Low Volume in QQQ Suggests Rally Will Falter

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The chart above is the volume of QQQ with some moving averages and standard deviation bands.  The 8 day average of the volume is the lowest since August 2013, at which point it went very slightly lower.  The next lowest reading in between came at the beginning of Sept 2014 as stocks pushed towards the highs and then corrected sharply into October 2014.

In general waning volume on a rally is a bearish leading indicator meaning that it will occur in advance of a top in price.  So my interpretation here is that near multi year lows in volume as the other indexes are trying to make breakouts of the December highs (and in the NYSE highs back in July 2014), is probably not a good sign for bulls.

I have analyzed current Commitment of Traders data for the major stock indexes, and a major selling surge came in in mid December.  There is not the same level of extreme in selling currently.  That could be interpreted as a bearish divergence, but it also could be interpreted as the smart money just not being extreme, and so there may be room to move higher before they create another extreme selling effort.

Shorter term measures of the total put/call volume ratio and equity put/call volume ratio came towards the lower end of their recent range this past week.  And so in conjunction with market volume waning, it appears that some complacency is setting in for this rally.

Given stocks are at new all time highs, a trailing stop behind the market may be the way to proceed from here, but another possibility is to exit part of long positions at these levels, with the idea to consider rebuying on the next correction.

Pete

Sell Signal For SPY Call Option

Yesterday my index option trading system registered a sell signal for the recent call option purchase.

The first sell signal does not tend to be right at a top of a leg up, but may often be right near the end of a directional portion of a move.  So I would suggest exiting at least part of a position at this signal.

The SPY option I purchased is currently up around 80%.  I have a market order to exit at the open today.

The hourly VIX chart is displaying what I consider a short term extreme configuration in the bollinger bands, and so a brief pullback here would be reasonable if not expected.

CHK, OAS, SPY and The Possibility of New Highs for the Nasdaq

Just a quick note here on a few of the stocks/options that I have noted in recent weeks.

CHK and OAS report earnings 2/25/15 before the open.

The sentiment backdrop on CHK is showing considerable pessimism in that the near term put/call open interest is almost at an annual high and the short interest is at an annual high and has increased by almost 29 million shares since 12/1/14 at which time the closing price was similar to the current price level.  This seems like a scenario where the bearish backdrop could lead to considerable continued buying interest if prices push higher.  I am still holding an 18 strike April expiration call option on CHK with plans to hold through earnings.

On SPY where I had mentioned a call purchase on 1/28/15, price has moved to new all time highs.  There are bearish divergences present in several areas, but there are few extremes to suggest that the current move up is overdone.  When price moves to new highs in the stock market, often times price is able to advance steadily on low or declining volatility.  Given the apparent upside breakout of a large contracting triangle, it will be interesting to see if prices are able to sustain a major advance.

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The Nasdaq Composite is only about 5.5% away from a new all time high currently.  It seems likely to me that price will exceed that high before a major correction occurs.  An ideal scenario may be a rather directional move up from here to eclipse the tech bubble highs with a good bit of fanfare.  Then that may be followed by a correction, or at least a pullback several % below the highs to punish the breakout buyers.

Pete

NYSE Still in Stuck in a Contracting Triangle

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I recently posted about the SPY being in a contracting triangle and ready to breakout, probably to the upside.  Well now SPY has broken to the upside of the triangle boundaries, but in very weak fashion with no follow through.  Price has now retraced back to the breakout point.

If you look at the broader index of the New York Stock Exchange composite, you can see that it is still within the bounds of a contracting triangle.  There are 3 touch points on either boundary, so from a charting standpoint this is very significant.  The price and time bounds have both been repeatedly respected.

As of the end of this week, we will be at the 50% mark of the time from beginning to apex of the boundary lines.  As we pass beyond that point, a breakout becomes more imminent.  With the size of this pattern, I would infer that the coming trend will be very significant.  The only question I really feel will be important is whether it will be a "clean" break, or whether there will be a brief false breakout and then reversal into the true new trend direction.  As price unfolds I think we should be able to catch whichever scenario occurs.

From an ideal Fibonacci perspective, the 0.618 time point from the high to the apex point will be at the end of the first week of March.  So maybe we see price continue to respect the boundaries for another several weeks and then breakout.  If so one could consider a straddle trade at the equivalent of 10,750 on the NYSE as we approach the 0.618 time division.  I would think that a June expiration or Q2 expiration would be sufficient to capture the lion's share of the probable move to follow in such a scenario.

