Gold and Oil

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Gold has reached the upper boundary of its 80% probability price retracement reversal zone for a bear market rally.  So it is sensible to start taking technical signals for short/inverse trades and take them again if stopped out.  Only a break of the Nov high, would suggest that an historically unusual move is taking place and that the bull market may continue.

The daily stochastics has been overbought, but the weekly could use another week or more to cycle back up to give a better multiple time frame momentum set-up.  The red arrow on the chart above represents a swing high from the last leg down which could provide an ideal reversal area.  More often than not the market will run the stops at a swing high like that before reversing.  So given the technical indicator set-up, it would be ideal for a brief pullback to occur, followed by a break to new rally highs and slightly exceed that swing high at the red arrow and then reverse lower to confirm a top is in place.  That would also create bearish divergence on the daily stochastics which would be nice for a short/inverse trade entry and the next sell signal.

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Oil is showing a beautiful trade set-up to go short/inverse.  The market has a very low ADX for an extended time creating a long basing pattern for a large move.  There has been a distribution type top here which the smart money has been selling.  Now there is a tight bollinger band squeeze providing a low volatility put option trade entry, and a short to intermediate term trade confirmation if the market closes below the lower band with bands expanding.  Watch for that tomorrow or before week's end.  The best patterns gap down and then close lower in the range with a fairly nice real body.  Once the breakout occurs the price won't come back above the high of the break down candlestick in most successful cases.


I have talked about these set-ups before.  Check these posts and see how a couple turned out.

 http://stockmarketalchemy.blogspot.com/2011/08/usd-update.html

 http://stockmarketalchemy.blogspot.com/2011/09/us-dollar-and-silver-update.html

 I already have long positions in DTO with a stop corresponding to the Jan highs in oil and also USO puts.  I plan on adding more puts on a confirmed break down like just mentioned.  I will add some further analysis soon.  But this should be a large and dramatic move down in oil according to my analysis.  My analysis is for oil to be in the $60 by early this spring.  More details to follow......

S&P 500 Update

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The SPX cash index formed a doji type candlestick this week.  The close was about 1 point above the open.  So it may be a spinning top which is less significant.  However, given that it was an FOMC meeting week with obvious overbought conditions, I think it is more significant.

I have put a basic conventional Elliott Wave labeling on the chart.  The reason this is important is that if the market does NOT break 2011's highs, the form of the pattern would imply a dramatic market swoon in coming months starting basically now.  It is basically as far as it can go to hold this pattern view.

Of note is that the CoT data this week showed a large increase in selling in Nasdaq futures as it broke the 2011 high.  So the implication is for either a top to be at hand very soon, or for a sustained short-covering rally that should push prices much higher.  Don't try to guess.  Let technical signal be the guide with appropriate stops.

There is a very tight harmonic resistance zone on the SPX right where it topped this week.  Also there are time relations that suggest this move should end ASAP, IF..., it is still relating to recent prior moves on a pattern basis.


On another note, after the FOMC news came out that they pledged to keep interest rates low for an extended time, bonds initially spiked but then fell back.  That would be taken to be a fundamentally bullish policy for bonds.  HOWEVER, the market already anticipates and moves ahead of these policies.  So, this could very well be a "sell the news" point in bonds where it sells off in coming weeks in response to the news.  The technical picture certainly suggests that on both a short and long term basis.

I continue to look for a contrarian position here to sell the market.  Part of my outlook for a continued expectation that the market is running on borrowed time is that oil appears to be in an EXTREMELY weak position, and gold looks by all measures to be topping on a counter trend rally an day now.  Typically they have moved in unison inflationary/deflationary cycles. 

GLL Stopped Out

GLL was stopped out at 15.94, slightly above breakeven.  Gold is a market I would look to short/inverse again in the coming weeks at a proper technical signal.

Gold and Silver Projections

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See the chart above for notes on silver.  Based on the averages of historical situations we are likely to see lower lows in silver.  However, based on a closest fit analog which is the 1974 silver bear market, the bear market low would be in place now, but with an expected retest of the lows in coming months.

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The red box on this gold chart shows where approximately 80% of all bear market rallies based on time and percentage retracement of the preceding leg down would be expected to top.  With today's rally we are already reaching the upper price range of that box.  So, we should likely expect some further time consumption with likely at least slight further highs.  My expectation based on price making such a deep advance already is that we would likely top in the earlier portion of that time range.  Also I expect it to be a great put option buying time as this high completes.  I am looking at April OTM puts on GLD with some historical precendents suggesting a move into the 1300's likely to follow this rally.

