The S & P 500 powered down with volume today.. Quite heavy volume too. A test of 1163 is starting to look like a very good possibility now and would at least open up the possiblity of that reverse head and shoulders pattern setup I mentioned in an earlier posting.

After looking more carefully at this index it appears that a sell signal was triggered on June 22nd 2005. The high for that day was 1219.59 which tested the high for the 17th of June which was 1219.55. Not only did the 22nd price bar test the June 17th price bar, it also finished with a close below the 17th price bar and on dramatically lighter volume.

The volume for the 22nd of June 2005 was 1.38 billion and the volume for the 17th of June was somewhere near 2.5 billion. The June 17th volume was skewed by quadruple witching.. so I am a bit perplexed as how to make a judgement on whether I can make a valid volume comparison given the quadruple witching skew. Either way it looks like a comfortable sell signal to me.

The other thing going on with the S & P as you may have heard me mention several times on other indices is a potential bearish monthly MACD cross coming up on this index. We do not have a negative or bearish crossover yet, but it is starting to look like this is the way it wants to go..

So as of this writing the bias to me is definitely bearish with the next possiblity and analysis being a run for and test of 1163. It will be interesting to see how the volume comparison is at that time and whether it means more selling or a bounce and reverse head and shoulders pattern.

For the S & P to avoid a bearish monthly MACD crossover, it is going to have to pull a rabit out of the hat going into the end of this year.

Thomas

P.S. An interesting side analysis here is the way this could play into the gold market. SOMETIMES the gold market moves inverse to a bearishly moving broad market as a hedge. An extra bearish broad market could further support some of the bullish gold clues I alluded to in my previous post on the Gold Market.

We are about to see some fireworks in the Gold market in July August and September and likely October, November and December as well. Gold during the last 6 to 9 months has been an absolute SLEEPER in terms of price action. Small price ranges, slow price movement and BORING price action.

But behind the scenes what this means is that the gold market is getting ready to lead us into super high volatility, or fireworks if you will. The lackluster action is explained by the fact that we have had during the last 2 price quarters a double inside quarter. This is huge news because it is a big clue for future volatility.

The gold market has been deceptively quiet so as not to warn anyone about what it wants to do next. This quiet, slow and boring price action was precisely the creation of a double inside quarter shown in the link in the previous paragraph.

I would like to be able to tell you in which direction the gold market will break next. The weight of the evidence seems to suggest that it will be upwards. However there is more confirmation needed.

I have created a series of articles on the gold market available over at the sister site to stock and commodity trading called ‘Gold and Silver Forum’.

Here is a list of the articles you may find interesting on the gold market:

1970 Gold Bull versus 2001 Gold Bull

The 1970 Gold Market Bearish Pause

The ultimate gold swing trading range

The ultimate Gold chart and most important chart of 2005!

Alert! Double Inside Quarter on Quarterly Gold Price Chart

Where will Gold go now?

Peace.

Thomas

I am still open to the possibility of a reverse head and shoulders pattern being created on the S & P 500 index.

Today we declined on big volume from the highs and makes me think my previous article of ’summer doldrums’ could be kicking into effect thereby delaying the big upwards breakout in the S & P 500.

The fact is that July and August can be horrible months to trade and a horrible time to get real momentum and adequate volume upwards in the market. Let’s face it, a lot of the big money is at the beach and body surfing on cape cod!

So here in this chart I just drew a brief sketch of a different possibility, a reverse head and shoulders pattern that could be in process right now. Further confirmation is needed however and the first sign will be a return to 1170 on the S & P to complete the creation of the right shoulder of this reverse head and shoulders pattern.

I am not saying that this WILL be a reverse head and shoulders pattern. Just open to the possibility of it being one given the probabilities of slow low volume lethargic summer trading…

Time will tell as they say.

I am still viewing this as an overall consolidation before break out to new highs down the road. This is the preferred scenario analysis for now.

Will update if new developments warrant on the S & P 500.

Out.

Tom

Whether you are a beginning trader just starting to get the feel for the business and making your first trade, or an experienced pro unfazed by anything the market throws at you, chances are that you are still susceptible to the emotional highs and lows of your day to day or month to month trading matters.

It is probably ok to have those emotional high’s and lows hit your brain when you have positions in the markets. But just be sure that your experience and overall knowledge and discipline is strong enough to override any possible emotional or euphoric effects of a great trade (or a bad losing trade).

