Not Sure About the BGZ Price but Suggest Maintaining This Trade

I'm hoping to get a video post up tonight or before the open tomorrow, but in case I don't, I wanted to get this post out.

I am seeing conflicting data on the price of BGZ toward Friday's close. When I zoom to a 1- minute chart, it show the low as 36.04. Also, during the last few minutes of the day Friday and even right after the closing bell, I saw no quotes below 36.00. However, I have seen the low on some daily charts quoted at around 35.70. So, I honestly am not sure of what is the "real" quote and if anyone got stopped out because I was not using a stop.

In short, I feel that going without a stop and waiting for a short-term model oversold signal to decide whether to hold or exit will be the strategy that will make the most money. I absolutely will not trust any breakout to a new high on the S&P over the couple days. The short-term model is showing a significant (in my interpretation) bearish divergence with the last overbought signal.

Also, if I get a video up I will try to get into this in more detail, but it seems that the sharp vertical move in the final minutes Friday was almost exclusively a running of the stops on short positions causing a huge volume short-covering rally just before the close. That should remove a significant part of any potential upside for the early part of this week if short-covering was indeed the main driver of that move.

So if you were stopped out then I would suggest getting back in ASAP, and if you had a stop but were not stopped out, I am removing any official blog stop on this until further notice.

5-29-09 Market Update Video (BGZ, SPY, GLD, TLT, UUP)

Latest market update video covers BGZ, SPY, gold, bonds, and US dollar.

Suggested stop loss on the open BGZ trade is 36.00.

New BGZ Trade

This post will be short in favor of time.


I will follow this with a video update later today, but for now I am suggesting a new trade entry on BGZ.


New Trade Recommendation

Buy BGZ with a market order ASAP before the close today. Current price is 37.75 which I will use for the blog entry price.


Pete

BGZ Stopped Out

Yesterday SDS was stopped out for about 1.5% gain. This morning BGZ was stopped out at breakeven. So there are no open blog trades right now.

The move toward the recent highs has set-up some bearish divergences among shorter term indicators, suggesting that it is very sensible to look to get back in a trade and hope to catch a breakdown move next week. Because of that, I would suggest staying alert through today because there is a chance that I will post a new trade. The short-term model is no where near overbought, but as I have discussed before, since price came back up to the same level as the last overbought signal, this may actually be a stronger than normal bearish signal (bearish divergence in the short-term model).

The trading has been more active in recent weeks than is my intention for the blog, but that is because of the multiple (and continuing) attempts to get in near the top of this (potential) trend reversal. Also, despite some good indicator based overbought entries the last 2 weeks, we have not seen oversold short-term model signals for exiting, and I have been opting to use protective stops rather than wait for a true indicator exit.


Pete

Blog Intro - Video

This video is more for any newcomers to the blog and just covers the general layout, etc. But I also briefly cover some of the sites I've linked to and feel are valuable for individual traders. I will put this in the "Best Posts" section as an easy reference.

SDS Stop Placement

Based off of the short-term model getting into the lower side of neutral, and the failure of the gap up to hold this morning, I think it makes sense to lock in a profit on the SDS trade right now and then hope to get out with a bigger gain if/when the short-term model becomes clearly oversold in the near future.

So for the open SDS trade, place a GTC sell stop at 58.19.

As for the BGZ trade, since I am hoping to catch a bigger move, I don't want to pinch pennies on the stop unless/until there is a clear breakdown, so let's just leave it at breakeven.


Pete

Market Update 5/27/09 - Video

I've decided to start trying to use some videos rather than all text posts. Hopefully everything will work OK for this first video. I'll still probably put trade recommendation posts in text, but I may move to using video for info type posts if it seems to be working well and reducing my time input.

I would appreciate any comments about the videos as far as quality, etc, because it is not something I've done before. The screen looks fuzy to me, after it goes into Youtube. Prior to uploading to Youtube it looked normal. If anybody has tips to combat this appearance please let me know.

Pete

BGZ Stop Loss Placement

Place a breakeven stop loss on the BGZ trade entered this morning. The market has turned down and given enough confirmation of a new short-term downtrend to reduce the risk to nothing at this point.

For those of you who are familiar with "stop limit" orders, I would suggest using this and setting the stop and the limit portion of the order both at breakeven. This may help avoid getting out at worse than breakeven if the market were to gap up tomorrow putting the BGZ trade at a loss on the open.


Pete

SDS and BGZ Double Trade Entry

I was gone the entire day yesterday and returned to find that the market did indeed make a big jump and stopped out the QID trade. However, this is the first every objective time during this rally that the short-term model has become overbought at a lower high than the previous signal, so that should give confidence to enter another bearish ETF trade. As I mentioned in a recent post, one of my goals with this rally has been to get into BGZ somewhere near the top and go for a longer holding time trade with a big potential gain. However, I want to continue to post strictly short-term trades as well which are the bread and butter of the blog so to speak.

The indicator set-up looks good to great for a trade here, and with each passing day that the indexes don't make new highs, the more likely it is that a top has already been made for this rally. A move down into the 850's on the S&P would basically confirm that a top is in as it will create a larger and more time consuming correction than any little correction during the rally so far.

Please refer to the money management posts if you are unsure about how much you should to potentially devote to these trades. Treat them as completely separate trades.


New Trade Recommendation:

Buy both SDS and BGZ today with a market order at the open or as soon as possible during the day. I am not going to suggest a stop right off the bat so please treat this according to the "trades without stops" guidelines in the money management posts. I will suggest a stop on BGZ ASAP to cut down risk on that trade.


Pete

Price Target For Potential QID Exit Today

I will be away for most of the day today, so I am going to suggest keeping the previous sell stop in place but also suggest a target price to sell QID if it is touched today.

Check the high price on QID today, and if at any time price exceeds 39.91, cancel the current sell stop order and sell the QID trade with a market order.

A day only limit order of 39.91 could be placed instead, but that would probably mean you have to cancel the protective stop order and leave a little risk of the trade going negative if the market managed to put together a big gain today. I don't think that is very probable, but you never know.


Pete

A Few Charts for Early Weekend Pondering, Possibly Instigating a Friday Afternoon Nap

Click on Chart to Enlarge

These charts are in no specific order of importance, but there were a few notable things that occurred today from my perspective. The chart above is the VIX/VXV ratio which I have shown before and is the ratio of 1 month implied volatility to 3 month implied volatility. The ratio oscillates around 1.00 over the long term. If the ratio is below 1.00, especially down in the 0.90-0.95 range, then that means that the options market is expecting near term (1 month) volatility to be less than longer term (3 month) volatility. Since the inception of the VXV, this data has been effective as a contrary indicator in that if near term volatility expectations are much lower than the longer term, then volatility is probably due to increase soon.

