Thursday, December 22, 2011

Approaching Resistance

The Dow and SP500 are approaching resistance at the early December highs.  While there may be a pause there next week, the weight of the evidence points to a likely breakout with the Dow hitting 12800 and the SP500 hitting 1350 in January.  As has been the case all year it could fall apart anytime, but this time should be different.  Unfortunately the Nasdaq indexes are lagging, but they should be playing catch-up in January.

Happy Holidays!  Due to the demands of the season and other matters, I may not post again until after the New Year unless something major happens.

Tuesday, December 20, 2011

Dow Rebounds Off Support

The Dow gained 2.87% today in what appears to be a late follow-through for the rally that began 11/28.  The target is around 12800, which may be reached by year-end, or by mid-January at the latest.  Thereafter, traders should be watching for signs of a top at the 2011 highs, and an ensuing correction that could last into May.  

As I pointed out on Friday, sentiment had approached an extreme level, and on Monday we saw waning downside breadth which hinted at the possibility of a strong rally today.  If the Dow can clear 12258, the bears will have been pushed to the sidelines once again.  

The target for the Qs is 63 to 64.

Friday, December 16, 2011

Sentiment Closing In On Bearish Extreme

There are a number of cross currents in the market at the moment that are sending mixed messages.  The elliott wave pattern is ambiguous with a bullish bias.  The VIX is trending down, but the Dollar is trending up.  Leading stocks are no longer doing well, but some are beginning to show some buying interest.  This is a typically bullish seasonal period, however, advisors are too bullish.  One measure that is beginning to support a bullish outcome is the short term sentiment as measured by the equity-only put-call ratio.  The PPO of the ratio is now beginning to approach levels seen at intermediate term lows.  This suggests that while there may be some more testing at the current level, the next significant move will probably be to the upside as I have previously indicated.

There is one thing that bothers me though, and that is the High-Low Logic Index which reached 1.18 today.  This is not a sell signal, but it is a warning as it has moved into the neutral zone.  Confirmation of a buy signal would occur if it falls back below 1.00.

There has been buying interest at current levels the past two days, and there is every reason to think that next week will be positive.  However, the pattern of the action suggests at least one more probe of this week's lows before wave [c] up can begin.

Thursday, December 15, 2011

Another Disappointing Close

Another down day was disappointing, and the bears seem to be expecting a significant decline, but while slightly lower prices may be seen tomorrow, the extended pullback seems to have run its course.  The McClellan oscillator has turned up from an oversold condition, and the pattern of the decline looks complete or nearly so.  Maybe Santa will show up next week.

That said, the weakness has put a significant dent in the number stocks that are set up to break out.  This probably means that the best we can hope for as we approach the end of the year is a rally back toward the early December highs.  It is fairly certain that the current choppy and weak rally that began October 4th is an (X) wave, and the market is currently in wave [b] of Y of (X) with wave [c] of Y of [X] to follow shortly.  Unfortunately, there is nothing that says that wave [b] can't be a triangle or double zigzag.  I'm thinking a triangle that plays out into the new year to keep everyone guessing, with a surge into late January.

What I don't see at the moment is primary wave 3 down, the mantra of the elliott wave perma-bears.

Wednesday, December 14, 2011

Dow Tags The 50ma

GOOG At Top Of Trading Range

GOOG has returned to the top of the range established since the January high and the June low.  After completing a 5 wave impulse at the January high, GOOG has been working on a flat correction that will most likely complete in the early part of next year after a retest of the June low.  At the moment a breakout is possible, and maybe even likely, but it would be prudent to wait for a pullback to support before assuming that it is the real deal.  It would probably be a false breakout.  Negative divergences are forming on the MACD, which may be used for short entry with a target at the low end of the range.  From there the upside target is 750 to 800, which may be seen toward the end of next year, or the early part of 2013.

Tuesday, December 13, 2011

More Testing with a Negative Close

We did get more downside testing today with a close under last week's low.  That is a pretty negative outcome, but the 5ma of the TRIN has now moved back to a level associated with bottoms over the last 3 years.  Also, the McClellan oscillator is again oversold.  The % of stocks above the 50ma remains well above 50%, which is also a positive.  We may see some more downside tomorrow, but unless we see a positive close on rising volume soon we will have to conclude that a much deeper correction is in progress.  Even so, as long as the 11/25 low holds, the outcome should be positive.  

I added the Qs on today's decline near the low.  We'll see if the market manages to rally tomorrow.  I also have some orders in for potential breakouts should they occur.  One possibility is SCSS which was mentioned this morning in IBD and has formed a cup and handle base on top of a larger double bottom base that triggered a buy signal on 10/20.  The new buy trigger price on SCSS is 21.24.  Be sure and use a stop.

Monday, December 12, 2011

Disappointing Start To The Week

While today's selloff was disappointing it did little to change the overall expectation for another move up as we approach the end of the year.  The volume was low, and the VIX was down in spite of the selling.  This may have just been a final shakeout before something gets started.  Even if we see more testing of last week's and today's low unless there is a solid close on volume below it, the outcome should be positive.

