This is my last post of the year until wave E tops or we get a breakout above the December highs. Honestly, I need a break from the markets and 4 days will be a blessing. There really is nothing to do until next week anyway. Even if markets break below the December 12 lows on Friday, the volume won't be there to confirm it and we will have to wait for another failed rally or test to confirm.
I continue to see a number of breadth indicators that are at bullish extremes indicating that a reversal is nigh. The bulls failed to break it out when they had the chance and I think now that any break out will be a false one.
I want to remind everyone that if you haven't completed your 2009 trading plan, it is time to get started. Don't expect it to be perfect and don't expect that it will prevent you from having losses, but having a plan and sticking to it will save you so much money and anxiety, it is well worth the time to do it now.
I continue to believe that there are hundreds, if not thousands, of proven methods to make money in the markets, but it is difficult for most people to have the patience necessary to wait out the slow periods and drawdowns to see the rewards. You may have to stick with something for three to four years before you really see the benefits, and that is a lifetime for many people. Look back at the last four years. In your mind, it is as if it were yesterday. So too, will the next four years be to you four years from now. If you act with discipline and consistency, you will be amazed at what you can accomplish over the next four years. Don't believe for a minute that one bad day, week, month or year will change that. Regardless of the past, commit to those actions today that will improve your life and trading in every way. This year is over and a new year of opportunity awaits. Let's make the most of it.
Wednesday, December 24, 2008
Tuesday, December 23, 2008
Nearing A Sell Signal
The markets are barely hanging by a thread. The bullish potential wanes with each passing day. As best as I can tell, the markets are in wave b of D down. Wave b has a couple of wiggles to go and then markets should fall to the December lows, after which we should see a surprising rally that does not surpass the December highs in wave E up. This last rally will fool a lot of people. On the other hand, if it does break out above the December highs next week it would be bullish for early January.
I have been pouring over my cycles data and I believe now that I can say confidently that November 21 was the 10 month cycle low. (This was my originally calculated date, that I later modified to November 26 and December 6.) Based on this I am projecting the end of primary wave 1 to be near the end of January. It calculates out to February 5, but I suspect it may come a little early since this is a 5th wave. That would be the bottom of the 11 week cycle. The mid-point of the 11 week cycle falls on December 29, so we should be nearing the end of this sideways movement.
As far as 2009 is concerned, you can check out the DJIA Post-Election Year chart at www.seasonalcharts.com. It shows a bottom in February followed by a substantial rally, which is exactly what I expect to happen. It is also followed by a substantial decline, which may be understated.
The indexes are only 1 to 2 days away from a macd sell signal. I will discuss trading tactics once wave E is near completion.
I had a shock today when I opened my platform and saw the QID down 12%. My stop was hit of course, but I did not know what happened until I called my broker and found out that Proshares declared a dividend today unannounced. I knew that this was coming from prior years, but in the past it as only a point or two. I think proshares owes it to those who trade these products to announce a dividend date in advance with amount of the expected dividend like any other stock. That way people can be prepared. Fortunately, I haven't lost anything but a commission as I reentered the position with new targets and stops. I will receive the dividend on tuesday which will offset today's loss. I will be putting a note up on the wall in large font for next year so that I can be prepared ahead of time.
I have been pouring over my cycles data and I believe now that I can say confidently that November 21 was the 10 month cycle low. (This was my originally calculated date, that I later modified to November 26 and December 6.) Based on this I am projecting the end of primary wave 1 to be near the end of January. It calculates out to February 5, but I suspect it may come a little early since this is a 5th wave. That would be the bottom of the 11 week cycle. The mid-point of the 11 week cycle falls on December 29, so we should be nearing the end of this sideways movement.
As far as 2009 is concerned, you can check out the DJIA Post-Election Year chart at www.seasonalcharts.com. It shows a bottom in February followed by a substantial rally, which is exactly what I expect to happen. It is also followed by a substantial decline, which may be understated.
The indexes are only 1 to 2 days away from a macd sell signal. I will discuss trading tactics once wave E is near completion.
I had a shock today when I opened my platform and saw the QID down 12%. My stop was hit of course, but I did not know what happened until I called my broker and found out that Proshares declared a dividend today unannounced. I knew that this was coming from prior years, but in the past it as only a point or two. I think proshares owes it to those who trade these products to announce a dividend date in advance with amount of the expected dividend like any other stock. That way people can be prepared. Fortunately, I haven't lost anything but a commission as I reentered the position with new targets and stops. I will receive the dividend on tuesday which will offset today's loss. I will be putting a note up on the wall in large font for next year so that I can be prepared ahead of time.
Monday, December 22, 2008
Bullish Potential Still Exists, But Waning Rapidly
Back in 2006 I posted a question to Elliottwave International regarding the correlation between individual wave patterns and index pattern and direction. At that time I observed that the majority of Dow components had bullish elliottwave patterns. To me it seemed logical that if the majority of stocks in the Dow are going up, the index is going to go up on balance. However, the response that I got back was surprising. The answer was that the pattern of the index was independent of the patterns of the stocks comprising the index. Now, I realize that sometimes relationships can be counterintuitive, but to me this answer seemed nonsensical. Well, of course the indexes exploded higher for another year and a half.
So what about now? The top ten weighted stocks in the Dow Industrials are, in order, IBM, XOM, CVX, MCD, PG, JNJ, MMM, WMT, UTX and KO. Looking at the patterns in these stocks, I count (5) neutral and (5) bearish patterns. For the next 2 to 3 days, I see that (5) could rally, (3) look flat and (1) looks like it could continue to fall. My conclusion is that any breakout should it occur is likely to fail quickly, which may seem to contradict my previous post on the Santa Claus rally. However, the weight of the evidence seems to lean in the bearish direction.
Today's action would seem to confirm the near term bearish direction, but the December 12 lows are still intact and a rally could still happen. Given the above, perhaps the most likely outcome is a 1 to 3 day rally over the rest of this week that does not take out the December 16/17 highs followed by further decline in wave D.
I am still prepared to buy a breakout, and should it occur on volume, it could be surprisingly strong as the bollinger bands are clamping down. This tightening of the bollinger bands can be resolved in one of three ways: 1) an immediate breakout in either direction, 2) a false breakout followed by a strong move in the other direction and 3) continued sideways action for 4 to 6 days followed by a breakout. Generally, if a breakout of this type is going to work it should not close back within the 1.0BB for several days and the lows should stay above the 20dema.
