Charts

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These are the charts I wanted to show last night. The S&P 500 is at a conjunction of possible chart resistance. The 200 day SMA, the neck line of the head and shoulders, and a long term trendline not visible, are all right in the area of price right now. And there is a low-low = high-high time relationship occurring right now as well. That is a possible time window for reversal.

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I have never heard or seen anyone else talk about this concept, and I've noticed it more in individual stock price charts than in indexes, but at times I've seen this in indexes. Basically the idea is that often times the major gap up in a trend will occur at a 61.8% retracement of the high to low of that trend. So when a trend is developing and you get a big gap, you can drag your retracement tool until the 61.8% retracement is at the beginning of that gap, and it will give you an ideal target for the ending price level of that trend. There are two examples on this chart here: the May-Oct decline, and possibly the current explosive uptrend since Oct 4th.

I may give more detail on this later.

Potential Price and Time Reversal Zone

Blogger is giving me an error in trying to post a couple images tonight. I will put them up when I can. One is a concept I haven't ever really covered in this blog before in any detail, but there are a couple very nice examples of right now on the charts. Basically the high today was pinpointed as the possible rally high by the prior gap up on Oct 10th. So the 1290 is a potential reversal zone.

Also there is a low-low = high-high time relationship possibly in play right now where the time between the Aug 9th and Oct 4th low is equal to the time between the Aug 31st high and the current high. There is one day difference as of today, but at times this relationship will occur before a major trend change/continuation.

While the S&P seems like it will probably be at around 50 billion by late next week, there is the possibility that it is climaxing on a counter trend rally right in this area.

Comparison of Bear Market Rallies

The bear market rallies lasting a month or more in the last 2 bear markets are listed below:

2000-2002
14.2% in 140 days
10.2% in 41 days
21.7% in 60 days
24.6% in 108 days
24.4% in 29 days

2007-2009
14.5% in 63 days
27.5% in 46 days

Currently we are up 19% in 24 days which is in the target zone for percent advance in price, but still short on time of what has been typical. So IF this is a bear market rally, which I think it probably is, it is likely to cool down soon, but may put in a higher high in the next few weeks.

Also, today the S&P 500 is bumping up into the 200 day moving average from the underside as well as the neckline of the head and shoulders chart pattern that formed earlier this year between Feb-July. The 200 day SMA is where the initial bear market rally stopped in the 2007-2009 bear market. Additionally the S&P 500 is touching a multi decade support/resistance line from the underside today (connecting the 1987 high and 2002 low).

On a longer term basis there are some significant reasons other than patterns to believe that the market will have difficulty pushing substantially higher. One of the most obvious to me is that the cash levels in major mutual funds is basically hovering at an all time low. The market has historically topped out bull markets when the cash levels fell to 4% or so. And we have been in the lower 3% range for most of the last year. So, while this advance has been amazing off the Oct low, I think the firepower to fuel new bull market highs is limited.

I think that the tops in 2000, 2007, and 2011 all in within about 10-12% of each other in the S&P 500 are an indication that the cash level is too low to be able to push the market higher. Before another major secular bull market it would be sensible in historical comparisons for the cash level to rise to levels suggestive that a multi year advance is sustainable. Another longer term bearish indication from this data is that this cash deficiency is occurring at a LOWER high than the last high in 2007.

Stocks and Commodities Update

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Based off of a couple chart pattern projections the minimum expected price target has already been met on this rally. Basically the lower range was the low 1250's and the high is around 1275. The daily stochastics is overbought and the weekly 8,3,3 stochastics is almost overbought, so we are close to dual time frame overbought momentum. Another poke up on the hourly chart would push the hourly momentum to overbought as well giving multiple time frames of momentum as overbought.

Based on the structure of the advance off the Oct 4th low, this looks like a complex upward pattern that may complete a second phase advance in the next 1-2 days. The gap down at the 61.8% retracement of the May-Oct decline is still unfilled just overhead. So it would be nice to see that filled in the next day or so, and then possibly we will see a pullback, possibly a significant top, though there is no great reason at this point to expect a top other than price pattern and retracement levels.

