SP500 - 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.

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.

Right now we are in a grey zone with the market.  And grey zones are very difficult to trade consistently.  When I say grey zone I am talking about difficult swing trading ranges that can be difficult to time because they do not push as low or as high as you would normally expect them to.  There is a lot of ‘noise’ and the follow through is frustrating.

I personally took some bad hits by holding on too long to my TZA short position during this recent rebound rally because I did not really think it would bounce as high as it would until the rally was already half way completed.

I could be wrong, but I think many who were bearish did not expect the market to bounce as high as it presently has from the high volume lows of a couple weeks ago.  I was looking for more persistent type down action at first, but I was clearly wrong on that front.

The market is definitely showing its true colors in terms of trading scenarios that I have talked about in the past on several occasions.  Right now wide ranging difficult swing trading ranges are to be expected.  It does appear that the next small down cycle should start soon and perhaps take the market down (in terms of the SP500) slightly below the 1050 area, but I suspect that it will only be slightly below and not significantly below.  The key level of 1116 on the SP500 is the one that will determine whether we are ready for a new down leg now in my opinion.  If we are able to hold ground here and trade above that level, then any new decline in the near term will be in serious doubt.  However, if that 1116 acts like a brick wall, then I think the door starts opening to another down leg soon.

This is exactly what occurred in the russell 2000 index in the first green shaded box in the chart above. 

This big counter trend rally tells me the market still has a lot of ‘fight’ left in it and that the trend is not clearly established as being down, not even close.  At this point it is still a ‘shotgun short’ type of market in my opinion meaning that if you do want to short the market, try to get a medium sized chunk and then run for the hills because there will likely be big counter trend rallies still, as opposed to persistent down.

If we are going to enter a severe bear phase down (I currently don’t believe this to be the case) then the key thing to watch for is the 20 week moving average crossing down through the 50 week moving average.  We are a long way away from that, but honestly I would rather wait until that point to get aggressively short when there is enough ease of downside movement and momentum for down price action.

I just cannot seem to stop this obsession with the SP500.  I am not sure why.  Perhaps because it is so enticing to try to figure out what direction it is going in 2010.  It is like the big mother earth ship whose direction is so crucial.  So crucial not just for the sake of the economic health of the globe, but crucial to the many forecasters who have made some big market calls in recent memory.

It occurred to me today how amazing it would be if the SP500 is now able to make new 52 week highs in the weeks ahead.  I almost cannot believe I am even considering that possibility, but looking at the behavior and nature of the yearly chart gets me thinking it is at least a possibility.

So far in 2010 we retraced into the 2009 yearly candlestick down to 1044.50  In previous posts I was talking about how this is very normal market action and that is exactly what we did so far.  But what we also have done now is rally very close to the crucial level of 1116 I had mentioned several times before.

If we are able to crawl higher in the weeks ahead it is going to start building a yearly candle body again and would at least open the door of possibility that that the 1044.50 low was all the bears could get done for now.  This is exactly what happened in the 2004 yearly candle.  The bottoming tail was very minimal, and it came off of a pretty strong yearly reversal candlebar in 2003.  We are in a similar situation now.

I still doubt that we will easily blast to new highs.  Instead as I have already talked about, a modest swing trading range for several months would be ideal to work off the overbought levels and create enough rotation in the market for a new leg higher later in the year 2010.

It is clear that the action since March of 2009 has been a very clear sign of strength and amazingly the tape still continues to show me that message.

I think the best times to short the market are when you see the 20 week moving average in a negative crossover stance to the 50 day moving average.  We are nowhere near that point yet and I don’t know when we will get there, but when we do then I will look more seriously at the short side of the market.  I would much rather be more focused on the short side of the market when we know that the shorts are heavily in control and have downward momentum, instead of the opposite which still seems to be the case now.

This is a very very important long term stock price chart.  It is a yearly candle bar price chart of the SP500 from the early 1970’s to the present.  Each candle bar represents one full year.

If you showed this price chart to me without telling me it was a stock market index like the sp500 and then asked me what my opinion of the chart is.  I would tell you that in my opinion the stock or index has shown a nice steady uptrend for a reasonable period of time along an uptrendline and then sky rocketed above trend in somewhat parabolic fashion.  Thereafter it has started a corrective process, once again returning to and testing the average uptrendline (this occurred in 2009).

