Market Timing - tag category postings

The SP500 has elected to break above the crucial 1116.56 level that I had alluded to several times before.  This is a very bullish development and now opens the door to expanding upside price action moving forward into 2010.

I cannot recommend shorting this market now.  The risk reward is simply not there.  That is not to say there will not be some chances to short some swings in the future, but as far as strategy is concerned I believe a mostly long only strategy is the most appropriate at this point. More specifically a long only small cap strategy.

We recently saw the Russell 2000 small cap index hit a new 52 week high, a bullish sign and showing that the small caps are leading the continued ongoing recovery.  I expect the SP500 to follow suit going forward.

At this point I believe the deflationary scenario so widely talked about is dead.  The market was not even able to get to the 1000 level on the sp500 so once again I have to read into the tea leaves and respect what the market is telling me.  It is telling me there is still internal strength, and an upward bias.  The Armageddon scenarios just do not hold any more water.  And to be frank, the only time I will next consider an Armageddon scenario and start to short aggressively again is when the 20 week moving average crosses below the 50 week moving average and price shows a weak stance after that configuration.  Even the XLF is starting to look bullish!  After a long sideways consolidation it may soon get a northward breakout going which is very important because it has built a substantial amount of sideways cause for quite some time now.

Be Bullish and Look for Bullish Opportunities

Now I want you to consider this chart of the SP500.  But before you do that, take a look at the previous post I did on the Shanghai Composite index.  In that post I point out the possibly huge implications a bullish breakout north out of the large head and shoulders bottoming pattern would imply.  Put simply, it would imply much much higher prices for the Shanghai Composite in the year(s) to come.

But now, when looking at the SP500, I cannot help but think there exists a similar and potentially just as powerful longer term pattern developing.

A massive cup and handle pattern on the SP500 ?  It is definitely a possibility, and given the size of this overall pattern could imply, similar to the Shanghai Composite index, a move near the previous all time highs (1500 SP500). 

Of course this is a much longer term chart and first the SP500 must get above 1150 and get a retest going and then power higher.  It seems almost absurd to think that the SP500 could actually get back up near its old all time highs again… but wait, this is actually a possibility and one of my original scenarios I have been considering quite some time ago.

It would be consistent with the nature of the very large swing trading range we have been in since the year 2000.

This is just a quick post.  But I wanted to relay to you what I noticed looking at 100 ETF charts across many different sectors yesterday.

Put simply, my take is that many of them look surprisingly constructive.  More specifically I am noticing quite a few clear head and shoulder bottoming formations.  If they engage into valid breakouts either this upcoming week or next then the measurements implications could point to new all time highs in many of them, including the major market indices.

If that happens, then it makes one wonder whether the deflationary scenario will be completely invalidated soon.  A couple months ago I was anxious to see which scenario would win out and it seemed clear that a rapid price decline in the form of a mini crash or at least rapid price destruction would hint towards a new deflation wave kicking in.

On the other hand a more orderly normal corrective decline somewhere in the neighborhood of 10% would seem to point to a sloppy directionless market perceiving an continued inflationary wave.

Anyway, I might as well put my finger on the chopping block right now instead of getting too ‘hedgy’ (I just made that word up, but it passed the spell check ?).

So the call is that many different markets will be able to break out north out of these small head and shoulder correction price action bases in the next few weeks and it may lead to some of them hitting their highs of January 2010 again.  I just have to make that call now based on what I am seeing in the charts and in the tape action.  This is not a time to be excessively bearish.

So once again key decision point numbers that will determine if I am wrong or right are the 1116.56 number on the SP500.  We get above there and it is a green light in my opinion.

The SP500 is trading so slow and quiet in recent days that it would seem we are already trading in the hot lackluster summer month of August.  The market is teasing both bears and bulls at this juncture and appears to be close to a decision point.

The ‘crash window’ I had written about earlier appears to be a lost cause at this point.  Instead the market is trading in either a rising wedge or a head and shoulders bottom.

Since march of 2009, this market has been defined by reluctant downside and relatively persistent upside.

I continue to believe that if the market is somehow able to break above 1116.56, then the market could get a ‘get out of jail free card’ for now.  But until that happens one has to assume that we are in a bearish counter trend rally  or almost 1 month duration and that price will resume to the downside after it is complete.

The blue trendlines in the chart above are the trigger points for the next big move in my opinion and it could go either way, in a big way.  I am not smart enough to tell you with a high degree of confidence right now which direction that will be.

So let’s let the market decide next week.

The sp500 did a significant reversal today and it at least opens the door to a break north of the 1116.50 level I was alluding to yesterday.  Simply candlestick analysis shows that we did a reversal hammer and there is also a slight tendency towards a small head and shoulders bottoming formation in the sp500.