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If commodities are to continue a downtrend, the correction upward thus far has been right in the range (red box on chart) to see a measured correction based on the other upward corrections in the downtrend. There is some bearish divergence on the daily stochastics at the fill of a major gap down, so this could be a reversal zone.

Breadth Thrust

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I did not include the stock prices on this chart for clarity sake, but this is the NYSE advancers-decliners data with a 63 and 126 day moving average. That represents 1 and 2 quarters of the trading year, respectively. The purple horizontal line is the zero line. Notice that the green 126 day average moved above zero in April of 2009 and remained there for the entire bull market. Now last month it dipped below zero. I take that as a possible breadth signal of a longer term trend change. Right now the green line is back right around zero, so let's keep an eye on how it behaves.

Also I drew some overbought/oversold horizontal lines to see where the peaks of the breadth thrusts were over the past 3 years. Currently the market is right near a 10 day breadth thrust extreme. These have happened in 2 distinct contexts over the last few years. Either the market was coming off a corrective low and was beginning a powerful new multi month trend OR it occurred a little before a peak leading to a sizable correction.

SLV Options

I had mentioned the Oct 34 strike put options I bought for 1.35 on SLV a few weeks back. I sold half of them Sept 29th for 5.10. I sold the rest this morning for 3.65 seeing as expiration is tomorrow with no obvious potential left in them.

No change on the limit order for the SLV short trade to exit at 26.00

Update

Today's trade has created some continuing bearish divergence in the stock indexes. Shorter term RSI (3 or 5 period) show nice divergences and the 60 min MACD is at an even lower peak at this high. Price pushed right up to the 1233 level which is at the top of the recent 2 month range and just under the upper daily bollinger band. This all in the context of a late "follow through" day in the markets. So we have some mixed messages here. Despite the follow through day, I think stocks are still likely to pullback before charging through the top of this trading range.

AAPL reported earnings after hours and missed estimates for the first time since the 2009 bull market began. Given the bearish divergences on AAPL developing over the past months, this may be a trend changer in AAPL shares.

GLD gapped down today, but then traded higher all day after that. If my recent outlook on it is generally correct, then given today's action, it may have another brief push to the top of its recent range before the consolidation is complete.

GLD and SPY - Further Pullback I Think

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This is a 4 hour chart of GLD, the gold ETF. It is showing a nice bearish divergence suggestive that we may a pullback continuing tomorrow and beyond. My suggestion has been and still is that this is likely to exceed the Sept low at least briefly before a probably reaction rally to a lower high than the all time high.

Silver is positioned similarly on the hourly chart. I expect new lows for the correction.

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This is an hourly chart of SPY. Again there is a nice bearish divergence on the MACD here which suggests a continuing pullback ahead. The blue arrow is the level of the unfilled gap down that may attract price on this decline. Also the daily slow stochastics is overbought and made a bearish cross today. To confirm this as a sell signal I like to see the low of the day be broken in the action that follows. So if we make a lower low tomorrow (below today's low) then that will be better confirmation of a high, and I will post a stop on the trade as well.

Some Details on Stocks and Gold

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See the notes on the chart above for gold. Looks to me like it should make another low before a longer rebound rally. The hourly chart has bearish divergence on gold and the retracement level is what I would expect to be the typical amount for this peak if a 5 wave move is occurring off the high in gold. My expected projection is on the chart above.

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After a minor bearish divergence on the hourly chart where I posted the recent new SDS trade, stocks have pushed higher, but with an even larger bearish divergence on the hourly chart. I expect the market to pause here for a number of reasons. Again, my target on this pullback, assuming we get one soon here, is 1155 on the SPX. After that I think it is likely that the rally pushes to new highs.