There is NO historical precedent for this being a completed correction or bear market in gold at this point.

Silver Update

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This chart shows 9 bear market rallies in silver from this bear market and the two prior bears.  You can see that most of them were in the 2 month range with the red box being where 7 of the 9 topped out.  The typical rally was 20-40% and 2-3 months.

The current silver market has rallied for 1 month and already is up around 30%.  The daily stochastics is overbought.  So my best guess as to how this will unfold, is for a pull back over the next couple weeks followed in the next month or so by a rally to a new high or a retest of any high that forms soon here.

The weekly stochastics has about 4-6 weeks before it will flirt with overbought territory.  So we may need to see that weekly momentum get more extreme before the market turns down in earnest.

Also while not shown on the chart here, past bear markets I've studied would suggest that the declines to come in this continuing silver bear market, may not be as aggressive as the ones we've already seen.

From a pattern perspective, the rally up from the Sept. low took 4 weeks, then the decline to follow took 9 weeks into the Dec low.  In a typical "flat" pattern with such a time differential between waves "b" and "a" the "c" leg will usually take half the time of the prior two combined.  That would suggest a 6-7 week rally up from the December low.  That would fit well with the projections of these prior rallies also.

So if you are holding silver or looking to short again, that is the set-up to look for.

SLV Stopped Out

The SLV short trade was stopped out at 31.47 today for a nice gain.  This would be one to look at another short entry soon.  I have the stop loose on the GLL trade to take advantage of continued downside potential in gold.

Follow-Up

So I guess that you can view the blog for up to 30 days without a Gmail account once invited.  And then you have to have a gmail account after that.

That's the message you get once you are invited.

Note Regarding the New Trading Blog

Some people are asking if they must have a Gmail account to access the new blog.  And honestly I am not sure if that is the case.  If any one has definitive knowledge on this issue, please comment on this blog.

For people wanting access you can reply to the post with your email info if you are on the email list.  If there are any issues, let me know, and we'll get them worked out.

Thanks.

Trading Moved To Another Blog

All new trading for this year will be done through an additional blog @

http://stockmarketalchemytrading.blogspot.com/

Detailed money management and trade stats will be kept and updated there as well.

However, this blog will be invite only.  So anybody wanting access to that blog will need to email me your email address so that I can add you to the invite list.

Trading will be mostly focused on the S&P 500 or related stock index ETF's.  However, there are current outstanding opportunities in oil and bonds as well.

Stock Market Update

There are some notable data points from today's session.

The total put/call volume came in a 0.70 which is the lowest reading since the May 2011 market top other than one day in mid July just before the markets topped out and fell hard.

The equity put/call volume came in at 0.47 which is the lowest reading since the May 2011 top.  Both of these data points suggest extreme optimism in the market right now and that the market is likely to experience a correction soon. 

So IF we are still in a range or downtrend mode, an intermediate high is very near.  The other time that we see data like this is a few weeks after the start of a major leg up.  In those cases any pullback only last a couple days and lead to trending moves higher.

The 14 day RSI on the QQQ poked above 70 today.  And it is at 69 on the SPY.  Non-trending moves typically end VERY soon after these extreme readings.  Trending moves again experience brief pullbacks and continue to trend up.

The SPX touched its 78.6% retracement level of the May-Oct decline today.  This is a common extreme retracement level for counter trend moves.  The markets are at, or a tiny bit below, the upper daily bollinger band meaning the move is stretched to the upside.  Again either an intermediate high is likely to form, or a small pullback and break to new highs will be a sign of a continuation.

The daily ADX line has turned up and is right above 20 now suggesting a new uptrend is at hand.  So we do have this suggesting a likely new up trending move.

My take is that this move is likely to continue upwards.  But if not then I think it only has a day or so left before we have seen the price highs basically in place before a sizable correction.

Gold Update - Topping Before Next Leg Down

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Gold appears to be in the process of topping on a counter trend rally at this point.  The daily stochastic is overbought.  And price has slightly exceeded a swing high from the downtrend which can be a stop running point and possibly lead to a breakout failure at that swing high.

Unless the high at point "B" is exceeded by the next blue vertical line in mid March, the trend remains down.  A break of the December low would be a likely continuation point and possibly lead to a large gap down and continuation move to the downside.  What would that move look like?  Use the Sept 2011 decline off the high as an approximation.  "A" waves are typically dramatic - sharp price moves but short lived.  The next move down will probably be like that.

The CoT data is locked in a bear market pattern with no sign of any type of bottom being made here.  Silver is in a very similar position to gold.  The same comments apply.

