Saturday, March 28, 2015

1 Month Low Signal In Stocks - Probably Just a Short Term Pause Before More Downside

Thursday's price action registered a "1 month low" signal in my bottom spotting algorithm.  These signals can be traded on the signal alone, but as an estimation, about 50% of failed signals will be removed if you wait for a close above the high of the signal day.  The downside of that method is that your reward to risk ratio will be smaller.

In any case, I track this signal primarily to be alerted to as many potential inflection points in the market as I can.  But I don't consider it to be a consistently outstanding signal for going long a market.  I like to have other factors also clearly pointing to an upside skew to trade on this signal.  I have other signals that I prefer to trade on for going long the US stock indexes.

Click on Chart to Enlarge - Bull Market Signals

This chart shows all the "1 month low" signals generated going back to the 2009 bear market low.  The averages at the bottom show the future 2 month max gains and losses in both the SPY etf as well as a proprietary at the money call and put option max gain calculation if buying exactly 2 months until expiration at each signal.  The results show a modest upside skew during the bull market.  So if the bull market remains intact, we may expect SPY to rise to roughly 213.00 during the next 2 months.  And an AVERAGE May expiration call option may be expected to gain 100% or so within the next 2 months.  In order to expect to capture nearly that on average on these signals, quality option exit points will need to be objectively flagged.  I also have an algorithm which nicely identifies such key points as a market rises.

Click on Chart to Enlarge - 2007-2009 Bear Market Signals

This chart shows all the "1 month low" signals which occurred during the last bear market.  The averages shows a distinctly negative skew here.  So the signal often flagged a very short term pause in the market decline, but not the type of signal you want to trade on in a downtrend.  It could be used to help you identify short term covering points on short positions or put options, but I would not use it as a buy signal in a downtrend.  So the point here is that if the bull market has topped, we realistically don't have any quality upside expectation, and price is not too far off the highs.  

Click on Chart to Enlarge - 2000-2002 Bear Market Signals

This chart shows the "1 month low" signals generated during the 2000-2002 bear market.  Again the averages show a negative skew to future price movement.  So nothing to add here.

If you are short stocks currently, I would view this signal as a partial exit position to help create an objective scale out process.  My suggestion would be to exit 1/3 to 1/2 of the short position, and hold the rest of the position short and await another signal to be generated at a lower low.  

OF NOTE here.....while a signal was generated on Thursday, a qualitative examination of the price reversal on Thursday reveals a very weak reversal bar.  The close was near the midpoint rather than the top of the range.  And the high-low range of the bar was modest, indicating the day was not likely a major flush out of positions on either side.  I feel that this signal is more likely a temporary blip in a market with at least a little more downside likely to unfold.  That is my opinion anyway from observing many signals and understanding how they are derived.

Click on Chart to Enlarge

To further quantify the signal, the right edge of the chart shows the current level of fear/panic in the market as evidenced by several real money measures of market sentiment.  The point here is that this week's decline did not cause much of a spike in the fear, and there is no statistical extreme even given the recent range trade in the market.  A signal without a corresponding extreme is much less significant in my opinion.

Hopefully this information is helpful in determining how to manage your trading positions.  In short my take given the data here and the price logic confirmation to the downside, I think prices will fall at least modestly lower before a better buying signal or short covering signal occurs.


Thursday, March 26, 2015

Price Logic Confirms Probable New Downward Pattern Off The Recent Highs In Stocks

Click on Chart of QQQ to Enlarge

The hourly chart of QQQ above shows that the current decline off of the 3/20/15 high is occurring rapidly and has retraced the recent rally up from 3/13 in less time than the rally took to form.  That is reasonable price logic confirmation that a larger phase of market action is ending and a new (at least short term) downward pattern has begun.  If a major top is not in place, then the pattern may not result in much further downside.  But given some of the things I've shown here over the last several weeks, the overall context seems ripe for a market high.

