before whatever bear phase is coming is complete. What would probably be prudent is to exit half the position at 26 with a breakeven stop on the rest, and wait for any rally attempt to fail and break to new lows before lowering the stop on the rest.

Gold Update - Major Top Likely Made

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This chart shows that the recent leg up in gold is likely over based off this 2 day correction. Not shown is that price spiked above the upper channel line of this leg up on Monday and Tuesday.

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Applying the same logic to the entire 2008-2011 bull market, we see the same thing. A spike above the upper channel line. And now the beginning of an aggressive decline. See the notes on the chart, but a move to the 1625 area would be a more definite sign that this bull market is over.

I may have shown this the other day, but this price high is also near the upper channel line from the line connecting the 2006-2008 highs. That is the main channel of the entire secular bull market in gold over the last decade.

Point being, we may be seeing a MAJOR top in gold here. There is just no good technical reason to be, get, or remain long gold here. At a minimum, wait for a correction and re-evaluate after price falls in line with normal historical corrections.

Wednesday, August 24, 2011

Tuesday, August 23, 2011

SPY Update

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Building upon the labeling I have been using for these patterns in the S&P 500 for the last several months, it seems likely that we currently are correcting the first phase down of a new larger downward market phase.

Based on the daily stochastics and general average time cycles, it seems likely that the market is due to consolidate or retrace and give stochastics some time to cycle back upward before continuation of the downward trend. There is a large unfilled gap down from last week around 120.00 on SPY again which I think is likely to be filled in the coming few weeks.

Based on studies of past waterfall declines I would expect a "flat" type pattern to occur here where the market rallies back up to the highs of the initial thrust off the bottom before resuming downward trending. However, we may see a triangle form in this position also. In either case I think this current move up that started today will probably get close to, or fill, that gap down from last week.

The dark red line on the chart I would think to be a resistance line should the market rally back to that area. I would definitely initiate short trades there if we get some reversal after rallying back there.

I am using the Oct 2008 waterfall decline as a template for what will happen here in this environment. In that case after a sharp rally attempt like today, the market broke back below what would correspond to yesterday's low, and retested the very bottom of the waterfall decline. Because of this, I will be quick to move the stop up on this trade with further upside, and if stopped out be willing to look at another entry a few days after that.

There has been a strong tendency for stocks to rise into option expiration the last couple years. I think a good expectation is for the market to hold the current August low, and then to cycle back up a bit into expiration next month.

New Trade - QLD

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This is the QQQ, Nasdaq 100. Notice the very strong bullish divergence on the MACD on this re-test of the recent low. Now the hourly chart has made a bullish cross with a gap up also today. There is an unfilled gap down at 53.58 which is likely to attract prices on a rally.

I am going to post a trade order here to go long and exit at the gap fill. I want to see yesterday's high exceeded before entry, so that will be the trade trigger.

New Trade Order:

Place a Day Only buy stop at 69.93 on QLD (2x bull ETF), and if filled place a GTC sell stop at 66.50. Exit the trade if the gap down at 76.60 is filled at any point.

Monday, August 22, 2011

Silver Very Close to Shorting Opportunity

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Based on looking at thousands and thousands of charts, when a rising wedge like this ends, it often touches or pokes through the upper wedge line before peaking and heading down. There will often be a gap down through the rising wedge line as price begins to decline. And there may be a backtesting rally underneath or even slightly above that rising wedge line shortly thereafter. This is followed by a quick move to exceed the low of the wedge. There is often a pause or brief rally attempt at the low, before a failure and resumption of the downtrend to the next support level ($26 in this case).

Assuming this rally ends in the next couple days, all the info posted on the chart would likely lead to a move to $26 or below by mid to late October.

I am holding the Oct 34 puts I purchased until expiration regardless of this poke to new rally highs. I would strongly encourage such put buying right now at these levels. The reward potential is phenomenal.

I'll post a short on this as soon as a reversal appears. For technical traders you can use either hourly or daily MACD to time the entry from this point.

This pattern in silver is so pure that I think the implication is that gold is likely topping soon too. I would strongly suggest selling of ALL gold investments here and get out of gold and silver stocks also. SLW is forming a head and shoulders top almost for sure. ABX looks like it is finishing an upward ABC after an initial breakdown.

Notice how the US Dollar Index is still holding above the May lows despite a phenomenal run up in gold prices. When gold comes down, watch the US Dollar take off to the upside. Again, Oct calls on UUP or puts on FXE could serve this purpose with limited/defined risk.

