Post Schedule

Due to a family emergency the next post will be Sunday May 3rd.

Positive But Not Solid Advance

Although the markets were higher today, the volume was average to below average and not convincing. I would have liked to see a more powerful follow-through. As it stands, the rally from Tuesday's low can still be counted as 3 waves up which could mean a flat or expanded flat correction with an expectation that the low of April 20/21 will be retested early next week. The Qs are now at resistance at the 200dema. The 200dema is not strong resistance for the Qs, as it frequently pushes right through that level in either direction, so we will just have to wait and see how the market behaves on Monday.

One thing seems to be clear to me with each passing day: the rally from March 9 is not over. JNPR staged a powerful breakout above its downtrend line today. That is not an indication of a market ready to roll over. HANS broke out strongly yesterday as well. AMGN rallied after a poor earnings report. I shorted AMGN(half-position) on Monday at 46.00 with a stop at 51.00. I thought that it would fall apart today after the action last night. If it continues higher Monday, I may reverse and go half long. This is bull market (rally) type behavior.

Bullish Action

Overall, the lack of downside follow-through today together with continuing positive reaction to tech earnings raises the likelihood of a contination of the rally with a possible breakout in the Qs tomorrow. It is possible that the Qs are working on a more complex flat correction that would lead to another downmove next week to retest the April 20 low, but I expect that the Qs will move on to 35.70 and 37.66 over the next few weeks.

To reiterate, the risk is to the upside until sentiment swings solidly to the bullish side, which it has yet to do. Rarely does CNBC offer insightful information for traders, but one report today was very insightful. The results of analysis by a firm, I missed the name, showed that retail traders have been sitting on the sidelines during the rally, hedgefunds have been selling this rally agressively, and institutions have been buying this rally. This fits exactly with the analysis by Alex Roslin at COTs Timer, which has showed the large speculators to be very bearish on this rally.

This rally has a long way to go, I believe, and will be fueled by the hedge funds reversing their positions and retail traders jumping on board. In fact, we may soon see a third of a third wave breakout in wave (A) of Primary wave 2 up. If this happens, we would expect wave (A) to top somtime in July. I will make an effort to provide a labelled chart soon.

Poor Close

The selloff at the end of the day probably means that wave c of this correction is underway. The Qs made a new rally high intraday. That, together with the positive response to technology earnings supports the view that only a brief test of the Jan/Feb highs is likely in the Qs. Should today's high be exceeded before today's low, it would be very bullish indeed. In any case, unless something unexpected happens, another day or two should complete this correction.

Follow-up on the MACD post from April 5th:

The MACD gave a sell signal in the Qs yesterday. Using Appel's rules for the MACD, this signal should be ignored since it is the first sell signal after the positive divergence buy signal on March 12. If the MACD pulls back to the neutral line (zero line), it would be a chance to add to positions. Otherwise, we will wait until the second sell signal for an exit whether the MACD is higher or lower than its recent high for this rally.

Traders could use this in combination with the 3 week trailing stop by exiting half with the MACD and half with the 3 week stop.

Nice Rebound

Today's action was very positive and afterhours reaction to SNDK and YHOO appears to be positive so the bounce may continue tomorrow, but I would expect at least one more down wave to complete a 3 wave correction from the recent high. The action in the financials was especially encouraging today with an outside reversal bar in JPM up 9.57% and WFC bouncing off of the recent downtrend line with a gain of 10.65%. My hunch is that this week will be flat overall and the rally should resume next week. It will be very bullish if the Dow can hold above 7750 and the Qs above 31.21, but we will see.

There are hardly any new lows and the summation index keeps moving higher which again supports the bullish view.

I finished reading Trading Chaos, 2nd Ed. by Bill Williams & Justine Gregory-Williams this weekend. It was interesting, but long on psychology. I am using the technical aspects of their work a great deal in my trading. I think it truly is the easiest and best way to trade, but I have adapted my own risk management techniques which work better for intermediate term trading.