I would not advise an exit of short positions here until some bullish divergence develops.  And even then, a partial exit may be wise with prospects of greater gains.

Given the price is now at a 1 month low, my bottom spotting algorithm with begin to flag certain 1 day reversal patterns as potential bottoms.  Those would be my preferred exit signals here - waiting for at least the shortest term signal, a "1 month low" to get picked up by my system.

Also given the data point registered on Monday, please review the stats in my December post highlighting the put/call ratio sell warning.  


Wednesday, March 25, 2015

Sell Warning From Total Put/Call Ratio

Click on Chart of Total Put/Call Ratio to Enlarge

I haven't had time to provide more detailed info on this, but Monday the total put/call ratio gave a sell warning with the 5 day average closing below the 20 period 1 standard deviation band.  I have discussed this signal quite a number of times here in the past, and you could search the blog for related terms to find more info.

Interestingly, this signal came at a slightly lower high in the SP500.

I will try to provide more detailed info here in the next day or two.

Currently I feel the two most reasonable price scenarios are for a continued rally to new highs as suggested in the recent video on an ending diagonal in the SP500 OR for weakness into the end of the month followed by a rally to new highs in May, which could also be the end of an ending diagonal if the price relations remain within the rules of logic for such a pattern.

The most recent signals from the ratio mentioned above were

  • 12/26/14
  • 12/26/13
  • 7/19/13


Tuesday, March 17, 2015

Ending Diagonal In the S&P 500 Possible

Ending Diagonal In the S&P 500 Possible

This technical analysis video of the S&P 500 and the total put/call ratio displays a possible ending diagonal pattern forming since the October 2014 low.  It cannot be confirmed yet, but the first 4 out of the 5 waves of the pattern are potentially complete.  Ending diagonals MUST be followed by explosive reversals in price action as the video details.  If not, then the pattern is not really and ending diagonal.  An ending diagonal ENDS a major market move, and then price will explosively move in the other direction.

There is an FOMC announcement tomorrow which may lead to a market reaction.  Currently my expectation is for a rally into the end of the month.  Beware a breakout of the February high.  If a move to new highs occurs with broad scoped divergences in breadth, price, volatility, put/call ratios, and other sentiment measures, and a bearish top reversal candlestick forms around or below the upper boundary of the wedge, it could offer a great short selling opportunity for stocks.  

I will update as price action unfolds here in the coming weeks.

Friday, March 13, 2015

QQQ Hourly MACD Bullish Divergence - Early Week Rally Probable Next Week

Click on Chart of QQQ to Enlarge

This is an hourly chart of QQQ.  Evident on the MACD below the chart is a pronounced bullish divergence between the MACD and price.  Price made a lower low, and the MACD made a higher low and reversed modestly higher today.  This is not enough to trigger a buy signal in my trading algorithm.  But it won't necessarily catch every turn, especially on a short term time frame.

Its seem likely that price could form a short term rebound of at least part of a day, and maybe about 2 days.  Now there is certainly potential even for new highs, but the weekly chart appears solidly bearish at this point, so I don't necessarily count on new high to create the classic multiple time frame bearish divergence which I mentioned in my stock market top video last week.

At this point, my expectation is for a brief rebound from these levels, followed by a move to yet lower lows for this decline.  I won't offer any more expectation than that currently for the short term trading time frame.

On an investment point for stocks, it seems like the only reason stocks have held up is "free money" that has continually been shunted into stocks and stock futures in the last couple years of quantitative easing.  So if long stocks, the February low would be my suggested stop loss point to exit investments.  On could certainly rationalize just remaining long stocks with a stop at that support level or with some % based trailing stop.  That would allow continued appreciation.


Wednesday, March 11, 2015

US Dollar at Climax Point - Breaking Above Upper Trend Channels

Click on Chart of UUP to Enlarge

In a recent post I suggested that the US Dollar index may break above the upper boundary of a high-high trend line.  As of today it has done so on three separate high-high trend boundaries of increasing vertical angulation.

