Online Trading

If you have been following my posts you probably know exactly what I am going to say in this post.  The bulls won today very clearly and it was a decisive day in terms of volume (276 million shares on the SPY) and price strength at resistance.  This was not necessarily blockbuster volume but it was surprisingly robust especially considering the volume pattern since late April 2010.  I believe it is time for the bears to raise the white flag and move on.  The market is also starting to break out above the diamond chart pattern I talked about yesterday and should now be implying that this diamond pattern was a reversal pattern, not a continuation pattern.

The bearish MACD histogram setup was not confirmed today clearly.  Instead we now have a bullish triple P pattern in the MACD histogram and it will be confirmed if we close above 1097.50 either tomorrow or next week.  Instead of the MACD failing at the zero line it now looks like it wants to blast above the zero line which is quite bullish.  In addition relative strength index is itching to blast higher than the 50 range midpoint, another bullish sign.  The summation index which I was concerned about yesterday because it ticked upwards did so again today and clearly shows new momentum is now topside.

Staying with the bearish case because of ‘bad news’ is usually never a good idea.  The problem with news is that the mainstream financial media chooses which news items they believe are the most important.  But in many cases or perhaps most cases the news items they choose as headliners on a daily and weekly basis are usually just a representation of the crowd mentality and usually the crowd is wrong.  So everyone gets sucked into these major headliner news items (ie. Europe debt problems, oil spill) but these news items are not necessarily what the stock market really cares about.  The market cares about supply and demand and ultimately the battles will be won or lost based solely on those factors.

The current setup in the market reminds me a little bit of 2003 when the market was all nervous about us going into Iraq to start war.  There was confusion about whether the dropping of the bombs would tank the stock market or rally the market.  As it turned out it caused the market to rally big time.  The series of bottoms leading up to that 2003 turning point was a series of retests each time on lighter volume.  This is also what I have seen since the first May 6, 2010 low.  A series of lows each on lighter volume.  And now we are seeing an upside expansion of volume.  If it walks like a bottom, talks like a bottom and acts like a bottom it probably is.

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According to Larry Pesavento the August 12, 2010 date is going to be ‘in the news’ because it contains the now much talked about cardinal climax aspects that are supposed to be extremely negative.

You can listen to his comments yourself right here (click arrow).

Source: http://commoditywatch.podbean.com/

Note that he makes the comment that the date can invert which could mean that it would be a high instead of a low.  That is a very important disclaimer which probably most astro predictors should always mention.

I am a bit confused why Larry is talking about August 12, 2010 and Arch Crawford is talking about August 1, ‘give or take a week’.  So perhaps it is safe to say that the first half of August is just plain negative with August 12th maybe being the most likely key date.

The astro folks have set quite a high bar of expectation for August 2010.  From my understanding this combination of aspects is the most focused and involved for hundreds if not thousands of years.

The bottom line is sometimes they work out, and sometimes they do not.  Sometimes they may just lead to a relatively obscure type world event that has absolutely nothing to do with economics or the stock market.

The fact that these targeted dates are in early August leaves me very suspicious that anything very market moving can happen for the simple reason that volume is typically very weak during that time frame.  If there is any effect perhaps it will just be a one day shakeout type move.  Also the effect does not necessarily have to just affect the stock market.  It could effect certain commodities as well, such as natural gas or gold ?

Either way, it will be interesting to see what happens if anything.  If this astro aspect does work, I hope no one gets hurt during it.

This August 12th, 2010 is either going to be one of the greatest Astro prediction forecasts ever made or a total non event… We will know in about 3 weeks from now.

Yesterday the sp500 printed a doji candlestick with a narrow range.  Today’s reversal looks like a hanging man candlestick which is also potentially a reversal in trend type candlestick.

However both of these potential reversal candlesticks are still as of yet unconfirmed because we did not close below the low of either of them yet.  I don’t know if we still can or not, it may be a toss up.  The bears tried to pull us down from this downtrending resistance line I pointed out yesterday and they did so for a while but then could not finish the job.

It would help the bear case a lot if they can manage to get a hard down day tomorrow as we are still contained within the bear market downtrend as defined by the blue dotted line.

Having said that it would also help the bull case quite a bit if we are able tomorrow to blast into the green shaded area on a Friday to close out the week.  These doji and hanging man candlesticks for now are still to be interpreted as a pause in the current uptrend instead of a change in trend.

I am a little bit skeptical that anything of magnitude will be accomplished tomorrow given it is a lazy summer Friday and option expiration day, but I am open to be surprised.  It is worth repeating that the market is indeed at a very important juncture here as the reaction or lack thereof from this level could have a lot to do with how the second half of July 2010 looks.