The pattern looks like completed "flat" pattern down from the highs, with the current move likely being an intervening "x" move, before another larger downside pattern unfolds.

As a side note, the CoT data is suggestive that oil has likely made a counter trend rally high.  Entry for short oil trades could be made ASAP or wait for a break of the December low as confirmation.  The target would be for a move below the Oct low at a minimum. 

As an additional side note, part of my bias in expecting a failed breakout in stocks here is that the real money CoT data in the commodity markets at large suggests a continuing deflationary theme.

SPX At Make or Break Point

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There are some significant potential time relationships that are occurring right now in the S&P 500.  Three potential reversal time points all lined up on Thursday.  The primary time being that the rally off the October low is now 0.618 of the time of the May-Oct decline.  The other relations are represented by the green boxes as a possible ABC relationship, and the purple line which is the same time as the August rally off that waterfall decline low projected up from the Dec low.  Given the price at a breakout point here, this may be a set-up for a failed breakout.  Any technical signal can be used here to enter short if a valid sell comes. 

If the trend is to turn down in the markets from this point, the logical price confirmation would be for the coming move to retrace the entire rally since the Dec low in less time that it took to form.  If that happens, I would consider the trend to be/remain down.  If that does not happen, BUT the market does correct more slowly, then we will likely see another sustained move higher to follow that correction.

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The total put/call ratio is relatively low right now, and extremely so, given the range over the last year.  The market shouldn't have but a few days to make a top in a typical downtrending environment.  I will also note that the longer term put/call ratios are in down trend mode.  So while price is neutral, the sentiment is in bear mode.

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There has been a 7-8 week cycle at play over the last year.  This past week would be due for an inflection point. 

Based on the evidence above, my belief is that the market is unlikely to successfully make a breakout of this level right now.  However, if a reversal doesn't shape up in the next few days and the market remain below the Oct high, then the trend indicators will likely be in up mode on the daily time frame.  Those can lead to steady low volatility up trends.

Market at Price and Time Resistance

In November I showed some time projections for bear market rallies and mentioned that since 2000, the average bear market rally has been about 62% in time of the average declining leg.  We have just surpassed that time frame in our current market.

With a slight new high above the Oct high in the S&P 500, and the S&P 500 at 1295 which has been repeated horizontal support and resistance, this will be a defining level for whether the trend is up or still down.  Also the 78.6% retracement of the May-Oct decline is just overhead, and downtrending move will typically not retrace more than that.

 The chart above shows that the weekly stochastics is overbought.  There is bearish divergence on the shorter time frame RSI compared to the Oct high.  If the downtrend is to resume, there should not be more than a brief break of the Oct high.  If an uptrend is developing, then we may see a pullback prior to a break to new highs yet again.

The daily ADX/DMI on the Dow 30 is starting to shape up like an uptrend.  However, the textbook signal of an uptrend is when the ADX turns up above 20, which it is not yet.  However, several more days will put it there.  So again, we are at a defining point in the next few days here.

Stock Update

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In reference to a recent post on the possible pattern development here in the S&P 500, the expected logical confirmation is not so far occurring, suggesting that a downward pattern did NOT complete at the December low.  The expected logical confirmation would be that the advance to follow the end of the pattern would be larger and faster than any upward move within the pattern just completed.  That is what the blue boxes represent.  So unless the market rallies really hard into Wednesday, it seems most likely to me that either an upward pattern is still developing and may be near completion this week, OR there is still another downward leg to be expected in a 7 legged downward pattern since the July highs.

On another pattern note, since the time of the move up from the November low was equal to the time of the following pullback, if an upward ABC is forming, it would be expected to complete on Wednesday as the ideal time relation in this case is C = A + B.  This is also represented by the blue box times.

The Dow futures Commitment of Trader's data also has made a minor sell signal as the commercial "smart money" has largely moved toward the short side during the last 6 weeks of this rally.  This is significant because it is "real money" data that represents what the big money that drives market trends is doing.  In a downtrend environment such a signal will typically lead to a reversal pretty quickly, but it may possibly lead to a smaller pullback, and then a move to slight new highs with bearish divergence.

I suggest viewing the market as "neutral" here, with willingness to take daily time frame technical sell signals for short side trades.

DTO Stopped Out

The DTO (inverse oil) trade was stopped out at 37.67 this week.  There was a slight move to new highs, but without any convincing confirming data.  And there is bearish technical divergence on this new high as well.  So my plan here is to monitor this and make another trade attempt if there is a bearish technical signal in the days ahead.