I have spent some time going over some detailed comparisons of our current market and the S&P 500 and gold prices at the end of the prior bull market (2007 top in stocks and 2008 top in gold). The move down off the May 2011 high in stocks to this point has been very similar to the move down off the Oct 2007 high. If the current rally is similar to the March-May 2008 rally then my projection from a recent post is still pretty close, though if it followed that template exactly it should only last 2 months. The general price levels I projected are still the same.

Additionally, behavior in gold has been similar in recent months to it 2008 top and turn down. It rose with stocks for most of the 2003-2007 bull market, but then as the bull market aged and debt/default issues started coming out, it continued to advance to new highs while stocks got hammered initially. Gold peaked 5 months after stocks peaked in Oct 2007, and before peaking gold gained 31% from its level when stocks peaked.

In the last several months (assuming gold has made a high) gold peaked a little over 4 months after stocks peaked. And it gained about 21% from its levels when stocks peaked. After the 2008 peak gold declined for 6 weeks prior to a 2.5 months rally to a lower high. That lower high was a great short sale point on gold and gold stocks. Watch for a similar play here. I believe ABX is setting up for a fantastic short sale in the coming months.

Pullback Ahead I Think - SDS Filled

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See the chart for notes. Basically we are set-up to at least move back toward the unfilled gap up from Monday. If/when we get a stochastics sell signal here, I will post a stop on the new SDS trade and then follow it for an exit strategy.

The opening price on SDS today was 22.42 which will be the blog entry price.

Short Term Overbought at Resistance - New Bearish ETF Trade

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A marked bearish divergence is present on the 30 min MACD chart of SPY and it also exhibits a "three push" type pattern that is often the end of a move. The MACD has been making lower peaks on the last two bearish crosses, but the SPY has continued substantially higher.

So now we are at a chart resistance area around 1207-1230 on SPX and there is loss of momentum on this move. So we should see a pullback here. At this point my suspicion is that this move down will fill the gap up at 115.65ish on SPY and we may see a retest of 1120 SPX, but I don't have any degree of certainty that we will see new corrective lows before there is further upside.

I am going to post a bearish trade here because I think that it is very unlikely the SPX will be able to push through this resistance area without pulling back to reload the guns first, so to speak. I then expect that most likely a bullish trade will present itself within a week or so.


New Blog Trade:

Buy SDS at the open tomorrow. I am not going to post a stop loss on this one, but exit at the next hourly MACD oversold bullish cross. Also, we could us a limit exit order at the fill of the 115.65 gap on SPY.

Possible Uptrend But Short-Term Overbought

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Today was a big gainer in the markets, however the volume came in way lower. In fact volume is at a 14 day low with the biggest price move up or down in the entire period. That seems kind of odd and possibly significant, but I don't have any stats to say one thing or another. So this is not a follow through day. Most follow-through days occur from 4-7 days off the lowest close according to IBD. Today was day 5. So we are in the sweet spot as far as that goes. Granted today was a "holiday" but that shouldn't be an excuse to count this as a sure thing follow through.

Also, for good confirmation of an uptrend, price should have exceeded 1195 today on the cash S&P 500 which it almost did today but didn't quite. This could be forgiven, but still it is not extremely convincing to me especially given the weak volume.

If a corrective low is in place, we may see something corresponding to the green projection above. If not, and the market is headed to lower lows on this move, then we should top quickly with some big downside ahead the next 2 weeks.

As far as trading opportunities, I feel a little foolish for not taking the bullish trade mid last week as the technical set-up was quite nice. From this point here is my plan: If we get a nice reversal on the hourly chart, I will post a bearish trade, but with the idea that I may exit and immediately reverse to a bullish trade if there is reversal back up on the hourly chart.

SLW Head and Shoulders Top

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I have given some detailed analysis of silver and posted some SLV etf trades over the last few months. Also I have mentioned stocks like SLW and SSRI which are silver stocks. I am posting this chart here on SLW because it is an absolute, no doubt about it, meets every criteria in the textbook, head and shoulders top that is at a short sell point NOW, and projects a greater than 50% loss from these levels. I am not going to post a trade on it here because at this point in time that is not the function of this blog.

