Commitment of Traders Stock Index Update July 2013

Commitment of Traders Stock Index Update

This video covers the recent commitment of traders report data relevant to the attempted breakout of the May 2013 highs.  I give you an interpretation of what to look for and a brief discussion of possible short entry strategy and initial profit target.  If prices move to new highs basis the S&P 500, then it may be a continuation and force further short covering as the short positions have built substantially between 1653-1697 on the S&P 500.  Further price increases will pressure those newly established shorts to cover which will provide buying fuel for the rally.  This really is a key level for stocks.

A New Market Analysis Video Is Available With Specific Trade Set-Ups

New Market Analysis Video Available

Today I recorded a new video for members of my Trader's Crystal Ball eCourse mailing list.  In this video I update you on the very important message the total put/call ratio is telling us and give you multiple time frame analysis of the MACD indicator for the S&P 500.  The video above gives you a brief overview of the content of that video.

Based on this information I offer you several individual stocks set-up for short selling opportunities and highlight a couple ETFs that have recently completed bullish chart patterns and are beginning to move higher.

At the end of the video I review my Integrative Harmonic Trading course which is a stock market trading course that I developed in order to help individual traders and investors learn to objectively identify and objectively trade the most powerful stock chart pattern in the markets.

The video runs nearly an hour with 40+ minutes of timely actionable analysis.  I hope this information is valuable to you and look forward to helping many of you learn this method of analysis.

All the best to your trading,

Pete

Gold and Silver Rally to Continue? Projections If So

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This is a chart of silver prices going back a few years.  I had recently mentioned in video updates that the smart money commercial traders were buying heavily into this market compared to historical buying/selling patterns.  They have not turned net long yet, but these producer dominated markets rarely get even close to net long.  So the current near net long exposure we are seeing is very extreme in its own right.

Based on seasonal patterns, the common time for gold and silver to form a bottom is the June/July time frame which coincident with the recent swing low in prices.  The leg down since last fall has been tremendous in both % decline and time duration compared to historical precedents.  This favors at least a relief rally in the metals if not a bear market bottom.

The chart above shows some historical comparison projections of the expected price and time of this rally if it is to continue to unfold into a typical bear market rally or even a first leg up in a new bull market.  In either case, we can expect some significant more buying to come in to even reach a minimum expectation.  So this would favor being on the lookout for short term buying patterns or signals to continue to follow this rebound up for several weeks.

Click on Chart to Enlarge

This is a weekly chart of gold showing an extremely oversold MACD.  Obviously with such an oversold environment a multi-month rally should probably be expected.  However, notice that there is no divergence pattern indicating the typical bottoming signal at this time.  At most major market bottoms, we see price make a lower low after a rebound from extreme oversold conditions.  But the technical indicator (MACD, RSI, momentum, etc.) will not make a lower low.  That is our usual tip-off that a bottoming set-up is present.

So given the overall context here, I would be looking for higher prices over the coming weeks, but with the tentative expectation that the rally may lead to another shorting opportunity and move to at least slight lower lows before a possible completed bear market.

Commitment of Traders Stock Index Update

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This week's CoT report includes trader positions through Tuesday as prices approached the May highs on the S&P 500 and the Dow 30, but did not break the old high yet.

There was a pretty large increase in the commercial/smart money short position on the week.  Next week's report will be key for analysis because it will include the push to new highs in the cash indexes on the Dow and S&P 500.  If we see another large jump in the selling and a move back to near record short position, then we could have more evidence of a failed breakout attempt.

As price made new highs in May of this year, the smart money was positioned heavily short, but then covered shorts on the run up in May after the breakout.  So that could certainly happen again.  But what we are looking for here is the sentiment of the smart money.

The CoT rate of change gave a typical minor buy signal in mid June.  That will typically occur in conjunction with the end of a correction in the markets.  Interestingly, the market pushed a bit lower after the signal came, but then has reached new highs.  In sustained trends that signal should maintain price above the corrective low.

So in our case a move below the June lows would be indication of failure to maintain the price trend both on a technical analysis level, and also in terms of the CoT data.  A failed breakout of the May high followed by a close below the June low, would be probable indication of a much larger correction or even possibly a bear market in effect in the stock indexes.

