Online Trading

We are once again at a crucial juncture in the market and possibly a very significant turning point.

The SPDR S&P 500 ETF SPY today did yet another reversal and showed that the market is lacking enough energy to bust through the very critical lows of the large swing trading range since April 2010.

Today was a very very important day in terms of what the SPDR S&P 500 ETF told us.  Today the SPY tested several very important key swing trading lows going all the way back to March of 2010.  In each instance the lows were tested on substantially lighter volume which is a bullish reversal sign for the market once again.

The ultra bearish scenario may be completely dead as of today and I would say at this point to be extremely careful about being heavily short this market going into September 2010.

We closed out our short trade today on the SPY ETF and intend to go long in the morning with the following two conditions:

• We need a bullish confirmation of the recent two day bullish engulfing candlestick pattern.  This means we need a close above 106.39 in the SPY.
• Secondly, we need a bullish close above 605.71 on the Russell 2000 as a confirmation of a MACD Histogram buy signal.  The Russell can tend to lead the market on both the bearish side and the bullish side of the market.  Right now it seems to be leading and showing a leading bullish possible buy signal on the Histogram

Probably most traders to not pay that much attention to trading volume.  But if you think about it, volume can potentially be the most important clue the market can give us because the volume is essentially the energy that moves markets.  It is the real money, the power that either has the force, or not.

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The Russell 2000 today is printing a reversal hammer that looks quite typical and reminiscent of the reversal hammer of 6/8/2010.  In the large swing trading we have been in over the last few months, these reversal hammers have been somewhat famous for picking exact bottoms in the markets large swing trading range.

Today’s reversal hammer is also significant if you look at it in terms of the previous reversal hammer on 6/8/2010 in that it shows possible symmetry.  The symmetry I am referring to are left and right shoulders of a head and shoulder bottoming pattern.

The volume pattern on the SPY and many other indices has been a series of surges at these major swing trading lows since beginning of May 2010, but relative to the previous surges they have been progressively less.  That drying up of volume on a relative basis does not seem to be the stuff of a new bearish breakdown.

When you consider the drying up of volume (plus the high TRIN reading yesterday) with the pattern in the Russell 2000 below it would seem to confirm that we are once again near a reversal point here.

Having said that, a hammer reversal candlestick is not a hammer reversal candlestick until it is confirmed.  We need to see a close above the high of today’s Russell 2000 Hammer before it can be said we have some kind of reversal going.

The last point to be made about the chart above is that today’s low is still a higher low relative to the last two valleys of July 6 and July 19.  The better sign of a character change in the market would be a break below the 7/19/2010 low of the Russell 2000 of 602.64

The SPDR S&P 500 ETF today so far at the trading day mid point is decline on what I consider to be very heavy volume for a Friday and also in early August.  By 12:45 PM eastern time volume looks to be close to 140 million on the SPY.  If we double that we come at a projected target of 280 million shares for the full day.

It remains to be seen what the final trading volume will be by the close, but this heavy downside volume and super light upside volume is a pattern that has been repeated time and time again in this so far ‘mini bear market’.

The very light upside volumes into the peak of the rising wedge formation I talked about yesterday is a concern and consistent with the structure of the rising wedge.

Break downs from rising wedges can be swift and occur with a big surge in volume.  Todays substantial increase in downside volume is a hint that we are about to break down from this rising wedge in the SPDR S&P 500 ETF.

The MACD histogram and the MACD are signaling that a bearish downside cross could occur next week coupled with a break down below the bottom supporting line of the rising wedge formation.

I would be remiss if I did not once again mention the August 10 to 12 Astro cycle dates that have the potential to lead to very volatile market action.  The much touted Astro dates earlier this week did not seem to lead to anything unless you consider that they served as a topping or turning point for the market this last week.

Looking at the chart above it is still quite clear that we have still not broken below the supporting green up trendline.  If we do so with volume to start next weeks trading then it could imply 105.82 as a first target on the SPY.  It could get there rather quickly if this wedge plays out consitently.

