Market Update

Today triggered several short-term extremes in the markets and the short-term model of the Nasdaq hit the oversold region. However, the methodolgy I use for trade recommendations on this blog is based around going with the prevailing trend (direction of 50 day moving average for simplicity). So I am not going to recommend a bullish trade here, because that is a counter trend trade, and I doubt the ability of the short-term model to clearly become overbought to signal the exit before we see new lows gain.

I do expect a strong bounce in the markets of 1-4 days starting tomorrow or Friday. The equity put/call ratio hit 1.16 today which is an extraordinarily high reading only matched a few times (3/14/08, 3/17/08, and 9/15/08). The reading was so high that it is beyond 3 standard deviations above the 20 day average reading.

The day after the March 14 incident the market had a large gap down that immediately reversed and the day closed well above its open. That day was the March 17 incident which is the highest reading that I am aware of. The market went on to make great gains over the next 4 sessions. The day after the Sept. 15 session there was a large gap down as well. Again the market reversed immediately and closed way above its open. The market went on to make great gains over the next 3 days though the two sessions after the 15th were very volatile.

So if we get a gap down tomorrow then I would consider that a buying opportunity for a very short-term trade of 1-4 days. If we gap up, then I would expect that a large up day is most likely, but I feel that the upside may not last as long if that happens.

This market is a very dangerous environment, so don't risk too much on any trade.

Pete

PG, WMT Technical Analysis

Click on Charts to Enlarge

The top chart above is Wal-Mart and the bottom chart is Proctor & Gamble. Both companies represent basic consumer spending and demand for everyday, non-luxury type products.

Looking at the charts of these companies you can see the extreme similarity in the price charts with respect to the timing of the highs and the rising wedge formation that has followed the recent severe price decline. What is not visible on the chart is the long-term context of the recent declines. PG has shown such a severe price correction that under cut the last major consolidation of the prior bull market, that it virtually gaurantees that this stock is headed substantially lower.

My analysis of the rising wedge pattern, which is actually a type of triangle pattern, is that there is likely to be one more high (likely this week) above the highs of Nov 4. Many of the same concepts that I mentioned in regards to NSC a week or so ago, apply to PG. There has been a high momentum rally (momentum indicator peak higher than any peak in years in this case) after the first obvious break of the bull market trend. The stock is rising underneath its 50 and 200 day moving averages which are likely "failed breakout" points over the coming days. I think there will soon be a great short-selling or put option trade entry point in this stock.

Almost all of the same comments apply on WMT technically though the long term context is a bit different.

Now is there any larger message that can be gleaned from looking at the charts? WMT is the biggest retailer in the world. The chart suggests future (long-term) weakness in the stock. I believe that this also tells us that consumer spending is going to be greatly slowing, even more than it already has, in the coming months/years. Stock prices are leading indicators of economic conditions as the future expectation/realization is very quickly priced into the stock, while it takes months or years of data to actually prove the point. With basic household goods companies showing severe weakness, we should expect a major downturn in the economy.

Pete

New SSO Trade

I don't have time for more details, but refer to the last several posts about this trade.

Trade Recommendation:

Buy SSO before today's close.

Current price is 27.28.

Pete

Market Update - VIX and S&P 500

Click on Chart to Enlarge

Click on Chart to Enlarge

The top chart above is of the S&P 500 ETF (SPY) and is a daily chart. The bollinger bands overlay the chart and a MACD is plotted below. In past posts I have mentioned that I always look at gaps as points of significance. There is an unfilled gap up in SPY at around 84.00. Other than major breakaway gaps, most gaps will get filled relatively soon. This is one reason I expect price to come back down at least to 84.00. Also, despite a historic decline in the markets, there has not been a classic divergence of technical indicators indicating a bottom. A move to new lows will likely show technical divergence and set up a better market rally.

I think the most likely scenario is a quick move under 84.00, lasting 1-2 days and then a reversal. I will look to aggressively trade any reversal and recommend a trade on SSO which will profit approximately twice the amount of the general market averages.

There are many seasonal and historical statistics suggesting the potential for a big move up in stocks, but my opinion is that the market has not inflicted enough pain and confusion just yet to stage that rally.

