Wednesday Trade Prep and Bullish Set-Up

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The chart above is a 15 minute chart of QQQQ for the last 8 days or so. It is showing an island top pattern on this time frame and also a head and shoulders type top. If the market falls from here, the standard target for this would be around 28.00 on QQQQ which also happens to be near the 61.8% retracement of the rally off the March low. There are also unfilled gaps underneath current prices that are likely to draw price down to fill the gaps.

I made a put option trade on SPY at about 1:30 ET Tuesday. The short-term model was nearing overbought, but never quite made it, so I could not justify recommending a blog trade on this. The futures are off to a solidly negative start in the overnight session, and I would not suggest trying to buy into a large gap down tomorrow. Also, if there is a large gap down, that will skew the risk to reward ratio for trying to enter a bearish trade tomorrow. For blog trading purposes, I will wait for a more clear signal after a more extreme price movement.

From the looks of the price pattern I would think that SPY will move down toward the 74.00 level into next week which, if accompanied by short-term oversold signals, may offer a solid bullish trade entry for the blog. But, that may be the last solid bullish set-up before things really fall apart. And even if this scenario plays out, I am still not certain that I will recommend a bullish trade due to the negative larger trend. We'll see how things look when the time comes.

Pete

Bear Market Bottoms Revisited

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Due to the strong rally the last few weeks, I wanted to take a look again at what type of price action has historically confirmed the end of bear markets. I originally made this post in mid-January so that blog readers could get an objective and easy to calculate way to "know" when the bear market is over and when to get back in long term investments. For those interested or questioning whether this bear market is over, you should read that post because the same logic applies to both the ends of bull and bear markets.

To sum up that prior post.....a near fool-proof method of knowing that the bear market is over is to see a handful or more of bear market rallies where finally a rally off a new bear market low is about 120% the size of any previous rally.

The chart above shows the current bear market with the approximate % gain of every rally lasting at least a month before making new bear market lows. The current rally stands in the 26+% range. The Nov-Jan rally was about 27%. So we need to see about a 33% gain off a bear market low to be 120% of 27%. That would correspond with 888 roughly in the S&P 500 if the market continues higher during this current rally.

So, it is not safe by historical standards to assume the bear market is over yet. From a pattern perspective I would say with near certainty that it is NOT over yet and we will see new lows, probably in dramatic fashion, before it is over.


As an aside and follow up to yesterday's post......

Here is a link to the 2008 Blog Trade Review post I made in January for anyone interested.


Pete

One Year Blogiversary and First Quarter Trade Review

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I started this blog in early April of last year because it was apparent in January of 2008 that the 2002-2007 bull market was over and that this bear market could be a severe one. I wanted to give friends and family a chance to take control of their investments to some degree, seeing as the largest segment of our population is hitting retirement age. Could there be a worse time for such a bad bear market?

Despite the horrible buy and hold performance for stocks since the bear market began, the huge increase in volatility has provided the short-term trader with almost the best possible environment to make money. Also, the advent of inverse ETFs has made it easily accessible for the retail trader to profit during market declines.

On account of the one year blogiversary and the end of the first quarter, I wanted to give a trade review and discuss some simple money management ideas for how to fit the blog trades into an investment strategy. The first quarter trades provided excellent results with a current string of 6 winning trades to only one small loss.

The chart above shows only the 2009 blog trades. I posted the 2008 trade review in January. Most of the info is self explanatory, but I wanted to explain some things so that interpretation of the results is easy.

The "Stop?" column shows a star if the trade was exited with a stop loss as opposed to the typical indicator signal. I have explained before that I don't typically recommend stops for these trade because it theoretically hurts the performance of a mean-reverting system.

The "$10,000 Per Trade" column under "2009" show the running total of profits from trades so far this year if devoting exactly $10,000 to each recommendation.

The "$10,000 Cumulative" column under "2009" shows the running account value with the intial $10,000 included if the entire account value was devoted to each trade. This allows a compounding effect.

The next 2 columns are the exact same thing except that it includes all the 2008 short-term trades as well which are represented by the purple font beginning value in those columns.

What you can see is that starting with $10,000 on the first blog trade in April of last year, and using the cumulative strategy, the account value would have more than tripled, gaining over 200%. No commisions, etc. are taken into account, but that wouldn't change things much. The only change in real life implementation of that strategy is that the first BGZ trade this year overlapped the following SDS trade. That would decrease the return a little. Otherwise, the trades are all non-overlapping and could realistically be traded in the "cumulative" fashion.

If simply devoting $10,000 to each trade since the first blog trade in 2008 the profits would be over $17,000 as of today's closed trade.

Those two strategies are really what I had in mind for blog followers when I started the blog, and they are still the two ways I would recommend approaching blog trades from a money management perspective. That is either....

1) Decide on an initial amount to devote to these trades and treat it like its own account continually devoting all profits (or losses) to the next trade to create a powerful compounding effect.

2) Make a fixed $ investment in every trade.

I think strategy #1 makes sense for a beginning trader or a small account size to try to increase account value. I think strategy #2 is more realistic for a large account size and is a more "business-like" approach.

