Another Reason to Remain Bearish On Stocks

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See the notes on the chart for further detail. Basically AAPL has been able to buck the trend to some extent and push to new all time highs this month. However, this comes in the context of a rising wedge or ending diagonal chart pattern. An ending diagonal lead to about the most vertical/explosive reversal of any chart pattern. Prices will retraced the entire diagonal often in a quarter to a third of the time it took to form or even less.

So given that AAPL pierced the upper diagonal line and reversed down with a gap and is below the prior peak from July, this has everything in place for a major top for AAPL. The weekly RSI and the daily MACD have beautiful bearish divergence. The daily MACD made a bearish cross sell signal today. If the lower diagonal trend line breaks....watch out below.

Earnings is next month, my guess is we will see a major downer this time. Some Jan 2012 puts would be appropriate here. Also, shorting ASAP with a stop above the all time high for short sales. The initial covering point would be $300 based on the chart pattern.

Also, distribution days are still running basically 2 to 1 to accumulation days over the last several months. So one could choose to ignore this and say "well it still broke out to new highs after last time you said that. It just shows AAPL is invincible." Or you could realize that this means, for a fact, that a tremendous amount of selling has occurred over the last 9 months while prices have remained generally higher. Big holders have been exiting this for the last 9 months. If you hold it, what is your exit plan?





BIDU and CMG are two more high fliers that look to be at critical points with likely downside ahead. So if the leaders are set to move down 25% or more in the coming months I have to think the market will come under severe pressure as well.

Another Interpretation on Silver Price/Form

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See the chart for notes on SLV. Because the expected time of wave C to end is upcoming in a couple weeks, and the decline has been dramatic, I think it best to place exit orders for SLV, and then see what the next rally looks like with the expectation of re-entering short at higher prices.

Place GTC "buy limit" orders to cover/exit the SLV short trade at 26.00.

Clarification on SLV

For clarification, a couple posts ago I had said to place a GTC buy stop on SLV at 36.50. I should have said "move" the buy stop to 36.50. That was only intended for the open SLV short trade. It is not a new trade recommendation to go long silver.

So that stop is a couple cents above the high of the breakout/breakdown bar on SLV that closes below the lower bollinger bands with the bands expanding. That should allow a lot of play room for SLV, and still have a small profit locked into the trade now.

Silver Update

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See notes on the chart. The initial target was met on the silver cash and nearest futures but the SLV etf fell short of the corresponding target by about $1.50. So SLV may consolidate above that level now, but I think it will be just part of a larger bear market.

I think that prices may form a triangular consolidation here off of yesterday's low. But after whatever rebound we get here, prices should continue lower.

On related notes watch SSRI for a short entry any time on a back test of a broken head and shoulders neck line on huge volume. Also, SLW is hovering above the neckline of a beautiful head and shoulders pattern. I would sell the breakdown of the neck line on a sell stop (~30.50) because it may not see a backtest of its neckline the way silver prices are situated.

Reader Feedback

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Trade Adjustments

Place a "day only" order to sell TWM at a limit of 55.36 for Tuesday 9-27-11. There is powerful bullish divergence on the underlying IWM/Russell 2000 index. While my previous post is still my main line of thinking here, the current set-up is very similar to March 2008 where after the initial meltdown, there was a retest of the low (some indexes undercut it and some didn't just like right now) and then a more substantial and broad-based rally before continuation of the downtrend.

Also there are some time relations between the recent moves that could place a bottom in at the recent low and then a move up into early November. So, I'll exit this trade here with a possible re-entry if conditions look right in the next few days or more.

Also, place a GTC buy stop on SLV at 36.50. Given the dramatic swoon in silver, I have every reason to believe we have seen a major high. Also, a few weeks back I detailed several time frames on gold and suggested a possible MAJOR top. I still think that is most likely the case. So we should see silver and gold continue down over the coming months and continued strength in the US Dollar.

However, the time relations between the prior moves in silver don't suggest a bottom for this move in silver until mid to late October. I am tentatively thinking around Oct expiration. With 3 huge gap downs in a row, today's rebound is to be expected in silver. However, I think that a re-test and undercut of the low is likely in order to create some divergence on the daily chart before a sustained rebound. Also, the $26 chart level is the really the first chart support from the last low in the uptrend before the peak. From experience, I expect that low to be exceeded to wash out sell stops before a more substantial rebound. I have GTC limit order to sell those Oct 34 puts I am holding @ 8.00.

As a side note, if we get a lower swing high in TLT/bonds I think a short is in order. I may post a trade on TBT if things look right in the coming days.

