Nearing Confirmation of A Correction- But Short-Term Oversold

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This is a 60 min chart of SPY.  The MACD is oversold indicating the market may attempt a rally.  It would be better to see a bullish divergence develop before considering a new long entry.

Given the momentum set-up with the weekly and monthly stochastics overbought and the weekly now in a sell signal formation, I think the better opportunity is to wait for the likely rally and then look to short/inverse on the next sell signal if price meets resistance at or below the recent highs of 9/14/12.

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The spread between the smart money commercial futures traders and the large speculators is at a 3 year low indicating the smart money is heavily short with a bearish outlook for prices.  The last times the spread was this large were June 2009 before a 4 week correction, around New Year's 2009 before the final plunge into the 2009 bear market low, and the first week of Oct 2008 before "the crash" plunge into the Oct 10th low.  The time before that was late February 2007 just before a surprise 4% plunge day in the markets and an 8% overall correction.

The point being that there is no other real interpretation of this than at least a modestly bearish one.

The correction off the recent high in the SPY etf is now 8 days long.  The prior longest correction since the June low was 9 days.  If the decline continues to 1415 on the S&P 500 cash, the decline will be larger than any other pullback since the June low as well.  So further downside would create an overbalancing of both price and time suggesting a correction of at least the June-Sept leg up is occurring.

Of note is that open interest rose sharply in the last reporting period with an increase in the commercial net short position.  This indicates that there is NEW hedging or commercial short interest coming in at these level.  While this may seem trivial, another pattern which occurs is for commercials to go heavily short, and then cover their shorts on falling open interest as the market pushes higher and puts them at a loss.  That pattern tends to lead to a sustainable price advance.  We are NOT seeing that right now, which indicates that we may be making a very important high here.

Again my suggestion is to exit longs and growth stocks, or trail stops tightly.

Stock Market Analysis 9-16-12

Stock Market Analysis 9-16-12

This video covers multiple time frame technical analysis on stocks as well as CoT data.  Stocks could be making a major top here.  I suggest tightening stops on any long positions and growth stocks.  Check the video out for further details.

Major Stock Index Selling By Smart Money

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The commercial "smart money" traders increased their selling in stock futures this past reporting period making them the most net short in over a year.  The last times they were this heavily short were at the July 2011 and May 2011 tops.  While a signal like this can fail to lead to a major correction, in the context of a double top/failed breakout I wouldn't bet on it.  At a bare minimum I suggest having in the market trailing stops on long positions or growth stocks.  Remember, our goal as individual traders is to observe what the big players are doing, anticipate what they are likely to do next, and to position ourselves with them.  So they are more bearish than in the last year or so.  Are you?

Combined with a failed breakout of the April 2012 high, this reinforces that a correction is likely from these levels.  But as noted in the recent video, it would be out of character for the market to push above the recent August high and then make a correction.  A new high would likely be a continuation point.

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Notice that the bollinger bands are squeezed tightly on SPY.  Not shown is the ADX/DMI which shows that the daily DMI has been below 20 for 2.5 months.  As it approached 20 two weeks ago, it turned down as the market failed to breakout.  Recall several posts talking about this explosive set up in the past.  Most recently it occurred in gold resulting in an upside breakout.  But the key is the watch for a close OUTSIDE the bands with both bands expanding.  When that happens in this situation it typically leads to a sharp price movement, though it may only last 1-2 weeks.

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The VIX/VXV ratio recent spiked lower again similar to what occurred in March of this year.  What this mean is that short term volatility is out of balance with longer term volatility expectations.  As you can see on the chart, that has often led to substantial corrections in stocks with on overall increase in volatility and a rebalancing of the VIX/VXV.  The other possibility is for volatility to remain low and the longer term volatility shrinks to rebalance the ratio.  If that happens it would likely be in the context of a continuing low volatility market advance.

As an additional note, the VIX has been running high relative to historical volatility.  This also often happens prior to market corrections.  The option market does not believe the current low volatility trade is sustainable.

At this point the US dollar looks set to make a continuation of its advance, and commodities have run very hot for several weeks and are likely to correct.  So I think we are likely to see a deflationary theme type sell off here again with most assets down and the US dollar up.

Stock Market Update 8-23-12

Stock Market Update 8-23-12

This video covers this week's attempted breakout of the April 2012 high in detail.  Check it out for what will determine a continuation versus a truly failed breakout.

Failed Breakout in Stocks Today - Possible Major High and Pattern Completion

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The Dow, Nasdaq 100, and SP 500 all broke their April 2012 highs today.  However, after a gap up opening, the market closed lower and formed a bearish engulfing pattern on the daily chart shown above. There is an intra-wave divergence on the momentum study and an overbought RSI.  All in all, it looks likely for the market to pullback from here even if it were to eventually move higher.  Since today is Tuesday, this weekend's CoT report will include "smart money" response to today's attempted breakout.  If they increased selling, then it would be further support to the idea that the market is topping here.  The May 2008 high was NOT exceeded, which I would like to see before a major reversal.  That would just be an added stop running point which is very typical at major reversal points.