The implication ahead is a deflationary phase with declining commodity prices and rising US Dollar valuations. Stocks may chop or rebound here, but the longer term trend I take to be down based on everything discussed recently on this blog.

Sunday, August 21, 2011

Non-Confirmations at a Blow-Off Top

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This chart is USO (oil) from the 2007-2008 bull market run into the final blow-off top where it over-threw the upper channel line before topping out.

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This is gold over the same 2007-2008 time frame. Notice that it peaked in March of 2008 then rallied to a lower high at the July 2008 peak in oil. Silver looked very similar to gold here. The talk was "peak oil" in the news.

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This is gold in the current bull market. Right now it is over-throwing the upper channel line of the current bull market. Look for it to either spike top here soon, or to start wedging and peak a few weeks down the road. Now the talk is inflation from debt monetization, etc.

Click on Chart to Enlarge

The is silver in the current market. Notice it looks kind of like gold did relative to oil in 2008. It is not rallying to new bull market highs, but gold is. This is a non-confirmation between gold and silver right now and implies weakness ahead in silver, but also that gold is likely to be rising on borrowed time here.

One bigger difference in context here is that the overall commodity indexes are much weak here than they were relative to oil in 2008. So most markets have already topped leaving only gold flying to new highs. It is unlikely that one market will hold up the whole board....more likely that it's just a matter of days or weeks until gold tops and commodities come down harder and in more unison.

As a side note, I expect sideways to upward action in stocks early this week. Maybe a triangle forming or a downward flat finishing. The triangle implies several more days of sideways action while the flat implies a bottom forming quickly here and a sharp rally this week.

SLV Stopped Out

The SLV short was stopped out at 41.25. It actually looks like a more solid technical analysis set-up is forming right now to attempt this again. The rally up in silver the last few months now appears that it will be a large rising wedge before another large decline. There is daily chart bearish divergence now on this new rally high, whereas we only had solid hourly divergence on the last entry. If the breakout above the recent 41.20 high fails and the market close back below there with a daily stochastics or MACD bearish cross, I'll post a new short entry.

Also, check out the next post, which highlights some similarity to the current market phase and the blowoff top in oil in 2008.

Saturday, August 20, 2011


Cancel the order to buy SDS @ 23.00. The next trade attempt may be on an hourly chart bullish set-up as this low is tested followed by a possible reversal to the upside.

Friday, August 19, 2011

Brief Note to Gold Watchers

Gold is set to make a large gap up today. This large of a gap up in such an overbought trend may be an exhaustion gap. I would be on the lookout for a gap up then a sell off today. If the daily chart makes a large bearish engulfing pattern, it may be a good trade to go short.

Thursday, August 18, 2011

Watching Gold and Bonds

Today may be a top reversal day for both gold and bonds. Gold has traded in a tight range after a gap up today, possibly on its way to forming a doji candlestick which may be a topping candlestick. Silver is not confirming gold on new bull market highs or even new highs for the rally the last couple months. If gold tops here, I really like the odds our silver trade will take a turn for the better.

TLT (long term bond prices) opened today with a large gap up, ran up and have since reversed to trade at the lows for the day. This may be a shooting star reversal candlestick in addition to a possible exhaustion gap up in this already overbought trend. The weekly RSI is overbought on TLT and the daily is overbought with bearish divergence. The hourly MACD chart is currently showing bearish divergence on today's high as well suggesting a multiple time frame blow off here. I would think that if this reversal holds, then TLT could be shorted with a stop above today's highs. TBT is an inverse ETF to look at as well.

Gold and bonds have been trading inversely to stocks on this panic sell-off, so we may see stocks rally if these two markets turn tail. What I think may be more likely is that stocks make a new low for the correction, while gold and bonds rally to lower highs creating a non-confirmation. That would be the better set-up to go long in stocks in my mind. It seems to me that gold is the only market really holding the US Dollar index down right now. So watch all 3 of those markets to confirm trend reversals in coming days. An alternate possibility is that stocks are not confirming new corrective lows today while these other markets are blowing off, suggesting strength to come in stocks if they form a swing low here.

Also the 10 year note yield undercut the 2008-2009 low this morning and has reversed higher, creating the possibility of a large double bottom in yields. This is just a screaming intermediate term sell sign in bonds.