Sunday, December 11, 2011

VIX Confirms Rally

While IBD continues to call the "Market In Correction" even after most of the recent decline has been retraced, but the VIX is saying that the rally is for real with Friday's big decline as shown below.  We see that unlike the July period when the 12ma was above the 50ma and rising, the opposite is true now with the 12ma below the 50ma and falling.  A break below the October low of 24.44 would solidify the rally, which is now expected to last into the first of January with the SP500 approaching 1340 to 1354.

Thursday, December 8, 2011

As Expected

The rally that occurred was really in the pre-market futures, and then the pullback continued to lower levels as expected.  It looks like it still needs some more work, but any reversal with a positive close should be enough to conclude that the pullback is complete, unless it extends in a combination, of course.

Regardless, the rally has another leg up that could begin anytime.

Wednesday, December 7, 2011

Is The Pullback Over?

The Qs came within a few cents of tagging the 12ema today with just crossed above the 50ema forming a bullish hammer.  The pullback may be over already, but it is premature to make that call.  It is more likely that we will see a small rally and another decline first to create a larger 3 wave pullback.

The presidential cycle is calling for a rally into the end of the year and into the first of January.  Thereafter a multimonth decline should follow into May and a major rally into the end of 2012.  This scenario fits with the combination correction pattern that appears to be playing out right now.  It also fits with the typical 2 year rally  - 1 year correction - 2 year rally pattern that Gann described.  We are in the middle of the 1 year corrective pattern right now.  Whether or not a 2 year rally follows remains to be seen, but it will be probably be more than most are expecting.

Tuesday, December 6, 2011

Waiting For The Pullback To The MAs

While it is possible that a pullback will not occur, it is more likely that it will, and probably somewhere in the zone of the 12ema and 50ema as was the case after previous rallies this year.  Today's price action produced a doji-like candle, which may be signalling that the pullback is at hand.

Friday, December 2, 2011

MACD Buy Signal

A valid MACD buy signal has triggered for the Qs.  All four previous signals this year led to significant gains, and there is no reason to believe that this won't as well.  However, a pullback is likely as a clear 5 wave impulse has completed on the intraday charts.  There is no way to know how sharp it will be, but regardless it will be a buying opportunity.

Wednesday, November 30, 2011

Uptrend Confirmed By Today's Action

IBD would not call today's rally a follow-through day, but there's enough other evidence to believe that it is a valid signal to be long this market.  First, the %Stocks Above The 50ma rose sharply above 60%.  This is a strong sign of an uptrend.  At this point, the signal would only be invalidated if it were to fall below 40%.

Secondly, the VIX confirmed a buy signal today be closing below 30, previous support during August and September, and its 50ma with a MACDH sell signal.  These facts confirm the trend in the VIX is down, which will support a continuing rally.

That said, the market is short term overbought, and a pullback would be preferred before entering new long positions.

The rally should continue up to around 1370 on the SP500 before it runs out of steam.  Afterward, wave (Y) down lasting 3 to 5 months should follow.  Wave (Y) of [X] will bring more of the same frustrations:  lack of follow-through in either direction, failed breakouts in either direction, choppy action, violent reversals, and a continuing range-bound market.  Wave (W) did not sufficiently subdue the overall optimistic sentiment that existed in early 2011.  That will be the job of wave (Y).  Once complete, after a correction that will end up lasting perhaps a year in duration from May 2011, people will be sick of this market.  At that point a multi-month to two year rally will likely begin with another chance to reap big rewards on the long side before another major decline lasting into 2016 begins.

Bulls Taking Control

This morning's action raises the odds that the recent November low was wave X of (X), and the market is now headed higher in wave Y of (X) toward a retest of the 2011 highs.  However, resistance at the median line and the March and June lows must be overcome first.  Since the March and June lows were already penetrated during the October rally, the resistance should be week.  Even so, the median line should repel the advance initially, and we should not expect the form of the rally to necessarily mirror the October rally.  A pullback would be a welcome opportunity for a long entry.

Monday, November 28, 2011

5 Waves Down In SBUX

SBUX is sporting a 5 wave impulsive decline off its recent high, which suggests that lower levels probably around the 200ema will be seen after a countertrend rally is complete.

The advance in the markets today fits the bill for the beginning of the expected bounce.  It could last into early next week.  Only if we see a 5 wave impulse on the hourly chart over the coming days might we change the expectation for lower prices.  At the moment the short term trend is still down despite today's rally.  This is good practice for sitting on your hands.

Sunday, November 27, 2011

Looking For A Bounce

At the moment the short term trend remains down, but by several measures the market has become very oversold while sentiment remains stubbornly neutral.  These factors suggest that a sharp countertrend rally could occur at anytime, but that it will be followed by lower prices.

I will be looking for shorting opportunities in the coming days.  Only a reversal on increasing volume with a rise the % of stocks above the 50ma to above 60% would change that outlook.

At the same time, the most likely course is for a restest of the August/October lows followed by another attempt at the October highs rather than an immediate breakdown below the October August/October low.  Once that point is reached we can re-evaluate the potential future course.