Possible Rally to Fill Thursday's Gap Down

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There is a historical tendency for large gap downs to be filled relatively quickly. I would have to say that when that gap is in a consolidation zone that is even more true, as opposed to when the market has broken to new lows.

See the notes on the chart for what I think is a likely scenario here. It seems to me that it is a function of the underlying order structure of the market that the market makers push to take out all the stops below all the swing lows of the rally which "causes" this typical pattern. Once that stop cleaning is accomplished the market is free to rebound, but any new break below that stop cleaning low is likely to lead to significant downside follow through.

So watch for that here.

CRB Commodity Index Update

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Everything has suggested to me that commodities would continue lower after the last rally, and that was confirmed today. The CRB Index is now at channel support, but I don't think it will hold. I think it will break that channel and trade underneath it.

Based on the time of the prior moves the purple line is my best projection of when this next move down is likely to bottom. This shows up as late October, which coincides with some of the other cycles I've mentioned in prior posts. The green lines are the next chart supports which may be basing or rallying areas.

The sharp move up in bonds this week may be either a continuation or an exhaustion move given the large gap up today. Bonds paused but did not rally at the time area that I suggested in a recent post, and they are trading inversely to stocks and commodities for the most part. So I don't have a great independent analysis on this right now. Just watch the weekly technical indicators and candlesticks for signs of reversal to indicate a top.

Gold Update

Gold has corrected 9 days off the recent new high. That is longer than any other minor correction for the last 8 months or so. This suggests that a high is likely in on gold. It needs to decline a couple more percent to become significantly greater than the recent sharp correction. That would be good added confirmation as well.

It is a bit oversold on the daily chart for me to suggest an entry here, though it may very well be a reasonable entry. My hope for this market is to get some further downside and then a significant rally to a lower high with an overbought stochastics in order to suggest a short or inverse trade on gold.

Short oil or USO looks to me to be a good intermediate term trade right here. I expect some retracement of the large gap down today, but I don't expect it to be too much. In any case, a stop above the recent swing high should be used if shorting.

SLV Breakdown and SPX New Downtrend Confirmed

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See that chart for notes. But it is probable that a new down leg has begun in stocks. Based off of chart patterns and support, I believe the next leg down will go to the 1000 area at least before a major pause.

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While this doesn't affect our open SLV short, this is the signal I've been suggesting to be watching for on SLV to give indication that a new large trend has begun. This can be a great signal for entering options trades 1-4 months out before expiration. The closer to expiration the closer to the money to buy.

I am still maintaining the SLV Oct 34 puts. I also bought SLW Jan 34 puts yesterday because it appears to be forming a head and shoulders top with a projected decline to about $20 based on the chart pattern. So that gives me a second exposure to the downside of the silver market.

Quick Note

No changes on anything. The reaction today is possibly the start of the next phase down in the markets as I've suggested over the past few weeks. You could look at the action since the Aug low as a giant bear flag chart pattern, though it is large and messy.

I plan on retaining the TWM trade and moving the stop up soon. Then once new lows for the correction/bear market are made, I will start trailing a stop behind support area and let things work down as far as possible.

SPX 1230 Is Likely Resistance Again

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So far the action in the S&P since the last post has unfolded about exactly like the projection I laid out. Now looking at the hourly chart above, notice that the price is basically at the recent high but the MACD is lower. This is setting up a potential bearish divergence on a price breakout. That is ideal to see before a downside reversal, so the indicators are starting to warn that the advance is losing steam.

Based on the ideal projection of a rally of this form, it would project to SPX 1229-1230 which again is right at the heart of a major longer term harmonic resistance zone. The ideal time for a high to occur would be tomorrow morning. Basically I would like to see a brief push up through the upper blue wedge line and then a price reversal with a bearish MACD cross and -DI cross above +DI on the DMI system to initiate any new trade.

The next FOMC meeting is tomorrow, so we may see the action settle down considerably until tomorrow afternoon.

Still Expecting Rally to Be Near Completion

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I expect this rally to be very near completion here. See the notes on the chart above. It would be nice to see some better signs of divergence on some oscillators before entering short, but basically we are in the window where we could take the next stochastic sell signal for a new bearish swing trade. A couple things not on the chart......there are two time areas which look to be reversal times based on some cycles I have looked at. The next one is at the end of next week around Sept 26th. The next zone after that I believe to be the 3rd-4th week of October. So the dashed projection lines on the chart use those time frames to show an approximate expectation of what will occur IF this is indeed a bear market rally to be followed by new corrective lows.