Looking for US Dollar Index Bottom

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This is the UUP etf for the US Dollar Index. Notice the lower bollinger band has flat lined underneath the downtrend indicating a weakening trend. The bands have squeezed relatively tight which often happens before breakout moves. This week price had touched the lower band and has reversed higher, so the stage is set for a rally attempt. See the other notes on the chart as well.

If this index rallies we are likely to see weakness in commodities. I may recommend a commodity index short or inverse ETF trade.

As for the S&P 500, the upper bollinger band has now turned down with the lower band still pointing down indicating the configuration of a stable downtrend. Until the lower band turns up, the bollinger band suggests a continuing downtrend.

Monday, August 15, 2011

New Trade Order - SDS

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Based on all the past waterfall declines that are somewhat similar to the recent downdraft in stocks, the tendency has been for a deep or complete retracement of the initial rally attempt. Based on past charts I've studied, I would anticipate this rally attempt to get close to the 122 SPY level as a target with the probable reversal zone being 120-124. I do not expect the market to retrace past 126. If it does then it is not behaving like the majority of past waterfall declines, particularly ones in a similar contextual position to our current market.

Also, as of right now there are a couple unfilled gap ups below prices that could offer exit targets for a short position. Additionally the 30 min and 60 min charts are now reaching overbought territory on the oscillators, suggesting a likely pullback in the near future.

Taking everything together here...

New Trade

Place a GTC limit order to buy SDS at 23.00. The trade will be exited if the high of Aug 3rd is exceeded, so that can be used as a stop. I'll use the hourly chart to monitor for exit and trail the stop down if/when swing highs are completed on the way down.

Thursday, August 11, 2011

Gold Overbought at Resistance

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See notes on the chart. Gold is the most overbought on weekly and daily RSI in 3+ years. Prices are at the upper channel resistance going back 3 years. Don't know if this is a bull market top, but prices should back down soon. This will likely correspond to a sharp rebound in stocks.

Also long term US bonds are overbought. Looks like a time for intermediate term increasing stock exposure and back off bonds.

There is not good indication yet on the stock indexes that the trend has shifted to up. It looks from the shorter term pattern that we should see at least one more smaller pullback which does NOT make a new low, OR some further consolidation and a break to new lows. I would like the break to new lows because we could jump on any reversal candlestick and get in near the bottom of what I think will be a very swift rebound in stocks.

Tuesday, August 9, 2011

More Upside Likely, Then a Re-test of the Low

At this point we have seen an initial sharp short-covering rally which was to be expected as discussed the last few days. They are breathtaking and seem like you better get in fast because the market is going up fast. It is not uncommon to see follow through the next day after a bottom reversal like this, so don't be surprised to see another big jump tomorrow.

However, let's go back to what I posted the other day. The initial sharp reaction off the low of these waterfall declines has often rallied to the high of the second candlestick prior to the day of the low. In our case now that would put the S&P 500 at around 1220. But after that we have tended to see a retest of the low. In our current case we have a large unfilled gap down from Monday that still needs to be filled, and based off of historical tendencies is likely to be filled soon. So we should see the market rally up to that 1200 level at a minimum, before retesting the low.

So the next short-term play here is probably to short the market as the sharp rally reaches those levels and loses momentum. In this position I would expect a flat or triangle type pattern to follow this waterfall decline. In either case we are likely to see a deep retracement of any initial rally attempt.

IBD suggests waiting till the 4th day of a rally to look for an increased volume large advance before trying to go long on growth stocks. And even then only in stocks with well formed basing patterns. How many nice solid basing patterns do you think you will find right now? Probably not many. So, this rally is likely to fail and allow some stocks to strengthen to form the right side of potential bases while the downside momentum wanes.

For those who don't have a good grasp on this, major declines don't typically bottom on peak momentum or fear levels. So right now we are seeing an end to an extreme momentum move. What are the odds it's the bottom of this decline? Not real good based on how most bottoms occur in history. So for an intermediate time frame looking to go long, wait for some divergence on the daily chart technicals (and probably put/call ratios and breadth etc) before taking a long trade. Assuming we get something like that a few weeks down the road, I still don't think it will be the bottom of this decline, but at least it may lead to a credible bear market rally.

Monday, August 8, 2011

Next Support

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Not all that much new to say today. Obviously the SSO trade was stopped out as the attempted rally failed. The close today is near the 1130 level from the prior trading range. If this level is penetrated (either now or after a rally attempt) the next chart support range is 1040 to 1010. All these are indicated as green support lines on the chart.

