Stock Market Update 8-23-12

Stock Market Update 8-23-12

This video covers this week's attempted breakout of the April 2012 high in detail.  Check it out for what will determine a continuation versus a truly failed breakout.

Failed Breakout in Stocks Today - Possible Major High and Pattern Completion

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The Dow, Nasdaq 100, and SP 500 all broke their April 2012 highs today.  However, after a gap up opening, the market closed lower and formed a bearish engulfing pattern on the daily chart shown above. There is an intra-wave divergence on the momentum study and an overbought RSI.  All in all, it looks likely for the market to pullback from here even if it were to eventually move higher.  Since today is Tuesday, this weekend's CoT report will include "smart money" response to today's attempted breakout.  If they increased selling, then it would be further support to the idea that the market is topping here.  The May 2008 high was NOT exceeded, which I would like to see before a major reversal.  That would just be an added stop running point which is very typical at major reversal points.

I like to trade major reversals because the risk/reward ratios are so good.  But the moving average trend is up and the daily ADX is pointing up and almost at 20 now which indicates a near stable trend developing.  So the trend strength is objectively still UP.  If long, I suggest a trailing stop method in case of a broad spread reversal.

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The weekly chart shows a strong MACD bearish divergence currently on this breakout.  However, another couple weeks of upward prices would put the MACD at or near new highs.  So if the breakout fails, the technical set-up is ideal for it to do so right now, not after more upside.
 
                                    

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The hourly chart shows a continuing massive bearish divergence on the MACD suggestive of a downside resolution.  When the daily trend gets tight, the MACD may take a similar appearance on the hourly chart, so that is one explanation of the divergence, but at this point I still interpret this as a powerful divergence rather than tight coils within a stable larger uptrend.

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Additionally AAPL formed a high volume dark cloud cover candlestick with overbought RSI.  It hit a new high this week after finally breaking out of its recent base.  This is a bearish candlestick so it could lead to some weakness ahead.  What I think is more telling is that the weekly MACD is now in a massive bearish divergence on this break to new highs in AAPL.  This has the "look" of the type of MACD signal at major tops.  So be wary of a base failure here in AAPL if in investment longs.  The breakout point of the cup with handle was about 620.  A weekly close below that level would be very negative for the price outlook on AAPL.

What Stock Market Final Highs and Lows Have Looked Like

The decline from this April to June in the S&p 500 fit very well in price and time with typical average corrections throughout history.  It did not fit well with the typical 1st leg down in a bull market.  So on this basis it may have been expected for prices to rally to new bull market highs based on the character of the moves.

Currently, with the markets very close to the year's highs, it seems very likely that the highs will be exceeded, even if this is still part of a drawn out topping process.  One thing that I believe many less experienced market analysts or market novices experience is a simple view of support or resistance and expecting or "hoping" that a certain high or low will not be violated because that would throw off their outlook, etc.  But from experience I can confidently say that many and probably MOST important highs or lows, actually exceed a prior important support or resistance, at least slightly, before actually reversing into a major new trend.  As brief evidence of this I will review the major highs and lows since 2000.  The situation at each of the 2 major highs and 2 major lows since then has been for a sharp 1-2 month correction against the trend, followed by a final 1-2 month move into the final high or low.

The last correction prior to the 2000 top was a 56 day 10% correction, which led to a 17% 25 day final advance to the high in March of 2000.  The final high exceeded the previous rally high by 5%.  It took 4 trading days after the final high for the market to trade back below the prior intermediate high.  And it took 13 trading days to close back below the prior intermediate high.

The rally up before the 2002 low saw 29 day 24% advance which led to 20% decline in 49 days into the Oct 2002 low.  The final low was 1% below the prior intermediate low.  The market closed back above the prior intermediate low on the day of the final low.

The final correction before the 2007 top was a 31 day 12% correction which led to a 15% advance in 56 days into the final Oct 2007 bull market high.  The final high exceeded the prior intermediate high (from July 2007) by 1.3%.  The market closed back below the pior high on the day of the final high.

The last rally before the 2009 low was a 46 day 27% advance which led to a 29% final leg down in 59 days into the March 2009 bear market low.  The March low exceeded the prior intermediate low by 9.8%.  It took 4 trading days to regain the prior intermediate low.

Now there are other market cycles that can be studied, and other markets that can be studied, but the tendency is for sharp short-lived corrections to preceed the final legs up or down.  And the final legs up or down have been relatively brief at 1-2 months. 

So at the current juncture, this is something to watch for.  We have already experienced a 63 day 10.9% correction.  And we have rallied for over 2 months into what looks like will be a new high.  So to fit the mold of a market making a final bull market high, we may be likely to see a mild to moderate break of the April 2012 high of say 1-2%.  In this case, I think it would be ideal for the market to slightly exceed the May 2008 high on the breakout as well.  This would be about 1.5% above the April 2012 high.  Then that should be followed by a reversal to quickly close back below the April high.

So that is a descriptive projection of what a final high for this bull market COULD look like.  If we break to new highs, I will track this scenario.  And also I will review this with charts in an upcoming video to get a better visual.

Based on the price logic pattern in the markets, I do still expect a failed breakout followed by a significant correction.  A move to new highs does NOT invalidate the topping pattern as I have been tracking it.  I will go over what level would invalidate that in a future video.

Be Alert for a Reversal Here

As of today, the maximum time I'd expect for this move up is upon us.  Additionally, the daily RSI has touched above 70 on the S&P 500 which is overbought, and in a range environment will typically give break signals.