Pete

USO Oil Chart Analysis

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This chart is an hourly of USO which is showing a MACD indicator in the lower pane.

I have a retracement of the the recent thrust higher on the chart as well as a simple time cycle projecting forward multiples of the time the recent thrust higher took.

A few points of note:

• The hourly MACD has not yet formed a bearish divergence with price on the rally.  This suggests to me that this rally robust short term move has not topped yet.
• Since the high earlier in the week, price has traded sideways below the high, suggesting to me that a correction of the initial thrust is occurring.
• As we move into next week, the time since the recent short term high will be greater than the time of the rally, increasing the possibility that the correction will complete and price will break higher.

I am also showing the b? possibly forming back toward the middle of the recent thrust, creating a more classic abc type look.  That is just an estimate of a typical "flat" type abc move in Elliott wave term, and may be a short term possibility.

Also for those that understand the concepts of overbalancing in price and time, note that the recent thrust off the lows in oil has created a larger move than any rally since the high in June 2014.   So, it appears logically that at least a correction of that decline is underway, if not a major bottom.

I have suggested recently that I think that oil may likely come down to test the lows or make a new low after this rally before bottoming for a longer time.  I still feel from comparisons to past oil bottoms and to the typical weekly MACD divergence present at major lows, that this could occur.  If so, I think next week would likely be the high for this thrust.  But, for now I am just closing tracking this hourly chart so that I can get a better gauge as to when this thrust is running out of steam.

Pete

DDD Technical Analysis and Short Interest Analysis

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This chart is a daily chart of DDD.  I bought a May 29 strike call on it yesterday.

The technical position of the stock is compelling for a rally here in my opinion.  Price has under cut a low from March 2013 (not visible on this chart) and reversed higher here.  Stochastics is showing a weekly and daily bullish divergence on the low Tuesday in conjunction with a very high volume gap down and under cut of the January lows only to reverse and close in the upper end of the range and above the January lows.  This has the appearance of a failed break of support which often provides a high quality long entry.

There is money flow index bullish divergence on the recent leg down, indicating that the downtrend is running out of steam.

The stock is heavily shorted with 33% of the float short as of 1/15/15.  The short interest ratio is 12.5 which is rather high and indicates plenty of short covering potential on a rally.  While I don't have detailed data on the underlying short squeeze trigger price, I am estimating that a rise to the $35-38 level will likely cause some short covering based on the short interest increase from October to December.

Another factor here is that earnings comes out 2/26/15 before the market opens.  Given the oversold technical position of the stock with bullish divergence, I would give better than even odds to a bullish response during this earnings period.

Pete

OAS Short Covering Underway......And Likely to See Further Gains?

In a recent post on OAS I talked at some length about the recent accumulation of a large amount of short interest in the stock and gave an estimate of the average price at which that new short interest may have been accumulated.  I estimated that the 15.00 level or 34 day simple moving average may be a short squeeze trigger price.  This is the theoretical point at which the short interest becomes a net loss.  Any further gains from there really create a forced buying to cover situation on the short position and can lead to significant price advances, often times in explosive fashion.

So here is an update on the current chart of OAS.

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Notice that as price moved to the blue 34 day moving average yesterday we saw a large price move occur, creating a 15% gain or so yesterday.  Then today we saw another 15% move or so.  So part of the equation is that oil has rallied as I have recently suggested would be the case.  But why has the range expanded so much in the last couple days, and why is it outpacing oil gains so much?  Well I think that the short interest has a lot to do with that.

Currently price is now right at the 12/23/14 high which from a charting basis is a likely buy stop point for shorts.  So it may be hard to gauge how rapidly the short interest is being covered, but I think it is logical to assume that there will be more short covering as price breaks through that 17.75 high.

The stock traded huge volume today, way higher than any day in the last 2 years.  I think that also adds evidence of frantic short covering.  How long will it last?  I don't know.  There were 16.9 million shares sold short as of the new year.  The total volume traded the last two days is 37 million shares.  So a significant amount of the potential covering may be done, but I think between new potential buying interest as oil turns up and OAS breaks through chart resistance, and some further short covering potential, this stock may have a good ways to go before it makes a significant high and pause in the buying pressure.

I currently have an order to sell the current option I have on it as the stock price approaches $25.  The option I have is February expiration, $15 strike.  So I am hoping for some more rapid follow through here and a fill of the gap down from Nov 28th prior to Feb 20th expiration.

