Possible Gap Fills and Extended Correction to Start Going Forward

The market is looking a bit exhausted at this point.  I issued a BOT Short Signal in my previous post because there seems to be enough evidence building up that says we should at a minimum do a gap fill of several days ago and maybe some more downside after that to work off the extreme overbought in terms of indicators but sentiment as well.

First before I forget, I wanted to mention that I happened to catch Glenn beck this past weekend except this time he was on television instead of radio.  The topic of his show was about how the dollar is going to absolutely collapse and how gold is going to go up 200 dollars.  He had some book author on who kept on ranting about how there will be a scenario of a total collapse of the dollar in 15 days and Glenn Beck had a white board up showing a timeline.

Anyway, my point in bringing this up is that Glenn Beck is starting to become an outstanding contrarian indicator.  In a post I did way back in early September 2010, Glenn Back was talking about the Hindenburg Omen stock market crash signal and this sentiment helped to mark the bottom.

But now, perhaps in a more indirect manner, he devoted his Sunday show and had two authors on talking about how the dollar is going to totally collapse 10 to 15% in a few days and gold will shoot up $200 in a day!

BZZZZZZZZZZZZZZZZZZZZZZZZT.  Wrong answer.

It could very well be that Glenn Beck is nailing the final low in the US dollar Index psychologically.  This could correlate to a possible nasty correction in the stock market and precious metals.

I have written about the US dollar index several times in recent weeks.  My main points were that the US Dollar was at triangle support of a 3 year supporting up trendline and it was critical we hold it. 

But there was also a recent break down under the 3 year uptrend line and it caused me to consider the possibility that he US dollar would get crushed from here since it could violate under the trendline.  But in the same breath I also indicated that it was hard to conceive the US Dollar collapsing too much farther down from here given the extreme bearish sentiment and almost total lack of dollar bulls sentiment wise.  It may be that the sentiment issue will win out here.

usdollarindex20101109

Today we see gold and silver do huge bearish extremely high volume piercing pattern reversals (so far unconfirmed) and we also see the dollar surge higher today that now makes the monthly candlestick look like a reversal hammer.

It is still very early in the November monthly price candlestick on the US dollar index to say that we have a confirmed hammer reversal.  But so far at least it is looking promising.

If it is going to be true that the US Dollar index is setting up for a monthly reversal then one has to consider how significant the reversal is and how long lasting it is.  Why? Because a significant monthly reversal in the dollar would seem to bolster the case of a more extended down more in the stock market.  At least this is the correlation that has been working for quite some time.  Whether or not the stock market can start to ignore this correlation is an open question.

Other Observations

Looking at AAPL Apple Computer today of the move that began in early September 2010, it looks to me that Apple computer is trading higher in a ‘shortening of the thrust’ pattern.  This is a Wyckoff term which points out that AAPL has had 3 advancing legs higher, but each one has been successively shorter and the break out to new highs has been successively WEAKER, especially the most recent one.  The RSI on Apple seems to be confirming the shortening of thrust and I think AAPL breaks down from here.  I am seeing this in several other important stocks as well.

Gold and Silver had HUGE reversals today and tells me very clearly that they have topped out for now.  The volume seems to suggest climax buying and then violent reversals today.  Using gold and silver as leading indicators seems to support the case of a stock market correction as well.

The Big Gap Fill

Gaps act like support and resistance.  There are huge gaps on the SPY and the DIA and the several other ETFS.  The volume that comes into those gaps assuming we trade down into them and fill them will be important to watch.  If we trade into those gaps on much higher volume that they were created with it could become a problem later.

The percent of stocks above 50 day moving average chart is starting to curl down again now and could start to build more momentum to the downside next week.  This would seem to indicate that stocks are going to stall from here.

I already mentioned the bearish MACD histogram setup in my previous post to this one after I issued the BOT Short signal.

The summation index looks like it is double topping similar to the April 2010 top.

If I am correct that this is some type of top, the degree of it is unknown to me at this point.  We already know that we have monthly confirmed bullish buy signals on the MACD long term monthly chart.  But we still need to keep an open mind.  I have my 1975 scenario and sp500 blasting to 1300 or 1400 in my mind.  But we have to take the market as it comes and see what it wants to tell us.

The fact of the matter is that the sp500 is right at the April 2010 highs now on the monthly candlestick chart.  One of two things is going to happen here.  Either we continue to blast higher above the April 2010 highs on the sp500, OR we start to sell off into November and create a possible gravestone reversal doji or a hammer reversal candlestick on the monthly chart.

If that happens then it would seem to confirm a theory I had before which said that ‘a bunch of people are going to want to get their money back from the April 2010 highs’.  That could be the selling pressure we are seeing now in the sp500.

The daily MACD on the sp500 is starting to curl over down again after staying way up in the clouds.  I can guarantee you that at some point the daily MACD will return back to the zero line and that will mean that prices either trade sideways to consolidate or they head down a bit faster.

