IAG Squeeze Long

IAG is set to continue its rally for several more weeks as it confirmed a weekly squeeze long signal on 2/11/11 and has now pulled back to support.  Note that DI+ > DI- and the ADX is rising strongly.  Gold is now setting up a new squeeze long on the weekly charts and should it confirm a long signal it will only support IAGs advance.

At the moment we can't be sure if the recent breakout is from a 4th wave triangle or a B wave triangle.  If the former, then the advance should last another 12 to 13 weeks.  If the latter, then the advance could last more than a year. In either case, the action in gold should affect the outcome and should be watched carefully.

QQQQ Median Lines

The Qs are trading above the long term median line formed by the 2010 summer correction.  The lower channel of the intermediate term median line formed by the August 2010 decline intersects the long term median line near the end of March.  As long as the Qs remain above median line support from point 1 to 3 the correction will be muted.  However, a break of the lower intermediate term channel line around point 3 would likely lead to a drop to the lower long term channel line at point 4.  Typically a break of the long term median line would be followed by a retest from the underside allowing for a shorting opportunity.  We are a long ways from seeing that potential outcome at the moment.

If long term median line support holds, then a move to the long term upper channel line becomes highly probable.  This line projects to around 64.00 by the end of April, a possible advance of around 12% from current levels.  If long term median line support fails, then a move from point 4 back toward the median line would be expected before a larger correction unfolds.

The Logic Of Oil

This is an edited copy of an email I sent to a friend this morning.


What do the charts say about the rally in oil?

If oil closes below the 2/3/11 low of $92.85, then the rally is over regardless of any fundamental argument to the contrary.

If oil sustains above $100.05, the January 2008 high, then it will likely continue higher.

Major resistance is at $120.75, the July 2008 low.

Only if $120.75 is broken to the upside and sustained, can we expect to retest the 2008 highs.

If the Dollar breaks its February low, then gold will likely make a new high.  If gold makes a new high, then the top in oil will be at least 13 weeks later.  Thus, if gold makes a new high, and oil hits $120 well before 13 weeks, then watch out because oil will hit $150.

From the equivalent point in 2008 to the 2008 high took 22 weeks.  Thus, if we are to see a retest of 

the 2008 highs, it will probably take at least that long, or in other words, a top in July 2011+/-.

I would expect such a high to coincide with a pullback low in the stock market at that time, so that would likely

be a buying opportunity in stocks, should it occur.

At the moment, it looks like we will see a correction low in stocks in mid-March followed by another move to new rally highs in May.

If oil continues higher this summer, expect stocks to correct this summer and possibly into the fall.  Afterward, the rally in stocks will continue for at least another year.

Boy that's a lot of ifs.

IWM MACD Sell Signal

We have the second negative divergence MACD sell signal in the IWM in the last 5 weeks.  The first one, which was a hook sell, is technically still in force as the MACD did not climb above its previous high.  However, with the second sell signal coming after the IWM made a fairly significant new rally high, we should expect that the downside potential will be somewhat muted with weak support at the January low and strong support at the April and November 2010 highs.  Notice how the rising 200dema will likely meet or surpass those levels by the time the IWM reaches them which will provide an additional level of support.

It seems the game plan would be to enter short on any weak retracement of this week's decline with the view of exiting at support.  If, and it's a big if, we see 5 waves down to that support, we could begin to look at intermediate opportunities on a subsequent rally into the April/May time frame.  Otherwise, this correction is setting up new long opportunities.

After hours Biogen is up $3+.  Today VRTX gained 15% gapping past my Stop Limit entry point of 40.25.  I will look to enter on a pullback.  BP has set up a very nice cup and handle.  See my post from 2/8/11 on oil http://tradercraig.blogspot.com/2011/02/breakout-failure-but-oil-still-in.html, which shows upside targets. Cash oil today closed at $100 and is well on its way to the next objective around $107.  I am long the OIL.  RBCN is set up for a double bottom breakout with a handle.  CME has barely been affected by the selloff.  The break below the longterm trendline in precious metals stocks (GDX) appears to have been a bear trap.  There are a few stocks in that sector that have setup - IAG, GG, AUY are a few.  WFR has built a very long base that has potential to double.

My conclusion is that the 2010 flash crash coupled with the extended rally has given a large number of laggards time to catch up and set up as a rotation out of recent high flyers is underway.  The current correction could last well into March, but should provide excellent long opportunities for the next rally.  Only if we were to see failure below the April 2010 highs might we conclude otherwise at this point.

LOL

I knew that as soon as I posted that article with a bullish outlook it would be followed by a day like today, but today's action doesn't change anything other than probably begin a much needed correction and confirm that this market has been skating on thin ice.  Hopefully you've used the last few weeks to lighten up on long positions.

If you are short with the MACD signal, then hold for a buy signal.  If there is a buy signal off the rising 50dema or 200dema, that would be an exit signal, or if not, then exit on the second buy signal.  We will wait and see if other trend following strategies give sell and/or short signals.

Already, the equity only put/call ratio is approaching oversold levels, so this correction may just be a pullback.  If the McClellan Oscillator and the EPCR both signal an oversold condition, it may present a good entry point.  If you believe this is the beginning of an extended correction or new bear market, it would be prudent to wait for a rally to enter short.