I also have suggested that a simple way to trade off this indicator (or use it as a confirming indicator) is to wait for the ratio to close below the lower bollinger band (meaning it is too low) and also below the 0.95 level, then to sell the market on a close back above the 20 day MA. The exit flag/buy back singal would occur when the ratio closes above its upper bollinger band AND above 1.05 (though 1.07 seems like it is could be used also and give better results).

Anyway, the "sell" singal occurred again today. It occurred around the April 20th week also, which obviously didn't mark a top, but neither has it given a buy back signal yet, so by the time it does, it could lead to a nicely profitable trade even from that first signal.

Click on Chart to Enlarge

This chart is the SPY/GLD ratio which is the S&P 500 price divided by the price of gold basically. The absolute value is not important from this perspective, but I wanted to pass along this chart and show how I use it as an indicator. I have never seen this anywhere else, but in the current market environment, it seems logical and has worked well.

With the overall down slope of the chart we see that stocks have been decreasing in value relative to gold for a couple years now. So since stocks are in the relative downtrend this is probably best used for sell signals for the market rather than buy signals. Anyway, I have not labeled the chart but you can look at it fo yourself in the following manner.....

Sell the S&P on the first close below the lower bollinger band after a recent close above the upper bollinger band. Then buy back the S&P when the ratio closes back above the upper bollinger band. In effect you are noting times when the S&P hits an extreme under performance relative to gold, and you sell/short at that time. Then when the S&P shows an extreme out performance, you buy back.

Today the ratio closed below the lower bollinger band (after an uptrend with multiple touches of the upper band) giving a sell signal on the S&P. Now I am not necessarily bullish on gold. In fact, if I had to bet one way, I would say gold prices will fall looking out 3-6 months from now. In any case......recent signals were ....

Sell in Oct 07 and buy back in March 08

Sell in May 07 and buy back in July 08

Sell in Sept 08 and buy back in March 09

So not a lot of signals, but all very good ones. Until there is a change of character, I feel this is something to watch.

Click on Chart to Enlarge

This last chart is VXX. For anyone not familiar with this, it is a relatively new ETF that basically tracks the VIX. So it is a tradable equity unlike the VIX. The VIX is actually just a cash/spot value kind of like the S&P 500 price. You can trade the VIX via VIX futures, but they are a different beast than the VIX. With the advent of VXX, there is now a way to easily trade the VIX, however it has proven less volatile than the VIX cash price, so it is not identical.

What I like about this is that I think since this is actually a traded equity, the candlestick and technical analysis should be more standard than using the cash VIX data. On this chart note the high vloume bullish hammer on Wednesday followed by 2 more up days the last 2 days. We have not seen 3 higher closes in a row on the VIX this whole rally since March, so that is yet another sign of a change in character and probably downturn in stocks.

Have a good nap.

QID Stop Placement

Click on Chart to Enlarge

I updated the standing orders section to indicate placing a "breakeven" sell stop on QID. The specific price will vary person to person but should be below 37ish if you got in Wednesday. I am placing the blog stop at 36.86. At this point I think there will most likely be a push to lower lows before that stop could be hit, but I don't see any sense from a trade management perspective to let this trade go for a potential loss, so let's just put the stop in and see what next week brings.

I suspect that a mini rising wedge is forming now which most likely has very limited upside, and would also likely lead to new lows before a potentially larger move up toward recent highs. Also the chart above shows SPY with a 30 min stochastics which is in overbought territory at a lower level than the previous signal, indicating a short-term down trend is likely still present.

As a side note, I am not going to show the chart here, but today looks very likely to be the first time since March that the VIX has closed 2 consectutive days above the TSF 63 line which I have referenced previously. The last couple times it closed above the line, it fell below it the next day. So that should be another indication of potential market topping and the VIX finding a floor or starting an uptrend.

Pete

Expect a Rebound of Some Nature Tomorrow

I don't have anything new for tonight. For anyone wanting a good market recap check out Cobra's Market View link on the right.

The QID trade got off to a good start today, but the short-term model did not reach the oversold area so no exit was justified on that grounds. I wasn't thrilled from a trading perspective on the last hour rebound, but I don't know that it implies anything specific about tomorrow. From my personal recollection, I would say that tomorrow is more likely to gap up after that late day rally, but I don't have stats to back that up.

I will go into more detail maybe tomorrow or this weekend on this, but I think it probably would be best to sell QID at the next oversold signal (even if we could know the top was in) and look for a longer hold trade at the next overbought signal. If that scenario is what occurs, I will begin what I probably should have done for the last month from an organizational standpoint in suggesting a double entry on both BGZ (3x ETF) and a 2x ETF (QID, SDS, DXD) at the same time with the 2x ETF being a strictly short-term trade as is my blog custom, and the 3x ETF trade having a longer potential hold but with a stop loss at entry and hoping to catch a major market top and hit a grand slam on a large correction in the markets over the next several weeks or months.

As for the current outlook, I would expect a positive day tomorrow and no exit on the QID trade until next week at the earliest, and just be pleasantly surprised if the market falls further and generates an exit signal before the long holiday weekend.


Pete

QID Trade Update

Click on Chart to Enlarge

I thought I'd give a quick lesson so to speak on the reverse head and shoulders pattern as it was one of the prompts for me to suggest quickly entering the QID trade yesterday.

This reverse H&S pattern shows up frequently on intraday charts, so it probably is worth any short-term trader's while to study good patterns. Things I look for are......

-volume should decline as the pattern reaches its lowest point/head

-the upthrust off the bottom should be nearly as strong (vertical) or stronger as the decline into the bottom. If you see a slow overlapping thrust off the bottom, beware.

-the right shoulder should undercut the low of the left shoulder, and then reverse to the upside very soon after

-as price breaks up out of the neckline volume should be picking up substantially. Beware low volume moves above the neckline.

-price should basically never close back below the neckline once it has broken out. A re-test should be allowed, but from experience the most powerful reversals will blow through and not pullback much shortly after breaking out.

The short-term S&P model is back near oversold, though the Nasdaq is not yet. It is probably smart to create a breakeven or better trade right now, but I will wait until later today to either suggest a stop placement or exit. The downside strength and approach of last week's lows has me favoring holding this trade longer.

I may post again later today.

Pete

Putting Today in Context

Click on Chart to Enlarge

I don't have a lot of time now, and there is probably not a lot more to be said that hasn't been said in recent posts, so this will be brief.

First off I suggested a trade on QID earlier today late in the trading day. The posted entry was 36.50. If anyone didn't have time to get in, I typically just suggest getting in on a market order the next day. Another option is to set a limit order of today's closing price to avoid getting a "bad" price if the markets gap down tomorrow. However, that means it is possible that you don't get in the trade.