While it appears to me that some more sideways and slightly higher action would be ideal before a top, I view this at an ideal momentum point to exit longs.  This appears to be a climactic move.  I would suggest to keep a daily routine of analysis on commodities the trade inversely to the dollar for trade set-ups.  I follow gold, silver, and oil most closely, and so I am watching those on multiple time frames to potentially purchase at a trough on the chart that has the potential for a nice rebound.


VIX and Bollinger Bands Today

Click on Chart of VIX to Enlarge

This chart of the VIX shows that relative to the recent range the VIX is elevated as evidenced by the shorter term bollinger band being outside of the upper longer term band.  Additionally, the VIX has touched and closed outside of this longer term upper band.

Now this is an hourly chart, so it needs to be viewed as a shorter term signal.  However, notice the red circles at prior dates and compare to your charts for reference.  It warns us that this move down may have an upside reaction soon.  For the very short term trader who is short indexes, I would suggest that a trailing stop of some sort be used in the market given the current configuration.

Another point of note is that the VIX is somewhat lower than the previous signals, so it is not really that extreme and could certainly see upside continuation which would occur with stock declines.

I am making no position changes today, but will assess my trading indicators after the close.


Tuesday, March 10, 2015

SPY MACD and Money Flow Index 3-10-15

money flow index MACD with no divergence
Click on Chart to Enlarge

This hourly chart of the SPY etf shows MACD and money flow index below the chart.  Also there are some vertical lines also which represent the time of the recent rally from low to high in February and that same time amount projected forward from the February high.  If price manages to fall another 4% by March 23, it would move below the February low and would break support but also would retrace the recent rally in less time than the rally took to form which would be a solid logical indication from price action that a pattern completed at the February high.

At this point I don't really have an opinion of whether that is likely, but given the information covered in the stock market top video I made this past weekend, it is on my radar.

The indicators below the price chart show that the money flow index is in the oversold region, but without bullish divergence.  Since it includes volume in the calculation, it tends to diverge and lead prices significantly at important turns.  So this suggests to me that we will see at least a few bars of price action on this time frame with lower lows.

The MACD indicator is relatively oversold and is also not displaying a divergence at the time of this typing.  So, while the possibility is certainly reasonable that prices rally later today and a short term low is formed, a low close today after a gap down may indicate at least a few more days of lower lows in or order to create a more classic bullish divergence in the hourly MACD.

Until otherwise posted here my vote is for generally (and possibly sharply) lower prices in the next several days.


Monday, March 9, 2015

US Dollar Index Showing Bearish Divergence at Extreme OverBought Conditions In Both Price and Time

Commitment of Traders Us Dollar
Click on Chart or US Dollar Index to Enlarge

This chart is a weekly chart of the US dollar index with Commitment of Traders data below.  These charts are available at  What is apparent is the massive rise in the speculative net long position, mirrored by the massive net short position by smart money/commercials.  So what does this mean?  A few things I believe...

  • First long term, this trend is not done.  There will likely need to be at least a weekly time frame bearish divergence on the technical analysis to end the trend.
  • By all measures, this move is historically extreme.  It is "overdone" and will likely result in a significant correction of the current uptrend in the relatively near term.
A few nuances of the chart suggest to me that the top for this leg up is close at hand.  First, there is a lower high in the speculator's positions in the last few weeks, creating a divergence that is typical of the end of a move, and is seen at all the other tops of importance on this chart as well.  Second, open interest is at a considerably lower point than its peak for the uptrend.  This also shows decreasing participation in the uptrend, and suggests that the leg up is ending.  You can also see the open interest (purple line in middle pane) make lower peaks as price reached ultimate peaks in the past.

So when can we expect the move to end?

One technique I have discussed before on this blog is the use of an upper channel line combined with technical divergence.  

