SP500

Today we saw big price destruction in the sp500 which gave back a good portion of the hard earned gains of last Friday’s reversal.  I was looking for a confirmation of last Friday’s bullish reversal today but clearly we did not get anything close to a confirmation today.  Instead we got a deep retracement that has to be truly testing the resolve of any bullish opinions.

Today the ARMS index closed at 3.8.  Not a record closing number but still in the high range of recent months.  And despite today’s high reading I do not see any new lows being taken out, not yet at least.

I have been trying to get into the mind of the market so I can figure out what it has in store for us this week to close the week  out going into Labor Day Weekend.  I am suspicious that today’s big drop and ‘give back’ of the action from last Friday is the beginning of another big down leg.  It just seems too convenient to give the bears everything they hoped for right on a low volume Monday to start this week.

The summation index still looks bearish and is in a downtrend but has not crossed below the zero line again (not yet at least).  The volume today was very light across the board which is part of the reason I am skeptical of the bearish action today.  Yes, we had plenty of price destruction, but where is the beef ?  The volume was absolutely pathetic today.

The volume analysis I did before still stands and is one of the main criteria that is keeping me bullish right now.  If this volume analysis does not work and not show some more bullish price action the rest of this week I might have to throw it under the bus.

Both the XLF, the SPY and the IJR did recent volume rests and reversals on 44 to 54% LESS volume and then closed back higher into the range.  So despite today’s big points drop, the volume analysis still holds in my book.  I have seen volume tests on 10% lighter volume that lead to big reversals.  But 50% volume reversals are rare and usually very strong signals.

The sp500 needs to bust through 1040.12 with strong conviction to flip me over to the bearish side again.  The XLF needs to bust down through 13.29 on a closing basis and the IJR (The S&P 600 small cap ETF) needs to close below 52.01.  If all three of these events occur during this week sometime then I will have to raise the white flag and declare the volume analysis a complete failure.

These volume reversals to me suggest that we should be heading back up to the top of the swing trading range.  The swing trading range is so large at this point that it could mean quite a large upside move.  The IJR chart is below:

I realize that is seems unthinkable that the indices could move back to the top of the range from a fundamental standpoint.  I too have a hard time believing that such a thing could be possible at this point.  Still, I am a very fearful long right now, but I will pull in my horns should the market tell me to do so in the days ahead.

But for now I am sticking to this forecast.  The IJR really looks quite strong to me in the chart above.  These small caps can show earlier signals than other large indices.  I am thinking the IJR will show the way for us.

The XLF daily chart below shows the same type of situation.

If I am correct then we should start to see some big signs of strength soon this week in the form of 20/20 candlestick bars also known as ‘belt hold candlesticks (wide price spread and closings near the highs).

A close look at the longer term sp500 chart shows that the sp500 really needs to start going up very soon otherwise it will be at risk of breaking the long term up trend line since the March 2009 low.  We are touching this long term up trendline for the third time which makes it significant.  We rejected it last Friday and bounced off of it sharply previous to that.  But this time we are hitting it on light volume and we have yet to see a strong reaction topside off of this line.  I have to admit that a big down week this week is going to bust this final bull market trend line and could perhaps seal the bear case.   On the other hand a strong topside reaction off of this trend line once again will confirm its strength and bode well for higher prices in September.

My biggest confusion over the years has to do with being able to separate the technical aspect of the market with the fundamental and news side of the market.  The news out there right now makes me feel like the market should drop 2000 points this week.  But the chart is telling me the exact opposite… and so the journey continues…

P.S.  My posting this week may be somewhat lighter than is usually the case.  Expect posting to be at regular speed after the Labor day holiday weekend.

This may be one of the most important posts I have ever written here at BOT.

There is a key technical analysis event taking place RIGHT NOW in the markets that forces me to tip my hat to the bullish side right now and advise extreme caution on any bearish bets going into next week.

Recently I did a volume analysis of the SPY ETF and it was flashing signals to me that the downward force in terms of volume was not enough to get the job done for the bearish case.

Today we are seeing the market rally and assuming the IWM closes above 60.68 then we will have a confirmed bullish buy signal in the IWM ETF daily price chart versus the MACD Histogram.