While I have already given the rationale for this trade in recent posts I wanted to highlight a few things. Looking at the chart we see that volume has been downtrending this whole rally and yesterday put in a multi month low in volume. This is occurring right as the SPY is approaching the 200 day MA. From basically everything I've gathered about this type of action, it has bearish implications.

Also, today gapped up but then reversed to close below yesterday's open-close range. This creates what is called a bearish engulfing candlestick pattern. These are not extraordinarily reliable, but considering overbought conditions, increased volume today, etc, and resistance of the recent highs, this should give some more importance to the pattern.

What we have yet to see on this rally is a solid candlestick reversal that had immediate confirmation the next day. A sizeable down day tomorrow would help to strengthen the longer term bearish implications of the pattern. Also, last week's low's should be important. If they are broken before new highs occur, then that signals weakness. If they are broken by Friday this week, that will be a big score for the bears in retracing a bullish move in equal or less time than it took to form. Also, notice the blue moving average line on the chart which is a 21 day exponential. It has held every pullback on this rally. So a close below that line will indicate a weakening trend.

For QID, my plan is to wait for the next oversold short-term signal and then make an evaluation of whether to hold or exit there. The OEX put/call ratio spiked again today, indicating that smart option traders are protecting themselves right now. Additionally, the difference between the OEX put/call ratio and the equity put/call ratio has been progressively widening in recent weeks. The smart money OEX ratio has been increasing as those traders see risk ahead, while the Equity ratio has been falling indicating those traders see blue skies. The spread between these ratios has been pretty effective in helping spot major turns in the past.

I will leave it at that other than saying that if this trade does not catch the top of this rally, I would feel very confident that the next one at new highs will. We'll see.


Pete

New QID Trade

This post will be short due to time constraints.


New Trade Recommendation

Buy QID with a market order ASAP today before the close. A stop could be placed below the lows today, but I am not suggesting an official stop at this point.


Pete

Looks Like a Another Good Bearish Set-up?

Click on Chart to Enlarge

Click on Chart to Enlarge

Today's advance pushed the end of day short-term models for both the Nasdaq and S&P 50o to overbought. The interpretation of where this is occurring relative to the larger trend is always a focus of mine since it is the objective indicator I use for blog trades and the goal is to go with the larger trend. Right now the markets are below their peaks for the rally which would suggest the trend is shifting to down. However, the last overbought signal actually registed at a price level lower than the current level. As the market advanced the indicator did not, creating the bearish divergence that led to declines last week. I always look to see whether the next trading signal is occurring below or above the previous signal to gauge trend from an indicator perspective.

While the rate and size of decline in SPY isn't large enough or fast enough for me to consider that the pattern has topped (from a market psychology view anyway), some sectors have declined enough to consider them topped and have given almost picture perfect shorting set-ups into today. RTH, SMH, and XHB are the ones that really look classic. The declines off the top were larger than other declines during the 2+ month rally and they undercut the first major support. Then they rallied up close to 50% of the decline in the last few days as the markets ran into short-term overbought areas.

In addition the Smart Money confidence indicator from Sentimentrader.com has declined both of the last 2 days and is back at its lowest levels in a couple years. It is very uncommon for the Smart Money indicator to decline 2 days in a row. I don't know how significant it is, but the last time it happened was in 2006 and it led to a 6 day modest decline, though it was not a major top.

The top chart above is the 60 min chart of QQQQ. Basically any fruther decline will create a bearish MACD cross at a lower level than the rally high, which may be indicative of a down trend beginning.

The bottom chart is the Treasury Bond indicator from Sentimentrader.com. It has hit an extremely low level which has usually been very close to bottoms in bond prices. So what does that mean for stocks? Well the stock/bond indicator has recently hit an extreme level suggesting stocks are overvalued relative to bonds. Also, while bonds and stocks do not always move in opposite directions, in recent years major peaks and bottoms in stocks have occurred opposite to peaks and bottoms in bonds. Also, the last month had seen a sharp rise in stocks and sharp drop in bonds, suggesting that this inverse relationship may still be in play.

Bottom line is that some key data have not given intermediate term sell signals (put call ratios haven't turned up, VIX still trending down), but I don't see a really good reason not to make a bearish trade entry at this time considering the recent indicator divergences and short-term overbought signals at (potentially) a lower high.

Depending on how tomorrow looks (gap down or up, and what happens in the first hour or so) I may suggest an inverse ETF trade.

SSO Trade Exit

The S&P 500 short-term model is not quite overbought but is close. The Nasdaq model is clearly overbought, and it tends to generate fewer signals, so I pay attention to it when it does register.

In short, I am recommending exiting the current SSO trade with a market order before the close today. I will use the current price of 25.96 for the exit for a little better than 2% gain.


Pete

Quick SSO Update

I think Blogger is having some kind of problem, because the last 2 post attempts were blank. This is a shortened post because I lost the other posts and don't feel like wasting time in the case it doesn't work again.

If you want/need to place a limit order today on SSO due to time constraints, etc, then I would suggest a day only order of 26.20.

I will post if/when the short-term models suggests an exit.


Pete

Waiting the Next Overbought Signal

Looking back at the last couple posts, I realize that I did not specifically say to put a "day only" order in for the 25.49 limit order I suggested last week, but that was my intention. So if you put that order in GTC, then I would suggest cancelling it and just wait for the next overbought signal to exit.

Based off of today's fast retracement of the last couple days' high to low range, coupled with bullish divergences on short-term indicators across the board as of Friday's close, I am favoring a move to new highs in the S&P before this rally is done. In either case, the short-term model still has a good bit of room before becoming overbought, so just wait on the signal.

Pete

Market Pattern Update As I See It

Click on Chart to Enlarge

In the post last night I jokingly said "why am I in SSO?" because of the sour note of the post. Just to be sure, the reason was that the short-term model was oversold above support and I thought at the time that the pattern favored another upside move.

I am about 50/50 on 2 scenarios right now, but there are rules that apply to certain patterns that help you rule them in or out. Without rules, attempts at pattern recognition are probably fruitless, and I think most often it is just best to stick with technical analysis and contrarian data analysis.

A rule for contracting triangles is that after the "e" wave completes, it should be completely retraced in less time than it took to form. So from the labeling above, the "e" wave is about 8 days long and began around the 850 level. From last week's high that means we have to see the 850 level undercut by Wednesday at the latest to confirm the possibility that a contracting traingle formed. If that doesn't happen, then I think it is best to assume there will be new highs for the rally.