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The lower wedge line on SLV has been broken now, including a gap down on the day of the break. Now there has been a relatively weaker little move back up under trendline which could be the final retest before a major swoon in silver prices. Indicators to use to take a new trade would be a ADX/DMI sell, and/or a close below the lower bollinger band with the bands expanding. In many cases the stop will be safe a tick above the high of the day that closes below the lower band on a breakout move like I just mentioned.

On a related note, the US Dollar Index look like it is in the process of backtesting its breakout of 76.25. I have no reason to believe it won't be successful, so when that completes, we should see pressure on commodities again. Crude oil looks to be forming a rising wedge, that may indicate further downside ahead very soon.

Zeroing In On Possible Reversal

If the markets are to reverse lower as the recent pattern updates have suggested, today it the ideal day time wise for the pattern to complete, and the shorter term technical structure is starting to look nearly ideal for a reversal. I am maintaining the TWM trade open at these levels with expectation of a downside reaction here. IF that occurs I will adjust the stop on the trade.

On the SPX chart, price once again hit the declining resistance line I have highlighted several time recently. That is ideal for a reversal as well.

S&P 500 Consolidation Near Completion

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Because of the price and time relations of the recent overlapping consolidation in the S&P 500, the logic I use for pattern interpretation suggests that IF last Thursday's high is not exceeded tomorrow, then the recent 3 days move down will not be retraced faster than it took to form. That would continue to suggest weakness ahead in stocks. As it stands since the Aug 9th low, the LARGER moves have been upward, but the two downward "x" moves have been FASTER and have NOT been retraced in less time than they took to form. So the strength of the market still seems to be in the downside based on the idea that the direction of trend is the direction in which the market is making both larger and faster moves.

The projection I made in the last post suggested the S&P 500 should approach 1200 and the declining red resistance line by tomorrow/Thursday. Also, if an upward pattern is completing here, it would be ideal if price did NOT exceed last Thursday's high. It slightly exceeded 1200 today, so that projection has been met, but tomorrow could be somewhat decisive.

Basically I am viewing the move up since last week's low as an upward flat pattern. If this is correct, it should complete in the next day or so, and be followed by a move back below the low of the pattern in less time than this last little leg up took to form (say 3-4 days).

SLV Update

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The bollinger bands are squeezing on SLV and the lower band is at 38.42 currently. A sharp downside break with a close below that band would be a good sign of a new downtrend. See the chart for other notes.

Brief Rally Ahead?

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There is no confirmation that this upward consolidation is complete, however, today's break of last week's low may indicate weakening and suggest that the pattern will complete at a lower high than the 1230 level. It looks like a brief upward flat pattern may form here which suggests 2-3 days of upward prices from here. This would likely give another test of the red resistance line before a possible break to new lows. See the notes on the chart for additional info.

I am going to hold the current TWM trade open with this in mind, but a breakeven stop could be used to remove risk.

US Dollar and Silver Update

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See the chart above for notes on the US Dollar. There are several technical signs of a new uptrend. Price has now moved above a prior intermediate term high after forming a higher intermediate term low. The ADX line has jumped above the 20 level with +DI above -DI. Price has closed several days outside the upper bollinger band with the bands expanding. All these are suggestive of a breakout move in a new trend.

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The US Dollar typically moves inversely to commodities. If the US Dollar continues up, then we are very likely to see commodities continue to decline. Cotton, silver, and coffee were 3 commodities in this recent bull market that made huge historic advances, which indicates the likelihood of major corrections or bear markets to follow. We already saw a big decline in cotton and captured a lot of it in a blog trade. Silver should be in a similar boat here.

Notice that silver looks a little like the US Dollar over the last year, but upside down. Silver is still in a lengthy trendless phase, which should be a basing for the next large move. This should be down. Based on the fact that this rally in silver since the spring low has taken much longer than the decline, I expect the next declining phase to take about half the time of the decline and the advance together. That could be used to determine how much time to buy on an option trade.

I already have Oct 34 puts on silver, but my plan is to add a new put trade on silver if/when it breaks down and closes below the lower bollinger band with the bands expanding. I will buy about 3 months of time and look at slightly out of the money strikes.

Bonds/Yields Update

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As of the next day or so, it looks like an ideal form, time, and technical bottoming scenario for long term US bond yields. This means time to sell long-term bonds.

I will post a trade on TBT (inverse bond ETF) if/when the entry looks good over the next few days. Waiting for a break of the wave 2-4 green trendline is a safe entry, though a good indicator signal may come slightly before that.

The long term context shows spiking of bonds prices to 2008-2009 levels, but yields still well off the lows of 2008-2009 creating a non-confirmation that is bullish for yields.