The potential crash window I was talking about yesterday may be completely destroyed as of today.  Perhaps I am jumping to the conclusion too quickly, but if we were going to stay bearish we ought to have had a hard down close today.

On the other hand the weekly price chart on the SP500 shows a small rising wedge formation that has yet to be broken to the downside.  So it could be that the market just wants to bide its time and back and fill until a real decision is made.

If somehow the weekly MACD is able to turn upwards in a bullish cross then all bets may be off and this market could start hitting new highs again in a slow push forward.

It may seem absurd to switch so quickly from a potential crash window to a bullish breakout scenario, but that is just the way the market works.  We are at a significant ‘tipping point’ in the market right now and that means that the market can tip in a big way either up or down, but the hard part is figuring it out ahead of time.

If somehow the bears manage to control the market tomorrow to close the week out then maybe the big decline scenario would still have a chance, but at least as of today’s close this seems unlikely.

I have identified what may be a potential deflationary crash window developing in the SP500.  The ‘window’ for this to occur is during the next 15 to 20 trading days.  It is unlikely we will get an exact repeat in terms of price action, but I am just drawing on potential possibilities here.  The comparison I have drawn just shows the pattern similarity and thus the potential ‘window’ for a semi repeat scenario.

The behavior of the market since the January 19th, 2010 high to February 5th, 2010 was a ‘sign of weakness’ on much heavier than relative volumes we have seen during the entire rally since March.  Then, the current reaction rally from February 5th, 2010 to present day is once again on lackluster volume.  That volume characteristic, combined with the oscillator pattern analysis in the chart above creates a potentially compelling crash window scenario.  But once again, 9.9 times out of 10 the market usually chooses a more orderly slow type decline.   We simply will not know with any degree of certainty what window the market will choose until it actually does.  See the bullet points below for more.

But briefly, before you do that, a few words about the chart at top.  The similarities I am seeing in the two time frames show that we had a decline under the 50 day moving average for a total decline in magnitude of about 9.2%.  That first leg decline in 1987 was about 8.7%.  In both cases each decline created a double bottom in the 14 day Relative Strength Index as shown in the chart.  Thereafter a rally developed that took RSI near the 60 range and also moved price into the zone of a fibonacci 61.8 retracement from the highs. After that point is when the real price destruction took hold and price raced right through and below the 200 day moving average.

In order for the scenario to occur without fail the following must occur:

1. The daily MACD on the current sp500 must begin to start curling over into a daily bearish crossover soon(within 5 or so trading days).  It would be ok for the daily MACD to extend slightly higher and even slightly break above the zero line, however the less it tends to do so the better in terms of this scenario being correct.
2. The market must not trade any higher than 1116.56 within the next 5 to 10 trading days.  It is imperative that this be the case.  If we do trade above that level then the exact opposite of this proposed scenario may occur.
3. Ideally, within the next 10 trading days the SP500 should trade at or below the 1084 sp500 level.  This level would break the current minor uptrend since February 5, 2010 and also take us below that key supporting shelf of the November-December 2009 time frame.
4. Assuming the market is able to trade below the required 1084 level, then we would want to see relatively FAST and WIDE price destruction (sign of weakness candlestick bars) combined with very heavy volume that is bold and dramatic.
5. Any rallies once under 1084 should really only be intra-day rallies, but there should be a very clear persistent down trend easily drawn with a trendline.
6. The market drifting around at these levels for too long a period would make this scenario fail.  Assuming a bearish daily MACD cross occurs, one would want to see immediately from that point onwards, fast bold price destruction combined with robust volume!  If not then once again, the window will likely turn invalid.

After looking at all Dow Industrial Average 30 stocks, it certainly does not seem like such a thing could occur at this time.  The structure of many stocks in that index still looks constructive.  On the other hand I can probably make almost as many cases for stocks that are in dire need of more correction (ie. Apple Computer AAPL, and Amazon.com AMZN – needs to fill that large gap!).

In addition the XLF financials ETF Index looks like an almost perfect large scalloping or rounding top formation.  The problem with that conclusion is that scalloping and rounding tops of that nature can evolve into very cumbersome price declines that are very choppy.  That does not seem to support the case of a severe down market shock.

What About the Euro and the Dollar?

If there is one thing that would cause this market to engage into a panic mode it would be the very rapid movement of either the Euro or the Dollar Index.  So far the dollar still looks strong and appears to be ready for yet another up leg.  On the contrary the bounce in the Euro so far has been very disappointing and could imply more near term weakness, if not climax selling into a new low.

Right now the market just feels like it is holding on for dear life and still has yet to reveal what the real trading pattern will be for the rest of 2010.  I feel as though this crash window is maybe the last real chance for the ‘heavy bears’ to get the real outcome they want.