The last 6 or 7 trading days has quite a similar look to the previous two large scale bear market rallies we have had since early May 2010.  Those in the bearish camp would point out that bear market rallies tend to be very sharp and quick and of considerable magnitude. 

Looking closely at the mid June rally that failed one can see clearly that it also had a series of dojis and reversal candlesticks.  The last candlestick on 6/21/2010 was a bearish engulfing candlestick and it lead to the big drop into early July.

We are also still trading at a lower low (the forth one since late April) consistent with a downtrend. 

The market may trade higher into the green shaded area and then reverse very hard down into the close tomorrow, that is probably the most bearish outcome I can think of at this point.

So there are several scenarios, but I am waiting for the market to give a clear signal about it’s next intention.  Given the current location of price relative to the downtrend and the lack of confirmation of the two most recent candlesticks I have to say it is ‘still to close to call’ at this point.

There are so many buy setups right now it is not even funny.  A very long time ago I did a post on how DryShips Inc was headed for a triple bottom.  As it turns out the triple bottom never arrived.  Instead DRYS broke through the downtrendline indicated at the link above but then just meandered sideways to flat for a very long 8 months or so.

But more recently DryShips Inc went into a mini death spiral and actually did create a triple bottom test and did so with an interesting characteristic.  The recent mini death spiral was done with a series of persistent but very narrow range candlesticks showing there was less interest in the decline and the speed and conviction of the decline was definitely lacking.  It was also lacking in terms of volume and you can see from the chart below (a weekly price chart of DRYS) that the recent retest was done on comparatively less weekly volume than the two previous retests.  That is another bullish sign.

We also have weekly RSI just above the 30 level and starting to turn up and creating a higher low than the first bottom.  There is a bullish triple P on the weekly MACD histogram which would be confirmed on a weekly close above 3.91 this week.

Also DRYS just recently on the daily chart broke up and through the near term down trendline.

DryShips Inc looks like it has room to move up to 5 before it starts to get into more heavy congestion.  There appears to be a correlation (definitely not  perfect one) between DRYS and the price of oil.  The huge mega run that DRYS had in 2007 to 2008 correlated nicely with the huge surge in oil to 145 a barrel.

Recently Crude Oil Futures have been going sideways for quite some time perhaps building bullish cause for a renewed move higher into eventually 120 range.

So DRYS could get some wind it its sails with a new move in Crude Oil and a completion out of this base.  Bear market bottoms sometimes take a very long time to complete and DryShips is no exception to the rule.  I would not consider DRYS to be completely out of the fog until and if it is able to break higher than 5.5 level.

After lots of thought over the weekend and after looking carefully once again at the charts right now I have to take an aggressive bullish stance on this market.  I think there is a decent possibility we could see between 1300 to 1400 by the end of this year.

If we do pull back I do not expect any pullback to break under 1040 and definitely not under 1010.91. If we do someone manage to break under 1010.91 or even 1040 in the future then I will have to rethink my stance.  As indicated in a previous post 1010.91 marks almost a perfect .382 fibonacci retracement of the entire rally that began since March 2009.  As long as this retracement level holds I expect the market to continue to power higher in the near term possibly as high as 1131.23 to test the 6/21/10 swing high.  One of the reasons why we are trading so persistently higher right now is because the market is ‘feeding’ off of a bullish divergence not only between the MACD and price but also between the McClellan summation index and price.

Of course we will not go up in a straight line and we are also heading fast into the lame summer low volume months.  Therefore I expect that we will cascade higher into end of July creating some sort of high below the April 2010 high and then I expect us to start selling off moderately sometime in August.  There is a decent possibility we will create a cup and handle type pattern.  The handle portion could start to form sometime in August and then curl back up and engage the market into an explosive topside breakout above the April 2010 highs.  There really needs to be some type of a handle and it makes sense because I am sure there are plenty of people who want to get out at ‘break even’ who were too slow to sell during the big drops of recent months.

It seems like everyone is afraid to be aggressively bullish right now.  It is a very unpopular stance in my opinion.  The accepted stance is the depression scenario and 1930’s parallel which in my opinion is flat out wrong.  I became tempted into this scenario for the last few months, but now I have done an complete 180 degree turn and now see a melt up instead of a melt down.  The charting parallels between the mid 1970 time frame are much more appropriate at this point in my opinion.  The current rally should have plenty of rocket fuel in the form of stubborn bearish sentiment as sentiment trader short term readings are currently indicated at ‘extreme pessimism’.

