SPX Update

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There are several things today that suggest maintaining a stance that a market high is imminent is sensible. The chart above shows a compelling time relationship in that on Monday the advance since July will be 1.618 time as long as the fall from April to July, AND the time of the current leg up will be equal to the time of the last two "waves" (early July to early Sept). So maybe this week is it as far as the advance goes.

Now the Dow 30 is very close to the April highs. It is only about 0.5% shy. A nice topping scenario may be for it to double top today or tomorrow, while the S&P still lags below the April highs.

There are several little non-confirmations or divergences happening today to that suggest the rally is ending. Neither gold nor silver nor the Euro are making new highs this morning while stocks are. Given the correlations and % declines, it looks like those markets may have already topped, and that this is a last gasp in stocks. Also the VIX is not making new lows compared to last week. That has often happened at the end of a leg up in stocks as sell.

USD Index Reversal Pattern

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Today the US Dollar Index provided several significant cues that it is making a trend reversal.

-made a bullish MACD cross on the daily chart
-formed a bigger white candlestick than any since the decline began in June
-the % advance is significantly larger than any any since the August top suggesting a new leg up has begun

Again the intermarket correlations suggest that the US stock market will likely decline if the US dollar does continue to rise. I think we will see a significant correction in stocks.

If the S&P 500 falls to 1154 or lower, that should be 1.2 times larger than the biggest decline since Sept. That would be good confirmation that a correction is underway in stocks.

Equity Put/Call Ratio and Flash Crash

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The chart above is really for the Elliott Wave enthusiasts. It is the equity put call ratio with a 5 day average overlaid. Occasionally on the chart you can make out a little 5 wave push in one direction on the 5 day average. At which point the trend reverses and corrects. The current set up has a nice correction after the 5 wave push which retraces just a little over 61.8%. Maybe there will now be another move higher?

Also the 5 day average now sits at 0.52 which is where it bottomed in Oct 2009 and Jan 2010. It also hit that low level in March and April of this year and continued for a bit before correcting. So this dumb money measure is starting to hit extreme levels corresponding with market tops.

Also, I'm sure many of you know the market flash crashed again today after hours. It put the S&P 500 down to about 1065. But then all the trades were canceled. I read a few things on this and some people noted that a similar thing happened soon before the May 6th flash crash. I don't know if this means anything, but it makes you wonder if the machines are about to go for a spin again.

As another side note, AAPL was down 6% after hours on earnings. It has a 20% weighting in the Nasdaq 100, so we should see a decent gap down tomorrow. Personally, with the past stats on market performance after AAPL earnings when overbought, it wouldn't buy the gap down.

New SDS Trade

New Blog Trade:

Buy SDS on the open Monday morning 10/18/10. I will post the blog entry as the opening price.

Market Showing Increasing Signs of Intermediate Term Top

A reasonably strong case could have been made the last couple weeks for a more significant pullback than we have seen. Now this past week's data makes it a very strong one. There was a big drop in "smart money" confidence this past week as measured by Sentimentrader.com. Also, the intermediate term models from Sentimentrader.com are now basically all overbought (they weren't last week).

When Oct. option expiration has occurred when the S&P futures were within 2% of a 3 month high it has always led to a pullback of a couple percent or so. Also the VIX made a bollinger band sell signal last week. It closed below it, and now is back inside. I have noted in the past the cyclical tendency for the market to rise into options expiration for the last year and a half, and then to fall or consolidate in the couple week following OpEx. So they expired Friday and look set to pull back soon this time.

The DIA (Dow 30) made an outside day reversal bar, and bearish engulfing candlestick. The Nasdaq composite made a hanging man top reversal candlestick. These need some confirmation to the downside for more confidence, but there is at least a hint of topping here. The US Dollar Index has formed a nice bottom reversal candlestick pattern amongst great bearish sentiment. This should be a catalyst for the stock market to decline.

The largest decline in the S&P since the early Sept. low has been 2.3%. So any decline larger than that would give added evidence that a larger correction will play out based on the tendency for trends to experience uniform corrections. The rule I have suggested in the past is to look for a move 1.2 or 1.25 times larger than any prior counter trend move. Currently this could require a 2.8+% decline to hit that threshold.