Hopefully this post was somewhat helpful and not just a boring read. It shows the power of a solid system with the inherent leverage of the ultra ETFs. I suppose you could take the idea further and propose using 3x ETFs for all trades or deep ITM options, but in the event of a very bad trade for whatever reason, that could result in an undesirably large drawdown in account value. I believe the 2x ETFs can be traded in the cumulative manner using this blog without much worries of any type of crippling drawdown.

Tomorrow I will again touch on the topic of what kind of price action is needed to confirm when the bear market is over. I know that many hope it is over already, but, in short, at this point I would advise extreme caution in that regard.

Pete

SDS Trade Exit

The short-term model is oversold after the declines Friday and this morning. So I am going to post the SDS trade exit price as the current price around noon ET. For anyone lunchtime only traders I would suggest exiting now. For anyone able to trade at the market close, I would suggest selling it a few minutes prior to the close today as today has the typical qualities of a close near the day's lows.

The entry price last Wednesday was 76.14 and the current price is 80.67 as I type for a 5.94% gain.

My guess is that the next blog trade will potentiall be a bullish trade if theS&P 500 falls back to around 740ish give or take. I don't have any interest in recommending the BGZ trade until we get back another overbought short-term reading.


Pete

Sharp Decrease in Buy to Open Put Options Last Week

In recent weeks I have discussed how put/call ratio data has shown complacency in that the ratio of put to call volume had not become very extreme on the Feb-March decline, and the ratios have been VERY low on the recent advance. Today I wanted to talk about another way of looking at put and call purchases.

Sentimentrader.com has an indicator that looks at the amount of calls and puts that were purchased by small traders as opening transactions. Small traders typically provide good contrary signals at extremes. The importance of looking only at buying transactions to open a position is that you can be sure that the traders are bearish when they open a put position and bullish when opening a call position. So looking at the data this way filters out the "pure" directional bias of less sophisticated traders that historically are most bullish at market highs and vice versa.

What the data shows from this past week is that opening put purchases dropped sharply to levels only seen at previous intermediate tops in this bear market. The current level is on par with the May 2008 and Oct 2007 tops, though not as low as in January of the last 2 years. Call purchases have not risen to troubling levels at this point but the message is clear enough.

Taken together with recent put/call volume data and historically extreme breadth readings, it seems that we should be very close (couple days to a couple weeks) to a significant retracement of the recent market rally.

This week I will be looking for a good opportunity to recommend a purchase on BGZ again with a multi-week or multi-month holding time frame to try to make a large gain on what I expect to be another fierce decline in stocks in coming months. The last trades on BGZ were modestly profitable, but the rate of decline never picked up to the level which justified a longer term hold. It often takes several tries to catch a major trend shift, so it is important to remain alert as as any large price pattern looks to be completing.


Pete

Short-Term Expectations.....My Take On It

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The chart above is SPY at about 3:00 ET. I have included some notes on the chart with what I think is most likely happening from a market logic and pattern interpretation.

After the low 3 weeks ago, there was an advance which included several small corrections of roughly equal size. Then there was a decline about twice as big last Thursday and Friday. I had expected there to be a larger correction after that, but the market has made new highs and is yet to form a really solid reversal pattern.

So my interpretation is that a wave did complete before that larger correction and now we are in another wave up which should end early to mid next week if this idea is correct. After that I do think there will be a much larger pullback than any since the March 6th low.

There are two relatively short-term models from Sentimentrader.com that I use to time entries and exits for blog trades. The most sensitive one did hit oversold later in the same day that the entry occurred for the current trade on SDS. The slightly different and longer short-term model has yet to even near oversold, but is building a bearish divergence with each new high in price. This slightly longer model is the one that I will use to post the trade exit because it is making more "sense" with price action. Recent trades have had very little drawdown intratrade, but I expect this one will not be the same way. It is easy to get spoiled after several bang, bang type trades in a row.

To sum up, I am pretty confident on several different grounds that we are close to the start of a very significant pullback, but it looks like it will be a week or so before an exit signal will come for this trade on SDS.

Spinning Top Candlestick in SPY

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Today's action was a bit wild and ended up forming a large "spinning top" candlestick pattern. This shows indecision and a violent struggle for direction. When this occurrs after a long trend, it often will lead to some amount of a reversal. It is not considered to be a high reliability pattern, but by looking back at charts of recent months, several of these candles have formed at important highs and lows.

I made a post the day of the March 6th low talking about the long-legged doji candlestick and almost every comment would be the same for today, except in reverse since we are well into a strong rally. The spinning top candlestick has a larger real body than the long-legged doji candlestick, but otherwise they are similar.

Also, according to Quantifiable Edges, there is about an 80+% tendency for 2% or larger gap ups like Monday's to have price close below that opening within 5 days. That would suggest about an 80% chance of another 4% decline in SPY by Monday. Of significance is that in the data table from that study, the only 2% gap ups that did not make that cut were either 1 or 2 days after a major intermediate term low. We are not in that situation, so I would say the probability is greater than 80% currently.

The short-term model is actually oversold already. But let's see what tomorrow brings and then see if there is follow-through to the downside or not. I may suggest setting a stop on the current SDS trade tomorrow, but I think the chances are good for a pullback.

Of note the 3x ETFs BGU and BGZ made high volume long-legged doji candlesticks today. In context of everything I've talked about the last week or so, I think we are very likely to get a pullback over the next few days.

Pete