The lower chart above is the VIX. This is a gauge of investor fear and willingness to over-pay for options, which are commonly used to protect stock portfolios. If the decline in stock holds today, the VIX will close above the 20 day moving average. The traditional target would be the upper bollinger band if this occurs. So, I will look for the VIX to move near its upper band and the S&P to move below its lower band. At that point, I will just be waiting for a classic reversal pattern.

Pete

Trade Set-ups

The last 2 days of big selling pushed the short-term model into clear oversold territory. However, there has been no significant reversal that gives indication that the recent selling pressure has hit a short-term climax. Additionally, the only real technical support underneath current prices is the October lows around 840 on the S&P 500.

I would be willing to suggest a trade on SSO if the October lows are violated and there is clear indication of intra-day reversal or a bullish candlestick formation. Ideally the short-term model would be oversold and divergent at that point, but oversold with signs of reversal would be good enough to make the trade.

Based off of all the information I consider in recommending these trades, I think the best way to play this market in the next few weeks is to assume rather high volatility, with little directional bias. I would give more weight to overbought conditions than oversold, because the "keep it simple stupid" principle tells me that the market trend is clearly down, and it makes best sense to trade overbought signals in a downtrend. The high volatility may indeed present good set-ups in both directions though.

Pete

NSC Technical Analysis

Click on Chart to Enlarge

The chart above is of NSC which is a railroad company, Norfolk Southern.

I bought a few Dec 55 put option contracts on this today. There are a number of things I wanted to point out on this chart for the interested technical analyst.....

Not visible on this chart is the long term trend. The stock was in a bull market for several years and the recent decline obviously broke the uptrend channel and the speed and size of the decline is greater than the bull market corrections on the way up. If you remember anything from this post, remember that last sentence.....that is typically the nail in coffin after a bull market. It is a clear shift in long term trend.

So, this particular stock has obviously topped, and the general markets are obviously in a bear market. So now we look for a good point at which to short the stock or to buy put options.

Now to the technical analysis.......

The stock is rising and is just under the 50 day moving average on this advance. That moving average is a key average that everyone watches and where smart money will look to short the stock on its first bear market rally.

Second the bollinger bands overlying the chart show that the stock has come up and touched the bands. The 3 standard deviation bands are not on the chart, but price actually touched those bands too. This provides a great area to look to short from a statistical point of view as those bands will contain over 95% of price action and a touch of the upper band in a downtrend is often a reversal point.

Also, look at the rate of change indicator above the chart. Despite a short advance, that line has hit peaks only seen a few times the last couple years. These ROC peaks in bull markets often mark short-term tops, and in bear markets I have seen this initial high momentum thrust after the first leg down be the top before massive declines in the next leg down.

Underneath the chart is a fast stochastic chart showing the fast stochastic line is overbought. In bull markets I don't follow that line much, but in bear markets an overbought stochastic often immediately leads to weakness.

I don't use volume as a primary indicator, but when you see heavy volume declines, followed by overlapping upward prices on declining volume, that is hallmark for a corrective advance rather than new uptrend.

Today also formed a bearish engulfing pattern, though on low volume. But still, that rejection of higher prices is another clue that sellers are there to jump on this.

To sum up, I think this is a stellar opportunity to make a bearish trade on NSC. I am not going to track this on the blog, but for a swing style trader, I would view 63.00 as a stop loss and if stopped out look for the next bearish candle stick to re-enter. For someone who is willing to give some wiggle room on this stock, I think that the 69.00 is unlikely to be approached before another large decline in the stock.

Pete

SSO Trade Exit

Despite the last few days not triggering a true obvious extreme in the short-term model I use for timing these trades, I am suggesting an exit.

The first reason is based off the indicator itself in that it was a hair's width from overbought a few days ago, and then prices eased and started making new highs but without the indicator making more highs. This is a classic technical type of divergence, and I have seen that divergence is useful in this indicator as well.

The next reason is that the election tomorrow is a wild card, and at this junction I don't have a clear indication of what way stocks are likely to move in either scenario.

So, while I typically will not deviate much from the indicator signals in recommendations here, I am going to post the exit at the current price on SSO which is 32.20.

This is another nice gain of 13.5% up from 28.37 at entry on Oct. 23rd. Selective timing using this model has continued to give outstanding results.

Pete