It is extremely difficult to switch from a very bearish stance to a very bullish stance overnight.  It goes against basic fundamental human nature.  To switch from extremely bearish to extremely bullish is a little bit like experiencing the emotions and sadness of a funeral proceeding for the first half of the day and then somehow switching 180 degrees for the second half of the day and acting very jovial, happy and the life of the party type mindset.  It is an very unnatural thing to switch emotionally so quickly like that.   This is probably one of the most difficult aspects of trading because it goes against fundamental human nature.  It is almost as if one has to have the ability to completely ‘step out of the body’ of the previous emotional state and then rapidly change ones emotional outlook towards the market.

Remember the March 2009 bottom?  It was a ‘V’ type bottom created by high levels of fear.  The recent bottom of 7/1/2010 is looking like similar ‘V’ type bottom typical of bottom type formations on high fear.  Bottoms are famous for being sharp and quick unlike the topping formation of February to March to April 2010 which was slow and gradual.

I don’t know why I got so obsessed with deflation.  Inflation Deflation Disinflation, it is all just one big confusing mess to me.  I think I can understand why they sometimes refer to the field of economics as the ‘dismal science’.  It is such a complex science and the variables seem to change all the time and probably most economist predictions turn out to be wrong.  Is it even fair to compare the economy of now to the economy of 1930’s?  Isn’t that sort of like comparing apples and oranges?

I must admit I became really obsessed with the deflation scenario in recent months.  Several months ago I had a pretty firm conviction that we were in a mid 1970’s type market environment.  Now I am starting to open up my mind again to the mid 1970’s scenario time frame and throwing the deflationary depression scenario into the garbage can.  I am not fully switched over but I probably will be soon.  It will depend on certain levels being reached and the overall character of the market action in the days and weeks ahead.

I think it is safe to say that the elliottwave folks are in the deflationary depression scenario looking for much lower prices perhaps in the DJIA 1000 range into the next 6 years I believe.  It is also somewhat widely known that there has been a comparison made between the 1929 crash, then the 1930’s rally and then the follow through collapse into 1931 and beyond.

No disrespect meant to the elliottwave folks (they have a lot of clout and probabyl a HUGE subscriber base that influences a lot of trading bloggers and other market participants) but I am really starting to wonder right now if it is even a valid comparison to make between the early 1920’s run up to 1929 and then the 3 year collapse into 1933.  I really do not think it is and is maybe a misguided approach and invalid.  Be very careful about getting married to a deflationary death spiral scenario where you feel that market must break the March 2009 lows and cascade down as was the case in 1930 to 1933.  For those who like to trade, it is very important to keep a flexible open mind on longer term market direction.  Often times it is the very subtle hints and clues that determine the ultimate longer term direction of the market.  I mean why can’t we just stay in a disinflationary period instead of a deflationary death spiral ?  Seems possible to me.

We have been in an enormous sideways trading range since the year 2000.  So basically we have been in an almost 10 year bear market already.  From the year 2000 to the year 2007 we did not go straight up in persistent fashion as was the case between 1922 to 1929.

So the entire context of our current market is very different than that time frame.  If I had to make a comparison to a previous market structure then the 1967 to 1975 market periods seems much more valid to me because it was a similar sideways bear market with an enormous trading range with an in between huge 2 year bear market decline into 1975.

The decline from 1972 to late 1974 had a similar structure in terms of time and pattern and depth.  It was also similar in that the final swing lows during September 1974 slightly pierced early 1970’s support but then closed back inside the range.

Unfortunately the time scaling in the two time periods is not correct but you can still get the basic idea of what I am talking about.  You can see the 10 year bear market duration.  Then the recent 2 month correction and in the case of the mid 1975 period a new rally that went almost back up to the all time highs!

The decline in the sp500 that started at end of April 2010 so far has lasted about maybe 2 to 2 and 1/2 months and it has been at a total depth of 14.6% from the intraday highs in April 2010 to the intraday lows in June 2010 and also a .382 retracement.

The corrective decline that began in July of 1975 and ended in September of 1975 had a total depth of 15.5% and was close to a .382 retracement of the previous rally.

The chart above pretty clearly shows the possible dynamics of what is going on here.  This seems like a much more valid comparison than any 1930’s scenario.  I am not saying that the economic factors are similar to 1975, just the chart structures and the current turning points. 

I forgot to draw in the 50 day moving average and the 200 day moving average in the chart above but they show a similar stance in both time frames.  And it is interesting to note that in 1975 the 50 day moving average was moving down at a very rapid pace almost certain to cross the 200 day moving average on the downside but it only briefly touched it and then SHOT UP LIKE A ROCKET and completely evaded a bearish death cross.  The only way it was able to evade the death cross was through a very rapid and steep price advance that wasted no time.