While I don't use the traditional subjective Elliott wave labeling to track market moves, if this is a wave 3 down, it often may be a 2.618 multiple of wave 1 which would put the S&P 500 at 1065. So before a significant bear market rally, we may see the market move down to the lower end of this support range.

FYI, usually these extreme volatility parabolic declines end with an extremely large gap down. So my guess would be that tomorrow we may see a very large gap down which again could be a nice buying attempt for short-term traders. If the market gaps up tomorrow, then I think the probability of a morning sell-off would be very high based off the stats I've seen and the way these types of moves go.

I may post a bullish trade to try to catch the huge snap back rebound to come if conditions look right. Stops must be used on these moves though because IF the market doesn't rebound the volatility is still expanding and the possibility of a historic market decline becomes reasonable.

So now it has been 5 days in a row closing below the lower bollinger band for the S&P 500, and basically 9 for the Russell 2000. Remember that the Oct 2008 crash ended after 5-7 days at or below the band, so we are extremely stretched here.

As a side note, this move down is larger and faster than the Jan 2008 plunge that really kicked off the last bear market. By using price logic concepts, this suggests that the market decline that has begun may be of similar or greater severity than the 2007-2009 bear market.

My hope for how this market unfolds is for a large counter trend rally this fall/winter which could provide an ideal short-selling/put option buying point. The CRB and CCI commodity indexes are now both below the June lows which puts them in a very vulnerable position. My belief is that gold and silver will sell off substantially when this decline ends and we get a counter trend rally. They are trading mostly inversely to stocks right now. It looks as if the US Dollar will not take off to the upside until the precious metals fall. Most commodities are weakening substantially, but the spike in gold seems to have kept the US Dollar from moving in typical inverse fashion to commodities.

Sunday, August 7, 2011

End of Initial Plunge?

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The intraday low on Friday in the SPX undercut the next chart support level from the Nov 2010 lows and then reversed higher to close basically unchanged. The candlestick was a wide range long legged doji indicating indecision or balance in the market at this level.

The 3.0 standard deviation lower bollinger band was touched 3 days in a row now, which is very rare. I believe this favors an imminent rally attempt or pause in the decline.

If a rally is attempted here there are some relatively clear and consistent indications of what is likely to follow based on past similar occurrences. The most recent similar occurrences to our recent waterfall decline were the Jan 2008 and Oct 2008 plunges. The Jan 2008 plunged ended with 3 consecutive closes below the standard lower bollinger band. The Oct 2008 plunge ended with 5 consecutive closes below it and the 2 prior to those 5 were right at it. Our current market is 4 days in row closing below the lower band and the 2 prior to those 4 were right at the band. So this is about as stretched as we ever see it relative to the bands.

Now, for what has tended to happen afterwards.... The initial rally after the end of the plunge has tended to retrace to the level of the high of the prior 2 candles immediately preceding the low. In our case this is at about 1260. So given we are at 1200 right now, that means a 5% rally, which usually happens quickly (a few days).

Then it has been pretty consistent for a retest of the plunge low (possibly even slightly undercutting it) before a more prolonged rally attempt than the initial sharp rally attempt. This rally tends to end near the levels of the initial attempt forming a "flat" type of correction. It may be reasonable to look for a triangle or pennant formation in the current environment as well.

In looking at past retracements of plunge type moves over the last couple bear markets, it has been common for the next rally after the plunge to retrace 50-62% of the plunge move. In our case, assuming Friday was the plunge low, that would also put us at 1260 or a little above. Also the neckline of the head and shoulders top is around the 1260 level, so we have a lot of indications pointing to that 1260 level being a topping level if the market manages to push back up there.

As far as how traditional Elliott wavers would be labeling this move, they would not expect prices to rally above the June lows on this reaction. Thus far the move off the May top is following the "character" of a traditional 1-2-3 Elliott wave sequence relatively well, so it may pay to continue to look at the market based on that labeling sequence and be on the watch for a triangle or flat type wave 4 up soon.

As far as the larger picture I will direct readers to some other charts. The Russell 2000 index (IWM) has thus far double topped with the 2007 bull market high in very similar fashion to the SPX 2000-2007 double top. Now it has completed a daily chart head and shoulders top, so I wouldn't count on this index popping to new highs any time soon.

The QQQ Nadaq 100 basically formed a triple top on the daily chart over the last 5-6 months. Triple tops are powerful charts signals. The measuring target for them is similar to that for a double top. So, by that metric, there is more downside ahead for QQQ.