The second scenario would be that the current pullback is a middle correction between two strong advances. I have put light blue boxes around what I have labeled as "b" and the current area because in this case I would expect some degree of price and time similarity between those pullbacks if the market does make new highs. The largest pullback so far this rally was 6.5%. A 6.5% decline off the recent highs would put the S&P around 870. A rule of thumb I use is that any pullback more than 1.2 times the largest pullback likely indicates a trend change. So if we see this correction go 8% or more, then that would call any new highs into serious question even if it is a slow pullback. The chart above shows what I view as the major overhead resistance levels should the market push to new highs.

I have said before on the blog that I use patterns only as a "filter" for choosing what objective indicator signals to act on for blog trades. My usual MO is to trade short-term only but will attempt to catch larger moves at major reversal points when the risk reward is very favorable for a longer hold. That has been what I have been selectively attempting for about 6 weeks now, without catching a major turn yet. From experience, it takes several attempts to both catch a major turn and do so with a very small risk relative to reward.

As for the current SSO trade, it did not get filled on the suggested limit order, so we just wait for the next overbought signal for the exit.

An Aside

Tonight's post will be a completely non trading post after this short trade update......

Place a limit order of 25.49 to potentially sell SSO tomorrow on further market upside. That price corresponds with the fill of the gap down from Wednesday. Historical comparisons from similar gap downs suggest about a 66% chance of the gap being filled in the next couple days. While that would be only a little better than breakeven, from what I'm seeing in the charts, this may be a level that the short-term model would get overbought at, and I would want to be out if the market becomes overbought tomorrow below last week's highs.


Now the rest of the post will be unusual in that I basically never put anything non trading related on the blog, but I came across a post from another blog and thought I'd throw 2 cents in.

http://pensionpulse.blogspot.com/2009/05/will-bilderberg-sink-global-economy.html

The link above discusses and gives a little background on the "Bilderberg Group" which is meeting this weekend in Greece. For anyone completely unfamiliar with this group, it is a private elitist type group that meets yearly to discuss world affairs "off the record." There are no media allowed and attendees are not allowed to discuss anything from the meetings at any time.

Participants always include household names of past (and future) major politicians, media moguls, and business persons including presidents, big time CEOs, and prime ministers, etc. The collective influence and wealth of the couple hundred participants at any given meeting is almost unimaginable. Many independent journalists have throughout the years tried (and to a very limited extent occasionally succeeded via insider leaks, etc) to aquire detailed information about the meeting's agenda.

Now I am not going to go into much more detail here because you can read the article above and follow the links. I read Daniel Estulin's book last year and found it/him to be a good down-to-earth source for information about the group. He calls them "an aristocracy of purpose" which I think is a good title. They are modern aristocrats with huge influence; they are very well organized and have a very specific (though not always unanimous) direction in which they collectively decide to take the world by way of influencing public policy and and public perception through the media.

For a very brief look at how this works..........one common way is that certain past Bilderberg attendees are either heavily financed to campaign for public office, or they are undemocratically placed in government positions via cabinet appointment. Two current cabinet members who have been past attendees in the past year or two are Tim Geithner - Secretary of the Treasury and Lawrence Summers - Director of the National Economic Council. So the two highest cabinet positions regarding finance and economic policy (appointed by the Obama administration in this case) are (undemocratically) occupied by Bilderberg members. That is just one example among many, but given the current economic climate and unprecedented scale of government intervention, pseudo-goverment/Federal Reserve (largely Bilderberg influenced) intervention, you can pretty much bet that Tim and Larry are following the agenda.

The agenda apparently has been/is to reduce demand for energy on a world wide basis for the foreseeable future and to create a massive "problem-reaction-solution" response to "The Credit Crisis." The basic way this works is.......

1) set in motion conditions/legislature/government policy/public ignorance that will create a HUGE problem (and it is always better if you can feign ignorance when the problems surface)

2) the problem is so large and severe that it creates a public reaction that is primarily manifested in FEAR (when fearful we engage in whatever behavior we think will most immediately remove the fear-inducing stimulus, and we are also psychologically wired to look for a "leader" or strong man to protect us, even if that means giving up certain freedoms, etc.)

3) there is already a pre-determined "solution" that has been hammered out in advance (in Bilderberg meeting and the like) of the problem surfacing and that solution (end or partial end goal of those "in the know") is then fed into the legislative system to become gold stamped public policy


Ring any bells? That is Credit Crisis 101 free of charge (no pun intended).

So what is the end goal and motivation? I can't answer that. I think anybody who has been around the block would doubt that the motivation is one for the public good, though there are points of debate I'm sure. As far as the end goal, I think that is more clear, but again I have little to offer other than what is patent.

One patent goal is definitely what we call globalization and/or a "new world order" as the saying has been coined. This is a world with ever decreasing nationalism and national determination (individual countries being phased out so to speak) in favor of large scale geographical zoning, political consolidation, and increasing influence of international organizations like the UN, World Bank, International Monetary Fund, etc. As for specific and relatively near term goals of the Bilderberg group, et al, I gather that one is movement toward international agreement on a world currency. This has already been in the works for decades, obviously, with the creation of the Euro $. With the current "crisis" being a world-wide economic one, it seems obvious that a world-wide economic re-structuring (with a world currency probably as one end goal) is going to take place, probably largely without public awareness of what is really occurring.

As for whether these kinds of changes will in the end be good or bad, I don't really know and I have some mixed feeings. In any case, the article above basically says that insider sources from the Bilderberg group have indicated that the direction for the world is going to be severe recession/depression but without concensus on the duration and some other factors. Also it seems that the current illusion of recovery is an intentional pump and dump type scheme in some ways.

While I am no expert, the fact that bank stocks have risen 100+% in many cases and are only now being told by the Treasury/Geithner/Bildergberg/NWO that they need to raise capital makes a pump and dump seem obvious. Create a huge media blitz of optimism and public anticipation about recovery to pump up the bank shares. Then after the shares are up a huge amount, perform stress tests and kindly inform the banks they need to raise capital. Now the banks decide to issue new shares to the public while prices have been pumped up (this could have been done months ago when shares were much lower I'm sure) so they get more capital with less shares sold. Then things are bound to get worse, and lots of shareholders get screwed, at least for the time being.


So, that is the end of my 2 cents. While gloom and doom is part of markets bottoming and is often a contrary indicator, these are real people with real influence with a real collective agenda, and the indication seems to be that the worst is yet to come. I have no problem reconciling this from a market pattern standpoint, because I believe the pattern suggests we are on the brink of completing an upward correction before at least one more huge meltdown occurs pushing the market to significant new bear market lows later this year.


So why am I in SSO???? lol.