Wednesday, November 23, 2011

Very Oversold

As measured by the McClellan Oscillator the market is extremely oversold.  A very sharp countertrend rally could begin anytime and probably will by Friday or Monday.  The elliott wave crowd is counting this as (i) (ii) i.  The problem with this view is that it could just as easily be (a) (b) (c).  We cannot know until there is a rally followed by failure.  

At this point a weak rally is shortable, but I wouldn't count on it being an intermediate term trade.  More likely it will be a retest of the August/October lows at best, and maybe only a retest of today's low.  My hunch is that the current decline is wave B of (X), which will be followed by wave C of (X) up to above the October highs.  Thereafter, a long choppy ABC decline should follow, or a long drawn out wave (Y) triangle lasting several months.

Tuesday, November 22, 2011

Are We In A Bear Market?

Technical analyst John Murphy used the following chart recently to argue that we are in a bear market.  The basic definition is that when the number of stocks above their 200ma's is over 50% it's a bull market, when it is less it's a bear market.  Mr. Murphy uses 40% and 60% as demarcation lines.  When the number is greater than 60% it's a bull market, less than 40% it's a bear market, and between 40% and 60% it's a correction.

There's a lot of truth to what he is saying, however, it doesn't let us know if we are close to a bottom or far away from one.  Unfortunately, there are a lot of different opinions about that right now. The extreme elliott wave camp is calling for a major selloff in a 3rd of a 3rd of a 3rd wave down that could begin any day now after a brief bounce.  This is nothing new as this call has been made many times.  Perhaps they will be right this time, but there are a number of factors working against it.

The NYSE McClellan Oscillator closed at a level today that is associated with intermediate term bottoms.  It can go lower, but that will simply increase the likelihood of a sharp rally.  The pattern of the decline so far is hardly a textbook impulse, and all of the stock indexes are not in agreement.  The VIX is forming a triangle pattern that could go either way.  An upside breakout would probably coincide with some panic selling, but a downside breakout would indicate that the worst is over.  Even if there is an upside breakout, the triangle pattern suggests it will be brief and lead to the conclusion, not the continuation, of the selling.  Finally, we are entering the positive year of the presidential cycle.  A repeat of 2008 when the presidential cycle rally inverted is not likely.

So altogether, even though the situation is serious, there are reasons to believe that it will be resolved positively.

Monday, November 21, 2011

Line In The Sand

It is amazing how quickly things can go from bad to worse.  Just last week the Qs were holding up above the median line for the rally.  Now they are at the lower channel line.  The general rule for median lines is that if the market fails to achieve the upper channel line, and then fails at the median line, a full retest of the lower channel line is to be expected.  That is what we are seeing here.  

The current level at today's low is in the zone of the January (counting 12/31/10), March and June lows.  If this level fails, then a full retest of the August/October lows is to be expected.  If there is any symmetry to the above pattern, we may see a rally from the current level to make another lower high before the failure occurs.  However, it would not be prudent to count on it.  Unless there is a concerted effort on the part of the bulls to end this rout now, it looks like it is downhill from here for the rest of the year.  A weak rally will setup shorting opportunities.  A powerful rally will put the long side back in play.  There is no reason to be long this market at the present time.

Saturday, November 19, 2011

Dow Is Leading Higher

The Dow Industrial's relative strength line just made a new cyclical bull market high.  I don't think this is consistent with the resumption of the bear market.  In 2000, the Dow lead the way lower, topping before the SP500 and the Nasdaq with a falling RS line.  The Dow's RS line did rise during the 2007 to 2009 bear market, so there is some ambiguity here, however, during that period it was falling slower than the broader market, and this time it appears to be rising faster.

Friday, November 18, 2011

Sentiment Is Becoming Bearish

My favorite sentiment indicator, the PPO of the equity only put call ratio, is approaching an oversold level associated with pullbacks since the cyclical bull market began in 2009 as denoted by the dark green line.  The lower green line is associated with the bottoms of major corrections.  If the current pullback is to remain as such and not turn into a larger correction, then it needs to find a bottom soon, otherwise we can expect the selling to intensify over the coming weeks.  My hunch is that some sort of bottom will materialize over the coming week.  Whether it will be enough to reignite the intermediate trend remains to be seen.

One factor that is encouraging is the Dow, which did not undercut its November 1 low this week.  I believe it is tracing out a much larger triangle as discussed earlier.

However, trend following indicators are now neutral to bearish, which is not a good sign.  IBD has now called the "Market In Correction" as of yesterday's close, and that deserves serious consideration under the present circumstances.  I still think it is premature to be looking short even though there have been a few high profile collapses of late.  There are just not enough of them to warrant taking that side of the market right now.

The best case scenario is that today's low is the low of the pullback.  The worse case scenario is that the selling will continue into the end of the year.  If the former, we should know fairly soon.  If the latter, we can short after the next rally failure.

Thursday, November 17, 2011

Bulls Getting Hammered

There is not much good that can be said about today's action except that the Dow did not break the 11/1 low and markets finished off the low.  So, we have some hope that tomorrow will not be more of the same.  Apparently the Wall Street Journal published an article about the bullish triangle, so we know that it is not too likely to work out.  Remember the "bearish" head and shoulders top in 2009 that was busted.  This time however, I think it is more likely that we needed a shakeout to keep the bulls honest.