Best Online Trades is going long here based on the current setup and our indication before that we would do so assuming a confirmed MACD Histogram buy signal on the IWM.  It is not confirmed as of a closing price but I am speculating that it will be by end of day.

There are other things going on as well.  The volume today.  It is not even mid day or end of day.  But I can tell you right now that the volume on the SPY is already 140 million shares which is very heavy before mid day.  Whether or not we are able to get double this amount by end of day or close to 300 million shares remains to be seen, but it would be a very significant event if we do in my opinion.

The other important analysis has to do with the IWM Russell 2000 ETF chart structure.  Look at the chart below and notice a few important points about this chart structure:

If you look at the IWM chart there is an important context with which to understand the recent action in my opinion.  We have the long term bear market resistance line from the April 2010 highs.  This line was BUSTED with a price breakout on 7/23/2010 with two price bars and a sign of strength.  Volume was robust but not blockbuster volume.

So you had that initial breakout north from the bear market down trend line in late July 2010.  Then, the IWM drifted down lower in a retracement back down to the recent lows on LOW VOLUME in the form of a slow retest.

This drift down created a pattern that looks like a falling wedge formation (shaded in red).  Now today we are only slightly busting the top of this falling wedge formation on very robust volume.  This is an indication to me combined with the MACD histogram buy signal that we are going to bust through this falling wedge and head for the 66 range on the IWM which is the measured target.

The fact that we have fallen back down in the form of a double bottom and falling wedge on low volume is important.  I have seen many stocks behave this way at bear market bottoms.  They do an initial thrust higher trying to break out topside from bear market trend but then do a 100% retracement and double bottom retest on light volume.  Many times this type of market setup leads to a big topside move.

This post was written at 12 noon Eastern Time today.  It remains to be seen still how the market closes and whether or not it can close near the top of the range and on the robust volumes I am predicting for end of day.  A lot can happen during the second half of the market day, but based on this new look and interpretation of the IWM I have to take the bullish side here and go with it.  The IWM chart is speaking to me very loudly today and it is not looking bearish at all right now. 

The big money will be back in September to take this market in a determined direction.  It is still early, but I think they want to take it higher from here and current prices may be the final bear market lows right now.

Could it actually be possible that Glenn Beck, with his Hindenburg Omen talk on 8/25/2010 has actually nailed the final low in this market ????

The market today was unable to confirm yesterday’s candlestick reversal pattern on all the popular indices and the IWM Russell 2000 ETF was unable to confirm the potential bullish triple P  pattern on the MACD histogram.

The sp500 is showing that the histogram continues to show downward momentum and does not have any clear signs of reversal yet.

For the bullish case one can point out the relatively light volume today on the SPY ETF of only 224 million shares.  But a bearish case can still be made in that we don’t have any confirmed reversal and also that we are hugging the bottom of the swing trading range without a decisive downward break.

This hugging of the bottom of the swing trading range (and also very near support levels) is still potentially very bearish because it could set the market up for a ‘jumping of the creek’ tomorrow on the GDP report where the market busts through support after the recent 3 day build up.

It could go either way tomorrow.  I did not like the close today either.  I hate to say it, but this one is a coin toss.  I have evidence that seems about equal on both sides of the market.  So it would seem the GDP report in the morning is either going to gap and go this market up in the morning. Or gap it down below very key support.

The SMH in particular looks like it is hanging on by a thread.  It closed right at the bottom range of its supporting channel line.  But the volume today was really light on the SMH. 

I really thought we would not get a clear break up or break down signal until the next two weeks.  But there exists the possibility (based on today’s close and lack of confirmation of yesterday’s bullish candlestick and MACD Histogram setup) that we could get a significant break down signal tomorrow morning with the GDP.

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 sp500 today once again briefly pierced the lower Bollinger Band and the Bollinger bands themselves have continued to expand wider.  This is an indication that we are entering early stages of a volatility expansion which is in contrast to the volatility contraction that occurred during the last several months.  The movement higher in the VIX volatility index today is confirming this fact as it broke out today from its large falling wedge formation.

