5th Failure to Hold Closing Above Oct Highs in S&P 500

On the most recent SPXU trade, the only people who told me they got in the trade either got in on Friday morning or were still in it from the prior attempt. So on a pragmatic basis, I am treating the trade as still active. The average price of those who told me they were in the trade is about 37.30. I will leave the blog entry price the same at 37.90, and have suggested using the initial stop of 36.40 at this point. Despite fear of another stop out, I think it should be in place because once either the bull or the bear tree gets completely chopped down, I think the market will move strongly the other direction. With the successive doji, bearish engulfing, and spinning top candlesticks, it looks like bears are winning, especially now that there is another close below 1100 on the S&P.

Click on Chart to Enlarge

The chart above shows the 5 closes back below the Oct high after it was exceeded last month. This choppy battle will lead to a significant directional move soon in my opinion.

Click on Chart to Enlarge

This chart is an hourly chart of SPY showing 3 little island top formations. Every time the market gets back above 1100 ( 3 sizable gap ups) it has had sizable gap downs back to the lower end (or below) of the preceding range. I can't see this type of mess lasting much longer.

Click on Chart to Enlarge

The dollar index showed a bit of follow through after managing to close 2 days in row above the 50 day MA. It made another big gain against the Euro today. Further gains in the dollar will put pressure on stocks.

Click on Chart to Enlarge

The chart from Sentimentrader.com shows that large speculators are extremely net long on commodities. The chart above weights equally to the CRB index (which is heavily weighted to energy). We see that they are almost back to the same level as at the commodity bubble peak last year. This shows excessive speculation across the commodity board.

As I said several months ago, the freebee money lent by the Fed to large institutions is not going back into economically productive loans. The Fed has been lending at 0% interest to these large banking institutions. But they then across the board raise consumer credit card rates to 29.99%. Also, while I don't have anything to post here, I don't think that business lending is all too great either. So where is the money going? Obviously into speculation on stocks and inflation sensitive issues like commodities and the US dollar carry trade.

So maybe those banks are making out on paper right now in these areas. But how much leverage are they putting up in the futures and forex market? Are they going to be out of those contracts while they are still in the green? If this gamble goes bad for banks at large and they don't get while the gettin's good.........

US Dollar, Gold, SPXU

Gold looks to have started a correction rather than a simple pullback. So expect prices to head basically lower for a month or 2. Longer term I'm not sure whether this is a major top or just the top of the first breakout move to much higher highs. Often when commodities break to new all time highs, they advance substantially and relatively quickly (say 80-100% in a year or so). This doesn't always happen, but that would be about average historically. So it will probably be several months before we could have a good idea of whether that could be playing out or not. However, the implication for the stock market intermediate term outlook is that stocks will likely pullback if gold does, as the inflationary theme is driving assets up in tandem right now.

For those who may be new to reading the blog, the point of the chart above is that typically markets move up in trends punctuated by relatively similar corrections in price and time. When you see a counter trend move that is larger (about 1.2x as large) and faster than several other corrections that already took place, it is likely that a larger degree move has begun in the counter trend direction.

The Euro is coming down off a strongly technical divergent new high and is at moving average support now. Continuation of the move down, especially with an acceleration, likely means a larger trend change (up US dollar, down Euro) for a period of months or more.

The Aussie/US dollar may be forming a head and shoulders topping pattern, but is coming down off a strong divergence at the most recent high in any case. Again it is near moving average support which should be watched. The Aussie dollar is a big beneficiary of the US dollar carry trade because the interest rate is much higher on the Aussie dollar. I've been constantly bringing up the US dollar in this blog because basically all stocks and commodities are moving inversely to the US dollar. If/when the carry trade starts to be taken off, expect it to be volatile and to drive stock and commodities down, probably sharply. My expectation based off of technical chart analysis and sentiment data is that such a move up in the USD is likely to be happening sooner rather than later. But so far there has been nothing lasting.

The US$/Yen made a big break below the lows from the recent bear market but then made a sharp reversal back above that level. Again for those that read the post on Natural Gas I made a week or two ago, remember the pattern: a long down trend that then shows the longest red candlestick of the whole move as it nears or breaks support. Expect it to be exhausting itself before reversing higher. In this case, there was a nice hammer reversal and a sharp move back up. Sentiment on the Yen is very bullish (see chart below) and smart commercial traders are as net short the Yen as they have been at any time in several years. If the USD holds above the horizontal line on the chart above, it may be a double bottom type chart pattern which could imply significant gains in the US dollar ahead.


The only comments I got on the most recent SPXU trade were people who entered and were still in the trade. So I am going to just treat the trade as still active with a stop at 36.40. The S&P 500 has been oscillating around the 1100 and change level for a while and has formed a third short-term island top with this morning's gap down. I think the break will be down from here, but most indicators are neutral.