If you have a technical analysis text book then get it out, check out head and shoulders topping patterns, and compare it to this one as far as price, volume, trendlines, and backtest/return moves. I use John Murphy's Technical Analysis of the Financial Markets.

If last week's low is broken, price should not return to the neckline again. So the chart above offers some basics as far as where the important points are and what the target is. While I can't guarantee anything, I see this one as shooting fish in a barrel. I already hold puts on this one which I got on the day of the high of the right shoulder. But if I didn't hold it, I would get in either ASAP or on a break of last week's low.

Conventional Elliott Wave Count and Projection

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See the chart for notes. There was a very significant breadth and price divergence on the recent break to new corrective lows in the stock indexes. With a pretty nice reversal thus far, the stage is set for a potential rally in stocks for a couple months or so.

If this is the case, then prices should trend up with a conventional Elliott wave target around 1260 which is the location of an unfilled gap down, and the 61.8% retracement. This would also fit with typical seasonality in the markets which often have displayed an October bottom, and a rally into Dec/Jan. Robert Prechter's book The Elliott Wave Principle lays out the guidelines for a wave 2 and says they are often a zig-zag formation, so they should pretty directional, and they most often retrace 50%-61.8% of wave 1. Based on that and the chart analysis, is how I projected the rally on the chart above.

The technical analysis of the markets suggests to me that this could be very likely. From a price logic perspective I don't have confirmation of an uptrend yet. That would require the S&P to rally above 1195 in the next 2 days. If that happens, then I would shift to intermediate term bullish in my outlook. Either way, there is no technical reason to hold shorts here for the swing trader. However, a break to new lows would likely be a quality short-term short sale point from my experience.

Since stocks and bonds have been moving inversely, and because bonds are displaying a valid sell point on their own, I have posted a trade order to enter the inverse bond etf TBT. If still holding EUO or longer term short stock positions or inverse stock ETF's, then this could give somewhat of a hedge to offset those. But it is a legit trade in its own right.

New Trade Order - TBT

The TLT etf has pierced its 2008 high 2 out of the last 3 weeks, but closed below it both weeks. The technical picture is very overbought and the pattern is mature. A tick below last week's low, which is not far off, would be a nice stochastics sell signal on TLT.

Given the overall context here, I think this has potential for a nice sell off. So I am going to post an order on the inverse bond etf TBT.

New Trade Order:

Place a GTC "stop" order to buy TBT at 20.60. So if price rises to 20.60 or higher this will trigger a market order entry. Place a GTC sell stop at 17.60 if filled and for position/risk sizing.

Gap Down Filled

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The gap down at $116 is now filled on SPY and the other index ETF's IWM and QQQ. So that target for this rally is met. Thus far the last 2 days of gains have come on progressively declining volume. For a rally to have higher probability of lasting the market should put in an increasing volume up day of 1.7% or greater sometime soon. That is the IBD follow though day guideline.

From a price logic standpoint the last swing down into the low was 5 days. So if this rally exceeds the high of that swing move around 119.50 in 5 days up, then that would be sign of a trend shift in stocks, at least intermediate term. So the market has about 2 and a half more days to accomplish that. In an expanding environment, it is possible that this move up does break that 119.50 high and then fail with a pretty violent leg down.

As long as prices remain below that 119.50 level, if the hourly chart turns down with a bearish MACD cross and a -DI above +DI directional movement signal, I plan on posting a new bearish trade entry. If the rally retraces the recent swing down completely but SLOWER than the downward move, I will still likely post a bearish trade on a reversal sign if there is no follow thorough day by then.

If the market retraces that move faster than it occurred, then I may look to post a long trade on a pullback above support.

Short Covering Rally? Then Waterfall Decline?

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I'm a little short on time tonight, but there is a very important and maybe somewhat advanced concept that I wanted to point out here to help get a handle on how and why bear market short-covering rallies occur, and what to expect and to look for.