Pete

The First Big Test of this Rally

Click on Charts to Enlarge

After today's decline the market is in very questionable technical position for a further advance to new highs. Despite the short-term model generating oversold signals yesterday, today was able to pull back deeper with the model never coming out of oversold condition. This type of behavior is one thing I look for to gauge trend changes. Prior to this oversold signal, the other signals had all bounced up by the next day. Also, the S&P has not had 3 straight down days this entire rally until today. So these are signs of a trend change, but there is not much technical damage yet.

The plus side for the bulls is that the S&P and Dow have held their 20 day MAs. The top chart above shows the S&P 500 with green vertical lines indicating times during prior bear market rallies that the RSI(3) has dropped below 30 and the S&P had not yet touched the lower bollinger band since the beginning of the rally. Today's decline has now set things up the same way. Other than in early January, all the other instances quickly led to nice short-term moves up. The January instance led to a further sharp slide for a few sessions before making a decent short-term rally that ever so slightly made it back to positive (if buying on this similar set-up) at the next overbought signal.

Also, the 875-880 level on the S&P is the breakout point from the January highs that many are watching for a re-test (blue horizontal line on the chart). This is only a few points below current levels. I would be surprised if the market did not put in a decent bounce from near the current levels or a little below. Maybe a gap down into that 875ish area tomorrow would be a short-term exhaustion point and would entice buyers, but we'll see.

The lower chart shown above is the VIX with the 63 day TSF study I showed before a few times. Today the VIX closed above that line for the first time since before the March lows. This signal has been so accurate at denoting market peaks and VIX bottoms for this entire bear market that I am paying serious attention to it. This signal last came in January after the market had made its first breakdown and showed oversold signals. However, I mentioned on the blog at that time that the short-term was probably too oversold to be a good intermediate sell point. That proved to be true with much better signals coming 2 and 4 weeks later after the first and second short-term rallies.

From this point I think the two most likely scenarios are a bounce starting tomorrow (maybe after a gap down or early weakness) followed by new highs for the index into next week OR a further slide for the next few days down to the 850 area followed by a nice bounce after that. If the market falls below 850 within the next few days, I would give the S&P basically no chance at new highs for this rally any time soon. That deep a pullback would be greater than all the pullbacks so far this rally and would also retrace what could be the E wave of the possible rising wedge I have shown in recent charts.

As far as the current SSO trade, the first scenario above (which I think is a little less likely) would probably result in a decent gain by the next exit signal. The second scenario would be lucky to breakeven by the exit signal. From my experience I would say that holding and waiting for the next overbought signal is the best thing to do even if there is some more short-term drawdown. I pretty much gaurantee that there are some eager potential buyers waiting for the first significant price break to try to catch a bargain. So even if there is further short-term weakness, I think the odds are good for a sharp bounce after that and would be the best exit point for the trade.

Sentiment Update

I didn't get around to updating the sentiment picture from the weekend data, so I will just give a quick recap here since there have been some further notable readings.

First, I had mentioned in recent posts that seeing increased small lot size call options bought to open would be something to watch for. As of this past week that call buying jumped to its highest level since last May. The put buying had already been significantly lower, but the combination of the increased call buying and lower put buying has pushed the ratio to levels once again not seen since last May. The ratio is now very close to the upper standard deviation band that has very nicely marked points at which the market has had trouble making further gains over the short to intermediate term even in bull markets.

Also corporate insiders (which tend to be a smarter money group) are net selling into this rally as of the last couple weeks and more heavily so than any time since mid 2007. Do they have a better gauge of future earnings and economic conditions? Probably.

I have touched on the "Smart Money" and "Dumb Money" confidence levels from Sentimentrader.com in recent weeks. As of last Friday's close the spread had increased even further from recent levels creating a disparity greater than any during this bear market. These are basically real money gauges - not "opinion" type indicators. So we know that the better market timers are showing decreasing confidence in and commitment to the market with each new high, while the poor market timers are speculating heavily on further gains.

The sentiment picture is nearing "as good as it gets" levels (from my opinion) to bet on a reversal in trend. Until this week, the technical picture was not confirming that really at all. However, the last 4 days have beat up a few sectors pretty hard, putting the market in a tedious technical spot.

This morning as the market pulled back, selling was met mid-day with strong buying interest. So as of now, things seems to still be holding together. The next couple days should be pivotal in determining if this rally is basically topped out or not.


Pete

New SSO Trade

As discussed yesterday, the S&P pullback this morning and generated short-term oversold signals. It has also formed a nice reversal candlestick on the 30 min chart at the common 10:30 AM reversal time.

New Trade Recommendation:

Buy SSO with a market order today. The current price is 25.40 which is the blog entry price.


Exit will be next overbought short-term signal. Following a 30 min stochastics chart is a good guide as well.


Pete

Bullish Trade Set-Up for Tomorrow

Click on Chart to Enlarge

Last Thursday the index ETFs showed bearish reversal candlesticks. However, Thursday's high in SPY and DIA was exceeded Friday, and today was not a type of session that gives much confirmation to that potentially bearish candle pattern. From a candlestick perspective this would suggest that the uptrend is still likely in effect.

Last week I had said that I thought that 940 would be a cap on prices if a rising wedge (contracting triangle) was the pattern that is forming off the March lows. The recent highs around 930 and change suggest to me that any further highs likely rule that scenario out, in favor of a complex corrective pattern that should continue at least a bit higher (see this post).



The short-term model for the S&P is back nearing oversold, and prices are easily holding the 20 day moving average as of today. If I throw all other types of analysis out the window, and just look at the moving averages for the main trend and the short-term model for extremes against the trend, I would say that a good bullish set-up is occurring, so that is how I am going to approach this tomorrow for a potential trade.



In addition, I had mentioned last week that a potentially good bullish set-up would occur if the market had an initial knee jerk negative reaction to the stress tests which generated oversold conditions. That is not clear cut in my eyes (prices ran up on the leaked news initially), but if we get oversold tomorrow with a controlled price decline, that would fit with the general picture I guess.



The chart above shows SPY with the RSI (3) which is usually a good guide to short-term overbought/oversold conditons, as well as the DMI and Aroon Indicator which are "trend finders." Last time I showed these, the Aroon indicated a strong uptrend, but the ADX line on the DMI had not turned up yet to confirm a trending market. Now both are showing trending signals. One thing to look for to help locate a potential top in coming days/weeks will be for the ADX line to decline for 2 straight days. I will re-evaluate whether or not to look for a longer term bearish trade when the short-term model reaches overbought levels again.


On the trading front, I will almost certainly post a trade tomorrow if the market is down and the short-term model becomes oversold.


If you happen to still be in the last BGZ trade :) then I would suggest watching a 15 minute stochastic chart of SPY and exit if/when the slow %D line gets oversold tomorrow or certainly exit if I post a bullish trade tomorrow.


