"Close" to a Bottom?

I am not going to post any charts tonight because nothing is very new from last time. In brief, my suspicion is that we are relatively close to a significant/tradable bottom from a time standpoint (maybe a week or so, or less). However, as has been the case for the better part of the last year, even if you "know" a bottom will happen soon, price may not be so close to a bottom.

There are many reliable indicators from market breadth and sentiment surveys and fund flows that are showing extreme pessimism right now, however some of the most reliable indicators, which are the put/call ratios, are glaringly absent from the list. In fact, despite the S&P 500 barely 2% above the key Nov low and the Dow several percent below that low, the equity put/call ratios have been 0.65, 0.64, and 0.65 the last 3 days. Those are ridiculously low and are more on par with excessive complacency (not feeling the need for put protection). I would be very surprised if we make a significant bottom without those ratios jumping up a good bit.

What I think is most likely is a break of the Nov lows in the S&P 500 with a move down to the 650-730 range, followed by another "sideways" consolidation for a few weeks. The initial upward thrust off a bottom tends to be very strong, and I will want to try to catch some of that move if possible on one of the next trades.

As for the current SDS blog trade, any sharp decline tomorrow will likely trigger an exit signal, so just be aware of that possibility.


Pete

New SDS Trade

This post will be brief because I am not feeling well. (Also if you got two of this post, this one is correct. I had mistakenly typed the wrong price of SDS in the prior post.)

The short-term model for the S&P is overbought as of this morning (due to yesterday's action). I think the probability is high that the Nov lows will be taken out (maybe significantly) before the market can make a solid rebound. With that said.....


Recommendation:

Buy SDS today with a "market" order. The current price is 94.15 which I will use for the blog entry price.


Pete

Potential Trade if Nov Lows are Broken

Click on Chart to Enlarge

The chart above is the S&P 500 as of about 3:00 ET Monday. It is ever so slightly above the November lows of 741. I think at this point the likeihood is high that those lows will be violated before any meaningful advance. On the flip side, a break of those lows will likely bring a lot of the "retest" crowd back into the market and could be a very explosive short-term move which I would be interested in trading. So for the near future, I am going to switch to short-term bullish mode and look for signs that this decline is over. A 35 point advance from its lowest point (or a $3.50 advance in SPY) would likely indicate that this phase of the decline is over. A significant gap down tomorrow morning would also be a potential indication of exhaustion.

If the Nov lows are broken today or tomorrow, then I will almost certainly recommend a trade on the blog. I would probably suggest QLD as the fund to trade. But let me make clear that this would be only a short-term trade, NOT NOT NOT a trade to get "stuck" in for any reason. It would be counter to the larger trend which is extremely negative over the next few months in my opinion. For that reason, any beginning trader should probably not even try to trade it.

I believe that any large advance off the recent or near-future lows, should be the best opportunity we will see for a while to short the markets or buy inverse funds. Also, this would be the time to either buy, or scale into, index put options in my opinion.

We'll see what happens.


Pete

Several Indicators Suggest Some Short-Term Gains are Ahead

Click on Chart to Enlarge

There are a lot of things I could look at for today's post, but since I'm getting a late start at this post and the conclusion wouldn't change by adding more analysis, I thought I'd just show some unique indicators that I made that I have never seen anyone else use. I value independent thought in market analysis. The tried and true indicators will be great guides, but I think there is some value in looking at a market from at least a slightly different perspective than most everybody else. It helps to avoid "group think" to some extent maybe.

The chart above is a chart of a 21 day running cumulative gap %. So the blue line is the sum of all the gap ups and gap downs for about the last month of trading. This chart is used as a contrary indicator. If there has been a large percentage of gapping down over the last month, that would indicate a bottom may be near. In the chart above, the current reading as of last Friday was just over -8%. That is in the range of past extremes. In fact, the -8% mark has been a kind of magic number as every time it has been reached since the beginning of this bear market, the next day has been positive (typically substantially positive) every time. That would suggest today should be a positive today, with likelihood of at least a bit more short-term gains ahead.

Click on Chart to Enlarge

This chart is the sum of the volume of SDS, QID, and DXD which are the 2X inverse index ETF's for the S&P, Nasdaq, and Dow respectively. I created this indicator last July and have found it to be useful in the same way as following put/call ratios. In fact, the reason I made the indicator was because during the decline of June and July 08, there was very little increase in put/call ratios, yet it was obvious that the market was bottoming, and these inverse ETFs were showing the highest volume in their history. This indicated that investors were using these funds as hedges (and speculative vehicles) in similar manner to put options.

The current readings are on par with past bottoms, though the Oct/Nov bottoms last year showed substantial further increases in volume. I view the current market situation as similar to last September. This indicator is reaching the same levels as mid September last year before a sharp 2 day rally followed by the "crash" into October.

In the interest of time, that is all for today's post. The conclusion from many indicators would suggest a short (couple days to 2 weeks) market rally starting today. After that I think a more vertical decline will ensue.