The SP500 has now matched two down days with the initial two days down from the rally high in October.  This is another reason to think that the worst may be over.  We also came close to testing the 50ma today.  

All that has happened so far is the SP500 has been trapped between the rising 50ma and the falling 200ma.  The reaction is to be expected either way.  This is a sideways market that frustrates everyone.  The only thing to do is to wait for a trend to emerge at this point.

Dow May Be In Wave (c) Of Triangle

The form of the triangle in the Dow Industrials and the YM is different than for the SP500 and the ES with the recent high on 11/13 higher than the high on 11/8. This suggests that the triangle may have much further to go and that it will remain intact as long as the 11/1 low is not violated.

Triangles can often break out in either direction.  Unfortunately, for the short-term case, if the market does not break out to the upside by early December, we will have to be on guard for a downside resolution.  This will ultimately prove to be bullish, but the bullish outcome will be pushed out toward the end of the year and early January.

There's nothing to do here but be patient.  The Dollar does not look like it is going to break out to the upside, at least for now, so the bullish bias remains.

Wednesday, November 16, 2011

Heading Down Toward Wave e Low

The triangle is in its last stages as the markets are moving down in wave e.  The low of the triangle consolidation that has been going on since the end of October is near.  The low should be seen by early tomorrow morning.  Afterward the rally toward the May highs should resume.

The alternative is that this is a b wave triangle.  If this is the case, then after a low tomorrow morning, a brief rally should follow that does not take out today's high.  Thereafter, markets should fall dramatically for two or three days in wave c down.  Then, the rally will resume.  Although it would be frustrating for this outcome to occur, the overall view is still bullish because of the clear and unmistakable triangle.

Tuesday, November 15, 2011

QQQ Squeeze

The QQQ is in a volatility squeeze with a long bias.  The most likely resolution is to the long side as the overall trend is up, the MACD histogram is trending up, and the DMI is positive.  

However, it looks like wave e of the triangle is still in progress with more downside toward last week's low expected tomorrow.  As long as last week's low holds, the market should breakout tomorrow or Thursday confirming the squeeze long signal by the end of the week.  These signals typically lead to an extended trend in the direction of the breakout.  Whichever way it goes, it looks like a big move is coming.

Monday, November 14, 2011

Still The Same

Nothing much has changed since Friday.  If we selloff toward last week's low, I would be a buyer with a tight stop just below last week's low.  If we breakout above today's high, then I would be a buyer with a stop below today's low.  Something will give by Wednesday I believe.

Saturday, November 12, 2011

Friday, November 11, 2011

Triangle It Is

Wednesday's downdraft seemed to confirm the zigzag pullback view, but the rally the last two days puts the triangle interpretation on top.  Overall the view is bullish with bullish seasonals and a bullish continuation pattern, but traders should be cautious lest the triangle become bearish by extending the consolidation into a larger zigzag correction as shown.  The most likely scenario is for a decline into the middle of next week followed by a breakout into and following Thanksgiving.

We also have positive developments with the economy as jobless claims fell again this week and consumer sentiment came in much better than expected.  Now we have the mix for a continuation of the rally with negative sentiment, positive seasonals, improving economic conditions, and a bullish trend.  Trading from the long side is the best bet until the end of the year at least.

The action early this morning made it clear that the market wanted to go up today.  I went long the ES around 1249 before the open on a breakout above a triangle pattern on the 5 min chart hoping for a move to 1276, but exited late around 1260 for a gain of 11 points.  I would hesitate to follow on Monday morning as the top of wave d should occur fairly quickly and maybe even Sunday night.  The best option for a swing trade is to wait for the wave e low around mid-week with a clear stop below the 11/9 wave c low.

Thursday, November 10, 2011

Still More Work To Do

The PPO of the equity only put/call ratio is headed back down toward the bearish extreme, but it has further to go.  It could reach the extreme level while the market treads sideways, or if the market continues lower.  The point however is that the both the McClellan Oscillator and the PPO of the CPCE are on their way to levels associated with bottoms, which bodes well for an end to the pullback in the coming days. 

From the point of view of the pattern, it looks like the pullback could end tomorrow.  However, if the triangle is in play it could take the rest of next week.  There is really no way to know at the moment.  One thing is for sure - there aren't many stocks with strong setups.  The best thing to do is to wait for the end of the pullback and a re-emergence of the uptrend.

Wednesday, November 9, 2011

TRIN Closes At Extreme High

Today the TRIN had the highest close of the past year.  This strongly suggests that the pullback is nearer its completion than its beginning.  However, lower prices are likely before the pullback is over.  For the SP500 the target is 1195 to 1200.  A sustained move below 1190 would probably mean a more severe decline is underway.  If the current leg down matches the first leg down that ended 11/1, then it should be over tomorrow or Friday.

Option A

It looks like markets are headed down to the 50ma in accordance with option A, see Two Options.  If the first leg of the pullback is any indication, this move down should not take more than 2 to 3 days.  Afterward the uptrend should resume.  Only a sustained move below 1200 would alter this outlook.

