Market Timing - tag category postings

This market is sick.  There is absolutely zero doubt about that after today’s price action.  Not only is it sick but it is extremely costly!  Especially during the last 7 or so trading days.

I have flip flopped my calls about where this market is going repeatedly for the last couple of weeks and it has been extremely frustrating.  Right now I am into analysis paralysis and I don’t have a clue if this market is going to crash next week or whether we will make another feeble attempt at a rally.  I just have to be honest about it.

Everything was lined up for the market to continue higher today after forming what seemed like a clear Adam and Eve double bottom pattern and a bullish MACD cross.  But the MACD cross has turned into a failure KISS and now at least potentially warns of a cascade decline that shows more lousy bounces and flat trading days for the next month or two.

The weekly chart is still extremely bearish and it does show much lower prices in the month or two ahead.

So I guess I have to go back to what I was originally saying about how the best way to trade this market is to just position trade it!

Perhaps others have had better success than I have but I would really like to meet the traders who during the last 7 or 8 trading days have bought near the lows and sold near the highs.  It has been extremely difficult and to be honest the technical analysis has not helped me much.

Whether you look at the sp500, the DJIA or the Nasdaq there appears to be a variety of patterns that could be rising wedges, symmetrical triangles or flag patterns.  All of these can have eventual bearish resolutions.

Again I have to emphasize that my weekly charts are looking extremely bearish for the next 4 to 8 trading weeks, so position trading is king here!

But the caveat with position trading is that one needs the ability to sit through the VIOLENT market rallies which depending on your stomach and ability to take draw down is no easy task.. You just got to believe… and sit tight… trusting that the weekly charts will eventually play their hand.

Perhaps the whole world was looking for the sp500 to rally back up to the 1150 range including myself.  But now that seems like a distant dream.. or is it ?

You know I was going to do a post here on how the current market structure has a decent resemblance to the 2008 period in September – October.  There was also a period there where the MACD seemed very overextended and was ready for a bullish cross but then turned and got even more oversold somehow beyond belief.  That move led to the 2008 October Panic.

But the key point about that decline phase in 2008 was that it was really sloppy price action and price was all over the map.  But still it did have the waterfall type persistence that seems evident now.

Any previously held fantasies I had about 1987 occurring again seem like a remote possibility at this point.  1987 was just too easy. It was so sudden and had such a full price move so fast it was like a 5 course dinner all at once.

The this market is all about frustrating the heck out of everyone and then making the big move.  Perhaps that is the definition of a waterfall decline.

But the question is, was 6/4/2010 ending action or beginning action ?

Ending as in the end of the decline and final cleanout or beginning action in terms of beginning a new multi week leg down.

The acceleration in volume today was interesting on the SPY ETF.  However compared to the two previous tests down at the 105 level it has a descending slope to it.  So whether or not that means we are headed for a short term triple bottom I don’t know yet…

Sorry for being so inconclusive on this post, but I am feeling like a deer looking into headlights after today’s action.

Today was about as wild a day in the stock market as I can ever remember.  I was not watching the market closely in 1987, but I certainly was watching it closely during October 2008. 

I can tell you that the 2008 decline seemed much more orderly than today’s decline.  The 2008 decline was smooth and steady but still persistent.

Today’s decline had much more flavor of panic, rapid price move, total confusion and despair.  The talk on the mainstream networks that today’s decline was because of ‘error trades’ or other nonsense is completely ridiculous.  Today’s decline occurred because the market had moved into an extreme overbought territory at the end of April and had also done so previously up to that point on lighter and lighter volume.

Probably the remaining shorts had covered their last positions near the end of April, so that when the decline started moving into early May, there was a big air pocket under the market, not enough willing buyers and not enough short covering to support the market.

I had a newly developed target today on the SP500 of near the 1127 range because this range would fill an SP500 gap that existed on March 5, 2010.  Not only that but, 1127 is a key area of support in terms of uptrend line that had defined  a portion of this bull run so far.

BestOnlineTrades correctly identified an ascending broadening wedge several days ago and this has proven very useful as a ‘map’ of sorts in determining how price action would play out.

(more…)

The market has a good bounce going today and currently the SP500 is trading right near the 61.8 fibonnaci retracement level of the decline that began on 4/26/2010.

If the sp500 trades higher than 1219.80 in the days ahead then the big sell signal I mentioned in my previous posts is going to have to be considered invalid.