From an investment standpoint then here is my analysis in a nutshell:

-get out of longer term government bonds and all "junk" bonds
-On an investment basis I have suggested being out of stocks for the last 2 years basically, and I still believe that will be shown to be wise as a longer-term suggestion (S&P 500 prices likely to go to the 900's as a bare minimum in the not too distant future)
-commodities including gold topping and entering bear market
-US Dollar set to gain against foreign currencies

So here is the non-speculative take home play: stay in cash (even literally dollar bills in a safe) or in funds of the shortest term US treasury bills which are extremely unlikely to default though they have a miniscule yield.

US Dollar Update

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Today's large gap up after recently breaking out a wedge, and a possible longer term pattern completion all suggests that we are likely to see continued pressure on commodities and that the markets may be shifting to a deflationary theme in coming months.

The advance should be very sharp (sharper than the May advance) in the dollar index if a bottom is, in fact, in place.

Several markets, I believe are near very significant turns. I will update on bonds ASAP, but the suggestion is that US 30 year bonds should be topping, I think this week. Cash is the place to be right now.

Harmonic Resistance at 1226-1232 on SPX

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There are multiple harmonic and chart resistances right in the 1226-1232 range on the S&P 500. I am viewing this as possibly a "point of no return" for the markets for quite some time. Inside the pink oval on the chart I have shown 5 harmonic resistance levels though at least one more of significance could be added.

Inside that little zone are the:

- 50% retracement level from the July high to August low
- 61.8% retracement of the 2007-2009 bear market
- A=C for an upward ABC correction since the July 9th 2011 low
- 141.4% extension/external retracement of the "B" wave of the upward ABC since Aug 9th
- 38.2% retracement of the July 2010 to May 2011 rally
- major horizontal chart support which has been a breakthrough and resistance point for 4 severe market swoons since year 2000

Keep that chart level permanently on your charts for future reference should the market continue to chop around these levels.

The next major horizontal chart support zone is the 1050-1070 area. Should the market break through the Aug 9th low, I think it will likely move down to that 1060ish area before a possible rally attempt.

Below 1060 the next major support is the 940 area. I am keeping those area bolded on my charts for future reference as we may see the markets move sharply to these levels if/when support levels are broken.

SPX and CRB Update - Possible Sharp Downside Next Week

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The CRB commodity index looks like it may be forming a tradable top here in a complex downward pattern/channel. The pink dashed "sell" line would be my sell trigger level once stochastics is overbought and makes a bearish cross like this. See the notes on the chart for the price/pattern logic.

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The S&P 500 has formed and extremely attractive upward ABC pattern since August 9th and had some nice reversal down from the resistance zone the last 2 days. That being said, I don't like the time relationships or channeling here that great for a textbook "flat" to form. But the harmonic and chart resistance area is extremely nice with multiple resistances at 1225ish on SPX. I will probably post these on another chart. The price logic still suggests a downtrend here because the upward moves are not retracing the downward moves in less time than the down moves took to form.

IF this is an upward flat pattern, then to confirm that we should see the market drop sharply next week to break below the bottom of the pink box. If we see that, then I think the next possible bottoming time frame in stocks will be late Sept to mid October. Some time relationships suggest Sept 26th-Oct 12th. See the chart for further notes.

Trade Set-Up on Inverse Index ETF's

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The set-up for a bearish trade is coming along nicely here. There are a few strategies that could be used for entry. One strategy I mentioned in a recent post which was to wait for the %D line on the daily fast stochastics to go back below 80 and enter then. Another method is to place a sell stop at the trailing 1 candle low once a bearish cross occurs on stochastics. In this case the sell stop would be at the low of yesterday's trade. The stop would go above whatever high is made on the current 2 week rally.

An alternate method would be to use the hourly chart with the same indicators I showed on the EUO trade last post. Wait for the -DI to cross above +DI and for the MACD to be in a sell signal and enter short with a stop above the recent high.

New Trade Order:

Place day only buy stop order at 49.00 on TWM (2x inverse Russell 200 ETF). Place a GTC sell stop below today's low if filled.

New Trade - EUO

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The US Dollar has jumped this morning and broken the trendline of a downward sloping wedge/triangle. It actually gapped up up above the trendline which is really nice for the beginning of a new trend.

Given everything discussed on this blog about gold, silver, commodities, and the US Dollar, I am going to post a new trade entry here on this. Notice that the +DI has crossed above the -DI and the daily MACD has made a bullish cross this morning. I like this combination of indicators, and an indicator exit can be made when BOTH the MACD makes a bearish cross above the 0 line AND the -DI crosses above the +DI. At that point a trailing chart based stop could be initiated as well rather than immediate exit.

Buy EUO today with a market order. Place a GTC sell stop at 16.45. Blog entry is 17.17.