Each passing day gives us more information about what the next move will be, but it may not be confirmed until next week. My hunch is that there will be some selling initially tomorrow, but that it will close up followed by updays on Wednesday and Friday, and then next week we will see selling into year end. Always remember that ultimately price and trend determine position, not predictions.
So what about now? The top ten weighted stocks in the Dow Industrials are, in order, IBM, XOM, CVX, MCD, PG, JNJ, MMM, WMT, UTX and KO. Looking at the patterns in these stocks, I count (5) neutral and (5) bearish patterns. For the next 2 to 3 days, I see that (5) could rally, (3) look flat and (1) looks like it could continue to fall. My conclusion is that any breakout should it occur is likely to fail quickly, which may seem to contradict my previous post on the Santa Claus rally. However, the weight of the evidence seems to lean in the bearish direction.
Today's action would seem to confirm the near term bearish direction, but the December 12 lows are still intact and a rally could still happen. Given the above, perhaps the most likely outcome is a 1 to 3 day rally over the rest of this week that does not take out the December 16/17 highs followed by further decline in wave D.
I am still prepared to buy a breakout, and should it occur on volume, it could be surprisingly strong as the bollinger bands are clamping down. This tightening of the bollinger bands can be resolved in one of three ways: 1) an immediate breakout in either direction, 2) a false breakout followed by a strong move in the other direction and 3) continued sideways action for 4 to 6 days followed by a breakout. Generally, if a breakout of this type is going to work it should not close back within the 1.0BB for several days and the lows should stay above the 20dema.
Each passing day gives us more information about what the next move will be, but it may not be confirmed until next week. My hunch is that there will be some selling initially tomorrow, but that it will close up followed by updays on Wednesday and Friday, and then next week we will see selling into year end. Always remember that ultimately price and trend determine position, not predictions.
Saturday, December 20, 2008
Rising Summation Index
I was looking at the McClellan Summation Index both for the NYSE and Nasdaq this week and wondering what the implications are that the summation indexes are rising rapidly. This can be really confusing and it might lead many people to believe that the rally is stronger than it really is.
The summation index can be very useful in that devergences between it and the indexes usually precede reversals and reversals without confirmation from the summation index will usually fail. However, a rising summation index does not mean the market must continue to go up, nor does a falling summation index mean that the market must continue to go down.
For example, the summation index fell from late April 2007 to mid August 2007, but the markets continued higher until mid July. The falling summation index did precede the sharp sell off from July to August 2007 and the summation index reversed coincident with the markets. In this case this was a clue the market advance into July was on weak underpinnings and a sharp reversal was likely.
On the other hand, I looked back 10 years for market behavior (using the QQQQ) after the 12dema crossed the 26dema, i.e. the macd crossed above 0. In all but 5 cases in 10 years the markets continued higher for at least a few days after that event. In most cases, the market continued higher for weeks to months, which is a strong reason for not ignoring such signals. But what about the 5 cases when the market reversed 0 to 3 days after the cross? The summation index continued higher for 2 to 3 weeks in each case.
The conclusion is that if the summation index diverges from the market, we should be on guard for sudden reversals, but the market can reverse without a signal from the summation index. Traders should not be complacent just because the summation index is moving with the market. I am not certain of the reason for this behavior, but in the 5 cases above, and in the current case I suspect it is because the weakest laggards are being bought because they appear "cheap" which keeps the summation index rising while the leaders are being sold. It takes time for the "buy cheap stocks" mentality to dissapate after a bottom even as the markets are rolling over.
To follow up on Friday's post, if the markets do break out Monday, the rally should be anywhere from 3 to 11 days based on the length of wave a, which puts the end of the rally at December 24 to January 7.
The summation index can be very useful in that devergences between it and the indexes usually precede reversals and reversals without confirmation from the summation index will usually fail. However, a rising summation index does not mean the market must continue to go up, nor does a falling summation index mean that the market must continue to go down.
For example, the summation index fell from late April 2007 to mid August 2007, but the markets continued higher until mid July. The falling summation index did precede the sharp sell off from July to August 2007 and the summation index reversed coincident with the markets. In this case this was a clue the market advance into July was on weak underpinnings and a sharp reversal was likely.
On the other hand, I looked back 10 years for market behavior (using the QQQQ) after the 12dema crossed the 26dema, i.e. the macd crossed above 0. In all but 5 cases in 10 years the markets continued higher for at least a few days after that event. In most cases, the market continued higher for weeks to months, which is a strong reason for not ignoring such signals. But what about the 5 cases when the market reversed 0 to 3 days after the cross? The summation index continued higher for 2 to 3 weeks in each case.
The conclusion is that if the summation index diverges from the market, we should be on guard for sudden reversals, but the market can reverse without a signal from the summation index. Traders should not be complacent just because the summation index is moving with the market. I am not certain of the reason for this behavior, but in the 5 cases above, and in the current case I suspect it is because the weakest laggards are being bought because they appear "cheap" which keeps the summation index rising while the leaders are being sold. It takes time for the "buy cheap stocks" mentality to dissapate after a bottom even as the markets are rolling over.
To follow up on Friday's post, if the markets do break out Monday, the rally should be anywhere from 3 to 11 days based on the length of wave a, which puts the end of the rally at December 24 to January 7.
Friday, December 19, 2008
Santa Claus Is Coming To Town - Probably
Today's action has introduced a new twist into the analysis of the probable direction of the market. While the Dow closed down today the other indexes did not follow suit. The Qs closed in a very tight range completing a b wave triangle from the 12/9 high. The triangle in the Qs is almost textbook on the 60min chart, so this means that the markets must move down almost immediately Monday morning and not breakout above today's high or we will see much higher markets. The Dow has traced out a slightly different and larger ascending b wave.
This is a tradeable move as I see it, and I will be going long on the breakout above Friday's high with a tight stop. Targets are 31.97, 33.97 & 35.44 for the Qs; 9182, 9654 & 9932 for the Dow. That's right, almost 10,000 for the Dow is a possibility.