The more I study charts and understand the markets, I have learned to think of the market in terms of order structure, kind of like a market maker I suppose. So think about this, the market makers are there to provide liquidity to the market. They make the bid/ask spread on every order filled. So what is their goal?

To fill as many orders as possible. That way they make maximum profit. So when they are looking at a market and can see where the bulk of orders are placed, they fight to drive the market that direction in order to fill the most possible orders.

So when you look at a price chart, think in terms of where the most standing orders will be placed......above and below chart swing highs and lows (support and resistance) that effectively are breakout/breakdown or stop out points. So expect the market to run the stops at those levels before resuming trend. Once the market makers have cleaned out all the orders possible, they are basically just neutral on the market, and then the underlying trend can continue.

So applied to the current market, over the last couple weeks as the S&P 500 proceeded to come back down and break to new corrective lows, it broke through some prior swing lows. Now understand that many new sell stop orders to short the market will be placed at those lows and be the level at which new short positions are initiated. Those are shown with pink lines and arrows on the chart above.

So once the market has broken those lows and a bunch of new positions are established, stops are placed above the market. What happens very often at times like the current one, is that shortly after the breakdown, the market rallies back above all those swing lows. That effectively puts all the newly established short positions under pressure because they are now negative on the trade. Also, some stops may be trailed behind the market or set to breakeven shortly after the breakdown. So the snap back rally functions to stop newly established short positions out and once again fill as many orders as possible.

So what we have seen today in the chart above is that the market came back above all those swing lows. That is exactly what you WANT to see before establishing a new short position. There has been so much chop that the weak hands are being cleared out, and only the short holders with well placed stops, above the consolidation remain. Once that happens, then the market is free to resume trend. In this case, there is an unfilled gap down a little above the market, so I expect we see that filled before the market falls again.

Now there will be new sell stops building below yesterday's low which could function both to stop out newly established long positions and to initiate new short positions. In an expanding environment like this, where each initial new round of breakdowns and short covering rallies results in successively larger declines, realize that power is building to the downside, and once the market is "exhausted" a fresh break to new lows can just slice through with no power to snap back. This often happens with a gap down after the break to new lows.

So I think we may see that here. Probably a little more upside (making this rally larger than wave "b"). But then if the recent low is broken, we could get a big gap down and a sharp waterfall decline in the markets once more, taking it to the next support level (1050 S&P 500) at a minimum.

I apologize if this post was not extraordinarily coherent. But if you go through it a few times with your own chart and try to get the concepts, I believe you will be ahead of most out there when faced with a situation like this. I expect to post a new inverse ETF entry if the gap down around $116 on SPY is filled. Use an hourly chart to watch for loss of momentum and a new hourly time frame downtrend. Then keep the stops above chart resistance.

Volatility Likely to Remain High

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Today was an interesting day and not unexpected based off of past similar instances. When Monday and Friday are down, there is a noted "turnaround" Tuesday effect historically. Also, the August low was exceeded significantly today in the S&P 500 and Dow 30. When a significant low breaks it often invokes some fear and also a reaction rally. The rallies are almost invariably extremely sharp really hurting the short term holder, running the stops on traders who shorted on the break to new lows. However, it is possible that the rally fails. Noted failures happened in Sept and Nov 2008 as the July and Oct 2008 lows were penetrated, respectively.

On a major bottom reversal day that closes up, the best reversals have extremely strong breadth. So looking at the advance-decline line is helpful in gauging the strength of the reversal. What is notable on today's reversal is that the NYSE adv-dec was relatively weak. See chart below.

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Note that today the reading came in at 633. That is lower than either of the up days last week and is not high on a relative basis to past similar instances either. Strong new upward patterns have started over the last few years with reading around 2500 coming off a significant new low. Also, for an intermediate bottom to be in place, the breadth on the reversal will often be higher than the highest readings of the recent move down.