Psychology is important, but a quite overworked area in trading. I remember several years ago paying a golfing coach to help figure out why I couldn't hit a golf ball. He spent the entire time talking about my emotional state. My emotional state was one of frustration at not being able to do something that otherwise appeared relatively simple. Well, needless to say, even when I was relaxed and calm, my slice was severe. Years later, I watched a golf video in which the instructor claimed that he could teach anyone to hit the golf ball straight. I had to watch it several times before I saw what he saying, but I went immediately to the driving range and was able to hit the golf ball straight. Now, if for some reason I hit an errant ball, I know exactly what I am doing wrong, and I can hit the ball straight whether I am angry, calm, excited, sad or happy. The point is that trading is simple, and once you understand how to do it effectively, your emotional state should not affect the outcome. Your emotional state only comes into play if you it prevents you from doing the simple things you need to do to be effective. Successful trading will then lead to even more successful trading in a virtuous cycle.

If you are not being profitable and successful in your trading, look to find a mentor who is successful and follow them until you are successful. Your emotions will take care of themselves.

Shakeout

As I said on Friday, the intermediate term trend is still up. Whether or not this current correction turns into a deep affair awaits to be seen. My suspicion is that the Qs will hold up above the recent breakout of the January and February highs at 31.63 to 31.68 with perhaps a move down to 31 intraday. The Dow could easily see the 7500 area, but again I expect it would be a brief foray. Only a sustained move below 7483 in the Dow and 29.79 in the Qs would alter the intermediate trend.

This is the type of action that is needed to rebuild some bearish sentiment, but to bail out now would be premature in my opinion. None of my stops were hit today, although a couple came close.

On the short side, SPW has set up nicely for a quick hit and run short trade with a target in the 28 to 30 area. However, exit on any solid reversal above the target zone.

Oil looks as though it is in wave c of a correction that could last 1 to 4 more days before the uptrend resumes.

A Bearish Wedge?

It is now common knowledge that the markets are nearing the completion of a bearish wedge, or ending diagonal triangle in elliott wave terms. I don't recall ever seeing a more highly publicized pattern, as if it is obvious to everyone that the markets are ready to correct. Occasionally the masses do get it right, but I have my doubts. I recall more than a few occasions when I was certain that I had identified an ending diagonal in a stock or index only to see it continue sharply in the direction of the trend. And that is the danger here. We could see the indexes explode higher instead of correct.

So far there is no evidence of a change in trend. In my opinion the risk is still to the upside as I have been saying for weeks. If you have doubts, buy some insurance - index puts or short ETFs. According to Bulkowski's thepatternsite.com, downward breakouts of rising wedge patterns hit the target only 46% of the time, and downward breakouts are ranked 20 out of 21 in performance of bearish patterns (1 being the best). To me, this is a pattern to be aware of but not one to take a pre-emptive position on. We may very well see a sharp thrust down for a day or two to shake some people out, but until I see evidence of a trend change, I will just keep trailing stops and looking for new setups.

I can't tell you how many times Elliott Wave International called the end of the rally in 2003. At least a couple of those were ending diagonal patterns. Well, all that happened was the rally would correct 5% to 8% and then surge higher. That may not happen this time, however, too many people are predicting the end of this rally. One pit trader has been on CNBC every morning this week talking about how he keeps trying to sell this market with no success, but he is sure the top is near. When I see people like him saying they are buying this market because they were wrong and now they believe the rally is for real, I will start to look for the exits.

How About Krispy Kreme?

Today Krispy Kreme exploded higher by 42% after posting better than expected earnings and significantly lowering it's loss per share while reducing debt.

I remember driving to Greensboro, NC with my mother when I was a boy from our small town an hour away to see my orthopedist. We would always pass the Krispy Kreme on Battleground Avenue, and it was my main memory of Greensboro as we only came once a year. At that time there were only two stores, the one in Greensboro and the original store in Winston-Salem. We rarely stopped to buy any, which was a disappointment. Later, when I was in the band in high school, we sold Krispy Kreme doughnuts to raise money for our trips. People rarely refused to buy as the doughnuts were irresistable.

So, it was sad to see such an icon almost completely self-destruct in 2004. I think many people had written it off, but I watched to see how the locals reacted. Almost everyone I know believed in the company and thought it would eventually right itself, contrary to the opinions in the financial media. I missed most of the initial surge after the IPO, so I told myself that if it got under $2 I would buy a 1/4 position. If it showed signs of turning the corner, I would double it. On January 15, I bought the 1/4 position at 1.54. On April 3, the 26ema crossed up the 50ema. On April 6, I doubled my position at 1.93 for an average entry of 1.745. Whether or not I add more will depend on how it behaves going forward, but I will not add any above $5.00 without a clear pattern.