The 105 range is still quite a strong range of support and if we do drop down to that range I think one still has to assume that the market could bounce higher from that range at least for a few days.

It is amazing to me that the market has not managed to test the 6/21/2010 swing high either on the SPY or the sp500.  It came close within a few pennies but never actually got the job done.  This is sort of a problem because it would have been better to see an actual test of the 6/21/2010 swing high on much lighter volume and then a close below that high.  The fact that the market has not tested it and also not yet broken under the green supporting up trendline still leaves a little room for doubt about a big break down.

Still, I have to trust this rising wedge pattern which is near perfect in terms of structure and declining volume pattern within the rising wedge.

There is also a gap on 8/2/2010 on 188 million in volume on the SPY. Today we are pushing into that gap probably well north of 188 million which is a bearish volume relationship sign since gaps act like support and resistance and the volume comparisons into gaps reveal clues about the next direction.

The setup here looks like very significant volatility is about to hit the tape early next week.  Rising wedges can lead to very rapid break downs.  I would not be surprised to see a 500 point down day (in the DJIA) early next week.

It really does look again today from today’s stock market action that the future tape into the end of this year is going to be quite bullish.  The XLF looks like it is projecting a move to near the April 2010 highs.  The broad market should at some point get to a challenge of the April 2010 highs as well.

I have to once again revert back to my ‘forest for the trees’ scenario of longer term bullish the stock market which I wrote up on July 8, 2010.  My frame of mind now is not to look for the next top or a crash, but instead just for upside continuation working towards an eventual upside breakout of the April 2010 highs.   I suspect that eventually we are going to start seeing an unemployment rate (see my MACD of the unemployment rate) that starts to tick DOWN and should help the stock market get some big upside moves.

The PowerShares QQQ Trust, Series 1 I suspect is about to bust out north and should be able to create a ‘busted pattern’ setup where it first broke down through its symmetrical triangle, then rallied back up to the apex (right about where it is now) and now appears ready to bust out north from the apex level again.  That would create the exact opposite directional implication of this large symmetrical triangle (the original one was down, now it is likely to be up).

In addition to this symmetrical triangle on the PowerShares QQQ Trust, Series 1 there is also the much larger pattern I discussed before which is the head and shoulders bottoming pattern.  This large pattern projects about 25 points higher from the neckline on the QQQ’s and has a potential price target of 75 on the QQQ’s.  This is an extremely important insight to be aware of especially if you tend to stick with long ETFS or leveraged long ETFS.  The most important part of the pattern at this point is the neckline which comes in at a value of 50.65.   A northward break from that level ought to contain wide price spread and massive volume.  Then after the break, a retest of that level should confirm it as support.  One of the best risk/reward trades is to first WAIT for the breakout above this level and then WATCH for the retrace back to 50.65 as a normal test of new support.

The Astro aspects have completely failed.  At this point I would have to say that it looks as though they will be completely irrelevant and have probably inverted.  This is about the worst thing that can happen for those who follow Astro blindly and do not use technical analysis as confirmation.  A simple up trendline from the July 1st, 2010 low is a clear fail/success line for all these astro forecasts.  The strong bounce higher today off of this uptrendline for the 3rd time says the Astro forecasts will likely fail miserably.  Look for a break down below this near term uptrendline for any hope of possible remaining bearish Astro scenarios coming to fruition.

The market action today was definitely not very bear inspiring.  I have to be honest and say it was actually quite bullish looking on a short term basis.  We had the opening gap down near the July 1, 2010 up trendline and then a reversal to close higher on the day.

This was somewhat similar to the candlestick setup that happened on July 20, 2010 and that led to a 5 day follow through up move.  Actually there is a difference.  The gap down and higher close candlestick that occurred on July 20 also fully engulfed the previous day’s doji candlestick and it closed right at the highs.  Today’s candlestick (on the sp500) was more of a doji candlestick with a bottoming tail.