The Dow/Gold ratio has now dropped all the way back down to the March 2009 bear market low level (and slightly undercut it). I don't know how helpful this is, however, obviously paper assets have been continuing to under perform hard assets. When the ratio becomes extreme it may make for a good pairs/reversion trade, however, the long term trend in this ratio is down, so I don't know that I would take on a long stocks/short gold pairs trade for more than an intermediate term trade.

I expect precious metals to weaken in the very near future. Silver is likely to be weaker than gold. In fact a short silver/long gold pairs trade is probably a high probability, low risk trade from this level until the Jan 2011 low in silver is broken.

As I type this the stock futures are down 2.5% right back at the lows from Friday. I would actually expect a gap down here tomorrow to have a great chance to be a buying opportunity for a short-term gap-fill trade. However, if the market doesn't rally then we may see a breathtaking plunge tomorrow.

Friday, August 5, 2011

New ETF Trade - SSO

Buy SSO asap with a stop at 41.18. Once filled place a GTC sell limit order at 47.00. This will provide a good reward to risk with a realistic profit target even if the large gap down yesterday is not completely filled.

42.60 is current price.

SLV Short Filled

SLV opened this morning at 38.35 which will be the blog entry price.

The Oct 34 strike put options I bought have an average price around 1.35.

Also now that the Nasdaq has undercut the March and June lows also, the stock indexes may be in position to again attempt a rally. I think there is a pretty good chance we see the market reverse to close higher today. But at this point watch the hourly chart for bullish divergence to possibly consider entering a short-term bullish trade on the indexes. It is worth it if the timing is good, because any coming rebound will almost invariably be quite sharp based on history of these types of moves.

SLV Re-entry

Short SLV GTC with a limit order of 37.61 and a buy stop to cover at 41.20 after entry.
The reward to risk is still about 3:1 given the 26.00 area target. I am buying Oct 34 strike put options as well on SLV with no stop loss on the options. Given the target area there is possibility of 300-400% gain on the options so that ratio is good enough.

Thursday, August 4, 2011

Updates - Dollar, Gold, Stocks

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The reversal yesterday failed today with acceleration to the downside. The target trendline I have suggested has now been exceeded. So all levels of confirmation of a large upward pattern completing are in place. HOWEVER, that doesn't mean that now is a good time to short. Often times these first moves down after major completions are extremely fast but short lived, giving way to more drawn out counter trend rallies which will provide safer lower risk short-entry opportunities. The target for the head and shoulders top is still below current prices, so maybe we still fall to hit that before a rebound. But, based on historical tendencies of the size and duration of this move we should be very close to a sharp rebound. See the chart for additional notes.
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In early July I had posted that the US Dollar Index may have completed a large downward correction ending with a contracting triangle. The move out of the triangle wasn't strong enough to confirm that though. Now we have the possibility again of a completed pattern with explosive upside to come in this index. This fits with what is going on and expected in commodities right now. We should see pressure downward in gold and silver very soon here I think. Also, the recent patterns suggested in the commodity indexes seem to be unfolding now, so don't look to jump into commodity funds long any time real soon for position traders.

I actually bought some UUP Sept. 21 calls today which should have no problem doubling in value before expiration if this projection is correct. UUP is such a slow moving instrument in absolute value terms that I don't ever trade it, but the liquidity is good, so the options make a good vehicle at major turns.

Click on Chart to Enlarge

Even if the gold trend is still up, prices have hit up against a longer term resistance line, so there should be a pullback here toward the green uptrend line at least. The next chart shows the shorter term picture with a bearish reversal today.

As a side note, while gold has trended upward with stocks for most of this bull market, it traded inversely to stocks most of the last bear market. It gets used as a crisis hedge investment often times. So, we may be at a point here where gold starts to trade inversely to stocks. I really don't have any solid expectations on this, but just understand that the recent correlation can change and may be at a perfect time to do so, as the market moves from inflationary fears, to more deflationary fears if stocks and commodities trend down as the patterns are suggesting right now.
Click on Chart to Enlarge

See chart for notes. Silver is actually a good short or put option buy (Oct expiration) here in my opinion. We should see continued pressure here. I will post a trade on it ASAP. The reward to risk ratio is not as good here as it was on the last entry, but this is what the market is giving, and it still should be pretty good.

SDS Exited

SDS opened at 23.00 which will be the exit price.