Monday, November 7, 2011

Two Options

I think the following two options represent the most likely course over the month of November.  We had a huge runup in October, and the market needs time to consolidate the gains.  Either way we should be approaching the old highs sometime in December.  Patience is required at the moment, and we have to be wary of a false expanded flat or running triangle breakout with the current rally from the 11/1 low.

Sideways Trading

The market seems to lack any downside impulsiveness at the moment.  Perhaps we are heading for a retest of the 10/27 high before another leg down in wave b, or perhaps a b wave triangle is developing.  In any case the decline from the 11/3 high to the early morning low in the futures looks like a zigzag, which suggests that the next move will be higher rather than lower even if it is still part of a larger corrective pullback pattern.  This is why I suggested last week that shorting this market would be an effort in futility.  We should have resolution before the end of the week either way, but the market looks higher overall.

Thursday, November 3, 2011

Still In A Pullback

Today's action looks like wave b of the pullback that 10/27.  Wave b may not be complete, but when it is wave c down should take the market below this week's low.  At that time I will be a buy for the next move up in this rally into December.

Today I exited my long position in the ES at 1151 for a gain of 27 points per contract in wave b after entering at 1123 late in the day Tuesday.  I did not want to hang around because wave c down could be just as bad as the first two days of this week.  I'm not too keen about the short side either for a swing trade as the trend is definitely higher.

Tuesday, November 1, 2011

Down To The Median Line

Despite the fact the selloff feels pretty bad over the last two days, all that's happened is the SP500 has returned to the median line of the current rally.  The sharpness of the decline could indicate that more selling is to come, but not necessarily.  After such a huge October advance a sharp pullback would certainly be an expected outcome. As long as the current pullback only results in a retest of today's low, then the rally should remain intact.  On the other hand, failure at the median line would mean trouble.  Note that the 50ma is rising into the pullback.

I was stopped out to two positions today.  I will wait for the dust to settle before looking to replace them.

Monday, October 31, 2011

Keeping Us On Our Toes

Well, after writing a post entitled "Why I Think The Bears Are All Wet", they managed to dump a little cold water on me today.  Still, one day doesn't make a bear market and nothing that happened today changes what I said yesterday.  The first day of November is usually an up day, so we will see what happens.  I expect some choppy action for the next few days.  Only if we see a break of the August high of 1231 in the SP500 followed by a retracement and a break of the resulting swing low would I conclude that a more significant retracement or leg down is underway, and we are a long way from that happening at the moment.

It is also likely that the MF Global bankruptcy had some effect on trading activity.  MF Global acted as a clearing house for my futures broker, which was unable to process trades today.

Sunday, October 30, 2011

Why I Think The Bears Are All Wet

There are many different ways to look at the market, and different conclusions will often be reached depending on one's perspective.  Since the 2009 low, most people who have been looking at the market action through the lens of elliott wave analysis have been overly and persistently bearish, as have those that view the market from a fundamental perspective, for the most part.  However, sometimes the problem with either of these viewpoints is that they impose an expectation about what will or should happen as opposed to what is actually happening which leads to rigid positions.  Being rigid and being profitable are pretty much exclusive.  Personally I'd rather be profitable.  I'll save being right for engineering and academic work.

When we look at a long term chart of the QQQ Nasdaq 100 ETF, it is very easy to see that there are two key levels going back to 2000.  The first level which was a resistance zone for some time was from about 50 to 54. The Qs were repelled from this level 4 separate time over the last 4_1/2 years.  In January of this year there was a clear break above the 2007 high of 55.07 in January followed by a return to the broken resistance level in August and October.  Had the August and October lows failed a more substantial decline would have probably occurred, but the fact is that October has seen one of the best rallies in the last 25 years, which is clearly evident on the monthly chart below.  The median line for the Qs going back to the 2002 low has held in conjunction with the May 2001 swing high.  At this point there is very little reason to believe that the Qs will not move in a sustained way up to the next resistance level at the May 2000 swing low which is conjoined by the upper channel line around 70 to 72.

Trying to get a handle on the market's moves over the last 2_1/2 years has been difficult for most everyone.  It hasn't been anything like 1994 to 2000 or 2000 to 2002 when the trends were persistent and clear.  Even so, the overwhelming evidence is that the market wants to go higher despite the abundant economic and elliott wave evidence to the contrary.  I think it would be in trader's best interest to continue with a generally long side approach until there is a clear break of the August/October 2011 lows or there is clear evidence of distribution at the next resistance level for the Qs.  Overall, in my opinion the market is in a 5 year pattern described by Gann as a 2-1-2 where the market goes up for 2 years, sideways to down for 1 year, and then up for 2 more years.  It is not exact and the transitions are not always easy to navigate, but this puts the top of this rally at sometime between 2013 and 2014.  If that is correct, there is a long way to go.

Besides trading the indexes, how can traders take advantage of this rally in individual stocks? It is easy to waste many hours trying to find stocks to trade, and much of the services available and sold are designed to help traders make stock selections.  In my experience, costly experience, most of this is a waste of time.  There are really only 3 categories of stocks that make good trading candidates:  1) fundamentally undervalued stocks with rising earnings and revenue forecasts, 2) high relative strength stocks that are outperforming the market, but that have not yet reached a climax stage, and 3) high beta stocks that have exaggerated swings relative to the market.