The alternative?

The alternative is the complex swing trading range that I have been talking about in recent posts.  The one that frustrates bears and bulls alike into total confusion waiting for a real final outcome months down the road.

Action Plan ?

Assuming we do get a daily bearish MACD cross in the days ahead on the SP500 I may once again try the TYP triple bear nasdaq ETF or the TZA triple bear Russell 2000 ETF.  But the market is really going to have to show me lots of weakness for me to step up to the short side again.  Weakness in terms of price and in terms of heavy downside volume.

The market delivered on my wish for either a flat or negative close today.  We needed a flat or negative close to keep the accelerated bearish forecast intact and that is how we ended today.

The bear flag shown in the chart above is at a point in its construction where it needs to either be confirmed or choose to fail as an indicator of the recent trend.  Simply put, there is no room left for it to keep forming without putting into doubt its integrity.  My reasoning for that is that it has bumped up right against the primary downtrend resistance line, so it either confirms or fails on Tuesday February 16th, 2010.

I suspect that a large part of the buying and relatively flat close today was due to heavy short covering considering Monday is a holiday for US markets.  Most traders would rather not hold a short position over a long 3 day weekend.  The psychology that makes that interesting is that you could go in Tuesday AM market opening with the shorts out of the market and no buyers to be found.  That type of setup is the stuff that creates very large air pockets in the market (ie. gaps).  Also significant is that China is on Holiday for most of next week and so that is another element of demand that will be somewhat absent from the equation.

The clue as to whether it confirms the pattern or fails is most likely going to be revealed by the action in the Euro and/or Dollar early next week.  The Euro is at a point right now (similar to the Dollar) where it is overdue for a large upside reactive rally given the heavy oversold level it is at right now.  However, I have also seen many times a stock or index move from a trend of orderly trending bearish tape action into a much faster vertical type panic cycle.  That type of action would be disruptive to the markets and would help the SP500 confirm the bear flag and get a break down going next week that could be quite large in magnitude.

The Dollar is also set up similarly.  We could see the US Dollar get a ‘super spike’ higher into next week that would spook the markets and cause disruption.

If I am wrong, then we will instead see the normal typical price action that we are used to.  Namely the dollar could start correcting downwards from its recent strong rally and the Euro could start correcting upwards for a more natural corrective process.

We really are at such a close ‘tipping point’ that it is too tough to call with high confidence which scenario will play out.  My bias is that we do get a fast breakdown in the Euro and a fast break up in the Dollar and that these events cause the market to go south in a hurry next week, perhaps even starting with a large opening gap down Tuesday in the AM leaving little chance if any for new shorts to take a position, or buyers an easy chance to get out of longs that were recently entered.

So the market heeded my request for a flat or negative close today.. will it oblige again next week?  Stay tuned…

So far the market correction is behaving similar to the 1975 correction and has been relatively ‘orderly’ and persistent but not of the nature of a ‘mini crash’.  That could still change, but at least up to this point it is on the track of being garden variety normal corrective action that was clearly over due since the July 2009 and March 2009 swing lows.

Friday’s reversal candle was significant in that it was a reversal hammer that typically should result in strong follow through to the upside.  That did not happen today and leaves the rebound rally in doubt.

Friday’s reversal candle was also a lower low on equally heavy volume as the previous day and leaves it wide open to be retested.  I suspect that could happen as early as this week.

Daily RSI (14), is signaling to me that it wants to bust below the key 30 level and do a little basing out under that level.  That is exactly what happened during the 1975 corrective leg and was the first signal that most of the damage was finished.

The behavior of this correction is very important because it will determine what probability exists for a solid base forming near the high 900’s level, or only a shorter term base that eventually fails and breaks down further towards the March 2009 lows area.

My preferred scenario is still that we form a solid base and do corrective basing action for several months which should eventually lead to a massive blast higher and resumption of the bull trend.

But of course that preferred scenario is subject to change at any time.  I need lots more data and price action to get a clearer picture.

The bear trend has characterized itself as being very persistent in terms of lower lows and lower highs and has not offered shorts many new chances to re load their short positions.

Incidentally the TYP triple bear Nasdaq ETF has a very bullish stance right now and I love the setup.  I went long the TYP today near the close after bailing out of the TZA after last Friday’s reversal hammer candle (because I thought it would lead to a big bounce).  But since the bounce never happened, we may have a ‘Hound of the Baskervilles’ signal which is a signal that Alexander Elder describes in his outstanding trading book Trading for a Living:

Elder says this signal occurs when a reliable pattern or an indicator does not lead to the expected action and the prices move in an opposite direction. Alexander Elder names this signal, as The Hound Of The Baskerville, based on a famous story written by Sir Arthur Conan Doyle. In the story detective Sherlock Holmes was called upon to solve a murder case in a country estate. He found the essential clue when he realized that the family dog did not bark while the murder was committed. This meant that the dog knew the murderer, and that this was an inside job. The signal was given by lack of expected action-by lack of barking.