I want to remind you that I have been positioned long and short, so I will be tightening stops on shorts and taking profits on longs on a breakout.
This does not mean that the bear market is over by any means as the b wave triangles confirm a 3 wave move no matter which way the breakout occurs in this case. If it is up, then we have wave c of C, or wave C of (A). If it is down then, we have wave a or c of D depending on how you look at it.
I must admit that I am a little upset with myself. It really didn't dawn on me what I had done until this week. Back on November 14, I went long the Qs via the QLD and was stopped out on November 19. On November 21, the markets reversed again and we had a positive divergence macd buy signal on November 25/26. I did not realize it at the time, but I can see now that I passed on that trade because I had just been stopped out for a loss. My decision to go short again was sound based on the reversal on 12/1 and potential breakdown and so now I have another loss, which is ok. We will have losses, the key is to take the next trade and I didn't take the macd trade. I had planned for it for months, even giving the cycle turn date on this blog, so I should have taken it.
This is a hard business because it requires a level of self discipline that most people just can't imagine, and the point is that now we have another valid trade setup, and I will take it because it is there. If I lose money, then so be it. That is what account risk management is for.
Take a moment to look at the system tracker. The VLE system had 7 losing trades in a row, and is still up over 20% for the year. Discipline requires that we take the next trade that is in our trading plan even if it feels painful, because the ultimate result will be positive (for a valid strategy).
This is a tradeable move as I see it, and I will be going long on the breakout above Friday's high with a tight stop. Targets are 31.97, 33.97 & 35.44 for the Qs; 9182, 9654 & 9932 for the Dow. That's right, almost 10,000 for the Dow is a possibility.
I want to remind you that I have been positioned long and short, so I will be tightening stops on shorts and taking profits on longs on a breakout.
This does not mean that the bear market is over by any means as the b wave triangles confirm a 3 wave move no matter which way the breakout occurs in this case. If it is up, then we have wave c of C, or wave C of (A). If it is down then, we have wave a or c of D depending on how you look at it.
I must admit that I am a little upset with myself. It really didn't dawn on me what I had done until this week. Back on November 14, I went long the Qs via the QLD and was stopped out on November 19. On November 21, the markets reversed again and we had a positive divergence macd buy signal on November 25/26. I did not realize it at the time, but I can see now that I passed on that trade because I had just been stopped out for a loss. My decision to go short again was sound based on the reversal on 12/1 and potential breakdown and so now I have another loss, which is ok. We will have losses, the key is to take the next trade and I didn't take the macd trade. I had planned for it for months, even giving the cycle turn date on this blog, so I should have taken it.
This is a hard business because it requires a level of self discipline that most people just can't imagine, and the point is that now we have another valid trade setup, and I will take it because it is there. If I lose money, then so be it. That is what account risk management is for.
Take a moment to look at the system tracker. The VLE system had 7 losing trades in a row, and is still up over 20% for the year. Discipline requires that we take the next trade that is in our trading plan even if it feels painful, because the ultimate result will be positive (for a valid strategy).
Thursday, December 18, 2008
Overall Bearish Day
Dave, my prefered count is as you indicated in your comment, wave A up on 11/4, wave B down on 11/21 and completing wave C up now.
If tomorrow closes below today's low then wave D down is underway. If tomorrow closes above today's high, then we wave at least one more little push higher.
I, too feel that the indexes are not in nearly as good a shape as everyone seems to think. Go back and look at the rallies off of the 9/01, 10/02 and 3/03 bottoms. Now, those were rallies. This thing feels like an overloaded single engine prop plane trying to get off the ground before the end of runway, but we must not get complacent as I do recall a couple of instances were powerful rallies seemed to emerge out of thin air.
One reason that I think we are rolling over is the Eliades New Trin index (see Market Harmonics link) has hit as all time high and is rolling over which is very bearish, while the Options Buyers Sentiment Gauge has remained relatively bearish. In other words, the small speculators and the public have gotten bullish very quickly, while the large speculators ahve remained bearish. This is one time when I do not want to be on the side of the small speculators. Also, the COTs Timer site went bearish the SP500 this week based on the commitment of trader's reports.
I think the markets will limp along until the end of the year, but I still expect selling to materialize near the end of December.
Another interesting fact that has come up is that the Dow is now forming a squeeze on a 2 day chart. This is where the 1.5 SD Bollinger bands are inside the 20 period Keltner channels indicating the possibility of an explosive move. I expect the squeeze to set up on the daily chart over the next week. By my calculations, this squeeze projects the Dow to move around 1500 points above or below the December bollinger band range, down to 6500 or up to 11000. I do not expect latter.
If tomorrow closes below today's low then wave D down is underway. If tomorrow closes above today's high, then we wave at least one more little push higher.
I, too feel that the indexes are not in nearly as good a shape as everyone seems to think. Go back and look at the rallies off of the 9/01, 10/02 and 3/03 bottoms. Now, those were rallies. This thing feels like an overloaded single engine prop plane trying to get off the ground before the end of runway, but we must not get complacent as I do recall a couple of instances were powerful rallies seemed to emerge out of thin air.
One reason that I think we are rolling over is the Eliades New Trin index (see Market Harmonics link) has hit as all time high and is rolling over which is very bearish, while the Options Buyers Sentiment Gauge has remained relatively bearish. In other words, the small speculators and the public have gotten bullish very quickly, while the large speculators ahve remained bearish. This is one time when I do not want to be on the side of the small speculators. Also, the COTs Timer site went bearish the SP500 this week based on the commitment of trader's reports.
I think the markets will limp along until the end of the year, but I still expect selling to materialize near the end of December.
Another interesting fact that has come up is that the Dow is now forming a squeeze on a 2 day chart. This is where the 1.5 SD Bollinger bands are inside the 20 period Keltner channels indicating the possibility of an explosive move. I expect the squeeze to set up on the daily chart over the next week. By my calculations, this squeeze projects the Dow to move around 1500 points above or below the December bollinger band range, down to 6500 or up to 11000. I do not expect latter.
Bullish Or Bearish Triangle?
The Qs have been consolidating sideways in what appears to be a triangle. Given that we are probably in a larger triangle, which is made up of a number of corrective moves in both directions, there is no way to be certain which way they will break out. However, the likelihood is that Qs will breakout to the upside as long as they remain above yesterday's lows of 29.82. If yesterday's low is breached, then the high of the rally is probably in. The Dow must hold 8682 to keep the uptrend alive.