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There are a few basic time relations that I look for that relate a move to its prior moves. One of them is that often one move may take the time of the two prior moves combined. This seems more often the case if the prior 2 moves were similar in time. There are time relations as well, but as pertains to the current situation, this is the longer time relation and is coming up the first couple days of this week.

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Here is the Shooting Star in the Nasdaq Composite.

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Here is the DIA bearish engulfing outside day. It is occurring right at a fibonacci confluence area and at the time relation mentioned above.

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The NYSE McClellan Oscillator is showing some continuing strong bearish divergence on this move up. That basically means the amount of stocks driving the market higher is narrowing. Fewer and fewer stocks are holding up with the market. That is a signs of a tired leg up.

Cobra's Market View notes that the institutional selling is starting to perk up and is forming a bearish divergence right now. The charts he mentions are from StockTiming.com. So this fits in with the diverging McClellan Oscillator.

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This is the US Dollar Index chart showing the nice candlestick reversal pattern after undercutting a prior wing low. The FXE (Euro Dollar) ETF made a bearish engulfing pattern Friday, and the UUP (US Dollar Bull ETF) made a bullish engulfing. These may reverse and drive the stock market lower.

On account of these I am posting a new inverse ETF trade on SDS.

Changes to Blog Layout

I am going to make some changes to the blog layout this week and also to the trading strategies. It was my original intention to continue with the current format throughout the end of the year, but for several reasons and feedback from readers, I am going to make the changes now.

Basically I am going to return to posting only trades on the stock indexes. And I will only have one trade going at a time. In think this will help to regain a high level of focus which has waned with following several different markets.

Basically the goal will be to outperform the S&P 500 compared to buy and hold. I will not post trade % allocations unless specified, just simply the trades and then track the performance on a cumulative basis. The individual reader needs to be responsible for money management strategies and diversification if desired. I will just focus on the trades and high quality set-ups.

I will still put educational material on the blog about other markets at times, but most content will be focused on short to intermediate term trades and set-ups on the stock indexes. All currently open trades will still be tracked until exit.

Your feedback or comments are welcome. I am willing to iron out some details of the format/layout over the course of the next few weeks dependent on feedback.

SPX Update

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The S&P 500 pushed above 1175 today and closed above that level. The RSI became overbought today in the process. So while anything can happen, the chances are that the market uptrend is tired and will reverse significantly soon. Imprint the way the market "feels" to you right now, so that in the future you can remember the feeling associated with what happened in the market.

I like the fact that 1175 was taken out to the upside, but I would prefer things not go higher given my current positioning in the market. If the market were to top right here, that would be a fairly nice Gartley pattern. Given the position of the Euro, USD, and gold, I think the possibility is distinct of a rather large correction from these levels.

Now from a harmonic pattern perspective, a bearish Gartley top like this, will often lead to a major prolonged move down. So be aware of that possibility if things level off and reverse from here. I personally would trim down investment longs significantly if your time frame allows.

There still has been no candlestick reversal pattern yet on the daily or weekly chart. It would be nice to see that for some confidence that a high is being put in.

On a side note, maximum pain theory would suggest that options should expire a little below 1150 on the S&P 500 based off of today's data. So we may see a pullback into Friday on that account.

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There are a couple high profile stocks that I believe will help us to know what the market will do from here. First is AAPL. It formed a very narrow range doji after a gap up today on a wider range day in the general market. There is a strong bearish divergence on the RSI and AAPL is at a Fibonacci resistance area. A downer tomorrow could confirm a bearish reversal pattern.

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Another one to look at is GOOG. It touched up today on a tight harmonic resistance zone and the daily RSI is showing divergence within this last leg up. The rally since July is a nicely formed ABC pattern with great harmonic proportions. This has sell written all over it in flashing lights. Now it may be best to wait for some type of initial confirmation that this outlook is correct, but I think the odds are high these will reverse to the downside.

On another note, BIDU, another high flyer is not confirming the new highs over the last couple weeks. It is still stuck below. Sometimes the leading stocks give you reliable tells on the market. It looks to me like this may be one of those times.