A Look at Longer Term Cash Data

Click on Charts to Enlarge

The two charts above are from Sentimentrader.com. The top chart shows the percentage of mutual funds' assets in cash. It is back down below 4% now. That level was the lowest reached at bull market tops over the last several decades. What is also interesting is that despite one of the greatest stock bear markets in history, the cash % only jumped to 6% at the bear market lows this year when it easily surpassed 10% several times in decades past.

These types of data tend to be long term signals. A high cash percentage means that funds have lots of cash to buy assets like stocks. We are seeing the opposite of that now - historically low cash levels. Also, I wonder if the lack of a comparable spike in the cash percentage during this recent bear market isn't indicative of a lingering optimism towards stocks and solid evidence that the bear market psychology has not run its course yet. Anyway, I certainly would not consider adding or buying stocks on a long term basis right now personally.

The lower chart shows cash in retail (individuals, non-professionals) money market funds. Again cash levels will swell as individuals see risk, which usually happens near bottoms. And cash levels fall as markets rise and they see no need to leave money sitting in these accounts. Cash levels did swell to a significant high at this year's bear market lows. As a percentage of the S&P market capitalization, it hit about 15%. However, that has fallen substantially in recent months. After similar instances in the past the market was sideways for extended periods of time.

From these charts it seems most sensible to maintain a sideways to down outlook for stocks into next year at least. I think that most intermediate term sentiment data toward the market suggests the same. Technically the trend is still up and price is still above key moving averages. But it's too late to come to the party now in my opinion. There will likely be opportunity to buy at lower levels in the coming year(s).

Request - Most Recent SPXU Trade

I didn't get the post out yesterday for the new trade until about 10 or 15 min before the close, which realistically would not give most people a chance to enter unless you were able to do it immediately. Now there was a large gap up this morning that would have stopped out that trade (insert curse words here).....

As I've touched on before, gap ups on monthly jobs reports like today tend to be good contrary signals in their own right. And the market is selling off dramatically since the open and this may be the final washout before a solid move down.

So my request is please post an anonymous comment if you got in yesterday (and also whether you got stopped out this morning). Also, please post a comment if you got in this morning and are still in the trade now.

If it turns out that no one got in yesterday, then it will make sense to just manage the trade from here as if it is still active, particularly since there may be those who got in this morning.

Thanks


Pete

Bearish Engulfing/Key Reversals Today

Click on Chart to Enlarge

The major averages and most sector ETFs formed bearish engulfing patterns today. After being chopped and stopped several times in the last couple weeks, I am experiencing some emotional exhaustion in trying to play this reversal. However, looking at charts and indicators, I would say this is the best set-up out of any of the last 4 I've tried. Also, any lower close from here will be a 4th failed breakout above the Oct highs.

These choppy environments make trading with tight stops/low risk, very difficult. That is just the way it is and basically has to be that way for a market to reverse. I personally find it easier to deal with this by either not using a stop, and managing risk by devoting a certain percentage of the account (going a little more conservative than seems necessary) or fixed dollar amount to every trade or using a last ditch type of stop level so that you only get stopped if you are way off. That way you are free to exit purely off indicators and don't get whipsawed very often. There are pros and cons to both ways. The main problem with using tight stops and getting stopped out several times, is that if there is any emotional input involved in the decision making process, it is against human nature to keep "hurting" yourself or doing anything that makes you feel bad or insecure, and then you don't persist to finally catch a very large move.

Click on Chart to Enlarge

The hourly chart above shows a fresh MACD bear cross and -DI crossing above +DI in the last hour of the day. Price is just pennies above the Parabolic Stop and Reverse sell point as well. There is continuing divergence on the MACD on this time frame and without price trending up.

My sense is that this is a very significant top forming right now. However, that is a serious minority opinion. But that is fundamental to contrarian thought and investing/trading. Learn to recognize consensus thinking and then act against it at well planned times.

The size and speed of any potential decline off these levels will be the most telling aspect of what is in store on a longer term basis.

SPXU Re-entry

No time for details. This is the last try on SPXU for now.


Re-enter SPXU ASAP today. Price is 37.90. GTC sell stop at 36.40 after entry and for sizing.

SPXU Stopped Out and New SPXU Trade

The recent SPXU trade was stopped out at 37.00 yesterday, down from 40.33 at entry. In retrospect this was a poor trade, and I was aware of that risk on entering on a large gap down. The last 2-3 weeks have been very choppy with no real overbought or oversold readings from the short-term model I usually use for entries. However, yesterday and this morning did register some solid overbought readings, and thus far the move to new highs has failed and the breakout attempt was on weak volume.

If the market closes anywhere near where it is now, the indexes will form shooting star candles at resistance that effectively ran stops above the recent highs. So without knowing what is in store for the rest of the afternoon, we have an overbought situation with a potentially quality candlestick reversal pattern in the making, so I want to take another chance on this set-up and re-enter.

New SPXU Trade:

Buy SPXU today with a market order. Current price is 37.37 and is the blog entry price. Use a GTC sell stop at 36.67 immediately after entry. Use the position sizing guidelines here if necessary (as a general rule only risk 1-2% of account value per trade).