A Few Thoughts on Stocks Here 11-1-17

Today there is an FOMC statement to be released.

Tech stocks have pushed higher the last week, but to me it appear to be an exhaustion type move, as evidenced by the following chart.

Click on Chart to Enlarge

This chart is XLK on a daily time frame.  It is a tech stock ETF.  What I have drawn is an upper channel line which connects the previous price peaks during the uptrend.  A touch or break of such a trend channel line is often an exhaustion point for a move.

Couple that with the fact that the recent gap up from last Friday was the largest gap up in a couple years, it smacks of an exhaustion gap from a charting standpoint.  Is that gap up on the earnings news almost 2 years into a 65% run up in prices a "smart money" gap?  Or is it a "dumb money" type gap after the news is out?  I think more of the later.

Click on Chart to Enlarge

This chart is a weekly chart of the Dow futures contract with associated Commitment of Traders data below the price chart.  When analyzing the CoT data, there are a few common patterns that show up at reversal points on the chart.

One of the key points in CoT is always extreme positioning between the market participants and their historical range of contracts held.  We have seen extremes in the chart for sure as it pushed to new highs in 2016.  Other index contracts are hitting or near extremes on this rally also.

However, an even more notable signal than the extreme position is a "blow off" pattern in the futures where the "smart money" commercial traders hold an extreme position, but then price continues to rise and there is a break from their pattern of selling on price rises.  Instead we see the commercial group decreasing their short position substantially as prices rise.  That indicates a typical finale to a rally where the speculators "won".  They cashed out into a strongly rising prices.

That is what we are seeing on this Dow chart.  The commercial pattern of selling into the price rise was standard until October began.  Then for the last month, price has risen very sharply while commercials have bought and large specs have sold.

Once the run is done, this could result in a substantial decline, even a bear market.

Not all of the index contracts are displaying the same pattern, but this one has a classic bull market peak type of look to it, and so I am paying attention.


On a shorter term note, I back tested SPY data looking at opening prices outside the upper bollinger band on a gap up as is occurring today.  I also added various other conditions which are currently present in the market to gauge the short term expectation.

The only real significant finding is for the same day.  There is about 2 to 4 times greater MAX loss than MAX gain on the day of this finding.  The forward returns after the close of the signal day were flat to typical.

So given this tendency for a close below the open, and some of the exhaustion signals occurring, I wonder if the FOMC news will lead to a sell the news response here.

We will see.


Pete

Longer Term Pattern Analysis on SPY ETF - A Major Top Possibly Forming 9-22-16

SPY ETF is Forming a Possible 5th Wave Up and Creating Longer Term Bearish Divergence

Click on the chart of SPY above to enlarge the image.  But there is a pretty nice Fibonacci type sequence developing here.  I have put labels 1,2,3,4 on the chart with an implied 5th wave up to new highs expected using an Elliott wave interpretation.  And if wave 5 is then 38.2% of wave 1, it would project SPY to 225.50ish (projected up from the September low).  Based on the duration and relations of the other price waves, it would seem that the Oct 6th time frame would be a nearly ideal end to the sequence.

From a charting standpoint, the suggested price move in that time frame would lead to a break above the upper channel line of the April to August highs.  And from a technical analysis perspective it could make a massive multiple time frame bearish divergence in the MACD - monthly, weekly, and daily all in bearish divergence.  I have learned that those set ups are significant.  Even if a major top does not end up forming, I would guess there will be a significant correction after such a set up.

From a smart money perspective, we have seen the smart money become aggressive sellers since the move to new highs in July.  Price has not made much headway since then.  If we continue to see increased smart money selling as prices push higher, and price then breaks below the September low, that would be suggestive that the bearish forces have won this battle.

However, when large short positions are accumulated by the smart money, and the opposing players are able to push price several percent above the valuation/battle zone, it may force a short covering by the smart money.  That scenario can lead to major price gains in the market, and often in pretty steady fashion.

But then the scenario is that once the short covering is complete, the stage would be ripe for a major top.  I highlighted such a scenario in 2011 in the cotton market.  Given the large potential "basing period" since May 2015, a short covering rally could take the market much higher.  So I am not hanging my hat on one outcome.

Any short attempted at a quality set up would need a defined stop loss to protect against such a scenario.

But for now, my expectation is that prices will trend higher for the next week or two before another short/inverse set ups "ripens".

Pete

Time to Cover All Gold Shorts - Massive Rally Likely to Occur Based on Extreme Smart Money Position

Click on Chart to Enlarge

There are multiple factors currently suggesting that anybody short in gold get out as fast as you can.  The move down is almost certainly done or very very nearly done.  How big the rally will be, we shall see, but it could easily be 10-20% in the next 1-2 months.

The chart above shows the extreme oversold MFI14 indicator below prices of GLD.  And note the wide range bullish engulfing pattern on Friday as well.  That is a bottom reversal pattern.  It occurred on heavy volume and an obviously extreme move in price over the last few weeks.  Without knowing anything else about a market, understanding the implications of this candlestick should be cause to exit any short position.

Furthermore, there has been a huge increase in the commercial/producers/smart money positions on the long side of gold.  There was an extreme accumulation of new longs by commercials last week, and going back to 2006 (which is where my data currently ends) the commercial net long position is the highest it has ever been.  On a relative basis it corresponds with the peak net longs which have occurred right at the bottom of other declining phases of this bear market in gold. 

On the flip side the large speculators are the most net short going back the same amount of time.  The total speculative long position of small and large combined is also at the lowest point going back over the stated time frame.  The last time their longs approached the current levels was at the beginning of July 2013 right as a leg down was ending and a pretty swift and large bear market rally occurred.

Lastly, June and July is the seasonally most common time for a bottom to occur in precious metals.  So given the extreme sentiment, technical analysis and historical extreme move into gold by the smart money, this appears to be an exit point for gold shorts without question.

There are various long strategies that could be used here to capitalize on the anticipated rally.  One would be to buy the gold miners ETF on Monday with a stop below Friday's low.  Bullish option spreads or other directional option strategies may be appropriate as well.

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.
Pete

"Smart Money" Continues to Increase Selling

This week's Commitment of Traders report shows that the commercial traders have continued to increase their net short position compared to last week.

This does not include this week's reaction and changes following the FOMC meeting, but with negligible price activity following announcement I would not anticipate that being a significant factor in the upcoming reporting period.

I plan to post a video update of the CoT charts this weekend, but the spread between the smart money and the speculative money is extreme.  When the smart money gets very heavily net short there are typically 2 outcomes.  The first is for an imminent topping process and for stocks to fall afterwards.  The second is for a low volatility and possibly persistent rise in the markets that leads the smart money to undergo a somewhat drawn out short covering process as prices rise.

For the intermediate term a trailing stop type of strategy out to be effective for long positions because the market is at high risk of correction based on the smart money's heavy short position.  But if the correction is not forth coming stocks may churn higher on low volatility allowing a smooth rise in the trailing stop.