For trading purposes just maintain the limit order to buy BGZ at 67.50 until further instructions are given.


Pete

SPY and Bollinger Bands

Click on Chart to Enlarge

First off, the price of BGZ at 12:30 ET today (the time I said I would use for an exit price) was 77.75 up from 73.63 at entry for a 5.5% gain. Depending on when anyone was able to exit from the time I made the post to the close today, the gain may have been from about 3% to 8%. If unable to exit today, just place a market order tonight to sell it first thing tomorrow.

I wanted to give a little rationale for exiting this trade since my goal is to get into a BGZ trade to hold for a few weeks. When the market is on the verge of a major move there are often multiple whipsaws before it finally takes off. When a major move starts, you should see price be able to accelerate in the direction of the new trend. That has not happened, so it would seem likely to me that another whipsaw move will occur before the market can continue lower. As it stands right now, on any rally followed by a break below the most recent minor low, the potential exists for a dramatic vertical type decline to begin.

The chart above is SPY with standard bollinger bands overlaid which are +/- 2 standard deviations of the last 20 days' average price. The light blue boxes on the chart show times during this bear market when SPY closed 2 or more consecutive days below the lower band on a breakout from a horizontal channel in the bands. Today is the 3rd consecutive close below the lower band. In the prior instances there were 2 to 4 closes below the band followed by a very sharp 1-2 day rally that typically topped near the highs of the second price bar before the most recent close below the band. Currently that would put the S&P at about 820 in the next couple days if the same pattern occurs again now.

Taken together with the recent studies I have referenced and the oversold short-term conditions, this bollinger band pattern would suggest a move back near the top of the recent large gap down (82.75 on SPY) in the 2 or 3 days. If such a move does not occur by the middle of next week, I will begin looking for a decent re-entry into BGZ on a breakout to the downside.

Pete

BGZ Trade Exit

I am recommending exiting (selling) the current 1/2 BGZ trade today ASAP (with a market order). I will use the 12:30 ET price of BGZ for the blog exit price, which currently is about a 3%
gain.

As indicated in the most recent post, keep GTC limit orders in place to buy BGZ at 67.50, but this time with a normal dollar amount instead of a half-sized amount.


In addition to the gap filling study I referenced yesterday, whenever there has been a down day (like yesterday) right after a <10% up issues day (like Tuesday) the next 4 days showed a positive return every time (8 out of 8) with an average return of 6.1%. That would put us right up into the same area as the 3% gap down occurred. So there are two studies showing an extremely consistent tendency for prices to move back to that area. With the short-term model oversold, I don't want to sit through a big market advance on this trade.


Pete

Short-Term Update and BGZ Trade Modification

Click on Chart to Enlarge

The chart above is SPY (S&P 500 ETF). There are several notes on the chart with some potential short-term bullish implication. First, the green line represents the previously unfilled gap up from November 24th. That gap is now finally filled. Major gaps like that often will provide at least temporary support in a case like this.

The light blue line represents last Friday's closing price before Tuesday's large gap down. In the last post I had mentioned that >2% gap downs tend to have prices close above the opening price of the gap down within 3 or 4 days. Today I saw a similar historical study looking at 3% or greater gap downs (like Tuesday). There were 12 instances of this in the last 20 years or so. In every case except the Crash of 1987 (market lost 25% in one day), prices came back up to the closing price of the day before the gap down within 6 days. The average was 3 days.

This would suggest a strong possibility of prices rising to 82.76 or higher on SPY within the next few days. I will show the corresponding price levels for BGZ in a moment. As I mentioned last post, this would suggest having a little patience with entering the second half of the BGZ trade until prices can work back into that gap.

The final note on the chart is that today marked the second consecutive close below the lower bollinger band on SPY. When this occurs after a channeling price movement with declining volatility, it often is a breakout move to the downside. I am not suggesting that the market will continue down the next few days, but I would take this as an indication that a downtrend is beginning.

Click on Chart to Enlarge

This chart is a 30 minute chart of BGZ. The green line represents the closing price the day before the 3% gap down. That price is roughly 67.50. The study above would suggest that BGZ may fall down to this price level in the next few days. If it does, that would be where we would want to enter the second half-trade on BGZ. The pink horizontal channel represents the "breakout" zone on BGZ which I would expect to be re-tested over the next few days at a bare minimum.

In addition to the info above, the short-term S&P 500 model is oversold, suggesting short-term downside may be limited. Also, several of my own indicators looking at gaps, put/call ratios, and inverse ETF volumes, have moved to statistical extremes within the last few days. Taken together, I think a decent little rally is likely in the next few days. But I would use that as an opportunity to enter bearish trades. With that in mind.......

Here is a slightly modified recommendation for entering the second half-trade on BGZ:

Place a GTC limit order to buy BGZ (half the dollar amount typically devoted to a trade) at 67.50 instead of 69.00 which was suggested in the last recommendation.

Pete