In the early years of my trading I spent countless hours trying to find the best stock screens.  It was total waste of time.  You can find great stocks to trade in literally about 30 minutes once every 3 months.  There are different ways to find fundamentally undervalued stocks, but the simplest and easiest I've found is presented in the book The Little Book That Beats The Market by Joel Greenblatt.  I developed screens in TC2000 and in online stock screeners that come close to matching his methods, but the simplest way is to just go to his free site  I run his screen with 2 or 3 different levels of market cap about once a quarter and come up with a list of about 20 to 30 stocks I like.  I don't just accept his list.  I want to see expected earnings growth above 15% and a nice looking chart.

High relative strength stocks are easy to find.  Just setup up your stock screener to sort by relative strength.  I troll through the first 100 or so stocks and pick the ones that have strong persistent trends, then I see if they have decent ROE and earnings growth.  I usually end up with 20 to 50 stocks on this list.  This is how I found QCOR back in 2008, which I have successfully traded several times including the recent advance off of the September low.  I also use IBD, but you have to be careful as a lot of their stock lists have stocks that are in or are approaching distribution stages.  It's interesting that QCOR was not mentioned much in IBD until it exceeded $20.  I first bought it around $6.

Finally, I sort the Nasdaq 100 stocks by beta and pick the top 10 to 12 stocks.  When I see a nice setup like I did with WYNN recently, I trade it.

I just run these screens once a quarter.  There is little reason to waste time doing it more often.  It won't improve your results much and may hurt them.  There's no reason to pay for expensive stock picking services.  I just use Worden Brothers Stockfinder and TC2000 to do my charting and screening, and I subscribe to IBD.

Using these methods and employing the trading techniques I have described on this blog, I have reduced the total amount of time that I spend analyzing the market and picking stocks to around 15 minutes a day.  I spend more time writing this blog than I do trading.  Currently, my annual returns are running around 40% over the last 4 years.  It's possible to do better occasionally, but realistically few traders are going to do better than 20% to 40% on average, although some do consistently achieve 60% to 100% returns.  These are the stars.  It would nice to be a star, but consistency is the most important thing, and if you have enough capital, you can do just fine on 20% to 40% a year.

I hope this helps.  Have a great week trading!

Friday, October 28, 2011

% Stocks Above 50 MA Says Rally Has Legs

The % of stocks above the 50ma has broken out above a downsloping trendline after a rally initiation move above the lower swing high.  This fact suggests that the current rally has greater potential than it may have seemed earlier.  Notice how the indicator declined in a series of lower highs after the last two moves up from a major low.  It doesn't mean it will be pretty, but I think the bears are going to be disappointed.

On the other hand the # of new 52 week highs has not been very impressive compared to prior rallies.  This may reflect an underlying weakness, or it just may mean that the market more oversold than before previous rallies.

I am now fully allocated to the long and plan to remain that way into at least early December.  Positions that hit profit targets or get stopped out will be replaced with new positions until momentum begins to wane.

I will discuss my methods for finding stocks to trade this weekend.

Wednesday, October 26, 2011

So Much For Analogies

It is still very possible that the current pullback will extend for 2 or 3 more days, but the strength of the reversal today suggests that the pullback is probably over.  I took positions in the Qs and the IWM near the mid-day low.  We'll see how that works out.

Wednesdays are peculiar days.  They tend to be very neutral.  If they start out going down in the morning, they tend to finish up in the afternoon, and vice versa.  One clue that today might be a day that could complete the pullback was the very fact that it started out going down instead of up.  Had today been an up day as I thought it might, we probably would be looking at a continuation of the pullback.

Tuesday, October 25, 2011

2007/8 Analogy Continues To Hold

The analogy with the decline from the 2007 high into 2008 continues with the October 11, 2007 high aligned with the 5/2/2011 high and the March 17, 2008 low aligned with the October 4, 2011 low within +/- 1 day.  So far the rally has matched the 2008 rally with 14 trading days up, although the current rally is stronger.  I was expecting more of a pullback in the middle of the 14 day rally as occurred in 2008, but we did not get it.  However, I suspect we will see the 5-6 day pullback that followed that began today.  If the pattern continues the pullback should bottom by Monday or Tuesday at the latest.  Given the strength of the rally, the pullback may be shorter.  Afterward we should see a 30 TD rally into the first of December at a minimum.

I don't know why this analogy would work except for the current approximately 3.5 year +/- cycle that has been in force for some time.  However, until it breaks down I will presume that the analogy is correct.  The main point to understand about the analogy is that is to the turning dates and not necessarily the form, although so far the form is similar as well.

I am looking to buy this pullback with the view of holding into the December top.

Monday, October 24, 2011

Loud and Clear

The market spoke loud and clear today with a solid move above the recent pullback.  The current move up should be wave (C) of [W] or C of (W), which should last into the end of November or early December.  The next pullback to support should be a buying opportunity.  When it will begin is anyone's guess, but probably soon.  The October 20 low should not be broken.