MACD Bearish Divergence UUP
Click on Chart of UUP etf to Enlarge

This chart is the UUP etf which is an unleveraged 1:1 mirror fund of the US Dollar Index.  I have shown an upper channel line in the chart, and price is just below it.  Certainly price could top right here, but a touch of the channel on further strength would be a great exit into strength in my opinion if you are long.

Also note the sharp bearish divergence on the MACD study in the lower pane.  View this as a "set-up" indicating that shorter term signals can be used for exit of longs or entry of shorts.

If the MACD now crosses down it would be a very simple exit signal that I think should be respected.  However, if price breaks to new highs, I would have to suggest covering a short position, but be willing to re-enter if there is yet another bearish signal while the divergence maintains.  

That being said, trying to catch a correction in a trend is not where most people will make consistent money.  The best idea may be to wait for a sell off in coming months, and then get serious about timing entry on the long side in expectation of a break to yet higher high later this year.


XLF Put Option Purchase

As per this weekend's video update where I discussed the non-confirmation in XLF in conjunction with the current (so far) failed breakout in February, I have purchased contracts of XLF put options.

I got both May 25 strike and Sept 24 strike contracts for the position.

I will update on this again in the future as action unfolds.

I have no planned stop loss on the contracts.  Risking only what can be lost if they expire worthless.


Sunday, March 8, 2015

2015 Stock Market, Bull Market Top - Bearish Divergence

2015 Stock Market, Bull Market Top - Bearish Divergence

It appears likely to me that the current bull market in stocks since 2009 is over or is in its finals stages. Whether it can be prolonged a few weeks or months, is probably quite reasonable, but I doubt that the current 5th year of the decade will have the same shine as it historically has.

There is bearish divergence in price, sentiment and breadth in the market on multiple time frame.

Additionally, price has now made a failed breakout and reversed below prior highs in several indexes, which is a typical topping pattern as smart money sells heavily into new high trying to unload right at the top.

Toward the end of the video above I was looking for some prior published material I posted on crude oil and did not find it in a blog post.  But the information is contained in a video I published on YouTube from June 18th 2014.  The video did not cover the Commitment of Traders data, only the technical analysis and pattern analysis.  So a longer term monthly chart of crude oil with the CoT positions is shown below.  From the green line on the bottom pane you can see speculators' positions reaching new all time highs in 2014 despite lower price peaks compared to 2013, 2011, and 2008.

Crude Oil Commitment of Traders Chart

The point here again is that crude oil price gains were made by speculators buying.  And there is no actual intent for use by the large specs.  It is only leveraged speculation for profit.  And the subsequent vertical price decline in 2014 (similar to 2008) shows the type of move that can occur with unwinding of that leverage with no real tangible demand.  Interestingly, it appears that there are still currently more long contracts held by speculators that there were held at the PEAK of the 2008 high in oil.  So, in the longer term view, it seems likely that oil will continue its bear market - I would guess breaking the 2008 lows, and possibly the 2001 and/or 1998 lows.

So the situation in stocks is that the bull market has been pushed higher on record margin debt, which has peaked (so far anyway) ahead of price - as it has at the last two bull market peaks.  And this fits in with a divergence theory of market trend changes where you will see the underlying buying/selling behavior peak and diverge prior to the price peak and turn.  The following link is from a website that I am just posting to give you a visual of the margin situation.

I don't want to over complicate the situation.  Bull market tops will lull the crowd into risk complacency.  All things move in cycles, and there will be an end to the current upward cycle in stock prices, followed by new cycles again.  So on a pragmatic basis the question is whether you have an objective strategy for exiting this market.  Do you?  

I have suggested various forms of trailing stops that can be used in the market or as an analytical red flag to take action.  I will make an update in the near future with further details of trade ideas and chart points at which I would suggest price has not only hinted, but CONFIRMED that the market is likely topped for investment purposes.