As I write this the markets are close to breaking down. The semiconductor index is rolling over which is a tell.
As I see it there are 3 possible outcomes: 1) either yesterday's afternoon high was a truncated 5th wave and wave C up is complete, 2) a small degree 4th wave triangle is nearing completion which will lead to a quick thrust up to complete wave C, probably tomorrow, or 3) a b wave triangle is underway which will lead to a slightly higher high, probably Monday. In the latter two cases, the 50dema in the Qs should contain the rally. If it does not, then we are likely headed to 34.
It is interesting to see the VIX falling with little upside response from the markets, but I think that as long as the VIX remains above the January high of 37.57, the trend in the VIX is up and we will likey see another spike 60. I don't expect we will match the October highs on the next decline.
QCOR has just completed wave A of a large correction. It may be a buy on a successful test of today's lows in January.
As I write this the markets are close to breaking down. The semiconductor index is rolling over which is a tell.
As I see it there are 3 possible outcomes: 1) either yesterday's afternoon high was a truncated 5th wave and wave C up is complete, 2) a small degree 4th wave triangle is nearing completion which will lead to a quick thrust up to complete wave C, probably tomorrow, or 3) a b wave triangle is underway which will lead to a slightly higher high, probably Monday. In the latter two cases, the 50dema in the Qs should contain the rally. If it does not, then we are likely headed to 34.
It is interesting to see the VIX falling with little upside response from the markets, but I think that as long as the VIX remains above the January high of 37.57, the trend in the VIX is up and we will likey see another spike 60. I don't expect we will match the October highs on the next decline.
QCOR has just completed wave A of a large correction. It may be a buy on a successful test of today's lows in January.
Wednesday, December 17, 2008
A Few More Days
The markets are likely headed higher from here. Today would have been a great day to reverse and head lower, but that didn't happen. Instead we had a pause day. The 25dema is close to crossing up the 50dema, but we will likely see a pullback when that happens since the 50dema is currently resistance. It looks like the Qs are headed to 31.50 to 32. The Dow looks to be headed to 9275. Any breakout above those levels would indicate a much larger than expected rally is underway.
AAPL spells trouble ahead. AAPL is forming a bearish descending running triangle, which has just completed wave d down. Wave e up should not move above 103.60. Look to short a break below 88.02 after wave e completes with a downside target of 65. However, since this is a 5th wave and the market will be headed down in a 5th wave, early profit taking would be prudent. RIMM is set to move down with AAPL. A move above 45.36 would change the outlook on RIMM.
I expect the financials and the transports to lead to the downside as they are lagging in this rally. Watch for moves below the 12/12 lows for a heads up on market direction.
Another market to watch for a heads up is the US Dollar Index. The stock markets have been rallying as the dollar has fallen. A reversal in dollar, which may be imminent would also be a sign that the rally has topped.
There may be very little action until the end of the year, so don't get chopped up. Wider stops than usual will be required until the trend reasserts itself. I heard today that there may be another wave of hedge fund redemptions due to the Madoff scandal, but that they won't hit until after 12/31/08 for tax reasons.
AAPL spells trouble ahead. AAPL is forming a bearish descending running triangle, which has just completed wave d down. Wave e up should not move above 103.60. Look to short a break below 88.02 after wave e completes with a downside target of 65. However, since this is a 5th wave and the market will be headed down in a 5th wave, early profit taking would be prudent. RIMM is set to move down with AAPL. A move above 45.36 would change the outlook on RIMM.
I expect the financials and the transports to lead to the downside as they are lagging in this rally. Watch for moves below the 12/12 lows for a heads up on market direction.
Another market to watch for a heads up is the US Dollar Index. The stock markets have been rallying as the dollar has fallen. A reversal in dollar, which may be imminent would also be a sign that the rally has topped.
There may be very little action until the end of the year, so don't get chopped up. Wider stops than usual will be required until the trend reasserts itself. I heard today that there may be another wave of hedge fund redemptions due to the Madoff scandal, but that they won't hit until after 12/31/08 for tax reasons.
Tuesday, December 16, 2008
What's a bear to do?
While the indexes continue to grind higher, the Transports and the Financials are lagging. Having broken the uptrend line from the November 12 low, they merely rose to test the underside of the line today. The VIX is still hanging on, but will likely invalidate the triangle pattern, which argues against any immediate strong downside action. However, none of the indexes bested their December highs today except the NYSE Comp. The volume was surprisingly below average given the overall hoopla around the Fed's action. Nevertheless it appears the markets will be heading higher if only for a few days.
But the question that must be asked is this. What will it take to get a confirmed uptrend signal in this market? From a technical point of view anything less than a move above the November 4 high is a countertrend rally, until we get a pullback on the weekly charts with a higher low and a move above that new swing high, and we are a long way from that regardless of moving averages and momentum indicators. However, if we did see the 20 or 25dema cross up the 50dema followed by a pullback and follow-through, that would also be enough to confirm the uptrend. Still, we are a long way from that as well.
Patience is key here. I will not be adding new positions until I see a confirmation one way or another, but don't believe for a second that just because the Fed is throwing everything but the kitchen sink at this market that it can't go down, at least one more time.
One amazing thing I want to report is that I have been using the 3 week rule to trail a stop on the second half of my stock short positions, and so far I have only been stopped out of DTV. I managed to cover the first half of DTV around 18 and exited the second half for a small profit. Although I have given back some gains, I am still in my remaining stock short positions. I am now only 40% short in the portion of my account allocated to invidual stocks while I am 60% long. Hopefully, I will be able to take some profits on the long positions by the end of the year. There are a lot more sophisticated volatility based stop systems, but I don't see that the more complicated is better than the simple 3 week stop.
But the question that must be asked is this. What will it take to get a confirmed uptrend signal in this market? From a technical point of view anything less than a move above the November 4 high is a countertrend rally, until we get a pullback on the weekly charts with a higher low and a move above that new swing high, and we are a long way from that regardless of moving averages and momentum indicators. However, if we did see the 20 or 25dema cross up the 50dema followed by a pullback and follow-through, that would also be enough to confirm the uptrend. Still, we are a long way from that as well.