So my suggestion is that the June low be perfectly clear as the make or break line for stock market longs here.  Now it would certainly be possible for a false break of the June low and the formation of a large trading range, but for now, keep it simple and understand the risk if prices are to break that low, especially if it occurs more rapidly than the rally since June took to form.

Stock Market Topping?

Stock Market Topping?

Multiple time frame analysis indicates stocks could be making an intermediate to long term high here.

This video covers a multiple time frame technical analysis of the MACD indicator on SPY.  What is apparent is that there is a condition of extreme overbought with divergence on multiple time frame which indicates that we may be approaching a longer term peak in stocks here.

I also give some ideas on what specific indicator signals to use to actually go about entering a possible short position if we see the market correct from these levels.

The Breakout Buy Pattern

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This chart is a daily chart of the Dow 30.  As I indicated in the last post, I am posting what I believe to be the typical higher reward and lower risk breakout buy pattern if one is looking to go long a market on a breakout.  As I stated in the last post, I think the technical indicator set-up is fairly obvious to be alert for a probable failed breakout here, but I also respect the fact that markets trading at all time highs can experience persistent trends on successful breakouts.

I discussed this breakout buy pattern last August and September, and probably other times as well, but here is the basic pattern.

1) Don't buy on the initial move to new highs.

2) Wait for the breakout to a new high to occur, and then for price to move back below the old high and create a swing high on the chart.

3) Buy on a stop order on the NEXT move to new highs, with a stop below the lowest point between the 2 breakouts

The rationale here is that the markets have an uncanny way of putting breakout buyers at a paper loss at some time before continuing the trend.  And also if you study final highs preceding corrections you often see brief breakouts that last a few days and then fail and never push to new highs on a second breakout.  I touched on that in a post last year about what final highs have looked like.  And anybody who has studied technical analysis at all should understand divergence patterns.  So when an indicator divergence pattern is set up and the market looks to make a break to new highs, that is often the final dumb money surge and where the smart money will be unloading shares.

So to avoid some of these obvious pitfalls and market pressure, if we simply let the market breakout and then expect to see some smart money selling come in and push prices back below the old high, we can then gauge whether that is strong selling or weak selling.  The CoT data (though delayed) is often very helpful in gauging this as well.  And by only buying when the market has enough buying capacity to push again to new highs, we have eliminated many of the most obvious bull traps from our trade selection.

I believe that this strategy will often offer a better reward to risk profile as well.  If you think about it in the current market scenario, let's say that prices push to new highs tomorrow.....well where does your stop go?  From an objective charting basis of support and resistance, I would have to say no higher than the 7/3/13 low which is pretty wide.  The typical second breakout may offer a stop that is 1/4 to 1/2 that wide with still roughly the same reward potential.

I will monitor this potential buy set pattern if the Dow and S&P 500 push to new highs.  It doesn't work 100% of the time, but is a much better buying plan here than just getting in on an initial push to new highs.

Nearing Another Possible Large Scale Pattern Completion

This post will be somewhat of a follow up to my early 2013 stock market forecast and its follow up as stocks broke out to the upside on the first trading day of January 2013.  At that time based on the market pattern I thought that a pattern could be completing and laid out in the forecast post the price action criteria that would need to be met to provide some early confirmation that the outlook was correct.  That type of price action never came and instead we saw a forceful upward move.

There is much folly I think in creating market forecasts, yet many traders and market analysts continue to do so.  I think a good market analyst is actually behaving in a scientific manner by making a forecast.  Essentially they have a theory or hypothesis of market movement and so they create an expectation based on that hypothesis.  I think that is excellent for building confidence in market analysis and trading decisions.  But the idea of objective confirming price action is a critical component as well, and if you follow any consistently good market timers or traders who make forecasts, they basically all have criteria that help to confirm the unfolding of a forecast or that quickly call a forecast into question.  This is precisely why I use price and time criteria for confirmation in conjunction with patterns.  It helps to keep somewhat patient in waiting for price to actually do what is expected, but also can still get you in early enough to make good profits.  At times I also feel that patterns can be clear enough that they give the opportunity to take calculated risk even before confirmation occurs.