Sunday, October 23, 2011

Pullback May Not Be Complete

The most notable feature of the market's action this week was that the Qs did not make a new high for the recent rally while the SP500 did.  This negative divergence suggests that the pullback is not yet complete.  I propose that the Qs completed wave b of the pullback or nearly so on Friday.  Wave c down should begin sometime early this week.

It follows that the SP500 and other similar markets are probably trading out an expanded flat or running triangle pattern.  The main point is that, barring a breakdown, the pullback should be complete by the end of this week with a target at the 50ma.

The equity only put call ratio shows that sentiment has not yet reached an extreme and the rally has further to go.  If history is any guide, the rally should continue into early December.

Thursday, October 20, 2011

%Stocks Above 50MA Confirms Uptrend

The breakout in the % of stocks of the 50ma above its recent swing high from an oversold condition confirms the current uptrend.  There is resistance at the downsloping trendline which suggests that near term upside potential may be muted.  A pullback to the 35% to 40% area would be in line with prior pullbacks.

At the moment the market does not appear to want to move to the downside, but rather trade sideways.  Even so, it is premature to consider the pullback as complete.  If it is a triangle, it has at least another day or so to go.  If it is a flat or expanded flat, then lower prices may be seen.  If it is only in the first leg down, then the pullback could last until the end of next week.  It is still too early to tell.

Wednesday, October 19, 2011

Be Patient

It finally looks like the pullback is gaining some momentum.  We need to be patient and wait for a clear indication that the pullback is nearing completion before taking any new long entries.  Of course, an upside breakout would qualify, but I don't think that is going to happen right away.  A better setup would be a pullback to MA support which is still below the market.

Tuesday, October 18, 2011

Still Looking For More Pullback

When a pullback or correction begins there is no way to know what form it will take.  Today the high for the Qs exceeded Friday's high, so the new high could end the first leg of the rally, or it could be part of a running triangle or expanded flat.  The fact is that the market is extended and the most likely next move is a pullback to the moving averages either by going down or moving sideways.  Of course, the market could continue to march higher, but we are due for some give back.

Monday, October 17, 2011

Pullback Underway

I am running behind due to recovering from computer problems.  Thanks for your patience.  It looks like the expected pullback is finally underway.  It should continue for 2 to 4 more days.  At that time we can re-evaluate the potential for further corrective action.

Thursday, October 13, 2011

Still Expecting A Pullback

The market has continued higher the last two days even as the number of new 52 week highs has declined.  The SP500 has retraced almost 50% of the entire decline from May, so a 3 to 5 days pullback would be normal and expected.

IBD has called the market in an Uptrend due to yesterday's confirmed follow-through.  However, this was not the most convincing follow-through as volume was not great, just higher than the day before, and the market closed well off the highs of the day.

Once the pullback is over, the probability of more sharp rallies similar to Monday's event is quite likely, so shorting is probably not the best idea right now unless you are going take very quick profits.

I am experiencing intermittent computer problems at the moment, so I may not post again until later this weekend or early next depending on how long it takes to get it fixed.

Monday, October 10, 2011

Low Volume Is A Problem

Since the August bottom, rally tops have been marked by very low volume with a top following in 0 to 2 days.  Given that the IWM remains below its previous high and is now approaching resistance at the 50ma with today's volume being the lowest since last week's low, a short term top is probably imminent.  We also have the 5ma of the TRIN at 0.65 with today's reading at 0.47, and the McClellan Oscillator in overbought territory.  A wave ii or b pullback into Friday's close is the most likely scenario.

I had to leave for a meeting at 2pm today.  With the low volume and an approaching top I decided to take profits in my ES position at 1186 just one point below the R3 pivot for a gain of 111.25 points in 5 days.  Instead of trying to short the upcoming pullback I will be looking for another chance to get long for a move to the 200ma probably around 1250 to 1260.  A 3 to 4 day pullback should do the trick.

Friday, October 7, 2011

How I Traded WYNN

WYNN provided a rare oversold long entry with two closes outside both the 12 and 50 x 2 SD Bollinger bands followed by a "doji" inside the 12 x 2 SD band.  With the market showing a desire to reverse Tuesday morning I went long WYNN at 110.00 and exited this morning at 134.72 when it became evident that the run-up was over.  When people say you can't buy bottoms they don't know what they are talking about.  This is a perfect example of how to buy a bottom in a stock.  The key is to buy when both the broader market AND the stock are both deeply oversold AND showing slowing momentum to the downside.

It looks like the expected pullback may be underway, but it is a little early to tell.  There may be another rally high before the pullback begins in earnest.  The 38.2% retracement target was not hit today for my ES position, so I am holding until either the target is hit, or there is a pullback with an opportunity to add to the position next week.  Currently my stop is at breakeven in the position.

Have a great weekend!