Keep the big picture in mind on this.  The real money data from the commitment of traders data is very suggestive that oil is likely to decline BELOW its 2008 lows in the $30+ range.  That may seem silly, but we are coming off in recent months an all time high in the "supply" or selling capacity in oil futures, even higher than in 2008.  A huge portion of this is purely speculative holdings.  There is no physical use or need for the oil.  That speculative unwinding will assuredly accelerate price declines if the price begins to trend down.

Dow Update - At Resistance With Bearish Divergence

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The Dow and S&P 500 are now in the region of their necklines from the head and shoulders in 2011.  That may prove to be a resistance line.  Even if the trend continues up, that old support is likely to be resistance on rallies.

While not shown here, if there is a rising wedge pattern forming since the August lows, we are now in the lower end of the price and time reversal zone for it to end based off of typical relations.  I may touch on the pattern more soon, but the pattern from October to December has often showed up in the next to last position before a trend change.  It is a triangular type pattern.  That would fit with the rising wedge scenario and with the overall technical analysis which is showing bearish divergence here (see below).

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The Dow has been the leader on this rally and is at new rally highs since October.  But notice the currently sharp bearish divergence in the MACD compared to price.  That is the typical look at the end of a trend or pattern.  So a reversal to the downside here still may be significant from a technical perspective.

As long as price maintains above the December low, I consider that bullish.  But a move below I consider bearish, though it may or may not be a good time to short if it is broken.

Still Looks Like This Is a Counter Trend Rally

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The 10 day average of advancers-decliners is nearing the overbought range for a counter trend rally.  Again, IF this is a bear market rally, it should be topping soon based off of past tendencies.

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The ADX is showing a non-trending upward move since the October low in the S&P 500 on the weekly chart.  Many times the MACD will reverse at or around the zero line on a correction against the trend.  Look at the MACD in the summer of 2010.  It went slightly below the zero line then reversed.  A similar thing may happen here as the S&P 500 approaches overhead supply/resistance.

Looking at all the technical information, I don't think the market is in good position here to make a sustained rally.  The moment of truth is close at hand though.

Indicator Update

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Not much time for comment here.  But the daily stochastics did NOT confirm a sell signal recently.  However, as of today there is now mild bearish divergence on the daily stochastics, and the markets are at significant horizontal resistance.  So I'll be interested to see what the smart money does this week.  If they sell this rally, then it may be a sign that it will get turned back.

The total put/call ratio dropped to its lowest level since July a few days before the market peaked and then tanked.  It is at levels that have marked imminent highs since last February.  So IF the market is still in a bearish trend, then it should be making a high soon.

The equity put call ratio is giving a picture perfect short trade set-up here.  The longer term put/call currents are in bear market mode, and the short term has just fallen below the longer term currents. This is just a set-up, but any indicator could be used as an entry signal short if a valid signal comes soon here.

If this is a bullish breakout move, then the pattern would imply substantial strength ahead.  From a pattern perspective, a bullish market should absolutely NOT break below December's low.  If it does, then we have probably seen a significant high.

Upside Breakout- But Overbought?

The stock indexes gapped up out of the triangular trendlines today, creating an initial upside breakout.  So maybe there will be an extended run up from here.

On the other hand, the weekly stochastics are overbought and the daily stochastics are overbought, and the hourly MACD has bearish divergence in overbought territory creating a nice set-up for a large downside move.

Additionally, the Dow has touched its upper daily bollinger band today, and the S&P 500 is just below it.  So on a statistical level, the market is close to overbought, though trending upward moves tend to hug the upper band, so this doesn't mean it won't continue higher.

The last 3 times the S&P 500 touched the upper band, it topped 4 days later, 4 days later, and that same day respectively.  So if we remain in a downtrending environment, expect a top within the next few days.

Watch for any bearish reversal candlestick at the upper bollinger band here as a clue that this may be a false breakout.

Gold Update

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Both gold and silver are in a very precarious position.  Thursday and Friday made a potential upside reversal after they undercut the Sept lows.  A break to new lows could lead to a waterfall decline over the short term.  I noted a similar instance in stocks in early August as the S&P 500 broke its neckline on a head and shoulders top formation.  Both in that case and in this one, the markets feel oversold and the daily oscillators are oversold.  But from a chart pattern tendency, a break to new lows could actually lead to an INCREASED selling wave, similar to the swoon in stocks this past August.

So to be clear, as long as these markets remain above this past week's lows, that is bullish.  However, a break below there should be considered a sell, a would even be valid for a new short entry with a stop above whatever rebound high is made prior to that break down.