Patience is key here. I will not be adding new positions until I see a confirmation one way or another, but don't believe for a second that just because the Fed is throwing everything but the kitchen sink at this market that it can't go down, at least one more time.
One amazing thing I want to report is that I have been using the 3 week rule to trail a stop on the second half of my stock short positions, and so far I have only been stopped out of DTV. I managed to cover the first half of DTV around 18 and exited the second half for a small profit. Although I have given back some gains, I am still in my remaining stock short positions. I am now only 40% short in the portion of my account allocated to invidual stocks while I am 60% long. Hopefully, I will be able to take some profits on the long positions by the end of the year. There are a lot more sophisticated volatility based stop systems, but I don't see that the more complicated is better than the simple 3 week stop.
Monday, December 15, 2008
The Transports Lead To The Downside
(click to enlarge chart)The Dow Transports and the S&P Financials have closed solidly below the uptrend line from the 11/21 low. It seems likely that the Dow Industrials, S&P 500 and Nasdaq Composite and 100 will follow suit. The VIX continues to hang in there amazingly. So what can we expect from here. If the indexes close above the 12/8 and 12/9 highs, then the rally will extend to the 50demas, but at the moment it appears that the Dow is headed to 8000 or below and the Qs are headed to 27 or below to complete wave D of the intermediate 4th wave triangle.
Elliot Wave International says that the upper trendline of the triangle will be too steep to be a valid triangle and therefore another pattern is developing, possibly an ending diagonal triangle if the market goes down tomorrow. I don't agree with this assessment. I think that this is most likely a triangle, and the reason is that I am seeing a lot of triangles developing in large cap stocks. The triangle makes the most sense as I think the mutual funds and institutional investors and the government are going to do everything possible to hold this market up until the end of the year, and the triangle allows that to happen. Then, the final wave of selling can begin on January 2.
The alternate view is that wave 3 of (5) is setting up, which is even more bearish, but I don't think this could be right as the decline from the 12/8 and 12/9 highs looks very corrective, which fits with a wave D interpretation.
I am still looking for a macd sell or a break of last weeks low to get more bearish. I will expect this to occur on increasing volume and wait for a retest to add to short positions. A failure of the retest would be the ideal entry point. Anything else could be a fakeout breakdown.
If the market was going to break out, I think it would have already done so as there has been ample opportunity over the last week for the generals to push it up and they haven't. Everyone knows what the Fed is going to do tomorrow. The only surprise will be if they only lower interest rates 1/4 pt instead of a 1/2 pt. Such a surprise would indeed be negative for stocks given the expectations.
So, don't lose your patience. It is not surprising to see a slow grind sideways to work off the oversold condition generated in October. The rally from the March 17 low took 44trading days. We are currently at 34 trading days from the October 27 low and 10 trading days will take us to December 30.
Friday, December 12, 2008
In Suspense
Well, early this morning it looked like the markets were ready to turn down, but by the end of the day everything was positive, except for the Transports, which closed decisively negative for the week. More importantly, the Transports broke the uptrend line from the 11/21 low and penetrated the 12/5 swing low. The VIX remains atop the upsloping trendline on the bottom of the triangle.
There's little to add. Until the markets roll over to confirm the triangle pattern or breakout to continue the rally there is not much to do. I am partially long and partially short, as a few stocks are acting well, but the indexes remain in monthly downtrends. We can look to any number of signals to indicate the weekly downtrend has resumed: 1) A break below this week's lows on volume (28.47 in the Qs), 2) a high volume reversal day, 3) a macd sell signal (approaching), 4) a solid close below a 10 to 13dema, 5) a close below the mid-point of the range of the last 10 to 14 days (28.84 in the Qs for 14 days), etc. I will be using the macd and this week's lows to confirm the resumption of the trend.
During the next three weeks I will be re-evaluating my methods and strategies to develop my plan for 2009. I will be making some changes. This year I have primarily used three ETF pairs to trade the indexes: QLD/QID, UWM/TWM and UYG/SKF. Next year I will be adding the USD/SSG. I am expecting some large moves in the semi-conductor index and the Nasdaq 100 is no longer just a technology index. While the above markets are highly correlated overall, my purpose in using 4 pairs is to allow me to use different trend following strategies on each pair. In addition, I will use two strategies on each pair as well as a method for taking partial profits. This will allow for asymmetric entries and exits, reduce drawdowns and eliminate most discretionary trades. While overall I have done very well with discretionary trades because I am fairly consistent in my approach, I want to reduce discretionary trading for one main reason: stress relief. Even when things are going well, I tend to get caught up in over analyzing outcomes when I am in a discretionary trade. I have also systematized all of the strategies that I use for invidual stock trades to further eliminate descretionary trades there as well. The discretion will be in final selection of stocks to trade, as opposed to entries and exits and trend determination.
I share this with you to encourage you to start now in making a successful plan for 2009. I believe 2009 may be an even better year for traders than 2008 has been. The next 3 years may offer an opportunity for traders to make 10 years of profits (or more), an opportunity that doesn't come around very often.
I am anticipating an explosive rally off of a climax selloff to come in January. The rally should last well into the summer and retrace 50% to 62% of the decline from the October 2007 highs. That rally alone will offer the opportunity to make as much profit as the entire decline has. For example, if the Dow bottoms around 7000, a 62% retracement will also yield a 62% gain vs a 50% gain for the shortside from the highs. At that point, I anticipate we will see another decline of the same magnitude as the current one into a 4 year cycle low in 2010, which should yield another 60% opportunity. That works out to almost 300% without using margin, or 900% using double leveraged ETFs. Of course, discipline in risk management will be key as drawdowns are inevitable.
Plan ahead for this exciting time and remember to keep it simple.
There's little to add. Until the markets roll over to confirm the triangle pattern or breakout to continue the rally there is not much to do. I am partially long and partially short, as a few stocks are acting well, but the indexes remain in monthly downtrends. We can look to any number of signals to indicate the weekly downtrend has resumed: 1) A break below this week's lows on volume (28.47 in the Qs), 2) a high volume reversal day, 3) a macd sell signal (approaching), 4) a solid close below a 10 to 13dema, 5) a close below the mid-point of the range of the last 10 to 14 days (28.84 in the Qs for 14 days), etc. I will be using the macd and this week's lows to confirm the resumption of the trend.