In the current time frame of 2010 we already know that the 50 day moving average has officially crossed the 200 day moving average giving a confirmed cross.  The market can still change the configuration of the two moving averages by doing exactly what happened in the 1975 period – a steep and persistent rally the recovered a lot of lost ground FAST.

Everything I just wrote in this post is still on the condition that we do not break down below the recent lows and go deeper past a .382 retracement.

Finally here is the super long term QUARTERLY candlestick chart of the sp500.  Note that the April 2010 highs where the sp500 stopped was consistent with resistance ranges and the recent decline stopped consistent with supportive ranges particularly back to the 1998 period.

The key thing about this long term chart is the MACD histogram which is still showing a rising slope and that the current market wants to trade higher after the recent 2 to 3 month consolidation.

Clearly the quarterly price chart is extremely long term and is like a massive oil tanker.  It is very hard to change its direction once a certain amount of momentum is achieved.  It is at least potentially a very important massive bull market signal.  But even if I am correct and we do trade back up to 1400 to 1500 range, I still feel that market will fail there from heavy resistance and succumb to another bearish quarterly triple M signal.

The quarterly MACD is starting to curl up may lead to an eventual bullish cross just as was the case in the mid 1970’s quarterly MACD.

And finally one last important point.  The Quarterly MACD crossed to the downside on June 30th, 1930 and crossed to the upside on December 31st, 1934.   This is just one more reason why the comparison is most likely invalid to the 1930’s scenario.

In the Near Term

What may happen in the near term is a bullish move to the .618 retracement of the entire bear decline.  This is what happened in the recovery rally of the 1975 period and would put us in terms of the DJIA near the 10600 to 10700 range which would also correlate to the top of the expanding triangle formation.  It could be quite a persistent rally up to that point given the current apparent bullish divergence.

I repeat… be very careful about assuming that stock prices must go down into a spiral as was the case in the 1930’s !  The correlations do not seem to match time wise.  Those who are talking about a total collapse below the March lows and 30% unemployment etc. etc. should seriously consider comparing the 1970’s period as an alternative.

A flexible open mind is key!

The 1095 level seems to be the line in the sand for the bear case at this point.  It is a simple down trendline but it is very important.  I mentioned yesterday about how we have a positive divergence in daily MACD versus price in the sp500.

It is an important divergence and shows that the recent price decline of last few weeks was on momentum only and lacking some conviction despite the bearish appearance.  The bullish divergence is not quite yet confirmed but it is pretty close.

The 1042 level was broken through yesterday with a big sign of strength but it was typically lacking in volume as usual.  A pull back to 1042 in the days ahead would probably still keep the bullish divergence intact.  The only thing at this point that would destroy is a very fast decline down next day or two that also breaks below 1042 again.

Assuming the market is able to hold its ground the next week then the next major issue is the 1095 down trending resistance which has up to this point been the defining downtrendline of the bear trend that began in April of 2010.  If we fail and start to break down again from 1095 (assuming we even get up that high) then it would suggest this bearish trend is intact.  But a confirmed breakout over this level is going to start to create some real doubt about the bearish trend.

I stated before that the July 2009 head and shoulders topping ‘fakeout’ that some were comparing the current market structure to was invalid because the alignment of the 50 day moving average to the 200 day moving average in the current time frame was the exact opposite.  Now I am thinking that this statement is not really correct.  If price is somehow able to rally strongly enough and persistently enough then it could potentially cause the bearish 50DMA over 200DMA cross to be a false signal.

I don’t know if it will be a false signal or a correct one (the 50DMA over 200DMA Cross) this time around, but the 1095 level is going to be one important guidepost in determining if it is a real signal or a weak one.

Lets drop the crash fantasy thing for now… Based on today’s action we can clearly see that the sp500 tried to rally above the 1042 level but then failed at breaking through.

This 1042 level is really very important as a resistance zone.  Perhaps I am stating the obvious but it is true.  And to be honest if we are to expect more rapid weakness I really would rather not see a full price bar break above this level and back into the range.  If it did it may evolve into a 2B buy signal and could propel the market higher up into the range, even the 1100 area.