A 2B sell signal would be confirmed on a close below 1087.88 on the sp500.

Still, the MACD Histogram bearish divergence is still in force and the VIX volatility index looks like it is just inches away from a bullish MACD upside crossover. 

It is still a tough call right at this point.  As long as we are still on the July 1st minor up trendline one has to respect the fact that we could get momentum off of it and push upwards even for a chance at exceeding the July 27, 2010 swing high.

So my take is pretty much the same as it was yesterday.  The SPDR S&P 500 ETF needs to trade below 109 (1090 on the sp500) for me to start getting excited about any serious bearish follow through and something more severe to the downside.

The final weekly candlestick chart for many of the indices are showing just simply doji indecision candlesticks instead of strong reversal hammers.  So from the weekly chart all I can say at this point is that the current weekly uptrend is showing a pause.  For us to get a serious weekly reversal we need to close hard down next week below 1088 in the sp500 confirm the 2B sell signal and confirm a break of the recent up trendline.

So it would seem that a lot is riding on Monday, August 2, 2012 and as of now I am still getting mixed signals.  Being completely objective about today’s action I would have to say the bulls won and that because they won right near this trendline test, they could take it higher right from the open on Monday August 2.

Until the bears take this market below 1090 or 109 on the SPY I cannot be pounding my fists on the table bearish yet.

P.S. I thought it was especially deviant how ‘they’ sold the market off right in the last 5 minutes or so of trading.  Maybe it was the Astro believers looking at the extremely negative Astro kicking in this weekend and the first week of August?  If this market blasts higher on Monday I might have to conclude that the Astro stuff is inverted and market may trade into them as a high instead of a low.  The other guidepost is the 7/27 swing high.  If that swing high is exceeded then for me it is pretty much confirmed that the Astro stuff is failing as far as the markets ability to trade down into them instead of up.

The SPDR S&P 500 ETF today broke down today on 35% greater volume than yesterday although still relatively lower volume as compared to other break downs in recent months.

Today the SPY candle engulfed yesterday’s doji candlestick on 35% greater volume.  On the Dow Diamonds DIA SPDR Dow Jones Industrial Average ETF today we engulfed yesterday’s near perfect doji on 55% greater volume.

This bearish engulfing setup is somewhat similar to the one that occurred on 6/21/2010 except that today’s engulfing has a slightly more bearish volume characteristic.

Despite these short term signals the fact still remains right now that the SPDR S&P 500 ETF is still trading both above the red dotted down trend line that has defined the bear phase and also above the near term green up trendline since July 1, 2010.

These two facts make it hard to be super bearish right now despite the near term signals of a possible turn down in the market right here.  It looks like the GDP report tomorrow is going to swing this market in a decisive direction.

I mentioned in yesterday’s post that the 1100 level on the sp500 was minor support and ideally for the bearish case would close near there or below it by end of this week.  That type of close would set up a nice weekly hammer reversal candlestick and give a good shot at next week being hard down.  Breaking below the 1100 level enough on the sp500 could help to accelerate selling a bit and also create a 2B sell signal.  But again, unless we start trading seriously below the 109 level on the SPDR S&P 500 ETF then I have to conclude that the bulls still have some steam left.

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Today was only slightly down on light volume.  We did however confirm yesterday’s doji candlestick (by closing under it) as a reversal candlestick and someone emailed me that there was also a ‘bearish meeting lines’ candlestick formation on the two previous days candlesticks.  So both of these appear to be confirmed today.

However despite today’s decline I still do not have a confirmed MACD histogram sell signal on the sp500.  That confirmation would come with a close under 1103.11 during the next couple of days.

Today we did get a confirmed bullish MACD histogram buy signal in the VIX (volatility index) and seems to suggest that an upward momentum turn in the VIX is on deck the next few weeks.