You know, I can tell you one thing that happened to me already several times many years ago ( I believe it was 1998). I was fortunate enough to have predicted that sharp decline with a decent amount of precision. Don’t ask me why but I chose to pick on Cisco Systems (CSCO) with a put option. Cisco was one of the strongest stocks at the time and really was not one to fall apart in a big way… until the Asian currency crisis happened. Cisco was one of the last stocks to break down during that market correction.

So anyway, as I was saying, I had a put option that was significantly out of the money and when Cisco finally broke, the volatility spiked and it got very close to being in the money. I had an enormous paper profit.

So what did I do?

I let it get to my head (the euphoria I mean).

I let my position keep running and did not close the trade. And during one of those nights I went to a luxury car dealership lusting over all the brand new shiny BMWs and Land Rovers. I drove around that dealership and felt like I was on top of the world. It was like a drug fix. But it was a big mistake.

My position was still open! and it was an option position!

Options positions are meant to be closed and closed quick with any sort of decent profit. Even if it is a long term leap option, it should be closed if it has a generous profit.

But I was euphoric, and blinded.

Running around luxury car dealerships or telling your friends and family members about all the things you are going to buy them and yourself is a very very bad mistake if your position is still open. DON”T DO IT. Trust me. It will get you into trouble and it will blind you. CLOSE your position and walk away for a few days or a week if necessary and then celebrate all you want or brag all you want. But DON’T do this if your position is still open.

Be a professional and don’t let your trading matters to get to your head.

My Father, champagne, and classical music

My Father was also guilty of letting his trading get to his head. In his case the trade was also an option position. It was a call option on Apple Computer way back when… I cannot remember the specific date. But it was a great great trade. I forget how much he committed to the trade at the start, perhaps around $5000.

As I try to recall exactly how this trade was setup… I believe Apple Computer (AAPL) at the time had nearly completed a pretty rough corrective period after a messy basing pattern. The stock was oversold and there were some good signs of volume coming into the stock. The oscillators were saying buy and the risk reward was pretty good. So my Dad had a call option on the stock. Two or three days later, there was a big press release and announcement by Bill Gates that Microsoft would continue to support and produce the Microsoft Office line of products for the Apple operating system. I think this is what the announcement was. It was so long ago that I cannot exactly recall what the big announcement was, but it was a major headliner and a vote of confidence in Apple’s business which was floundering at the time.

To make a long story short, my Dad’s account on paper was near $25,000. Needless to say he was euphoric about it and it got to his head.

So what did he do?

He invited me and my Mother out to an outdoor classic music concert that was happening that night (Beethoven). But his call option position was still open!

We sat there on the lawn, listened to that mesmerizing music and drank champagne and giggle and laughed about what a great trade he had made…

But he did not close the trade yet!

So the next day the trade turned around on him. And rightly so because the 3 or 4 day upmove was a vertical spike, and vertical spikes always do retracements because they are unsustainable in most cases.

So he ended up with still an average profit, but no where near the blowout profit he could have had, had he not let the euphoria get to his head.

No one is perfect. These types of mistakes happen to everyone surely. The key is to do your best to minimize the euphoric damage so that you can maximize your profits.

Peace!

I’m out.

The one thing I forgot to mention in my previous post regarding the S&P 500 breaking to new highs was that we cannot rule out a delay of the breakout due to ‘low volume summer trading’ ! The low volume factor was ignored however on June 17th. And it was a Friday at that! So at this point I do not know whether to ignore the factor of summer slow trading or open myself up to the possibility that it will not be a factor this time.

This does bring up a general point worth mentioning. Is it even worth trading or following the markets during the slow summer months? I suppose it depends on what you favorite flavor is. If you love to dabble in small stocks or the OTC BB market then the summer is probably definitely NOT a good time to be trading too much. The problem is that during slow summer months there can be so much whipsawing, minor ranges and lackluster volume that the only thing it really accomplishes for you if extra commission charges from your online trading firm.

But alas, there are alternatives. You could concentrate solely on trading QQQ’s or spyders on an intra-day basis and make your trades quick and light.

Anyway, the bottom line is that experience suggests to keep your trading very selective during the summer months or you are setting yourself up to be eaten for lunch!

P.S. Right now the S&P 500 is hovering like a bat right under longer term resistance… If the ’summer doldrums’ effect kicks in, the first sign will be a price break back down under the previous high volume swing mentioned previously! That could mean a bit more backing and filling will occur to weed out the weak hands before the big breakout!

P.P.S. As far as the occurence of the actual breakout, when it happens, we want to watch for long price spread and confirmed volume, then after that a low volume retest back to the new support area, but ahhhh… I am getting ahead of myself !