The elliott wave pattern in KKD would allow for an assault on the all time highs, but I don't expect that in a bear market environment, even though it's action in 2001 and 2002 shows that KKD is a bear market stock. My first target is $12 and my second target is $20. Whether or not I sell will depend on the intervening action. I do think that KKD will eventually see new highs, but it may take a few years.

When you have knowledge of a company (legal knowledge), use it. Peter Lynch advised to buy stocks you know.

Orderly Pullback

The markets continue to correct in an orderly fashion with buyers showing up at key levels. For those who were observant, today offered a second chance to buy the breakout in the UYG as the UYG sold off to the low of the 4/9 breakout at 3.14 but closed higher at 3.62 (+15% from low). If my read of the pattern in the financials is correct, we should see at least 3 more pushes to new highs with two intervening corrections. The process should take at least 2 to 4 more weeks.

Several commentators are calling the advance from the 3/30 low in the SP500 a bearish wedge, but the smaller time frame look doesn't support that view. One of the subwaves appears to be a 5 wave move, when it should be a 3, if this were a bearish wedge. So, this may be a bullish pattern that could lead to another large breakout soon. If not, we should see continuing sideways consolidation before another breakout.

I think the best way to approach this is to add positions over time, but I would be cautious about adding new positions after May 6.

Another Test

It looks like we may be heading for another test of the January and February highs in the Qs. Looking back at the 2003 rally, there were 7 corrections on the order of 7% to 9% between the March 03 low and the January 04 high. There were two more corrections around 5.5%. We should expect no less than this type of action now. Waiting for the corrections to end and then buying proper pullbacks and breakouts will lead to positive results. RIMM is ripe for a pullback to fib support in the 53 to 55 area, for example. Don't let these corrections shake you out. We are a long way from a resumption of the intermediate and primary downtrends. Appropriate stops - yes. Panic selling - no. Patience and Discipline - yes.

Last Call!

Well, the market sure has been good to us the last 5 weeks. It really doesn't get any better than this, except it might over the next 4 to 5 weeks. My breadth momentum system turned bullish yesterday, and coincidentally, Carl Swenlin at Decisionpoint has now called the medium term trend up. All systems are go. This is one of the rare times that traders and investors can make huge gains in a relatively short period of time. Probably, the biggest issue facing both traders and investors is not realizing that this type of action typically only lasts for a few months and then it is back to grinding it out. Continuing to position oneself for outsized gains after the rate of change has diminished then leads many to give back their hard won profits. Just as it was hard for trend followers to make money in December and January, there will be a period this summer or next fall that will be difficult. If you are fortunate to book some large profits, you might want to consider taking a portion out of your account. This will effectively reduce your portfolio heat, keep the gains safe in a cash account and reduce your potential future drawdown. Also, consider reducing your total allocation on the remaining funds in your trading account until a new strong trend emerges.

I may have spoken too soon with regard to IBD stocks. I actually found a few that I liked this morning in the IBD 100 list, in particular, I like the setups in TNDM, INT, STAR, CERN, PETS, OTEX, HANS and WIRE. The key is to look for stocks that are not in 4th waves that could lead to a false 5th wave breakout. I have found that many stocks that make it into the IBD 100 and Stocks In The News are ready to break out in 5th waves. This is particularly frustrating. However, several of the shorts that I profited from last fall were IBD 100 stocks that had failed breakouts, so it can be useful.

FYI, I am long HANS from 36.00. It hasn't gone anywhere yet, but it looks as though it is ready to breakout with a target between 50 and 60. As a rule I don't trade any stock on the intermediate term that I don't think has a good chance at making 40%. This culls out a lot of candidates, but it gives me room to a) be wrong in my analysis, b) make a trading mistake, and c) potentially make a large profit with some cushion. Why eat crumbs when you can have the cake?

Happy Easter.