Pete

Quick Money Management Post

I wanted to make a quick post rehashing and giving some more specifics on money management and account allocation ideas for these blog trades. I have suggested in the past to take a look at the "best posts" section on the right side of the page to get some basic ideas, but for most people who are into trading, I really assume that you know the basic rules that are often suggested regarding risk per trade etc. Also, there will probably be very significant differences in account sizes and risk tolerance for people following this blog, which makes it impossible to suggest one ideal strategy.

Because my focus for the last month has been on getting in at low risk points that have the potential to be a major bear market rally top, I have recently been suggesting stops more so than in the past. This has resulted in a couple breakeven type stop out trades and a couple stop outs for losses (not exited with short-term indicator signals). While basically all of those trades would have been positive if exited using my usual short-term exit signals, I have discussed that the purpose here is to try to get a huge reward on risk trade for a longer holding time, and then get back to concurrent short-term trades if/when the market clearly turns down in coming weeks/months.

So there are really two types of trades on this blog 1) those with stop losses and 2) those without stop losses. The first type are best handled by using the stop loss point to calculate a risk per share, and then use that to determine position size based on a predetermined standard percentage of your account that you risk on every trade (suggestions below). The second type I think is best handled by thinking in terms of how much of your entire account you will devote to the trade or by having a standard fixed dollar amount that you devote to every trade. Since there is no defined risk, you are instead relying on % allocation to roughly estimate risk.

So here are my basic ideas on this for anyone who is interested......


For trades with a stop loss recommendation (defined risk per share):

Account size over $100,000 risk 0.5% per trade
Account size $20,000-$100,000 risk 1% per trade
Account size $5,000-$20,000 risk 2% per trade
Accounts under $5,000 risk 3% per trade, but if you have a very low commision broker ($1 or less per trade) then just still go with 2% risk


For trades without a stop loss recommendation:

Since I have started the blog, the average losing trade has been 2-3%. So, 33% of an account devoted to the trade on average would be about 1% risk per trade if it ends in a loss. So that would be about right for $20,000+ account sizes.

For an account around $10,000 I would say you could go up to 50% or a little more, still being pretty conservative.

For small accounts like $5,000 or less (and if this blog is your only trading methodology) I think putting your whole account in on each trade would be fine until you build it up more.


Referring to the results of all blog trades in the past, devoting the entire account to each trade would have resulted in the best performance, but obviously you have all your capital tied up and potentially at risk and I wouldn't suggest that for larger accounts because a dollar is still a dollar no matter what fraction of your account that dollar happens to be.


So those are my rules of thumb for money management, but obviously if you have a good reason to deviate from them, then that is up to you.


As a quick side note, the last BGZ trade was stopped out for a loss on Friday. Based on the most recent data, I will be looking to get back in a trade as soon as a good opportunity presents itself. My only regret with this last trade is that I knew that the QQQQ/tech reversal candles were much stronger and less likely to get stopped out (they wouldn't have been even very close to being stopped out) on an otherwise good trade, but I went with BGZ (3x) for the trade rather than QID (2x). While the market may prove me wrong, the tech reversal this past week was so imposing, that I think this past week was basically the top of this rally. So, I didn't really WANT to be stopped out. But that is in the past now, so I would just encourage blog traders to continue to make the trades even if a couple losers shook your confidence. The "smart money" is selling into the "dumb money" buyers right now, and we want to bet with the smart money. More on this in the next post.


Pete

New BGZ Trade

Today's reversal after the gap up looks serious. When yesterday closes at a 3 month high then today gaps up like it did today, the returns are solidly negative over the next week historically.

Also, the market broke the first hour low and the advances, decliners, and TICK are confirming the break to new lows, indicating that the market may continue lower today.

Since we may be able to get in at a major top here with low risk, I am going to suggest a trade today with a stop loss above the day's highs.

New Trade Recommendation

Buy BGZ today with a market order. After entry place a sell stop order at 36.40 and use that to determine position size if necessary. 38.30 is the current price and the price I will use for blog entry.


Pete

Check Back Later Today, Possibly a New Trade

I can't say for sure, but today looks like it could be the high of this move. After a long run up, XLF gapped up nearly 5% today. QQQQ is lagging badly for 2 days in a row. Hanging man candlesticks yesterday on QQQQ. Bearish engulfing patterns on XHB and RTH yesterday with follow through today on XHB.

If today closes weak, then the trade would be an entry with a stop above today's high.

Pete

Surveys Showing Large Decrease in Bearishness

Click on Chart to Enlarge

This week's results of the Investor's Intelligence and American Assoc. of Individual Investors surveys show a large decrease in bearish opinion. In fact, the current levels are near the lowest bearish opinion since the beginning of the bear market.


The chart above is the II bearish opinion survey with some standard deviation bands that help to put the data into context. Notice that the bearish % is now just a little above 30%. The last reading this low was last year around this time as the market approached the peak of its 44 day rally off the March lows. Also, notice that the current reading is below the standard deviation band which nicely marked the top this January.

Click on Chart to Enlarge

This chart is a screenshot from Sentimentrader.com of the AAII bull ratio (bulls/(bulls+bears)). The red dotted lines are 1.5 standard deviations from the 1 yr average reading. Notice that the current reading has just hit that red line. That standard deviation band has been a good guide for locating market peaks in this bear market with comparable readings this January, late last October, and the middle of last May. This reading is largely due to a big decrease in bearish %, but the bullish % has also risen substantially.

So, for about 3 weeks we have been seeing real money gauges from put/call ratios, Rydex fund flows, Nasdaq mini futures long positions, etc, reaching into "excessive optimism" territory. Now, we are seeing a noticeable increase in comfort with the market's prospects by both individual investors and investment advisors. To help confirm this other dataI, would like to see a sizeable increase in call buying and decrease in put buying from small lot orders when the data comes out this weekend. Also, while I have not discussed this on the blog, stocks are largely overvalued relative to bonds on a statistical basis currently. This type of relative valuation model is very helpful in indentifying price extremes against the long term trend (200 day MA).

In any case though, if this is truly a bear market rally, I have to expect that the market will begin to pullback within the next week or two. If new highs continue into June, then that would call things into question for me on the longer term outlook.

I wrote the previous part of this post this morning, but am just publishing now after the close. Today looks like a pretty classic reversal day. The candlestick patterns are very solid bearish engulfing patterns on the index ETFs. XLF ended with a high volume dark cloud cover off of a very large gap up. Take a look at SMH (semiconductors ETF)! It engulfed the real bodies of the last 5 trading days and marked the largest down day since near the bottom of the bear market. When those days occur coming off of highs, it usually indicates a trend change. Many energy stocks showed very wide range engulfing patterns on heavy volume. XHB (housing) broke its uptrend by completely retracing the last swing move to new highs.