I may not update further on this one unless someone has a position in it.  But I thought the educational value of the underlying dynamics was of value to follow on an intra trade basis here.


Pete

NUE Call Option - Steel Should Be Rallying Too

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This chart is a daily of NUE which is in the steel and iron industry.  Along with commodities, steel stocks have taken a major beating in recent months.  And it is a place to bottom fish for big reward opportunities currently in my opinion.

Notice that as price has moved lower the last couple weeks, the money flow index has made progressively higher peaks, indicating that the trend may be set to reverse.  Now we are seeing a pop higher from a fibonacci support zone and a major, multi layered bullish divergence.

I believe this stock has good potential for continuation higher.

I have an order to buy an April 44 call option for 2.35 or less.  It would take a mild 1% or so pullback for the order to fill, but given the very short term overbought nature of these materials stocks right now, I think it has a good chance to make that pullback, and that will also create a more favorable reward to risk scenario for the option.

Pete

Buy Signal on SPY and DIA 2-2-15

Today's market action is the type of signal that my personal bottom spotting algorithm flags as significant for a market low.

I will probably not have time to give a more full background and historical trade stats from the model for comparison this evening, so I just wanted to note that for those looking to enter the market from the long side of stocks, I would consider with DIA or SPY to be a long trade here if there is a higher high tomorrow and the stop would be a penny below today's low.

As I have time to post some comparative stats, I will give guidance to probable expectation of upcoming action if price is to continue in bull market fashion.

But in trading it is limitation of losses that is the first order of business, and so if I were to be long or enter a trade here, the stop would be below today's low.

Reply or comment if there are specific trade management issues you would like addressed or an opinion on.  I will do my best to assist you.


Pete

SPY at Support and Put/Call Ratio Elevated

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The chart above is the total put/call ratio with a moving average and some standard deviation bands.

I am showing this because based upon the recent history of the moving average, it is in the upper end of its range and is near the upper deviation band.  So there is the distinct possibility that the current price level or slightly lower will be a bottom region for stock prices.  However, note instances like early Oct 2014 when the ratio moved up and then came back inside the bands, only to be followed with a break to new low in prices which led to a significant price decline.

That scenario needs to be accounted for in the current environment as price has mostly traded in a range for the last two months.  So while price is at the lower end of the range ( and the put/call ratio is near the upper end of the range), price is not necessarily extended to the downside, and so a significant price break lower could occur.

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Here is SPY with bollinger bands.  The bands have not been narrow for the last 6 weeks, and 3 times since early January the SPY price has touched the lower band and reversed higher, including (so far) today.  My feeling here is that if today's low is revisited then it will probably occur with some significant short-term downside and multiple closes below recent support at 198ish.

For the bullish case, at this morning's lows in the indexes, there was a significant hourly time frame bullish divergence on the MACD followed by swift rebounds.  A move above 202.30 would be a short term chart sign of strength as it would break an hourly chart swing high/resistance.

For index trader's here if long an ETF, I think this morning's low could be used as a stop point.

Pete

CHK Ascending Triangle Ready to Breakout

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Since I have made some recent posts mentioning CHK and suggesting it may be set for a nice move up if oil continues to rally, I am going to make another follow up here on it.

Currently there are a couple interesting points of note on the chart.  The first is the double bottom between October and December.  And now the action since then has formed an objectively ascending triangle with a horizontal resistance line at 20.35ish and an up sloping support line from the December and January lows.  Price has moved right back up to the resistance line today.  This price level will be the potential breakout of the pattern.  Additionally, one of my posts on CHK mentioned the short interest pattern in the stock and highlighted that December 23rd high as a probable short covering trigger point if price moves higher.

A short covering rally tends to be very directional and so it can be a nice move to participate in.  There are 3 points on the chart that I would suggest as partial profit taking areas or potential price targets.

The first is the unfilled gap down at 23.04.

Then the other two are at essentially the same level at roughly 25.25.

• The first is the projection up from the symmetrical triangle taking the widest leg of the triangle and projecting it up from the resistance/breakout point.  
• The second projection is the green line on the chart showing an equal price move to the Oct-Nov advance projected up from the Jan low.  Since this stock has the potential from a pattern standpoint to be right in the middle of a strong new uptrend, I think that it is likely to make a larger move from here than any rally in the downtrend.  

Again, I have April 18 strike calls here personally, but a close above the 20.38 level, would be reasonable cause in my opinion to expect that stock to quickly move up to 23.00 or higher.

Pete