I was watching Apple Inc AAPL today and I noticed that today it tested its big earnings candlestick on 50% lighter volume and closed back under that high.  That is a daily volume sell signal and should suggest that AAPL has topped out here and should head back down to the bottom of its recent swing trading range near the 240 range.  Not to say that AAPL is the entire market, but to a certain degree it has been preventing the Nasdaq from falling apart.  The QQQ’s failed to trade higher than the apex of its symmetrical triangle today and still continues to be a good guidepost for the rest of the market.

A close under 1100 on the sp500 by the end of this week would go a long way towards setting up a hard down follow on week.

The weekly price chart of the sp500 shows that we currently mid week have a possible hammer reversal weekly candlestick.  The sp500 during the next two days ideally for the bearish case need to close where we did today or slightly lower near 1100 to keep this bearish weekly reversal hammer intact.

If we do finish this week in that stance then it would be consistent with a hard down week next week and maybe the follow on week as well into mid August.

To be more strict on the tape I think it is safe to say that the next two trading days really must close very close to today’s level or lower in order for a strong bearish trend change to take shape the  next couple of weeks.  If the next two trading days close strongly higher or near the top of this weeks range, it is going to limit heavy bearish chances next week.

Technically we are still trading at a lower high 1131.23 (week of June 25th) versus 1120.95 (this week) and I think it is important to keep that stance for the market to have a chance of bearish action next couple of weeks.

The weekly close is pretty much the bottom line.  The market could trade higher tomorrow, but then ideally Friday ought to make up for it and retrace the gains and ideally get back into the 1100 range or lower.

Despite my recent bullish tendencies I am becoming a bit concerned today about the uptrend.  I think it has exhausted itself today and may start to turn down tomorrow, perhaps very hard.  I am looking to go short the market tomorrow in the early AM via the various short ETFS and may be looking to do so as a position trade into the August 10th to 12th time frame.  I am still looking for bearish confirmation as we are not quite there yet, but we may get bearish confirmation either tomorrow or Thursday.

I think flexibility is key in the market right now.  Yes, I have had many different scenarios on a longer term basis about how this market will unfold, but I never want to get 100% married to one particular scenario.

Flexibility is your greatest ally in this market right now and this should be clearly evident if you look at a 2 month chart of the major indices.  It has been a series of violent large swing trading ranges of the ‘V’ shape.  The market is thrashing back and forth like a great white shark in the heat of a large battle in the ocean.  The market has still not shown us that it wants to trade in a clear persistent trend in one direction yet.  We are in the middle of the range and the true direction is still somewhat unclear.

Today the sp500 printed an indecision doji candlestick and was not able to get up to test the swing high of 1131.23 .  So technically we still have a lower high as of today.  If we blast higher tomorrow and test or exceed the 1131.23 swing high then I have to tip my hat to the bulls and it would maybe invalidate my short term bearish tendencies.

On the other hand, if we get another doji tomorrow, a bearish hanging man candlestick or a shooting star reversal candlestick then it will start to confirm my bearish feelings as of late.

Another reason for my bearishness today is that in many indices we are at the top range of resistance.  If you look at the XLF financials ETF you can see that today it is clearly right on the top range of resistance.  The pattern for many weeks is for this level to act as a selling point.

I was also looking over the charts today and it occurred to me that while the 1987 pattern similarity scenario in terms of time is pretty much dead at this point, I cannot help but think that it is somehow still alive when I do a side by side comparison of indicators versus price patterns.

The key dynamic in the 87 crash was that the market had broken north out of price downtrendline resistance and then formed a couple dojis and then went into a 10 day crash cycle.  This crash cycle was evident after it broke down through the solid red uptrendline as shown in the right half of the chart above.

The MACD had also started to cross above the zero line as a bullish indication in 1987 and the RSI had hit the 60 level.