During the next three weeks I will be re-evaluating my methods and strategies to develop my plan for 2009. I will be making some changes. This year I have primarily used three ETF pairs to trade the indexes: QLD/QID, UWM/TWM and UYG/SKF. Next year I will be adding the USD/SSG. I am expecting some large moves in the semi-conductor index and the Nasdaq 100 is no longer just a technology index. While the above markets are highly correlated overall, my purpose in using 4 pairs is to allow me to use different trend following strategies on each pair. In addition, I will use two strategies on each pair as well as a method for taking partial profits. This will allow for asymmetric entries and exits, reduce drawdowns and eliminate most discretionary trades. While overall I have done very well with discretionary trades because I am fairly consistent in my approach, I want to reduce discretionary trading for one main reason: stress relief. Even when things are going well, I tend to get caught up in over analyzing outcomes when I am in a discretionary trade. I have also systematized all of the strategies that I use for invidual stock trades to further eliminate descretionary trades there as well. The discretion will be in final selection of stocks to trade, as opposed to entries and exits and trend determination.
I share this with you to encourage you to start now in making a successful plan for 2009. I believe 2009 may be an even better year for traders than 2008 has been. The next 3 years may offer an opportunity for traders to make 10 years of profits (or more), an opportunity that doesn't come around very often.
I am anticipating an explosive rally off of a climax selloff to come in January. The rally should last well into the summer and retrace 50% to 62% of the decline from the October 2007 highs. That rally alone will offer the opportunity to make as much profit as the entire decline has. For example, if the Dow bottoms around 7000, a 62% retracement will also yield a 62% gain vs a 50% gain for the shortside from the highs. At that point, I anticipate we will see another decline of the same magnitude as the current one into a 4 year cycle low in 2010, which should yield another 60% opportunity. That works out to almost 300% without using margin, or 900% using double leveraged ETFs. Of course, discipline in risk management will be key as drawdowns are inevitable.
Plan ahead for this exciting time and remember to keep it simple.
Thursday, December 11, 2008
Tomorrow Will Tell
I think the markets have run out of steam here. I went long the DDM off of a nice setup on the 60min chart, but it rolled over an hour later for a small loss. I took the trade primarily as a hedge against my QID position, in case the markets broke out, which it appeared they were ready to do. Amazingly, the VIX held firm and did not break the wave c low of the triangle. Currently the futures are down another 2%+-, so we may see a large down day tomorrow. There is trendline support, but I don't think it is likely to hold.
Several markets are near reversal points, including the Euro and the Yen which also points to a reversal in stocks.
I don't know if it was in jest, but the comment on the relation between the Gann lines I showed on the Qs and heliocentric positions of the planets is interesting. I dare not talk about it too much, but I have investigated these matters. I don't want to put people off, as most view such things as irrational and unscientific. But consider this: last year the Dow bottomed on 11/26/97, topped on 11/30/07, bottomed on 12/4/07 and topped on 12/11/07. This year the Dow bottomed on 11/21/08, topped on 11/28/08, bottomed on 12/1/08 and topped? on 12/8/08. Accounting for weekends, that is an exact duplication of last year's movements with negative 3 day shift. If the pattern holds, we should see a bottom on Monday 12/15/08, a top on Monday 12/22/08 (to complete wave E of the triangle) followed by a strong down move to 1/16/09 for a bottom. At that point the triangle in the Dow will be 39 days long. The typical length of the thrust is 1/3 of the length of the triangle which would be 13 days, putting a bottom at 1/12/09. Of course, this is all interesting for context and possible turn dates, but I will not be 100% short until I see some valid sell signals.
Several markets are near reversal points, including the Euro and the Yen which also points to a reversal in stocks.
I don't know if it was in jest, but the comment on the relation between the Gann lines I showed on the Qs and heliocentric positions of the planets is interesting. I dare not talk about it too much, but I have investigated these matters. I don't want to put people off, as most view such things as irrational and unscientific. But consider this: last year the Dow bottomed on 11/26/97, topped on 11/30/07, bottomed on 12/4/07 and topped on 12/11/07. This year the Dow bottomed on 11/21/08, topped on 11/28/08, bottomed on 12/1/08 and topped? on 12/8/08. Accounting for weekends, that is an exact duplication of last year's movements with negative 3 day shift. If the pattern holds, we should see a bottom on Monday 12/15/08, a top on Monday 12/22/08 (to complete wave E of the triangle) followed by a strong down move to 1/16/09 for a bottom. At that point the triangle in the Dow will be 39 days long. The typical length of the thrust is 1/3 of the length of the triangle which would be 13 days, putting a bottom at 1/12/09. Of course, this is all interesting for context and possible turn dates, but I will not be 100% short until I see some valid sell signals.
Wednesday, December 10, 2008
Interesting View Of The QQQQs
Thanks Dave for the clarification on the "short" QID position. Yes, I am short the Qs via the QID, and I agree that there is no more room left for the VIX to move down. If we don't see an increase in volatility tomorrow, the markets may be ready to break out to the next downsloping channel line as shown in the above chart.I have read some of WD Gann's books and although I don't agree with all of his methods, some of his ideas deserve merit. His idea that markets tend to move along fixed lines until they jump to the next level or angle seems to be a valid observation. I find it difficult to implement however. But look at the lines drawn above. Is it just total coincidence that the line through the two lower lows from the first wave down in 2007 is exactly parallel to the line through the three lower lows in October and November of this year, as well as the three lower highs from the same period which also hit the June high? I can't explain it, but I think these lines are the dominant force in the downtrend until it reverses. One possible outcome that I see happening is a breakout above the current trendline after which the market slides down the upper side of that line to new lows, and then finally breaks out above the highest line to signal an end to primary wave 1 down.