I really have not used Bollinger Bands that much in my analysis but I might start to use them a lot more because they can be a very useful tool for trend direction signals.  They are most useful to me when I see the Bollinger bands move from a state of low volatility (a contraction) to expanding volatility.  The expansion of the bands often signals the start of a new more volatile move.  The piercing of price under either the higher or lower band can be an indication that price now wants to trend or hug closely that particular Bollinger band line.

Sometimes price moves so fast that it can trade almost completely outside one of the lower or upper Bollinger Bands.  This is very rare and is usually a point where the market has climaxed and ready to trade sideways again.

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Today I give the bears 4 out of 5 stars.  I think it can be said with a reasonable degree of confidence that they got the job done and done well.  On the other hand, given the bearish news today, I would have thought a 5% down day would have been more appropriate.

After the gap down and downside follow through into the news the market got an extended typical rally going that probably had a lot of bears feeling disgusted once again.  But despite the attempt to get a strong hammer reversal by end of day the bulls did not accomplish anything significant in my opinion.  The opening gap was not filled and still remains open.  The other day I talked about how the very large WEEKLY opening gap higher in the TLT was a sign of strength and could lead to another few weeks of upside or a parabolic blow off.  Part of the reasoning for that is the view from the Japanese interpretation of gaps is that they can serve as ‘opening windows’ or beginnings of very large moves.  But that interpretation of course depends a lot on the context of where the gaps are.

So in my view, the daily opening gap down in many of the major indices today will serve also as an ‘opening window’ towards more weakness into the end of this week.  Eventually there will be a capitulation, but I think it is way too early to be talking about that yet.

The chart above shows the long sideways channel trading range on the SPY ETF and shows clearly that today’s gap down on high volume broke below the channel trading range.  I see this as initiation of a larger move down.

In order to cancel the bearishness of this gap down today the SPY ETF is going to have to close at 106.88 or higher during the next few days.  That is an extremely unlikely scenario and I do not expect that to occur.   However, it would not be that unusual to see a rally tomorrow right back up to the underside of the channel that ‘kisses’ it briefly (to a maximum of 106.60 on the SPY ETF).  If that happens it would serve in my opinion as an outstanding ‘reload’ shorting opportunity or new shorting opportunity.  I am still heavily biased to more downside price action as the week progresses. . .

Here is the Bollinger Band comparison chart between the time periods 1987 and 2010.  The time similarity does not exist whatsoever.  I am only trying to identify the overall pattern similarity irrespective of time.

The chart below pretty much does the talking.  The market in both time frames does a double bottom on the lower Bollinger Band line and then goes up and through the mid line for a final rally attempt which fails at the top Bollinger Band line.  Then a big sign of price weakness breaks the market back through the red dotted mid line again and price finds short term support at the bottom Bollinger band line in the form of reversal hammers.

Then one last very minor rally attempt is done back towards the mid dotted line but that fails and leads to a very sharp decline that is indicated by price hugging the bottom Bollinger Band line.

The expansion (curling outward) of the Bollinger Band lines begins to occur right now in the 2010 time frame and is an indication of a volatility expansion that is about to start.  Of course we already know the volatility expansion that occurred in 1987.  Whether or not we get the same degree of volatility expansion now remains to be seen. . .

Here we are early in the last week of August 2010 and guess what?  My 1987 crash fantasies are creeping in again.  Perhaps I need to dial a 1-800-crash-aholics anonymous support line if there is one?  When the market gets into a stance that I find somewhat similar to the 1987 crash I start to look at the charts and indicators and see if there is any interpretation that could result in a similar occurrence.  Every single time I have done this in the past has failed so far.  But now I am about to do it again…

I am sure you have already read about the double Hindenburg Omen sell signal which I previously never really followed.  It seems to have a very interesting record which I was reading about over the weekend.  It is interesting to me that this signal is now ‘live’ in the context of the overall price action right now.  It is also interesting to me that the expected occurrence of the crash could start as soon as 1 day or several months.