I don’t want to get too bearish too fast this time.  But I am on alert for more volatility and want to see if the market can show a much more meaningful sign of weakness as a clue to what might be next.

But the dollar is the big story and also bears close watching.  If it truly is doing a major monthly reversal then I don’t see how stocks and metals are going to be able to stay up given how lofty a run they have had.

In the short term I am expecting a GAP fill on the major ETFS SPY DIA and the Nasdaq Composite and NDX.  Then after the gap fill I am expecting some type of thrust up again, and then maybe another big down after that…

Lets see how much weakness can come into the market.  This market has been a stream train on steroids as of late…

I am temped to go long the TYP ETF here but think it needs to cook for a few more days.  Will watch it closely this week.

Posted in Index Trading, Market Timing, SP500, US Dollar Index
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8 comments on “Possible Gap Fills and Extended Correction to Start Going Forward
  1. Geoff says:

    The Aall Investor Sentiment Index for wk ending Nov 10 showed 57.5% Bullish – – a jump of 9% over the preceding week and 20% over the long term average for bullish.

    As I feared, the 38 string of positive days of moving average of 10 day Advance Decline was halted, but only with ONE day in negative territory before starting a new string of positive days – – yesterday was day #10 in a new positive string!

    This market has absolutely NO FEAR. The market is convinced that FED POMO will forever goose the market higher. Over the last week there has been a lot of worldwide attention (negative) to the FEDs latest QE2. Other countries are getting fed up with weakening dollar. Geithner repeated last night that US policy is not to weaken the dollar. He has said that before but no one believed him, least of all the market. But this time “maybe” he will have to put some lipstick on the pig to be taken halfway credibly.

    This will end badly. But when? Seasonally, this is absolutely not the time, But sentiment indicators really do need to be reset lower, a lot lower.

  2. Geoff says:

    from http://www.zerohedge.com today

    QUOTE Insiders have officially marked the top of the stock market: last week’s insider selling of all stocks (not just S&P) hit an all time record of $4.5 billion. This is the biggest weekly number ever recorded by tracking company InsiderScore.com: as Sentiment Trader highlights no other week before had more than $2 billion in net selling. Furthermore, selling in just S&P companies hit a whopping $2.8 billion: over 4 times more than the week prior! As such the ratio of insider selling to buying is now meaningless. Even Bloomberg, which traditionally just posts the data without providing commentary to it, highlighted this ridiculous outlier: “Insider selling at Standard & Poor’s 500 Index companies reached a record in the past week as executives took advantage of a two-year high in the stock-market to sell their shares.” We hope those retail investors who dared to reemerge in the stock market and play some hot potatoes with the big boys, enjoy their brief profit as they once again end up being the biggest fools. UNQUOTE

    What is not mentioned is that 1 transaction represented $1.3 Billion – – – Microsoft’s Balmer sale.

  3. Tom says:

    well my ‘fear’ is that because the seasonal time frame is so extremely bullish that any pullback we do get will only be very pathetic and garden variety boring which can be a disaster for those looking to go heavily short… lets see how this top forms and what they can get done.

  4. RiceToaster says:

    But with FED start doing POMO tomorrow for the next 6 months, how would the market ever go down? The FED is doing POMO as much as 19 days out of 20. It seems that they juicing up the market everyday, so how is it possible that the market the crashing?

  5. Tom says:

    I never said it would crash. But it would be nice to see a 5% decline at least. But we may not even be able to manage more than a 2% decline at the current rate.

  6. Geoff says:

    this guy has been very unspectacular in his commentary, but he has been exceptionally accurate!

    http://pugsma.wordpress.com/

    despite all the bears’ reasons that this market should go down, it does so only very grudgingly and this guy “pug” expects the market to add another 100 SP points by about mid Jan. boy, if that happens, the sentiment indicators sure should be extremely bullish. . . . i am totally confounded. i have been very wrong.

  7. JR says:

    Hmm, all very interesting comments.
    As everyone knows I am quite bullish on the market.
    I have felt quite alone, but it seems I am now enjoying some company.

    We all know how hard it is to predict the future. For the most part we cannot even predict what the market will do in the next 24 hours.

    My experience has been not to fight the tape and not to fight the Fed. I wish I could predict the next move but since I can’t, I just go with the flow. Which right now is up!

    Additionally, I find all the foreign gnashing and gnawing of teeth over the Fed move quite disingenuous. With all this foreign criticism, I am reaching the conclusion that the Fed is on the right track!

  8. Tom says:

    Hmm, Well 1300 on the sp500 by mid January seems a bit optimistic but I suppose not impossible. If we decline into end of November 2010 then I would doubt very much he will be right about 1300+ by mid January.

    But if the market cannot get any real decline going into end of November then I suppose it could be 1999 all over again..

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