But I would still have to conclude that the stock is still in a long term uptrend.  Yes it is in a sideways corrective process, but that is definitely not unusual.

Having said that it makes one ponder the current dynamic of the SP500.  Even though we have had a housing crash, seemingly endless bank failures and government indebtedness, just a simple glance at the above price chart tells me that the current trend would best be described as being in a ‘caution zone’, but not in the ‘red zone’. 

If quarterly or yearly SP500 price is able to eventually get into the red shaded zone as shown in the chart, then that would depict a very serious bear market situation.  On the contrary, if by some chance price were able to break above the 1500 level and get into the green zone and sustain itself, then it would imply a very bullish breakout level.  Everything that lies in between is simply cause building and base building.

So to make a long story short, the conclusion I make for now is that I am still open minded.  I am open to higher prices going forward sometime in 2010 but at the same time aware of potential corrective risks.

The recent counter trend rally we have seen in the past 2 weeks has been on very light volume relative to a very heavy selling leg during early February.  That should keep us in a corrective process for a while longer perhaps defined by a complex swing trading range as I had mentioned a few times in previous posts.  A new corrective ‘C’ leg down now will be interesting to watch to see if it can make some sort of double bottom at the 1050 level or finally get a lower low relative to the 11/2/2009 swing lows.

The stock market bears failed once again to deliver on persistent bearish follow through out of the potential bear flag and persistent down trend.  Not only did they fail in that regard, but they also failed to evade a bullish daily MACD buy signal and they failed to break the market to a new low range ( I am referring to the low ranges shown by the red horizontal dotted lines).

The fact that during the entire 3 week decline the market failed to break to a lower low by definition still characterizes the market trend as being in an uptrend despite the previous 3 week decline. Albeit it is a much more modest uptrend, but uptrend it is.

It is starting to look like the 1929 scenario is wrong.  The 1975 bear scenario may also be a no go at this point as well.  That would leave the 2004 sloppy swing trading range corrective scenario which is the one I labeled scenario number 3.

So this could mean the SP500 wants to trade back up to 1130, and then start another corrective leg down again, breaking the 1050 range but only slightly to perhaps 1030 range.  And then swing back up again within the large swing trading range.

It is way too early to tell if this large swing trading range is going to have a slight upward slant or a slight downward slant.  But the bottom line is that this type of trading range is in my opinion very difficult to trade and ought to be quite frustrating to say the least.

(more…)

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…

Right now the SP500 is sitting right on the down trending resistance line that has defined the bear trend since mid January.  In fact we slightly pierced this downtrend today.

If the SP500 does not either get a flat or down close tomorrow, February 12th, 2010 then it will in my opinion put the strength of this downtrend in doubt and possibly open the door to a more complex correction that could send the SP500 as high as 1130 before turning down again.

That scenario was definitely not the one I was expecting and it still needs to be proven based on the next few days trading data.  But the market will do what it wants to do.  It is all about scenarios.

As the decline started I was looking for either:

1. A 1975 type persistent decline somewhere in the neighborhood of 15 to 20% with very minor if any bull retracements through the duration of the correction
2. A 1929 style very fast mini crash type decline with a speed and suddenness that would leave no doubt about the downward trend.
3. A March 2004 type corrective scenario that is made up of a series of large swing trading corrective waves.

Scenario number 3 is the least preferred of all the scenarios because it is the most difficult to trade and the most frustrating to watch and participate in.  In fact it is probably not good to participate in that type of corrective scenario at all.  If you want to see what it looks like just look at the Sp500 back in the March 2004 time frame and look at the large swing trading ranges that were created.

If we were to duplicate that now then the SP500 could trade as high as 1130 only to peak out and then trade down again, but only to MARGINALLY lower lows than our most recent lows.  The reasoning for that is that if we have such a large upward retracement to 1130, then technically what that would do is weaken the overall nature of this decline and set up a scenario whereby the next decline wave is not able to carry through significantly, only marginally.

Here is what it could possible look like:

The market has not ‘decided’ that it wants to do this type of scenario yet.  But the next few days could go a long way towards deciding it.

I really do not want to see this type of trading scenario develop.  Honestly, it would be a real downer if we do for the simple reason that it would be very choppy messy trading within a slightly angled swing trading range down trend.

A slightly more mild version of scenario 1 that I listed above is still possible.  The next few trading days should help provide a clearer picture.