The BGZ trade is off to a good start, but the short-term model for the S&P 500 is not yet oversold. Just maintain the current sell stop at 36.40, but I won't blame anyone for moving a stop to breakeven, particularly if there is a gap down tomorrow. This reversal looks "real", so my plan is to reduce risk ASAP but hope to catch what may be a large move down in the markets, which would make a huge gain on BGZ if this reversal sticks.

A buy the rumor - sell the news top seems almost too scripted here, but there is a plethora of supporting evidence for a significant pullback any day now. So let's keep the stop as loose as is sensible for now considering that even if stocks "just" pull back to the 50 day MA, the reward could easily exceed 6 times the current risk with the stop at 36.40.

Pete

"Triangles, Triangles Everywhere - And Not a Drop to Drink"

Click on Chart to Enlarge

This post may not be very interesting for anyone not obsessively interested in pattern identification, but I think it may at a minimum give chartists a few helpful ideas for understanding what it means when successive phases of market action (in the same direction) get progressively larger and what kind of action typically marks a true trend reversal.

The chart above is the 2000-2003 bear market in the S&P 500. First off I won't go into detail on the labeling other than to say what I will say again later. From a market logic/psychology perspective when a "wave" or "pattern" ends, it will completely retrace the most recent leg up or down in equal, or typically less, time than the recent leg took to form. Notice the successive overlapping moves from the bull market highs, with each move down larger on a % basis than the last down move. This forms a downward sloping expanding pattern.

The important part of an expanding triangle are the A, C, and E waves. They should be successively larger on a % basis. The intervening B and D waves may or may not be larger than the previous wave. In the case above, the B and D waves are smaller than A and C respectively. Another aspect of these patterns is that they commonly occur as the first phase of a large complex correction, or sometimes in what is called an "x" wave position in Elliot Wave theory. An "x" wave is a middle wave between other corrections in a complex correction. These patterns will almost always slope up or down in the direction of the larger complex pattern. This is all the more true in large scale patterns like the one above. If they formed on a horizontal axis, that would be odd as the market is gyrating wildly with no net loss or gain. There is almost always a force pulling the market one way or the other.

Another aspect of these patterns is that the E wave is so strong, that it almost never is retraced in less time than it took to form. That encompasses the basics of these patterns. Now to a couple more examples.

Click on Chart to Enlarge

This is a chart of the current market. I have recently said that an upward expanding triangle may be what is forming here. Each rally has been successively larger since the October bottom. But here is THE MOST IMPORTANT THING from my perspective........As I mentioned above, new psychological trends start with price moves that completely retrace the previous wave in less time than it took to form. This has not happened in the current market. Whether considering the last wave down as being from the February highs or the January highs, neither was retraced in less or equal time than it took to form. For this reason, I believe the current move is NOT the beginning of a new bull market, but a glorified bear market rally instead. At a minimum then we should expect a significant retracement of the current rally, but the pattern is suggestive of significant new bear market lows in months to come from my perspective. While the E wave doesn't have to be larger than wave D, it usually is, so I would guess a rather quick push up above 944ish would likely occur before this rally tops.

Click on Chart to Enlarge

This chart is the banking index, $BKX. The portion of the chart I have shown I believe is best viewed as an expanding triangle. One of the give aways is the slight undercut of the A-C trendline by wave E. Also, because wave E is typically so large and vertical, it is usually a very powerful corrective pattern on its own - often a double zig-zag or a smaller scale expanding triangle. The chart above is interesting because it appears that the E' wave of the large expanding triangle is a smaller degree expanding triangle and the E wave of that smaller expanding triangle looks like a complex correction, showing the two most common ways expanding triangles end in one chart.

While fibonacci relationships are not thought to be common in expanding triangles, wave E may relate to either wave A or C by 1.618 or 2.618. Wave E would equal 1.618 times wave C at 957ish on the S&P 500, so that may be an area to pay close attention to and consider going short/bearish if the market rises that far and is short-term overbought near those levels.

Tomorrow I plan to give a brief update on the Investor's Intelligence and the AAII surveys and see how the bullish % is coming along. If this week ends strong, then next week will be very interesting to see the II survey because each week's data is for the past week through Friday.

Looking to Get Bearish Again If/When S&P 500 Exceeds 944

I don't have any specific trade in mind that looks imminent, but the two possibilities I see that look promising are......

1) There is a "controlled" sell-off over the next few days that generates short-term oversold extremes. Initial reactions to major news are often times reversed after the initial knee-jerk reaction, so that would set up a potential bullish trade.

2) A move above 944 on the S&P 500 over the next few days that generates more overbought extremes. That would put the S&P in a major chart-based resistance window, and may draw in much Johnny come lately buying after the news is out, creating a good bearish set-up.


A few weeks ago I touched on the widening spread between the Dumb Money and Smart Money indicators from Sentimentrader.com. As of this week, the Smart Money confidence in a further rally has dropped even further, putting it at levels last seen in May 2007 when the bull market was nearing its peak. I would like to see some more signs of increasing bullishness among small traders like a nice jump in small lot call buying and a big jump in bullish % in the AAII survey to help confirm that the Dumb Money is "on board" for the rally.

I'm guessing the earliest possible next trade for the blog would be Friday, but I would want it to look especially nice.


Pete

Market Pattern Update - Likely More Near Term Upside

Click on Chart to Enlarge

I just wanted to show a chart with the price pattern that I have recently referenced that has suggested the possibility of a significant further rally before any major retracement. With today's move to new highs, I think this is now the most likely scenario.

When this rally started I had suggested that if the market was forming a triple three correction, the most likely ending pattern would probably be a contracting triangle, which could be either horizontal or a rising wedge type triangle.

The fact that the S&P 500 exceeded the 880 level makes it less likely that the pattern since October's low is technically a triple three. It may be an expanding triangle instead where waves A, C, and E get progressively longer in % gains. While I may make a post very soon regarding expanding triangles, I will just say that the E wave (which may be what we are in now) tends to be VERY directional and is usually a complex correction from a wave theory perspective. The fact that this upward rally is taking so long and is not really looking like an nice wedge, I would guess that a complex correction is occurring (i.e. ABC-x-ABC) as the E wave of an expanding triangle.