So if the signal is valid then one of the next few days should be very hard down, not just down…

The bear case was confirmed on many fronts today in my opinion.  I continue to believe that the recent highs in the market are the final highs for at least several months. 

Here is a quick summary of reasons why:

• The bullish divergence in the US Dollar Index (and also the UUP ETF) was confirmed today and we saw record all time high volume on the advance in the UUP today.
• The SP500 bearish divergence was also confirmed today and price is now ‘relieving’ the divergence.  Divergences can lead to persistent and significant price declines.
• A 2B buy signal was initiated in the UUP today and a 2B sell signal was initiated in the SP500 today as well.
• The WEEKLY MACD in the UUP ETF is about to turn upwards and the WEEKLY MACD in the SP500 although not in a bearish cross is slowly getting there.
• The downside volume today in the SPY ETF was heavy again coming down off the highs.  Not blockbuster volume but still heavy relative to what we saw on recent advances and shows a character change volume wise in this market.  Heavy volume downside price action off of all time highs is never a good sign.
• The Dow Transports are breaking down bad after a double top earlier last week.
• The gap up and run moves in big stock names like AMZN, MSFT, GOOG and some others will not likely get sold off and help the current correction gain some steam.
• There is a risk of an ‘island top’ forming in a few indices if we get a gap down tomorrow.  Island tops are very bearish and rare technical analysis patterns. 

I don’t expect us to go down in a straight line, but I do expect this WEEK of market action to close badly by Friday.  Best case for the bears is a close near 1030 as I alluded to in a previous post as it would create a NASTY monthly October reversal bar and set up bearish November price action.

We may hit some sort of oversold bottom sometime tomorrow and then do a dead cat bounce for a couple days and then start heading down again Thursday and Friday.

The price advance in the US Dollar Index could possibly do a sharp continuation into its own 50 day moving average.  Remember, everyone hates the US dollar based on sentiment readings and that creates fertile territory for a HUGE short covering rally.  So we may jump into the 50 day moving average on the US Dollar tomorrow and create a short term high in the index and a short term low in the broad market.

TZA and other double, and triple short ETF’s continue to have very bullish looking charts are are in my opinion the best way to play this decline into end of October and November.

So far 1/2 hour into the close today it seems as though I might have a huge pile of egg on my face given my ‘extra strength’ bearishness yesterday and call that we have hit the final top.

It amazes me how they were able to reverse the market from yesterday’s key reversal day on heavy volume.  Today we did almost the complete opposite of yesterday and once again it shows who is running the show here.  The bulls are.

If yesterdays high was the final top then today’s tape action just would not be happening, but it is.  It is telling me something is really wrong with my analysis at this point.

I am going to have to once again revert back to my original strategy of simply waiting for a much closer weekly MACD cross.  Today’s action still keeps the weekly MACD in the bullish zone and does not turn the bias in favor of bears yet.  The bears have one more day tomorrow to get some real damage done and close the weekly price bar at the bottom of the range but at least based on today’s action it seems they will not be able to get it done tomorrow.  But we will just have to wait and see.

The weekly MACD is a slow moving beast and it takes a lot of price action to turn the tide and momentum in the other direction.  So these daily swing moves and reversals could go on for maybe another 3 weeks before we get enough price action that ‘certifies’ a more significant top.

Another possibility is that we just move sideways for the next 5 to 10 trading days.  But again, until that weekly MACD gets more serious about an imminent crossover I am once again going to just have to cool off here and let the bulls play a while.

This is only a short term post and I realize there are only 15 minutes until the close of market today but everything I am seeing right now as we go into the close is confirming to me that today’s intra day high is the final top for this market, possibly for several months.

I have to do some more analysis when the dust settles but this is looking like the real deal now.

I went long TZA  at 11.60 and plan to sit tight and be right for a bit on that one.  Also went long some call options on the TZA as well. 

This is a very negative reversal and it appears that the very negative astro aspect that was in place on Sunday October the 18th is valid and the market is succumbing to those forces.

There are still 2 trading days left in this week, but I am going to be surprised if we do not issue a 2B sell signal by the end of this week.

More updates to follow on this but I wanted to ‘get the word out’ based on what I consider to be very important closing action right now.

If we somehow magically rally to close positive today then ignore this post, but so far it looks like we have a done deal here as far as the broad market is concerned!