Tuesday, December 9, 2008
Triangle In The VIX
A triangle has formed in the VIX representing a possible 4th wave in a 5 wave impulse from the May low. As long as the VIX remains above the wave c low, the implication is that we will see a short but explosive selloff once the downtrend resumes. If wave e is labeled correctly above , then the selloff may begin as soon as tomorrow. On the other hand, if wave d needs more work, then it may be another two weeks before the downtrend continues. Currently, the triangle is 31 days in length which gives us an estimated 10 days for the 5th wave thrust. Once wave 5 completes, we can expect a significant intermediate term rally in the stock indexes lasting several months that retraces as much as 62% of the decline from the October 2007 high.Once the triangle in the indexes is near completion, I will discuss ways to trade it. I am still short the QID and will add other index short positions once wave c up in the indexes is complete as evidenced by a fall below the low of the prior week or a macd sell signal.
Today's rally in the Qs reversed almost exactly at the downsloping trendline connecting the highs of 10/14 and 11/4 so any significant breakout above today's high may mean that this rally is going higher and the triangle interpretation is invalid. The action over the next two days is key.
New 10 Year Relative Strength Low In SOX
The semiconductor index just made a new 10 year relative strength low yesterday. That is perhaps the most telling sign that this is a bear market rally!
Monday, December 8, 2008
3 Wave Rally Nears Completion
Markets closed decisively above last week's highs but the volume lagged on the QQQQ and the IWM while volume expanded on the major indexes. QQQQ relative strength is still lagging, which is a bad sign. Overall the current rally appears to be a double zigzag upward correction from the November 21 low. It may have ended today, but most likely we will see one more down-up sequence to complete it. The Dow finished just shy of the 50dema and the Qs finished just shy of the .618 retracement from the Nov 4 high. Both of those facts point to one more attempt at a rally high. If I had to guess, I would say it happens Wednesday after a down day tomorrow.
Today's open handed the bears one of those gotcha moments. Your exit level has been exceeded, but the market has gapped up well beyond the exit level. So what do you do? I think consistency is the most important trait to develop here. Always do it the same way and your results will be more consistent. In these situations, I choose to give the market an hour to see what happens. Sometimes it is clear that the market is running away and I go ahead and exit, but today was not clear at all. Yes, the Qs closed up 3.94%, but they only closed up .53 from the open and on lower volume. I saw that the volume was running light so I decided to hold my QID position. In an earlier post I recommended using wide stops. In this case my stop was 2 ATRs below the recent swing low (QID), so my stop has not yet been hit. My choice to exit on a breakout would have reduced my original loss expectation. However, I am still in and within my original trade parameters.
So far we have had few market long signals to suggest that this rally is for real. The Cabot Tides indicators are still short. The markets are still below the high of the low month and volume has been below average. Another interesting fact that John Carter of tradethemarkets.com has pointed out several times is that the Yen/Dollar is a great leading indicator for market action. The chart above shows that the rally in the Yen/Dollar is clearly 3 waves and it may already be breaking down in 5 waves.
My long positions helped cushion the blow from today's rally and I continue to look for a reversal in the next two days. If the markets continue higher I will exit short and look to go long on a pullback to the breakout level.
Saturday, December 6, 2008
A Note On The Cycle Low
Since earlier this year, I have been projecting the low of the 10 month cycle to fall on or around 11/26 to 12/5. ( I had said 12/6, but today is not a trading day.) Yesterday marked the exact date for the 10 month cycle low from the 1/23 low. However, we saw the markets close near the highs of the week after last week's rally. One interesting phenomenon that often occurs with cycle lows and highs is that they can form a double bottom or double top with the intervening high or low occuring at the cycle low or high.
This occurred in July when the market bottomed near the mid-point of the 10 month cycle. It may be happening now on a smaller scale as we may be seeing a minor high occurring between the two lows of a double bottom. If this is the case, then we should see another low in 4 to 6 days. From the 11/21 low, we have 4 days up, 3 days down, 3 days up and by symmetry we may expect 4 days down to a new low around December 11 to 12, or if we make a minor new high on Monday, then we could expect 12 days down to a new low around December 24. The latter projection is exceptionally late, but the usual year-end rally may not occur this year.
Based on this possible outcome, I will remain short the indexes unless the markets rally on exception volume above the 11/26 high. I usually wait for the first hour of trading and multiply the first hour's volume by 5. This usually gives the end of day volume for the day within 10%. Compare this to the previous days volume and the average volume to determine if it supports the breakout. A projected end of day volume more than 10% less than the prior day's volume on a breakout makes the breakout suspect.
This occurred in July when the market bottomed near the mid-point of the 10 month cycle. It may be happening now on a smaller scale as we may be seeing a minor high occurring between the two lows of a double bottom. If this is the case, then we should see another low in 4 to 6 days. From the 11/21 low, we have 4 days up, 3 days down, 3 days up and by symmetry we may expect 4 days down to a new low around December 11 to 12, or if we make a minor new high on Monday, then we could expect 12 days down to a new low around December 24. The latter projection is exceptionally late, but the usual year-end rally may not occur this year.
Based on this possible outcome, I will remain short the indexes unless the markets rally on exception volume above the 11/26 high. I usually wait for the first hour of trading and multiply the first hour's volume by 5. This usually gives the end of day volume for the day within 10%. Compare this to the previous days volume and the average volume to determine if it supports the breakout. A projected end of day volume more than 10% less than the prior day's volume on a breakout makes the breakout suspect.
Friday, December 5, 2008
Is This Rally For Real?
The bulls have pushed the markets to the edge of the envelope for the bears. Any sustained move above last week's highs of 29.36 in the Qs and 8831 in the Dow would be cause to exit short positions. However, the 50dema looms just above that level in the Dow and may lead to a reversal on any breakout.
I must say that it is hard to believe in this rally. The intraday pattern suggests that today's high was the top of a countertrend rally against the 12/1 decline. The advance/decline ratio has deteriorated on every advance since it began back on 11/21. The McClellan Oscillator is at an extreme high level associated with tops. If the markets had already broken out, a coincident high reading in the McClellan Oscillator would be bullish, but since they haven't it would normally be bearish. On the other hand the Summation Index is rising and the Options Buyers Sentiment Gauge is at an extreme bearish reading, both of which are bullish.
The bottom line is that should we get a breakout above last week's high next week, I will exiting my index short positions and reversing to go long the Qs for a move to the 50dema. This period reminds me of February 2008. I got chopped up a couple of times then too before the real rally materialized. We can't expect to win every trade. As long as we are trading the trend, we will be rewarded in the long run. For now, the trend is still down, but a reversal could be a hand.