So this reversal today does not look that strong on this basis. The technical analysis picture is definitely showing a bullish divergence on these new lows, so a reversal must be respected here. I just am leaning toward this not holding. The time relation is not ideal from my perspective for this move down to bottom. I think next week or even a couple weeks out would be better. In addition there is a tendency for market turns to happen around options expiration. So that would also suggest a little more "work" before a bottom.

If this low fails to hold, what will the following decline look like? From how this chart is developing the Sept 2008 and Nov 2008 precedents look most similar. One thing of significant importance is that the "a" and "b" wave labels I have on the top chart of this post, show that "b" is larger than "a" at -10.2% vs -8.7%. So the pattern is starting with EXPANSION. So if today's low is broken I expect the next move down to be larger than -10.2%. So a 14% or greater decline is reasonable or expected from my analysis if that happens. Again, the 1050 S&P 500 level is the next major chart support area (long term support and resistance).

There are a few other points I could make here that I have touched on in the past, but my take is that I think today's low is failure prone and certainly likely to be retested. However, we could see a dramatic move up (a large gap up, etc) for a day or so before it fails.

It is very tempting for me to post a bullish/long trade here, but I think that in this scenario waiting for a higher swing low would be very wise. So if we get some upside then a higher swing low, I would likely take that trade with a stop below the low.

One point that I don't know what to make of is that at basically all of the past similar occurrences from 2007-2009, when a low like this was broken, the put call ratio spiked. We just didn't see that here yet. The equity put/call ratio has consistently exceeded 1.00 at times like this. But today it was just 0.78 down from 0.85 yesterday. What I interpret that as is that there has not been enough fear generated for a lasting rally to happen. That fits with the analysis above. The other interpretation is like at the end of the last bear market in March 2009 where the put/call ratios didn't spike and in retrospect was an obvious sign of bullish sentiment divergence.

Bottom line, the long term is pretty objectively down right now, and I would use stops very close below any reversal if trading long. The market could get whacked hard if any reversal fails.

Gold, US Dollar, Stocks

In a prior post on gold I showed the corrections in this recent bull market and the level at which we are likely to have a confirmed bear market. Those levels have been exceeded which confirms that we are likely to be in a bear market now - a significant high has been made in gold.

Also, in this prior post I outlined the largest and fastest moves up in the US Dollar Index over the last 2 years and noted that if the green dashed line was exceeded that we wold have confirmation of a new uptrend there. That occurred today. So we have all the information now that we need to confirm commodities are in a bear market.

Now the S&P 500 also broke to new corrective lows today, and the NYSE has been at new lows over recent weeks. That is out of character with what historical corrections in bull markets have looked like. So, this break to new lows is reasonably strong confirmation on a historical/statistical level that stocks are in a bear market as well. The Nasdaq is leading and not at new corrective lows yet, but the price action/logic suggests it will break to new lows as well.

TWM Sold

TWM sold at 59.33 at the open today.

Sell TWM at the Open Today

Exit the TWM trade at the open today/Monday. I expect this gap down to be bought and the market to rally this week. If not then it may be a bad call, but the price action and pattern suggest to me this is probable. Hopefully we'll get a re-entry at a better level.

2010 and 2011 Trade Data

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I haven't posted updated trade history on the blog in a while. So here are all the trades which were closed in 2010 in the top chart and all the 2011 closed trades and the still open trades as well. The profit numbers are simply calculated with no commissions added and assuming a flat $10,000 allocated to each trade every time.

The open TZA and UNG trade are obviously sore spots. However, sentiment on UNG has never returned from the extreme pessimism level at entry to extreme optimism for exit. So until that happens I will continue to hold this trade in the blog.

Given the longer term outlook on the markets right now, I expect TZA will increase substantially in value prior to exiting the trade. The markets are at a place right now where a breakdown below the August lows could happen in the next 1-2 weeks, possibly resulting in another substantial leg down in stocks, and as soon as I can safely do so, I will post stops on all the open trades.

I expect the best trades to be short sales in the current environment, but I will continue posting inverse ETF trades when possible for those who don't sell short.