Failed Rally Attempt?

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The chart above is the Nasdaq composite. I am showing this because of the chart pattern and because tech has been in a leading position since the beginning of the bull market, but it is now leading to the downside for the first time since late in 2008.

Notice the March low was exceeded slightly on the downside on this correction. That hasn't happened in the Dow or S&P. Also, the breakout at the April/May high was weaker in the Nasdaq than in those averages. This suggests weakness in the leading stocks and index. It is very common for a rally to occur after the break of a significant low like this. Basically there is a lot of pressure for short covering. As long as the reversal above this low holds it should be respected, but a break back below it will likely accelerate the decline to the next chart support.

This past week there was a follow-through type day on Tuesday (for those that are familiar with IBD methods). However, the Dow and S&P were well off the % gains expected on a follow through, AND there have been 2 high volume declines since then (distribution days) suggesting the rally attempt may not have staying power.

The CRB and CCI commodity averages have both broken the May lows which I noted in a recent post. This now suggests that commodities are likely to be in a weak position. We are likely to see the US Dollar advance and stocks decline if commodities do breakaway to the downside.

For growth stock buyers, I would suggest waiting for another follow-through type day to appear before looking for new buys. I have seen a lot of faulty basing structures too in many charts.

SSO Trade Order

Place a GTC sell limit order for SSO at 52.00.

Equity Put/Call Ratio Has Spiked

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The chart above shows the equity put/call ratio with a 3 day moving average in blue. It has spiked to the highest level since Nov 2008 and is right at that level now. Other times the ratio spiked like this it led to immediate reversals higher. However, those rallies eventually failed and moved to new lows. Since the indexes are near support from the March lows right now, it may be reasonable to expect a rally here to form what looks like a right shoulder on a head an shoulders formation. It would make sense to do that , and then break the neck line at least briefly even if it then continues higher.

There is a little divergence the last couple days on the NYSE McClellan Oscillator suggesting improving breadth. It is not the major kind seen before large moves up, but still suggests a rebound is probable.

JO Chart Explanation

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The chart above has some notes on it. It explains the logic on this trade. Learn this set-up, because it is a common one across many markets. I am looking at a set-up like this in the stock indexes right now too. Nasdaq broke first support today. Put/call ratios have been quite high, suggesting a rebound is likely. The same set-up is also in play in the broad commodity indexes CRB/CCI. With commodities looking weak, I expect any rally to fail here in stocks and move to at least moderate new corrective lows.

New Trade - Short JO

Place an GTC sell stop order to enter short JO, a coffee etf, at 66.35. If filled place a GTC buy stop 71.57.

Commodities look close to breaking down hard out of a triangular consolidation. The next move down will probably be explosive. Hold onto the BAL/cotton short for now, and place this one on JO/coffee. I would also be keen on shorting USO or UHN with a well thought out strategy.

Market Update

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Here is a possible pattern scenario on the S&P 500. The recent move down since the beginning of June explosively retraced the prior small wave, which itself related well to the prior waves. But the move down became extended suggesting a larger pattern beginning. From a price logic standpoint this suggests that a new downward pattern is now unfolding, or possibly that an expanding downward pattern is ending, in which case the move up will likely be less explosive. The blue rectangles are the same time duration, so if any upward move from here retraces the recent move down slower than it happened, then the balance of power is still down.

The 1295-1300 is the first overhead resistance on the chart. Today was the 2nd day of a rally attempt in a market correction. IBD says that a 1.7% or greater advance on increasing volume from the prior day, should occur at day 4 or after to confirm a possible new advance. So keep an eye out for that here. After looking at many charts recently, I am leaning toward a continued correction. There are some base failures and high profile stocks that seem likely to decline. That should continue adding pressure on stocks.

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This is the CRB index. It seems very likely to me that the May low will be broken based off this upward consolidation after an explosive downward move from the highs. If it does break the May low, then based off historical tendencies, we are likely in a bear market which should have a long way to go yet.

Coffee looks like a good short opportunity and there is an etf, JO, that could be used. I may post a trade on that soon.

New Trade - SSO

The market averages are bouncing today after finally completely filling the large gap up from April that I had mentioned previously. I still think the odds favor an advance off these levels.

I am going to post a new trade here on SSO. That is a 2x bullish S&P etf.

Buy SSO today with a market order. Current price is 52.29 which is the blog entry. Exit with RSI (3) overbought.