Right now the market also has the MACD just beginning to cross above the zero line and also has the RSI at the 60 level.  These current levels are also coinciding with many indices hitting top of range resistance levels.  Plus, there is a potential bearish MACD histogram sell signal in development versus the last 2 weeks of price action.

I am going to go short if we get a confirmed MACD histogram sell signal and/or we break below and close below 1100 on the sp500 in the days ahead.  If the price of the sp500 travels into the red zone as shown in the chart above it is going to give my bearish scenario a lot more weight and confidence.

If we somehow manage to blast higher into the end of this week overtaking the 1131.23 swing high then I will obviously have to rethink these bearish feelings.

We are only 10 to 12 days from August 10th to 12th and it seems almost absurd that the market will be able to get a real decline into that time frame on such short notice.  But we have seen this market show us it has the ability to move fast, and the ability to change trend direction very quickly and persistently.

If you look at the PowerShares QQQ Trust Series 1 we can also see some interesting dynamics.

The PowerShares QQQ Trust, Series 1 broken down south through this symmetrical triangle in late June but since then has rallied all the way back up right into the APEX of this large symmetrical triangle.

This is interesting because this is a fairly large symmetrical triangle and generally speaking the apex of symmetrical triangles tend to act as resistance or support depending on the trading dynamics.  In this case I believe the apex is acting as strong resistance.

In my opinion it is going to be very difficult for the QQQ to blast above this apex resistance level.  If it is going to do it, then it probably ought to happen during the next 3 trading days and then I will be wrong and it will instead change this bearish setup into a bullish ‘busted symmetrical triangle pattern’.  A busted symmetrical triangle pattern is when you get an initial break down out of a symmetrical triangle but then a reversal and then new uptrend.  But it will not be considered ‘busted’ unless the QQQQ can blast higher the next 3 trading days.

My take now is that the QQQQ’s either tomorrow or sometime end of this week is going to reverse down again after having ‘bumped its head’ on a low attic ceiling with nails in it.  But again if I am wrong, we should know by the end of this week.

Look at the VIX (volatility index) we see that it will issue a confirmed MACD histogram buy signal with a close above 23.57 tomorrow.  Today it had an opening gap down followed by a reversal and nice close upwards.  This is a typical reversal signal from a previous downtrend.

The VIX has been trading in this somewhat large falling wedge pattern and if the pattern confirms a buy signal and moves to its projected target then it could move to the 47 and change level.

The VIX can move very fast if it needs to.  This falling wedge implies that a fast upward move could come out of nowhere.  If my bearish tendencies are wrong then the VIX will break below the supporting line of this falling wedge in the days ahead.

So again, flexibility is key.  This market has had a tendency of late to throw many curve balls and I see no reason why it will stop doing so for now.  The risk of betting to the downside now is that we are in this low volume slow trading period of end July and August.  It seems atypical for the market to make any kind of big move during this period.

But it will become very clear what the market’s intentions are within the next few trading days…

Here is the inverse head and shoulders pattern I was talking about yesterday on the SP500.  The neckline of this pattern is roughly 1100 and so it is pretty clear at this point that the battle line of near term consequence is 1100.  A big breakout above this line and it would go one strong step further to confirming the bull case. A failure below 1100 is not necessarily the end of the world, but it does become a problem as we get closer to the white short term uptrend line I have drawn in the chart below.

At this point I have to tip my hat in favor of the bullish breakout scenario for reasons I pointed out in yesterday’s post (Mcllellan Summation Index, Macd curling over the zero line).  A close above 1097.50 would confirm the MACD histogram buy signal.

If this really is a head and shoulders bottom it would be ideal for it to be confirmed with a strong move early next week that shows a wide price bar and preferably on robust volume.

The pattern if confirmed has a potential measurement target to 1180.  If the breakout does not occur next week then prices are either going to go sideways or down.  But again, the white uptrendline is where price must hold to keep the recent bullish tendencies of the market intact.