XLF Breakout - Extraordinarily Bullish

The breakout in the XLF today was huge because it significantly raises the odds that we are in wave iii of 3 in this rally. Third waves can be any length except they can't be the shortest of waves 1, 3 and 5. Typically, wave 3 is 1.618 or 2.618 times wave 1, which gives 14.45 and 18.27 as targets for the end of wave 3. The top of the previous 4th wave of lesser degree is 13.82. The January high is 12.82. There is Fib resistance around 12.90 and 15.10. The 200dema is around 14, and the 400dema is around 19. All in all, it would seem that 13.82 to 14.45 is highly probable, and 18 may be seen as well.

The strength of this breakout is evident by the fact that the entire body of today's price bar is above the March high, and it closed near the top of the range on higher volume. It is possible that we could see a continuation gap on Monday if this is a 3rd of a 3rd wave.

There still may be a chance to enter the UYG around 3.25 to 3.35 on Monday, but risk is significantly greater now than in mid-March so smaller position sizes should be considered. I was fortunate enough to be able to add to my UYG position near the open this morning at 3.15. I suggested in prior posts that traders be ready to buy the pullback or the breakout. We got the breakout, so there was no reason to hesitate. The above XLF targets would suggest the UYG could move up to 6.00 to 8.50 by the end of wave 3.

Overall, it seems to me that up until now that most people do not believe in this rally. Next week should tell us a great deal. If this rally is for real, as I believe it is, then this rally should accelerate next week as the naysayers are forced to chase it higher.

The name of the game from this point forward will be high quality breakouts, but of the recovering beaten down large caps. I am staying away from the IBD names for the most part as it seems that most of the breakouts of IBD 100 stocks get sold. One exception would be ORCL, which seems set for a nice move after completing a 5 wave rally. A Nasdaq 100 stock that looks interesting is FWLT, which has setup nicely atop the 50dema.

Be patient and only take the best setups, and don't add too many positions in a given week.

Bullish FTSE

The London FTSE index is sporting a potentially very bullish 1,2,i,ii pattern, which could portend an imminent and powerful 3rd of 3rd wave breakout. As much as I have wanted to fill out the balance of my index positions on a sharp pullback, it is beginning to look like the breakout will be the setup to trade. It is possible that wave ii could move sideways for some time, but as long as the 3/31 low is not taken out, the pattern is valid.

Working Lower

Today's intraday rally occured in 3 waves indicating that the correction is still in progress. It is not clear if wave c of a flat correction is unfolding or some other type of correction. Today's action also underscores why I stated that it would not be a good idea to sell this rally. The risk remains to the upside, and the longer the markets fail to break down the greater the likelihood of a strong breakout near term.

Patience.

Correction Likely To Continue

Any continuation of the decline tomorrow that carries the Dow below 7725 and the Qs below 30.95 will lead to a restest of the March 30 lows at Dow 7437 and QQQQ 29.62. This should prove to be the last great buying opportunity.

The risk is still to the upside, so this is not the time for intermediate term traders to get cute by trying to sell and buy back at the correction low. Most likely, the market will come off this correction low like a rocket. I will ride out the drawdown and add to complete my index long positions.

Shakeout

A break of yesterday's (4/6/09) low in the Dow could lead to another test of the November 08 level of 7449 in wave c of a flat correction. However, holding above 7725 would be near term bullish. Any test of the 7449 level should be sharp and quick, and it would be a buying opportunity in my opinion. Only a break that sustains below 7449 would alter that outlook.

April 14 is a turn date, but could be a swing low or high. I suspect that the upcoming 3 day weekend will be bullish for next week so it could be a high. These turn dates are usually right within +- 1 day, or they are meaningless. They become important when the confluence of the pattern, price levels and cycles confirms them. Currently, the pattern in the uptrend is incomplete, and the price levels and cycle are pointing to higher highs, so the turn dates may not have any influence, or may just represent pause points in the trend.

The Qs should hold above the 31 level as the breakout above the January high appears to be solid.

On JAVA & DGP

Today I was stopped out of DGP for a very small loss. Overall, the trends in gold were quite bullish and worth the risk of being stopped for the potential upside. While it now appears likely that gold will now fall below 700, it is by now means a certainty, but what is highly probable is that gold will move much higher after this correction is over. This breakdown negates the long setups in RGLD and other gold stocks for the time being.