I like to trade major reversals because the risk/reward ratios are so good.  But the moving average trend is up and the daily ADX is pointing up and almost at 20 now which indicates a near stable trend developing.  So the trend strength is objectively still UP.  If long, I suggest a trailing stop method in case of a broad spread reversal.

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The weekly chart shows a strong MACD bearish divergence currently on this breakout.  However, another couple weeks of upward prices would put the MACD at or near new highs.  So if the breakout fails, the technical set-up is ideal for it to do so right now, not after more upside.
 
                                    

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The hourly chart shows a continuing massive bearish divergence on the MACD suggestive of a downside resolution.  When the daily trend gets tight, the MACD may take a similar appearance on the hourly chart, so that is one explanation of the divergence, but at this point I still interpret this as a powerful divergence rather than tight coils within a stable larger uptrend.

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Additionally AAPL formed a high volume dark cloud cover candlestick with overbought RSI.  It hit a new high this week after finally breaking out of its recent base.  This is a bearish candlestick so it could lead to some weakness ahead.  What I think is more telling is that the weekly MACD is now in a massive bearish divergence on this break to new highs in AAPL.  This has the "look" of the type of MACD signal at major tops.  So be wary of a base failure here in AAPL if in investment longs.  The breakout point of the cup with handle was about 620.  A weekly close below that level would be very negative for the price outlook on AAPL.

What Stock Market Final Highs and Lows Have Looked Like

The decline from this April to June in the S&p 500 fit very well in price and time with typical average corrections throughout history.  It did not fit well with the typical 1st leg down in a bull market.  So on this basis it may have been expected for prices to rally to new bull market highs based on the character of the moves.

Currently, with the markets very close to the year's highs, it seems very likely that the highs will be exceeded, even if this is still part of a drawn out topping process.  One thing that I believe many less experienced market analysts or market novices experience is a simple view of support or resistance and expecting or "hoping" that a certain high or low will not be violated because that would throw off their outlook, etc.  But from experience I can confidently say that many and probably MOST important highs or lows, actually exceed a prior important support or resistance, at least slightly, before actually reversing into a major new trend.  As brief evidence of this I will review the major highs and lows since 2000.  The situation at each of the 2 major highs and 2 major lows since then has been for a sharp 1-2 month correction against the trend, followed by a final 1-2 month move into the final high or low.

The last correction prior to the 2000 top was a 56 day 10% correction, which led to a 17% 25 day final advance to the high in March of 2000.  The final high exceeded the previous rally high by 5%.  It took 4 trading days after the final high for the market to trade back below the prior intermediate high.  And it took 13 trading days to close back below the prior intermediate high.

The rally up before the 2002 low saw 29 day 24% advance which led to 20% decline in 49 days into the Oct 2002 low.  The final low was 1% below the prior intermediate low.  The market closed back above the prior intermediate low on the day of the final low.

The final correction before the 2007 top was a 31 day 12% correction which led to a 15% advance in 56 days into the final Oct 2007 bull market high.  The final high exceeded the prior intermediate high (from July 2007) by 1.3%.  The market closed back below the pior high on the day of the final high.

The last rally before the 2009 low was a 46 day 27% advance which led to a 29% final leg down in 59 days into the March 2009 bear market low.  The March low exceeded the prior intermediate low by 9.8%.  It took 4 trading days to regain the prior intermediate low.

Now there are other market cycles that can be studied, and other markets that can be studied, but the tendency is for sharp short-lived corrections to preceed the final legs up or down.  And the final legs up or down have been relatively brief at 1-2 months. 

So at the current juncture, this is something to watch for.  We have already experienced a 63 day 10.9% correction.  And we have rallied for over 2 months into what looks like will be a new high.  So to fit the mold of a market making a final bull market high, we may be likely to see a mild to moderate break of the April 2012 high of say 1-2%.  In this case, I think it would be ideal for the market to slightly exceed the May 2008 high on the breakout as well.  This would be about 1.5% above the April 2012 high.  Then that should be followed by a reversal to quickly close back below the April high.

So that is a descriptive projection of what a final high for this bull market COULD look like.  If we break to new highs, I will track this scenario.  And also I will review this with charts in an upcoming video to get a better visual.

Based on the price logic pattern in the markets, I do still expect a failed breakout followed by a significant correction.  A move to new highs does NOT invalidate the topping pattern as I have been tracking it.  I will go over what level would invalidate that in a future video.

Be Alert for a Reversal Here

As of today, the maximum time I'd expect for this move up is upon us.  Additionally, the daily RSI has touched above 70 on the S&P 500 which is overbought, and in a range environment will typically give break signals.

The ADX is rising on the daily chart as the market is rising here, so we should respect that a new uptrend may be beginning, but it currently is at about 16, whereas 20 is the textbook level to define a new trend.  So again, we are either at an imminent reversal point, possibly even this afternoon, OR the market is likely to continue a tight trend higher for several weeks.

The NYSE is poking above the 8060 resistance level I had mentioned recently.  It is pretty common for price to go completely through a resistance zone, at least intraday, before reversing.  So we should watch to see how it reacts today and tomorrow.