I must say that it is hard to believe in this rally. The intraday pattern suggests that today's high was the top of a countertrend rally against the 12/1 decline. The advance/decline ratio has deteriorated on every advance since it began back on 11/21. The McClellan Oscillator is at an extreme high level associated with tops. If the markets had already broken out, a coincident high reading in the McClellan Oscillator would be bullish, but since they haven't it would normally be bearish. On the other hand the Summation Index is rising and the Options Buyers Sentiment Gauge is at an extreme bearish reading, both of which are bullish.
The bottom line is that should we get a breakout above last week's high next week, I will exiting my index short positions and reversing to go long the Qs for a move to the 50dema. This period reminds me of February 2008. I got chopped up a couple of times then too before the real rally materialized. We can't expect to win every trade. As long as we are trading the trend, we will be rewarded in the long run. For now, the trend is still down, but a reversal could be a hand.
Wednesday, December 3, 2008
Make Or Break Time
(Click To Enlarge)The stock indexes continued higher today after yesterday's follow-through day, so do this mean the rally will continue? I still think the balance of risk is to the downside. ( I apologize for the poor image quality of the above chart. One of my goals for 2009 is to provide better charts.) The above chart shows an interesting interpretation that has only become evident today. It is possible that the Dow complete Minor wave 5 of Intermediate wave (3) on 10/27 as a truncated 5th wave and has been tracing out a running triangle for wave (4) since then. At this point, we would be in wave E or wave b of D. We can estimate wave (5) to complete around 6420 if this view is correct.
We are at a make or break point with regard to the near term bearish viewpoint. The indexes should begin to decline fairly soon tomorrow or we are probably in wave C of (4) up to new rally highs around the 50dema. The rally over the last two days seems to be an upward correction with overlapping waves forming a double zigzag. If the Dow moves above 8680 and the Qs move above 26.84 tomorrow, then in all likelihood wave C up is underway.
Another reason to suspect that won't be the case is that the rally from the early afternoon low appears to clearly be 3 waves with an intervening b wave triangle, which again supports the view that this is an upward correction.
The bottom line is that we will know tomorrow if wave C up to the 50dema is underway, or if we are headed to new lows. If it is wave C, I will be exiting my index short positions and waiting for a new opportunity.
I added two new stock long positions today. QCOR broke out to new highs today. RIMM recovered from its early morning breakdown. However, ADBE and DTV are down after hours. This is certainly a bifurcated market.
Tuesday, December 2, 2008
Was Today A Follow-Through Day?
Today's action met the IBD criteria for a follow-through off of the 11/21 low as the Nasdaq Composite was up 3.7% on higher volume than yesterday. I would not be surprised to see it called that way in tomorrow's edition. However, looking at the intraday chart the rally appeared to be an upward flat correction in the form of a 3-3-5 wave count which completed wave c near the close. I could be wrong of course. An alternate view is that the upward correction is a double zigzag with one more down up sequence to complete. I suspect there will be some additional upside tomorrow morning, but none of the indexes advanced more than 50% of yesterday's decline, so I find it hard to get too excited about the long side (in the indexes) yet.
I was filled today on two index short positions on today's retracement. I guess I will know in a day or two if they work out. You can only trade what you see, and what I see is a market in a downtrend that had a nice bounce today. Follow-through tomorrow on increasing volume would be cause to reconsider.
An additional interesting pattern emerged today as the VIX appears to be forming a triangle, which could be a continuation pattern, or wave b of a correction. Either case suggests that the VIX will move higher in the future indicating further selling ahead as well.
I was filled today on two index short positions on today's retracement. I guess I will know in a day or two if they work out. You can only trade what you see, and what I see is a market in a downtrend that had a nice bounce today. Follow-through tomorrow on increasing volume would be cause to reconsider.
An additional interesting pattern emerged today as the VIX appears to be forming a triangle, which could be a continuation pattern, or wave b of a correction. Either case suggests that the VIX will move higher in the future indicating further selling ahead as well.
Monday, December 1, 2008
Retest Of The Lows Underway
The week before Thanksgiving I offered two possible scenarios for market action over the last two weeks. It appears that the latter of those two scenarios is now playing out: "number two, we trade sideways to slightly up next week followed by selling into December 6+/- to put in the final low". The part I missed was that the market traded up dramatically instead of sideways to slightly up. However, today's action made up for that. The only problem is that I have so far failed to get an entry in any index short positions. Perhaps the extreme gap this morning was a clue. In any case I will be looking to short any retracement, preferably 50% of the decline from Friday's high for a retest of the November lows.
I believe the Nasdaq 100 (QQQQ) will go beyond the lows possibly as low as 23. Also, the current pattern suggests that it may take two more lows before we get a sustainable rally. I anticipate based on the pattern that we will see a low around December 5 to 9 followed by a 3 to 4 day rally and then another low during the week of December 15. The reason for this is that the decline in the Qs from November 4 to November 21 counts best as wave i of an ending diagonal triangle. So we are likely just beginning wave iii of 5.
Although I am still looking to get short the indexes, I was able to add a new stock short position today and I have orders for four more that could get filled in the next two days. I was still carrying four 1/2 short positions from November, so overall I did not experience much of a drawdown today. My long positions are holding up as I expect they will since we are likely approaching a bottom, and I continue to look for long opportunties during December.
A balance of longs and shorts should work well in this environment.
I believe the Nasdaq 100 (QQQQ) will go beyond the lows possibly as low as 23. Also, the current pattern suggests that it may take two more lows before we get a sustainable rally. I anticipate based on the pattern that we will see a low around December 5 to 9 followed by a 3 to 4 day rally and then another low during the week of December 15. The reason for this is that the decline in the Qs from November 4 to November 21 counts best as wave i of an ending diagonal triangle. So we are likely just beginning wave iii of 5.
Although I am still looking to get short the indexes, I was able to add a new stock short position today and I have orders for four more that could get filled in the next two days. I was still carrying four 1/2 short positions from November, so overall I did not experience much of a drawdown today. My long positions are holding up as I expect they will since we are likely approaching a bottom, and I continue to look for long opportunties during December.
A balance of longs and shorts should work well in this environment.
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