So the lower half of the hammer reversal has now been penetrated, which as explained may be expected. However, if the low is broken, then maybe that hammer was just a short backtest of the neckline, and the market will still trend down.

Exit SDS

Place a GTC sell limit order at 22.56 to sell the open SDS trade.

Wednesday, August 3, 2011

Hammer Reversal in Stocks

I don't have time for charts tonight, but the action today made a wide range very nice looking bullish hammer reversal on the SPY etf. It reversed after undercutting the March lows, which makes a solid chart based buy signal. I am taking this reversal higher very seriously in respect of the dramatic series of down days recently.

There are times like the Nov 2008 break of the Oct 2008 crash low, where once an important prior low breaks, the sell stops are run, and then there is no more selling at that time. This results in a dramatic reversal higher. However, like reversals at the 200 day moving average, it is ultimately a trading algorithm initiated move, which is not always a legit shift in market psychology. So it is possible that after a brief pause today's low gets broken and the head and shoulders pattern continues.

That actually feels unlikely to me. Also, a reversal this strong right under the neckline of the head and shoulders is probably not a good sign for bearish traders. I will have to do a little more looking, but I will likely suggest exiting the long wasting inverse ETF trades still open on the blog. However, if the S&P 500 remains below the neckline for a few days and offers any suggestions that it is likely to break lower, then I will consider re-entry.

FYI...Statistically (according to Steve Nison the candlestick guru) the hammer candlestick has about a 60% chance of having future price action move below the mid point of the tail even on successful bottoming candles. So we may see some further churning here for a day or so, before reversal higher. I think the odds are lower than that in this case, but those are the stats from their historical info.

Tuesday, August 2, 2011

Early Confirmation of Major Pattern Completion

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A few posts back I mentioned the stages of expected confirmation if the pattern suggested had completed indicating a possible major top in place. The first was for the wave "ii" - "iv" trendline to be broken in less time than wave "v" took to form. That happened. Then wave "v" should be retraced in less time than it took to form. It lagged by about a day, so that was not very clear. Then the entire June-July (i-v) rally should be retraced in less time than it took to form. That basically happened today at least given the completion points of the pattern as I've labeled it. Since this occurred I think we can forgive the slight delay in the retracement of wave v.

The next stage of confirmation is for the dashed downsloping red line to be exceeded in less time than the June-July rally took to form. That has not happened yet, but it seems within reason that it could. Even if it happens by the right edge of the light blue box, that would be decent confirmation.

I obviously would have liked to shorted the market as I felt and noted the pattern was completing, but right now it is late to just jump on if using a defined risk trade. The best opportunity for that should be if there is a brief rally back underneath the neck line of this possible head and shoulders pattern. (see next chart)

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See the notes on the charts for details. Basically this looks like a credible head and shoulders topping formation. Ideally it should stay below the neck line or not close back above the neckline. However, I would expect a backtest from the underside in this case, though that doesn't always happen. If it does back test, the SAFEST way to short is to short it on a break to new lows for the move with a stop above the high of the backtest. Often that break to new lows will be with acceleration, and maybe even a large gap down. So, you could even put the stop tighter if there is a chart based reason to do so.

Click on Chart to Enlarge

Notice the bollinger band configuration right now. The bands are expanding indicating a volatile breakout type move. If there is to be a new downtrend, what should usually happen is for the bottom band to stay pointing down, and the top band to peak and start to trend down also. If the bottom band turns up, then that may indicate the correction is over or nearly so. The prior red and green lines show when the top band turns down after an expanding downside breakout, and when the bottom line turns up, respectively.

The daily chart is pretty oversold right now. Even if the downtrend continues, I think we are almost certain to have a rebound rally (probably quite sharp) within the week.

Monday, August 1, 2011

SPY Update

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After the early morning sell off today, SPY rallied into the close and remains above its 200 day moving average and also above a tight harmonic support zone at 128.21. The hourly chart indicators are very oversold. There is not perfect bullish divergence on them, but this is a reasonable long set-up here with a stop below the June lows. It may be better to wait for a higher swing low on the hourly charts to give some confirmation of a new possible uptrend on this time frame.

At this point I would really need to see a short-term rally before going short/inverse or a break of the March-June neckline followed by a back-test before going short. Daily stochastics are oversold but without divergence right now. So maybe we need some churning here before bottoming, or maybe the market does actually follow through to the downside. But I definitely would NOT jump in short right here.