Right now there really does not seem to be any price pattern symmetry between the two periods in terms of time.  The 1987 topping formation formed rather quickly and resolved itself just as fast.  The current topping formation since our April 2010 high has dragged on forever it seems and the price action appears much more complex.

Still, the overall pattern of the 1987 stock market crash was basically an A B C down as well as some other characteristics which I will get into in a minute.  The B to C portion of the 1987 crash was the final upwards retracement rally before the plunge.  In the 1987 period this was a 61.8% fibonacci retracement.

During our 2010 upwards B to C retracement rally we only managed to get to a 50% fibonacci retracment level near the 1030 level (actually it was slightly more than a 50% retracement but not quite 61.8%).

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So far the action to start the very early part of this week looks very bearish to me.  I really think this is the week that we finally start to see some very significant bearish follow through for a change.  The S&P 500 futures were typically trading higher Sunday night and then into Monday morning.  But so far the early morning bounce seems to have faded quite a bit.  There is a steadily climbing mountain of evidence that suggests downward price momentum should increase the next 1 to 3 weeks and in particular this week.

Today I see that AAPL has (so far) bearishly engulfed last Friday’s gravestone doji and may finally get a break down from its large trading range.  GE has also bearishly engulfed last Friday’s candlestick (so far) and is currently trading below the May 6, 2010 flash crash intra day low.

I would really like to see the SPY ETF get down near 106.75 to end the day today as it would strongly confirm the daily MACD histogram sell I was referring to last week.

The one nagging factor that makes me nervous about being ‘all in’ bearish is the lack of heavy volume today.  The week is just starting off and the big money is headed for the beach.  I am going to become a lot less concerned about volume if we can manage a daily MACD histogram sell confirmed signal today and some real weakness into end of day.

I see the 25th to 26th of August this week either serving as a massive acceleration point down for the market or possible low.  It is looking like the 26th will be an acceleration point instead of a low right now.  It is impossible to figure out until we see how the market looks going into the end of the week.  The speed of price action will be the determining factor.

I really do not want to see any price action trading above 108.25 on the SPY ETF this week.  If you look at the chart above you can see why.  I want price to stay ‘broken’ under the up trend line shown by the yellow arrows.  If this week is destined to be a hard down week, then there is absolutely no excuse for prices to be trading above this up trend line again.

Note: The above portion was written near mid day.  The below portion was written at the close.

I am quite pleased with the bearish closing action today.  The risk today was that some of the reversal hammers shown on a few indices would be confirmed as bullish today.  This was not the case.  Instead what I see at the close is bearish continuation and bearish engulfing showing that the bears want to exert some more control as we get into this week.

We could be in for 2 really wild down weeks with a possible massive acceleration or epicenter of the decline either mid week or Thursday of this week.

AAPL looks extremely bearish into the close (with the exception of relatively light volume).  The bulls will say that every time AAPL has traded at the bottom of this very long trading range a strong bid came in and supported it back to the top of range again. This is true, but my current read of both the daily and weekly chart shows that this time we will get a breakdown that lasts.

I also see at the close today that we have a confirmed daily MACD histogram sell in the sp500.  We needed to close under 1070.66 today to get that confirmation and we did get it with a close at 1067.36 today.

I got a weekly confirmed sell on the sp500 to end last week.  The weekly candle on the sp500 looks quite bearish going into this week.  I suspect we will bounce higher early in the week for a typical mutual fund Monday but then end the week very hard down.

The most recent two weekly candlesticks look similar to two other monthly candlesticks that occurred way back in 2002.  I don’t know if they fit a precise candlestick pattern setup but I think the comparison is still interesting.

The first weekly candle was a belt hold candle strong full candle down.   Then the next candle was an attempt at a rally but then a failure and showed a topping tail and closed near the low of the candle.  In 2002 that led to the next month being hard down.

Since the current pattern is weekly one would presume that the next week will end hard down by Friday.

I think we break below 1063 by end of this upcoming week.  Ideally an early bounce this week would not get above the 50 day moving average at 1090.

I really have not talked much at all about the large head and shoulders topping pattern in development.  But that is still in play here as well.  The right shoulder appears to be on quick formation now and should slice through the neckline as a break of support.