On Friday I made the decision to exit my position in JAVA (Sun Micro). I had been long from $5.00. When the news of a buyout from IBM first broke, I was hopeful that JAVA would move above $10, but the correction that followed was more than would be expected if the deal was a certainty. Friday, news came that IBM was lowering its offer to less than $10. Even so, with talks to take place over the weekend, one might have expected JAVA to move above $9. When it failed to mvoe much at all on Friday, it seemed to me to be a signal that the smart money was not confident in the deal, so I bailed. Fortuntately, it seems to have been the right decision. That's not to say that it can't take off again on expectations another suitor will come along.

One thing about this rally that is very positive is that I am finding trade setups almost everyday. There are so many that I am waiting for only the best setups. The one negative is that not many leaders are breaking out to new highs. I think this will come as the rally progresses. Right now the beaten down stocks are still moving the most.

Using The MACD

The above chart shows my interpretation of the MACD for the QQQQ since October 2008 according to the methods explained in Gerald Appel's (the inventor the MACD) book "Technical Analysis".

After being in a strong downtrend in September and October, the MACD gave a positive divergence buy signal on 11/25/08. Entering long on the open the next day at 27.88, traders would have remained long until hitting the downtrending 50dema on 1/2/09 with an exit on the open the next day at 30.82 for a profit of 10.55%.

With the 50dema still in a downtrend, the next signal is a short on 1/13/09, entry at 29.17 and stop above the 1/6/09 high. Traders should not have been stopped out as the stop should have been placed more than 0.10 to 0.25 above the high. A second short signal on 2/17/09, entry at 29.41 and stop above the 2/10/09 high, gave a chance to add to short positions or to initiate new ones for those that missed the first one. While there was significant talk at the time about about much lower lows for the indexes, the inability of the Qs to penetrate below the 11/20/09 low was a strong indication to cover short positions. Exiting on the open on 3/10/09 at 26.26 gave a profit of 9.98% and 10.70% resectively.

The last signal occured on 3/12/09 and was a positive divergence buy signal, entry at 28.68 and stop below the 3/9/09 low. The purists who might say that this was not a positive divergence because the March low did not go below the November low are missing the big picture. The Qs did form a positive divergence with the October low, and since almost every other major index did fall below the November lows and also had positive divergence buy signals, the signal for the Qs is valid. The Qs are currently at 32.35 and up 12.80% for a compounded return of 37.15% since November.

From Appel's book, "If there are no negative divergences ...., you can bypass the first sell signal that takes place." Appel also advises using a 19-39-9 MACD for selling and trailing a stop at the 50dema. I have not found the 19-39 to be that useful, although it does work. So traders should be content to ride out this trend as the 50dema has turned up. Rather than trailing a stop right at the 50dema, traders can use a ratchet stop. The stop should be placed under the last swing low that successfully tests the 50dema after a breakout to new rally highs.

Alternatively, traders may want to take all or partial profits at the currently declining 200dema, and look to re-enter long positions at the 50dema. A careful examination of the volume and market action as the 200dema is approached can help with the decision making, but plan what you're going to do ahead of time.

If you think this post is helpful, please share it.

Good trading next week.

Gold At A Crossroads

A move below the March lows in gold will not automatically confirm a change to a downtrend but it will go a long way. A two day pullback followed by a break of the resulting pivot, or a sharp move below 850 will confirm it. If the downtrend is confirmed, a retest of the 700 level would be expected.

The indexes continue to march higher with a smaller degree 5 wave impulse from the 3/30 low almost complete. This should lead to a pullback or consolidation that holds above the 3/30 low. An alternate view would have the indexes retesting that low slightly. Either way, the pullback should be an opportunity to add to existing or new long positions.

Alcoa has completed a nice 5 wave movement. Wait for a pullback to consider an entry with upside targets between 12 and 15.

Solid Breakout

Today's breakout confirms the uptrend and traders should be long this market. The trend may not be straight up, and there may be opportunties over the next week to get in at or near the breakout levels. The action today in the Qs puts QQQQ investors in the black for the year as the Qs closed above the January highs. It is hard to imagine a scenario at this point which would compel investors to throw in the towel. Even a bad employment report tomorrow, if it leads to a down open, should be a buying opportunity. Resistance lies ahead at the 200demas, but I don't think this market will slow down too much until the Dow hits its 200dema at around 9000.