Obviously since that early 2013 time we saw the bull market continue without any major corrections along the way, affirming that indeed the move up in early 2013 was a "breakout" in that it started a new price pattern and phase of market psychology to the upside.

Now at this point it appears from technical analysis and sentiment that we may be on the other side of that equation, and are nearing a possible large scale pattern completion, at least of the pattern up since Nov 2012, and possibly also of either the move up since Oct 2011 or the entire bull market since 2009.  Based on the logical concepts I use to track pattern formation, I think that it is possible we are entering the peak price area for this bull market, but it appears that the entire bull market price pattern could either end at a lower high next year or even experience a major correction, followed by another sustained bullish advance to new bull market highs into the more typical 6th or 7th year of the decade which are the most common historical topping years for bull markets.

Click on Chart to Enlarge

I do feel that I have some legs to stand on in tracking market patterns in that I highlighted in advance both the price high pattern completions at the April 2010 and May-July 2011 market highs.  See the posts below for the posts I created at those times.  In both cases I remember as I wrote them that it felt a little absurd to suggest major corrections at those times.  And in the current market environment I feel the same because the broad markets are at new all time highs yet again.

http://stockmarketalchemy.blogspot.com/2010/05/possible-major-pattern-completion-in.html

http://stockmarketalchemy.blogspot.com/2011/07/possible-completion-of-flat-pattern.html
http://stockmarketalchemy.blogspot.com/2011/07/possible-confirmation-of-new-downward.html
http://stockmarketalchemy.blogspot.com/2011/08/end-of-initial-plunge.html

-Now in order to provide confirmation that a pattern is completing what will need to see for the move up since June to now to be completely retraced in less time than it took to form.  

The red box on the chart above is the expected topping area for this rally based on pattern trend lines and time relations.  The specific date range is July 16th to August 14th.  At this time it appears likely that we could see a mild pullback followed by a push to new high or to test the highs but create a lower swing high.

As an initial stage of confirmation that a top may be in place, we would like to see the trend line of the move up since June broken.  At this point the structure looks somewhat incomplete on the short term charts, and it would be nice to see a pullback and lower high to give us a different trend line and set of swing highs and lows to work with to more specifically track the price logic here.  Basically the confirmation of a pattern completion comes when the subsequent price action completely retraces the most recent trending move in LESS TIME than it took to form.

Click on Chart to Enlarge

This is a weekly chart of the S&P 500 showing the MACD underneath.  What is very obvious from the chart is that the MACD is in the "overbought" region compared to past highs.  In fact, its recent high is the highest level it has reached going back through both this bull market AND the 2002-2007 bull market.  So we certainly are justified in being cautious here.  Now also noted on the chart on some red lines on the MACD showing divergence patterns, which are where prices makes a higher high but the MACD makes a lower high.  Weekly time frame divergences have consistently led to corrections in the last 2 bull markets. Currently as price is pushing back to new bull market highs, we have a divergence pattern setting up with the MACD at extreme overbought levels.  So we are potentially set up for a failed breakout of the May highs based on this indicator pattern.

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This is a monthly time frame chart showing labeling of a potential continually unfolding expanding triangle pattern since the 2000 highs.  That would imply that there is a coming bear market of historic proportions that would likely take price below the 2009 lows in the S&P 500.

Just for the sake of analysis, let's say we are coming to a bull market high here this summer.  Then based on the time of the last 2 bear markets we may expect the coming bear market to last about 2 years, which is about half the total time of the last 2 bear markets combined.

The red rectangle on this chart represents what I would anticipate to be the time of greatest risk of a major decline based on multiple cycle analysis that I covered in October of last year.  That time frame will be the conjunction of three potentially important cycle lows:

1) The 4 year/Presidential cycle due in Oct 2014
2) The annual cycle weakness into the Sept/Oct time frame
3) The projected low for a 7 year HIGH-HIGH-LOW sequence starting from the 2000 bull market high.