The ADX is rising on the daily chart as the market is rising here, so we should respect that a new uptrend may be beginning, but it currently is at about 16, whereas 20 is the textbook level to define a new trend.  So again, we are either at an imminent reversal point, possibly even this afternoon, OR the market is likely to continue a tight trend higher for several weeks.

The NYSE is poking above the 8060 resistance level I had mentioned recently.  It is pretty common for price to go completely through a resistance zone, at least intraday, before reversing.  So we should watch to see how it reacts today and tomorrow.

Three Push Pattern Complete - Market at an Inflection Point

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The current move up since 8/2/12 is now nearly equal in time to the last 3 "waves" combined.  This is typically the time limit for any move of the same degree.  So 1 of 2 things is likely to happen, probably starting tomorrow.  Either a downside breakout of this tight range occurs and the market makes a significant high.  Or the market makes a decisive breakout above this consolidation, and confirms that a larger degree uptrend is in place.

I recently mentioned a three push pattern that could be forming on the hourly chart here.  With the recent push to slight higher highs, we now see a clear succession of 3 lower highs on the MACD since late July and 3 wedging higher highs in price.  This type of momentum pattern often shows up in rising wedges or terminal impulse patterns, which can both lead to strong reversals.

The next couple days should define the trend direction.  I'll update as this unfolds.

As of today the multiple time frame momentum set-up in stochastics is beautiful for a short/inverse trad opportunity at the next daily sell signal.

Stocks and Gold Video Update

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Major price highs likely near in stocks and gold.  Bearish divergences are all over the place, and volume is at multi year lows.  AAPL likely set to break down from a failed base pattern.

Market Is Likely Making a Top Here

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The current set-up on the stock indexes is nearly ideal for a short trade from my perspective.  The weekly stochastics on SPY is overbought.  The daily is overbought.  And the hourly MACD is overbought with bearish divergence.  The pattern is weakening, but may have another slight push to new highs to form a "3 push pattern" on the hourly chart.

We are now seeing lots of confirming evidence for a top in addition to the price indicators.  Of note
-very sharp bearish divergence in breadth/McClellan oscillator
-low put/call ratios this week consistent with prior intermediate highs
-2 of the lowest volume days in over 2 years excluding holiday trade.  This indicates waning demand or participation buy the big money.

This weekend we will get the data on the "smart" money action in response to the rally over the last week.  If we see another jump in smart money selling, then in combination we have a powerful case for initiating shorts or liquidating longs on any technical sell signal.

Longer Term Investment Outlook

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This video contains charts and some further details regarding stocks and bonds specifically.  The outlook and advice is pretty simple.  Sell all bonds and move to cash.  Understand that after the 2008 stock market decline, big money has flowed to bonds and that is the class of assets that your investment adviser or financial planner will currently feel safe recommending and be able to show you that has positive returns over the last few years.  But as investors, we have to be savvy and see the risk or potential BEFORE it actually happens, and be willing to act with little to no confirmation from FACT that we have chosen correctly.  THIS IS ONE OF THOSE TIMES.

Additionally the smart money commercial stock futures traders took a big jump in selling this according to the CoT data, and I think we will see that they sold even more heavily through this past week's jobs/unemployment data.  My suggestion is again to sell stocks and move to cash.  The pattern and real money data are becoming increasingly clear that a major market movement is about to take place to the downside.  If you need some initial PROOF, then I suggest that a daily close below 1310 on the S&P 500 be your signal that this current bull market is over, and we will see a rapid price decline.

Again this is investment time frame advice.  So understand that while I think that we truly are very close to seeing a major market shift to the downside and unwinding of some of the "bubble" activity in stocks and bonds, it may be 2-4 years for things to really play before possibly re-investing in a major way.

For the Short-Term Trader

Now that the market is at a new rally high, the pattern suggests that the time frame for the next tradable daily swing high will be between Tuesday and Friday next week.  I personally would suggest waiting for some further bearish divergence to form on the 30 min or hourly charts within this still young move up since Thursday afternoon.

The pattern also suggests a possible MAJOR pattern completion about to occur and would imply immense downside.  This is the type of move that can make the whole year's trading worthwhile.  I will go over specifics in an upcoming video, but any close below 131.28 on SPY would suggest to me that the upward pattern since Oct 2011 is complete, and we should see a sharp move back below the Oct 2011 low probably in less than 4 weeks time.

I am not planning on waiting for that level to break to initiate a trade, but for investment or longer term speculation, that is a sensible option.

Rally Into Next Week?

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The market reaction since the FOMC announcement yesterday has been an initial modest sell off.  Often times initial reactions to news items are reversed, and given the technical set-up, we may be set for that here.  The move up last week was more powerful than the move down over the last 4 days.  The hourly technical charts are now more oversold than overbought, and price is holding above the 7-26-12 gap up which is chart support underneath current prices.

The chart above is a 30 min chart of SPY.  The MACD is oversold, but the first cross up has not been a great signal over the last month.  However, if a bullish divergence develops over the next couple days, that would be a nice short term long trade set-up.  At this point it looks like the advance since June is running out of steam, but even if the market pulls back a bit more, the pattern and price logic are suggestive that the market will make another tradeable move up on the hourly charts.

There is no indication that the recent range type trade is over yet, so using oscillators for trading signals should be productive in the near term.