Thursday, October 6, 2011

Approaching Resistance

On Monday I said, "The question is not if a sharp rally will occur, but when will it occur?"  We got the answer by Tuesday morning after the Qs came within 0.17 of the 8/9 low.  I bought the ES at 1074.75 Tuesday morning.  If it hits the 38.2% retracement tomorrow, I may sell for a gain of around 100 points.  If not, I may hold and add on a pullback.  The risk is that given the declining volume a pullback may be sharp.  But the main thing to understand is that this rally should last well into December at least and maybe even January, so keep your eye on the prize.  It will probably be choppy, and this could make things difficult.

So far the timing of the current market correction has followed the pattern from the 10/11/2007 top extremely closely.  The initial decline into the March 2008 low lasted 107 trading days, which would have equated to October 3, 2011 in the current correction, so it was off by one day.  If the pattern continues to hold, the market will continue up one or two more days, and then pullback for 3 to 4 days followed by another surge.  This may be a good time to look for intermediate term long entries lasting 6 to 12 weeks as well as short term trade setups.

Tuesday, October 4, 2011

Putting In A Low

I think a strong case can be made that with the market's reversal today and close back above the August closing low that an intermediate low is now in place.  There are outcomes that would allow for another retest, but it looks as though the monthly pattern I showed on Friday, Familiar Pattern, has been fulfilled, and a 4th quarter rally is now probably underway.  At a minimum the Qs should exceed the September high by year end.  An immediate reversal that takes out today's low would invalidate this view.

Two Scenarios

I see two scenarios for the a potential intermediate term bottom based on this morning's market action.  The Qs are within a few cents of undercutting the 8/9 low.  The decline could end there, or it could fall to 47.45, which would make the decline from the 9/20 high equal to the decline from the 7/26 high.

The first scenario would make the declines equal in time, the latter would make them equal in length.  Unfortunately, the latter might alter the flat combination interpretation, but it will take a long time before we know that.  Again, although things look bleak right now, there is light at the end of this tunnel.

Monday, October 3, 2011

Qs Near Support

The Qs are very near support at the lower 50 week 2 sd BB, and at the same time the 5ma of the TRIN has reached an extreme level.  The question is not if a sharp rally will occur, but when will it occur.  It could happen at any time.  The SP500 closed below the 8/9 low on substantially lower volume than on 8/9 - another bullish divergence.  

Sunday, October 2, 2011

Outlook For October

The opinions about the market's direction vary across the board from the most bearish to quite bullish.  This is not surprising given the fact that the SP500 has been trading in a range now for over 6 weeks, and no one really knows when it breakout in either direction or form an intermediate term low.

I have seen comparisons made with a number of past markets.  Tom McClellan has shown a strong correlation to 1946 (65 year cycle).  I think there is a strong correlation to late 2007 and early 2008 (4 year cycle).  Both correlations seem to be saying the same thing:  there will likely be some type of bottom by the end of October.  I suspect probably around October 13, if not, then probably by October 28.  Others disagree and suggest that the downtrend will continue until the end of the year.  I don't think that is likely given the severity of the recent decline, but anything is possible.

The key is not to fall into the trap of believing that any one particular view must be the right one.  Let the market lead and only take high probability setups.  The current market environment is not conducive to trend following.  That will change at some point, but we will have to be patient.

Perhaps the best approach would be to use an indicator like the MACD to enter on a positive divergence buy signal.

Friday, September 30, 2011

A Familiar Pattern

The Qs have a pattern that has occurred twice before in the last 3_1/2 years -  a huge down month with a long tail, followed by an inside down month mostly in the range of the tail, followed by a rally.  Will the pattern turn out the same again?  If so, we should expect a penetration below the September low followed by a reversal back above the September low.  

Based on the lighter volume for the Qs on today's decline, the likelihood for an up day Monday, and the above pattern I exited my short position in the Qs today near the close at 52.75 for a gain of 5.31% in 3 days.  There may be another short opportunity, but I would be cautious about it.  I will mostly be looking to get long soon.

Thursday, September 29, 2011

More Of The Same

We may get some end of quarter window dressing and a first day of the month rally, but at this point it doesn't appear the market will be satisfied without a completed retest of the August low.  Patience is required.

Wednesday, September 28, 2011

As Expected

Today's action unfolded as expected.  The SP500 is now headed below 1100 to complete the decline from May.  The Qs are headed to around 51+/-.  Most are counting the action in the SP500 as an impulse wave down from May 2nd.  It may be, but at the moment the pattern in the Qs does not confirm that view, and the pattern in the Wilshire and Dow requires a truncated 5th wave for minor wave 3 down in August, so in my opinion there is serious doubt about the validity of the impulse interpretation.

Regardless, we are nearing the end of the decline on an intermediate term basis, and shorts need to keep this in mind.  A huge reversal could come out of nowhere.  The most likely time frame for a low based on a number of cycles and past history of October reversals is probably around October 11, but it could be anytime between now and mid-October.

I am short the Qs from 55.71 with a view of exiting early on an approach toward 51.

Tuesday, September 27, 2011

Approaching A Significant Low

The next low in the SP500 should be a significant one - leading to a multiweek rally.  The best course is to wait for confirmation that a low is in place with either a positive divergence MACD buy signal or an IBD confirmed rally call.  The impending rally should retrace 1/2 to 2/3 of the decline from May before another major round of selling.

Saturday, September 24, 2011