On the chart above I have the recent sideways action labeled as a contracting (upward slanting and hence very bullish) triangle in either a "D" position or an "x" position. In both these scenarios I would expect further upside from a pattern perspective. The 940 level would probably be a cap on the advance if the pattern is a large rising wedge since March's low. If the pattern since March is a complex correction, then I believe that should allow the market to rise even further over the next few weeks (say to 1000ish on the S&P). As I mentioned in the weekend post, as a pattern concludes, possibilities should become limited for what can happen, and we should be able to zero in on a coming "top." Since in either case above we are past the halfway point of pattern development, I think that things will get progressively clearer over the next week or so from a pattern perspective.

This time may provide nice very short-term trend trades, but probably won't register enough of short-term extremes for me to suggest trades for the blog. However, in either case above, I would expect a very significant top to form within the next couple weeks (almost certainly this month) which should make for a good bearish trading opportunity.

So don't expect much in the way of blog trades in the near future:)

Housing and Financials Signaling a Top Here???

Click on Chart to Enlarge

First off a couple blog related things......


For anyone that has used the "subscribe by email" feed, my experience is that when I put my own email in there, I do not get the blog updates until the next day, which doesn't do much good for trading purposes. So if anyone knows how to change that or if they have a similar experience let me know to try to figure out how to get it faster.


Also, the "subscribe in a reader" seems to work very nicely as it is simple to do, and every time you use the reader and hit refresh, you will be assured of the latest posts. So that may be the best option out of these two.


Also, I am not really interested in using Twitter on the blog, but occasionally I will have a comment to make that I don't feel justifies a whole post, so I have been and will continue to put those in the "comments" section under the most recent post. Anything important regarding trade management I will always put in a separate post though.


Now to the chart.......I have spent some limited time this weekend trying to look for clues as to what the most likely next direction for the market is because this past week or two has raised some possibility from my perspective for a significant further rally based on the price pattern. However, that does not really match well with the sentiment picture which has been on par (for a couple weeks) with significant imminent market peaks of the past.


I have looked at several things but just used one chart because it is loaded with potential market education. In short, the banking index $BKX is badly lagging the S&P 500 on this recent move to new rally highs. This has been a uniform occurence during bear market rallies during this bear. This would indicate stocks are likely to fall. Also, the total put/call ratio (index and equity) tends to be a leading indicator of future price at turns in that it will form divergences. Right now, that measure is showing a bearish divergence. That is largely because the index option put/call ratio has been rising on this recent rally. That measure is often a smart money indicator as they prepare for near term volatility to increase.



Lastly for this post, the housing index, XHB, is showing a minor non-confirmation the last couple days as it has fallen and is several percent off the highs of last week. More importantly, the chart is showing a compelling pattern both short and longer term that are suggestive of potentially severe weakness the next couple months. The chart above has the notes, but I will add a few here. First, the larger pattern looks like a large upward ABC "flat" pattern since the November lows. The rules associated with this pattern are......



1) waves B and C each have to take equal or more time than wave A.......check

2) if wave B takes substantially more time than wave A, wave C will most likely take about half the time of (A+B).......that is about dead on for the recent high this week.

3) wave B has to retrace more than 61.8% of wave A.....check (in this case since wave B is almost exactly the same size as wave A, then wave C should be almost the exact same size as well, hence the name "flat" due to the double bottom and double top appearance).

4)and here is the biggie.....after the pattern is over, price should retrace wave C in equal or less time than it took to form.



So if this is a flat pattern, then price should drop severely over the next 2 months. The technical indicators and candlestick patterns are both confirming a potential top here as well, so things look strong in support of this case.



So if I had to pick a direction for the market in the near term and intermediate term, I would say "down" from all this evidence.........possibly a major top in the forming. But bank related news, etc. may trump any other factors over the next couple weeks, so I am not extremely confident. Also, Friday looked like it is forming a continuation head and shoulders bottom on the very short term charts. So maybe we will get a gap up and/or test of Thursday's high even if the high does hold.

Lack of Pattern Clarity Says "Get Back to Basics"

It is probably a truism of trading that bad trades follow great trades or at least that periods of great success are often followed by periods of sub par success. I think that probably applies both to individuals and to systems, because some systems perform better under certain market conditions and not as good under others, and individuals naturally experience periods of bias or emotional attachment to behaviors that have been rewarding in the past, even if they are not now. I'm sure the more real live trading experience one has and the more refined his or her methodology, the more ablility to overcome these tendencies.

I feel that I personally had a period of rather good trading and pattern recognition clarity since the beginning of January this year through the middle of March. However, the last few weeks things have become considerably less clear, particularly after this week from my perspective. This leads me to believe that the market is forming a somewhat complex price pattern since the March lows and that it still has some time to go before completeing it.

It is the nature of pattern recogntion that things are only relatively clear at the beginning and end of a pattern, but have much greater flexibility toward the middle. As a brief illustration......it may be like someone driving from New York to LA. By looking at a map, we could probably have a large degree of certainty as to what routes they are, or should be, taking to leave New York and get headed west. Also as they approach LA, we once again would likely be able to limit the possible routes that they will be using to make the final approach to enter the city. However, there may be significant variability of the routes taken through the greater portion of the trip through the middle of the country. So for people who have followed this blog for some time, that's why it was possible to rather narrowly outline the bottoming range (end of a pattern) in March and to aggressively trade the expected initial strong thrust off the low (beginning of new pattern).

As relates to the current market, I feel that maybe I am in eastern Colorado somewhere where it is nice and flat, but things are obviously changing on the landscape ahead. Once I get through the Rockies, I think things will be considerably clearer, but right now I could see almost complete opposite scenarios as being about equally likely, which doesn't do much (if any) good.....or maybe that means I should make a straddle trade..........

So for the record, until I feel some legitimate level of certainty regarding the market pattern is returning, I am just going back to the basic (more mechanical) methodology of this blog which is to trade in the direction of the 20 and 50 day moving averages (with greater preference for the 50 day MA if they don't agree) at short-term extremes counter to that trend. Then when the next big turn is VERY close or already just underway, I think I should be able to quickly recognize it as this pattern nears completion.

So the safest bet at this point from that mechanical perspective is to assume the trend is "up" for now. Then if we see either a significantly larger decline than has occurred since the March lows, OR if we see an acceleration up into a potential climax type top, I think we could make a reasonable bet that the highs for this rally are in or close at hand.


Enjoy the weekend!

BGZ Trade Exit

While there are no short-term extremes either way right now, staying in counter trend trades is dangerous, and obviously the safest thing to do is to get out as soon as things don't do what you expect. When going with the trend I typically don't suggest tight stops or exiting without an indicator signal, but counter trend trades are different. At times the pullbacks are so weak that they don't ever register an exit signal and you get strung along.

So I don't know what next week will bring but I want to err on the side of caution here and wait for a new short-term extreme one way or the other before making potentially a new trade.

Exit the current BGZ trade ASAP with a market order. Current price is 43.85.


Pete