So far today, we've had four big news events: 1) FASB relaxes the mark-to-market accounting rules for financial institutions, but the financials didn't move too strongly, perhaps the news was baked in, 2) the Dow Transports powered ahead for a gain of 7.85%, this alone is enough to send the bears packing, 3) the IMF plans to sell 403 tonnes of gold, but gold still holds its March low, which is mildly bullish, and 4) RIMM beats its earnings estimates, offers a better outlook and is up 20% after hours, which should keep the Qs heading higher tomorrow.

RIMM broke out today above the high of the low month, March, but I am not going to buy the day of earnings before the report is out. I'll just let this one go or wait for a better opportunity later on. You can't judge a trade by what happens afterward, only by what was evident beforehand.

One interesting thing occured today that was a little unusual. The TRIN moved decisively higher with the market. My take on this is that there was a definite campaign to sell the market as it went higher. Given the fact that it held up, the short sellers should add more fuel to the rally as they cover in the days ahead.

A Marketclub blog post went out yesterday discussing the MACD. I don't want to be critical of others' work, and I understand the point that the writer was making, but I cannot disagree more with his conclusions. He was basically saying to fade MACD signals because the MACD is too closely followed and doesn't work anymore. This may work for short term countertrend traders, but I can assure you that the MACD is not broken any more than the market is broken.

The MACD is just a reflection of market action as measured by the moving averages. To say that the MACD is broken is to say that somehow the market is behaving differently than it ever has. Sure, market behavior varies, but it's basic behavior has not changed since it has been in existence because people have not changed. The only thing that has really changed is the volatility in recent years.

The reason the author concluded that the MACD was broken is that he left out one crucial element to using it successfully: a trend indicator, usually the 50dema. Signals must be taken in the direction of the trend indicator, and not against, unless there is a valid divergence. I can assure you that if you will add that one element to the MACD, you can be very successful with it.

As an example, the Dow Industrials were trading under a downtrending 50dema in January when the MACD gave a sell (short) signal on January 12th. If you ignored the next buy signal, as recommended by Gerald Appel in his book and took the second buy signal on March 11th, which formed a positive divergence with the October low, you would have made 1542 Dow points. This is equal to 18.20% on the cash index, or $7,710 per Dow mini contract. You would have been short 5 days after the January high and out 4 days after the March low. I don't know about you, but I don't call that broken.

In addition, if you had gone long based on the positive divergence, you would now be up 1045 Dow points, 15.08%, or $5,225 per mini contract. Thus, a trader using the MACD and only trading the Dow this year would be up $36,000 in an unleveraged $100,000 cash account, or $38,805 in a $100,000 futures account trading a very conservative 3 contracts, which would have required a risk of about $9,210.

Traders must realize that it is not the indicators that make a trader successful, but a keen understanding of how the market and the indicators work. Understanding the markets requires hard work and a developed vision derived from years of experience. If your trades aren't working, it is probably not the indicator.

Breakout Imminent

It appears the markets have decided and a breakout above the March highs is imminent. Of course, something could change between now and the open, but with the London-FTSE already above the March highs this morning, it looks fairly certain that US markets will follow. Expect some acceleration once the Dow gets above 8000. While 4/7 is a turn date, it may be nothing more than a pause, just like 3/17 was. Traders should not hesitate to jump on board this breakout train with appropriate position sizing and risk management.

The 3 week lows on the Dow, SP500 and QQQQ are 7172.02, 749.93 and 28.19, respectively. The 3 ATR(10 day) lows on the Dow, SP500 and QQQQ are 7176.17, 749.19 and 28.37, respectively. (Please verify these numbers for yourself and do your own work.) I would choose stop loss levels below the lower of the above number, which are fairly large spreads, so your position size may be smaller than usual.

Good trading.

Decisionpoint

Which way does the market want to go? Today's action fit the typical profile for April 1, but with generally light volume. The pattern however is giving mixed signals. Either the correction resumes tomorrow, or we are heading for a breakout. I am prepared to go either way with limit orders for a potential pullback, and stop-limit orders for a breakout. In an ideal case, I will get filled on both. Overall, the action is exceedlingly bullish. The market was saying loud and clear today that it doesn't care about the upcoming Employment Report, which most know is a lagging indicator anyway. It is possible that we trade in a tight range for another week or so as well, which would also be bullish.

Potential upcoming turn dates are 4/7 , 4/14 and the period 5/19 to 5/30.