I would rather see this market pinned down under 1042 in the days ahead.. it is a very important resistance level.  There is also a sort of broadening triangle that has formed and it could mean more rally is coming…  But that is going to depend on a break above 1042.  So again, for the sake of the ultra bearish scenario I hate to see us jump over that level with conviction…

I must admit I am starting to think this is taking too long..  the tape is still bearish, but this broadening triangle is bothering me.  And I am going to be bothered a lot more on a move with conviction over 1042…

But strangely enough that one day last rally in 1987 on October 13th also thrusted back into the trading range.  But then the next day broke back down below it easily.  If we blast to 1050, 1060 or 1070 then it would really be necessary to have the market break down very quickly again back under 1042, otherwise the risk rises substantially that the market trends up to the top of the range again possibly near the 1100 area.

I have no idea what price we will close at today.  But ideally somewhere close to 1045 would be ideal.  It would potentially set up the final catapult needed to flip this market around one last time.  I think the bears should be hoping for a strong close today.  It would help the pattern similarity.  On the other hand, to expect an exact mirror image is misguided thinking as well.  Market movements rhyme.  They are never exactly the same.

I do have to repeat that the absolute last thing I want to see is another very bullish follow through day on Wednesday.  I suppose we could say that ‘max pain’ is the 1070 level on the sp500.  Anything above that and this pattern similarity will start to crumble very fast.

The market was declining 7 or 8 days down in a row and it was starting to break some serious records.  Certainly a bounce was overdue and today looks like that bounce has arrived right on schedule.

The time factor is still critical in my opinion.  This is a short week anyway. So there are really only 3 trading days left for the week after today and then we have the eclipse on Monday the 12th of July.  So after today that is a total of 4 full trading days.  It does not seem like a lot of time, but the fact of the matter is that this decline started at the end of April and has been progressing since that time, so usually one tends to see the most price movement during the capitulation phase.  As I mentioned in a previous post I would rather get the majority of the decline completed by Monday the 12th of July before we get into full blown earnings season.  If we drag on too long here there is a risk of entering the highly risky up and down volatility that is usually associated with earnings season. 

In the chart above I have plotted the 1987 and 2010 price moves with Bollinger bands.  The Bollinger bands show that if we are to continue the pattern similarity then today’s rally should stop somewhere near the mid point bollinger line and ideally it would stop at 1045 to create some nice RSI (relative strength index) symmetry as it did during the 1987 period.

I have also drawn in the hypothetical price moves that could lead into July 12, 2010.  If we close at 1045 or higher today, then ideally you would want to see the next day ENGULF todays move as well as the previous two days and maybe close near the bottom of the last few days range.

My sense is that we are at the end game during the next two weeks, the final stage of what I think will be a mega crash.  I sense this from my extended observations of the 1987 price chart versus the 2010 price chart.  The structures are so similar it is not even funny. 

Just to sum up some of the reasons why I believe a mega crash is likely to occur:

• The rally since the March 2009 lows was a low volume manipulated rally by government interests.  Markets can only be manipulated for brief periods of time but ultimately they tend to resume to where they were trending before the manipulation and reflect real economic realities again.
• The market right now is cranky, in a bad mood, and has a bad looking nervous tape.  That is not the type of action you like to see for new bull trends.
• The rally from the March 2009 lows was arguably an ‘automatic rally’ given the nature of the severe plunge into 2008.  The downside follow through after automatic rallies are complete in my observation has many times led to crashes (at least in individual stocks).
• IF we are really about to enter a massive deflationary economic spiral it is not uncommon for the market to signal this fact with some type of ‘shock and awe’ campaign.  A big crash would do the job and signal to the world that the market has started to price in a zero growth deflationary environment.  The market may suddenly start to build in price to earnings ratios of 1 to 5 instead of 15 to 20.
• The Jobs Killer
• The pattern similarity to 1987
• The Astro Cardinal climax aspects which kicked in late June and seem to be exerting some serious downside pressure on the market now.
• Almost no one is calling for a devastating rock bottom crash where prices go down and STAY DOWN.  Actually this is not entirely true. Richard Russell has been talking about a crash as well as Bill Mclaren.  Bob Prechter is bearish and looking for much lower prices but I have not heard him specifically talking about a huge down move happening in the next couple of weeks.  Perhaps he has for his paid subscribers (see elliottwave links on left sidebar).  There have been plenty of more underground type sites and blogs looking for a crash however, but not too many mainstream sources from what I have observed.

I have spent many many hours staring at and studying the nuances of the 1987 topping pattern as compared to our current topping pattern.  The pattern similarity is strikingly similar.  The candlesticks and engulfing patterns are similar.  And the final act, the subtly down sloping decline leading to a vertical decline is also similar.  We are situated right now in the subtly down sloping decline.  The most important question now is, do we transfer into a persistent vertical decline as 87 did. The time similarity is what is missing.  The 2010 pattern is taking longer to form and this may or may not destroy the correlation.

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