The sp500 right now is also trading in reaction fashion right back up to the underside of the up trendline that it broke 2 days ago on very heavy volume.  Up trendline breaks are to be taken seriously in my opinion especially considering how far and how fast the market has come up so far, not to mention all the current sentiment readings that are so out of the stratosphere bullish.

Important also is to remember that market tops are built on hope, not fear.  So there is this tendency to push and push and push until the last breath comes in to finally nail the top.

The determination on whether the market is able to make a new highs seems to be riding on the GDP numbers that come out tomorrow morning at 8:30AM eastern time.

In order for the market to make new highs, it is going to have to break above this trendline that it just broke down through.  Certainly this is possible, but at least for now I am considering this as unlikely to happen.

The market has switched into total overdrive with the weekly RSI reading currently showing 72.62 above the critical 70 line. 

BestOnlineTrades has been correct in maintaining the stance that this reading should be perceived as internal market strength and not a sudden reason to short the market.  The path of least resistance remains up and the daily tape action continues to show persistence and strength.

Price movement on the weekly charts is still forming higher highs and higher lows and has not transitioned into a distribution pattern.  This is a very key point because before the market can start to roll over what we want to typically see is a market that is moving higher with less upward force and progress.  This can be observed by the angle of ascent if you look carefully at the charts.

So at some point we expect the market to still trade higher but transition into a more sideways to up trend rather than the current state which is mostly just up up up.  The sideways movement will be a sign that distribution has started to occur and that a change in trend is at hand or least closer than before.

BestOnlineTrades has identified some potential key factors that will mark the market top this year.  We believe it will occur in the time frame of July August 2010.  I hope to write up a report pointing out how I will identify this top, when it might occur and why sometime early next week.

This top may be one of the most significant trade setups for the entire year of 2010 and will probably be well worth the patience to identify it correctly.

Ideally, that would make three possible massive trade setups this year.

1. Gold
2. Natural Gas
3. Stock Market

Gold looks about ready to get above critical levels that should mark a new serious uptrend.  We hope to identify that next week sometime and will be looking for confirmation.

Natural gas is finding a supporting bid lately on the weekly charts and could also possibly be signaling a new bull market by the end of this month or end of next month.  No confirmation exists in the Natural Gas market yet however.

The stock market ‘big trade’ will be trading it from the short side as already indicated above in the July-August time frame.  In our opinion this could be one of the best online trades of 2010, but just as with the other markets, important confirmation is necessary.

This is why we feel it is not worth it to short the stock market at any time in the next 2 months.  It is probably a much better strategy to keep plenty of dry powder for the expected turn in the July-August time frame.

The big trades are the ones that make trading worthwhile.  Identifying continuation or turning points is where most of the money is made in the stock market.

We agree with Jesse Livermore when he says:

It’s not the thinkin’ that makes the money – it’s the sittin’ and the waitin’ that makes the money.

I used to think that by this quote Livermore meant that he made the most profits by sitting in a position and waiting for it to mature.  But I recently learned (from Richard Smitten – author of Trade like Jesse Livermore) that he meant there were many occasions when he sat and and waited in cash, until the right situation appeared.  When these conditions came together, when as many odds as possible were in his favor, then and only then, like a cobra, he would strike.

That mentality is the one which I think will help in identifying the next great shorting opportunity.

But the problem is I am just a tiny water droplet and the market itself is an entire ocean.  The market could care less what I think and it will do exactly what it wants to do on its own time.

I have done a number of posts on what appear to be good reasons for a near term bearish resolution in price behavior for the sp500 and most other major broad market indices.  But despite that recent bias, I have to pinch myself and at least consider a bullish possibility for the market going into the long Easter holiday weekend.

By many measures the market is overbought.  But a market just being overbought is sometimes not enough of a reason for it to decline.  It can continue into ‘tilt mode’ overbought before any meaningful price reversal occurs.

The jobs report is coming out this Friday.  There will be no trading that day.  So whatever the results are of that report will have 3 full days to build up and stew over the long weekend.  That 3 day rest period before a market reaction usually leads to a very big opening move to start the following week.  And the market as of late has a very strong habit of being up on Mondays.

But everything seems to be relying on the interpretation of Friday’s jobs report.  Most of the news lately has been good news and it just seems to keep on coming, so why should this Friday be any different ?

I can speculate until I am blue in the face and will still not be able to figure out how the market will react on Monday of next week.

So here are the cold hard facts based on the chart:

The SP500 since early February has been in a very strong uptrend.  In early March it broke out above a significant resistance line with a moderate sign of strength and then attempted to retest the breakout area a few days later.

(more…)

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.