If the bull market is completing here, the chart above has some projections of what we may expect to follow.  We may see an immediate decline that is larger and faster than any in the bull market to date.  Or we may see a larger and more time consuming correction that does not retrace the most recent leg up in less time than it took to form and is not FASTER than the prior declines like the major correction in 2011.  In the second case we would be more likely to experience a rebound/retest of the old highs, which would give the classic low risk shorting opportunity and the first bear market rebound is completing.

Given the typical annual cycle weakness into the fall and strength into the spring, we may expect weakness into this fall followed by a rebound into next spring before the major downside portion of these cycles really kicks in.  Again this is all IF we are completing a bull market high in the current near term.

So let's watch as the action unfolds here.  I will also update with the typical breakout buy pattern to look for if the bull is to continue.

Stock Market Pattern Update

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The move down off the May 22nd high unfolded with 3 relatively distinct moves down, each larger than the previous one.  This creates a possible expanding triangle pattern formation.  There are a couple typical future modes of price action of an expanding triangle.

1) If the pattern is a completed correction, often price will completely retrace the E portion of the expanding triangle, but often much more slowly than it took to form.  Given the current price action this is a possibility, but the E portion has not been retraced completely yet.  If it is, I think that it more likely logically indicates that the correction is complete and prices will make new bull market highs soon.

2) An expanding type of pattern may often be the first phase of a complex corrective pattern.  So we see something like: (expanding triangle) -x wave- (contracting triangle).  In this case the rally in the x wave position, often won't completely retrace the E wave before leading to a move to new lows.

If this second scenario is to unfold, then I think it is more likely that the current rally stalls very soon without taking out the June 18th highs.

Looking at the momentum indicator on the hourly time frame of this chart, we see a bearish divergence set-up making the technical possibility of a rally ending here a realistic one.  Also the large gap down from June 20th has filled, which is a point to watch.

Based on the time consumption of the prior two waves D+E, projecting that time forward from the wave E low, gives us a date of July 12th.  That would be the next important turning date in my mind based on the common time relations within these patterns.

At ~5% the current rally off the June low is larger than almost any corrective rallies in the bull market since 2009 other than in the large corrections of 2010 and 2011.  So if we do see a move to new lows it may imply that we are in a large scale correction similar to those.  However, the flip side is that this large of a move probably implies that the correction is already complete.


What's the trading takeaway message?  It is sensible to take long positions, but a stop below the June low would be mandatory because of the possibility of a much larger correction occurring.  The current correction was only about 7%, whereas the 2010 and 2011 corrections were ~17% and 22% respectively.

It is also sensible to take short positions based on hourly time frame signals if they occur below the June 18th highs.  In this case the stop should go above the June 18th high because a move above there would be further logical implication that the correction is already complete and any move down will be short-lived.

Testing the 50 Day Moving Average

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Three out of the last four sessions have seen the S&P 500 move up to the 50 day moving average and then pullback to close near the middle of the range.  I believe this is typical evidence of program trading kicking in around the 50 day moving average.

In my experience I believe 1 of 2 scenarios is likely to result.

1) The rally attempt fails here near the 50 day average.  Thus far we have been seeing a basically declining volume rally off the June lows, and there is evidence that there is some initial selling as price pushes into this average.

2) Very soon we see a gap up and a big up day probably with a pick up in the volume.  If the rally is to continue, then once the weak program trading selling pressure is exhausted after several tests of the average, price will often blast through the average and often occurs with a gap.

In these situations I would either switch to a shorter time frame to take trading signals, or await a breakout to the upside of the 6/18/13 high in order to go long.

If prices do manage to make new all time highs, then I think it is possible that the market experiences a further sustained rally.  Markets at new all time highs can often moved in sustained trends as there is no overhead resistance attracting sellers.  The NYSE short interest ratio is at about 4.0 and has risen as prices have risen the last couple years.  From comparison to the 2000 and 2007 bull market highs, that is NOT the pattern we would expect at a bull market high.  The last major highs have been preceded by periods of falling short interest.  In any case, the prior highs topped with a ratio around 4.0, but after coming off of higher levels.  As stocks make new highs, significant short interest can create some forced buying to help sustain the rally.

On a short term basis I personally am looking for an hourly time frame sell signal to develop on this test of the 50 day MA in order to possibly establish short positions for a move to new corrective lows.