The rising price of crude oil to date has had a somewhat limited affect on the economy ( so far) but my overall analysis of the crude oil chart says to me that there is still plenty of bullish potential for the intermediate and longer term time frames.

Certainly it seems somewhat odd that the S&P 500 is near all time highs while crude oil is also hitting record highs at about the same time ( Gold may soon do the same but will be analyzed in a future posting). According to my previous posting ( The S P 500 will break to new all time highs ) the S&P 500 will eventually break to new all time highs joining the crude oil run.

Traditional wisdom would suggest that crude oil and gold at new all time highs would suggest a weak economy or inflationary concerns. The inflationary bite has not really been seen yet in my opinion. There is plenty of anecdotal evidence to suggest that increased inflation is here and that it is growing, but to my knowledge, so far anyway we do not have a situation of run away or a really “painful” inflation situation.

Perhaps what we are dealing with is the old ‘frog does not notice the water is boiling analogy until it is too late’. This could be the case. It could be that by the time the public and the investment community at large realizes that inflation is a very bad problem it will be too late.. and the effects will be large enough that they are seen obviously everywhere.

I will tell you what the crude oil chart is telling me from my experience and observations. Number one, the overall trending pattern since 2001 is of a parabolic arc symmetry. What this means is that as time moves forward price subsequently rises at a faster and faster pace until you come to the point of almost zero price declines. In other words, it looks like crude oil wants to take the path of a parabolic blow off with eventual near vertical price rises until it exhausts itself. Since about mid 2004, the price of crude oil has chosen to build a rising wedge price formation which is a price consolidation pattern. So even though the price of crude oil has recently hit an all time high, the current price is still contained within this rising wedge formation. This suggests to me that we are likely due for some sort of pullback into the rising wedge range at this time. However if the crude oil chart elects to break out and upwards (green arrow) out of this rising wedge it could lead to a very fast straight line bullish move.

I have discussed rising wedges before and they are somewhat of a tricky price pattern. The normal thinking is that they are temporary bearish patterns and not necessarily ‘end of bull market’ patterns. They have a bearish tendency because you have a combined situation of diminishing price appreciation and constricted price range both of which indicate less demand.

However, rising wedges can fake you out and also be very bullish. They show this bullishness when price breaks out upwards over the top resistance line. So the exact opposite message is being sent, one of extra strong bullishness.

The price of copper has also exhibited such a rising wedge pattern as I pointed out in commodity copper shows good technical analysis trend. The copper price is starting to break out of that rising wedge however further confirmation is needed.

Time wise, this rising wedge in crude oil could extend all the way out to January 1st 2006, but the jury is still out on how long it takes to make its decision.

Crude oil at new highs, the S&P at new highs, and gold at new highs…

Honestly…

Can it get any crazier than that?

Thomas.

The S & P 500 will break to new all time highs. I have no doubt in my mind as of June 20th 2005 that the S&P 500 will eventually break out to new all time highs and likely head for a test of the next swing point of May 22nd 2001.

We saw very good volume expansion on the S P 500 on June 17th, 2005. This volume came through despite typical slow summer trading activity. But more importantly the volume came through significantly higher than the previous price swing of January 3rd 2005. March 7th, 2005 still needs to be tested in terms of price and volume, however given how the S P 500 has pushed up against this resistance line with above average volume, the evidence suggests a break of resistance is coming.

How do I know that we will break to new highs and likely attack the swing point of May 22nd 2001 ??? Well the evidence comes mostly from the S P 500 volume analysis, the most powerful analysis you will ever encounter in your trading matters. As you can see from the chart I have created to the left there is the specific resistance level of 1220 on the S P 500. On June 17th 2005 we tested this level. The volume on June 17th was 2 billion shares. This volume was about 33% greater than the previous swing (Jan. 3rd 2005) volume of 1.5 billion shares. The three price swings around the date March 7th 2005 have volume betweeen 1.4 and 1.6 billion shares. These have not officially been tested yet.

The volume expansion on June 17th was extraordinary! This market wants to push higher and do so in a big way! The volume is the energy, the force and the reason why the market will move higher above the 1220 resistance level and head for the May 22nd, 2001 swing.

“If the market tests a previous swing on equal or greater volume, ultimately that swing will at a minimum be tested and likely exceeded”.

Not only did we test the Jan 3rd, 2005 swing on equal volume, we did so on about 33% greater volume!

The bull market lives on!

Thomas

P.S. The gold market is also extremely interesting at this point! Will the gold market head to new highs? It would be truly extraordinary to again see gold and the S P 500 breaking to new highs at the same time! If it happens it will be absolutely fascinating to me! Stay tuned for my gold analysis.