I think oil is headed to at least $105 and maybe higher.  Gold and silver look higher too.

A Reluctant Bull Reality Check

In psychology the term reality testing is used to describe objective measures by which we distinguish what is occurring in our mind versus what is happening in the external world.  I think a reality check is in order here. I have put forth the view that his rally would last longer than expected and probably retest the old SP500 highs.  I have also been expecting some sort of correction prior to continuation of that advance based on elliott wave theories, cycles and sentiment.  However, we have passed the point at which any of the evidence supports the view that an intermediate term correction would reasonably be expected to occur.  While it is disappointing to have missed a substantial advance from the July 2010 low, that is in the past and is of no value going forward.  The question at this point is what happens from here and what do we do about it?

We can see from the above chart that nasdaq relative strength has been waning since mid-January.  While this divergence in strength usually precedes or coincides with market corrections, there were several such occurrences in 2010 that only led to minor pullbacks or consolidations.  So, I don't put much weight on this at the moment.

The PPO of the equity put/call ratio has worked off the extreme bullish sentiment that was seen in mid-December and is now neutral.  The fact that the market continued higher while this occurred is actually quite bullish.  Although investment advisors have become extremely bullish as has been widely reported, the investing public has not.  The percent of retail investors expecting another flash crash in the next six months has risen from 60% to 75% in recent weeks - maintaining an opposing sentiment to investment advisors.  So, overall the sentiment picture has moved to neutral.

Leading stocks like Aruba Networks are breaking out.  The action in ARUN yesterday does not appear to be an exhaustion gap or climax move.  It appears to be a third wave breakout.

CME is showing a very bullish (1), (2), 1, 2 elliott wave count that is not at all ambiguous.  This stock has been a leading/coincident indicator for the market.

The SP500 has pretty much moved through all strong resistance zones except the 1370 area.  If that level is surpassed there is nothing really to hold it back.  I show trendline breakout projections from 1574 to as high as 1867.  I suspect that instead of wave (5) of [C], the SP500 is in wave 3 of (3) of [C].  Since third waves are not constrained other than not being the shortest wave, there is no theoretical limit to how far it can go.  However, a typical 1.618 relationship to wave 1 gives 1476.  If wave [C] is 1.618 times wave [A] the target is 1906, and 1.618 times the decline from 2007 to 2009 gives a target of 2138.  So, we have a potential range of targets from 1370 to 2138.

The potential for a bullish advance in the Dollar that would coincide with a market correction appears to have been invalidated yesterday as well.  It seems that the bearish case is falling apart at the seams.  Most of the damage to the bearish case has happened in this past week.  As for me, I had been looking to take advantage of an expected correction for shorting opportunities.  These have not come to pass.  Also, I said that once the expected correction was over, I would not be shorting this market again until the cyclical bull market is over.  I believe the time for shorting is over, and traders should not waste any more time and money on that exercise, but concentrate on looking for long opportunities.

At this point traders who are not long the Qs or other indexes should wait for a pullback or small correction to find an entry point, but many stocks are setting up with bases and should be considered as primary candidates.  CME above is an example, but there are many others.

XAU Gold/Silver Stock Index May Be Ready To Breakout

The gold and silver mining stocks have lagged the precious metals badly during the latest advance with only a few exceptions.  That may be getting ready to change.  Given its poor relative strength performance, the recent failure of the XAU at its 2008 high prompted some observers to speculate that the index was about go into a serious decline.  However, after 3 weeks of rallying in what appears to be a 5 wave advance, the XAU has recovered its 2008 high.  Depending on how you count it this could be either the third or fourth attempt to breakout.  I would call it the fourth attempt as shown below.

As many have observed in the past, including WD Gann, when a market fails to breakout on the first, second, or third try it can be a good shorting opportunity.  However, a successful fourth attempt is a buy signal.  I suspect the XAU will rest here for 1 to 3 weeks in preparation for an advance that will make up for lost time.  This may be a good opportunity to take positions in leading gold and silver stocks.  Two candidates that I am looking at are IAG and SLW.

The Qs did in fact breakout from the triangle yesterday and slightly exceeded the calculated targets.  It just seems to me that this market is running on borrowed time with respect to a needed correction.  A four week pullback to the 2010 highs might be a good long entry for the next advance as long as it occurs as a corrective pattern.

Another Sign Of A Top?

Amid record bullishness among professionals (http://www.marketwatch.com/story/fund-managers-bullishness-at-a-record-survey-2011-02-15) we have another sign of an impending top as the Qs have formed a very nice symmetrical triangle on the intraday chart.  Usual time and price relationships suggest a top around noon today with target of 58.81+/-, although all that is required is an attempt at a new high around 58.66.

I would caution you not to be fooled by all of the great action in leading stocks of late.  This says something about future market potential this year, but nothing about the immediate future.  I have seen this all too many times before as a plethora of individual stock names appear to heading to the moon just as the broader markets top.  Then all of the wonderful patterns and price projections go to hell in a handbasket.  It is so tempting to be buying these breakouts, but all of the gains for this year could be given back in just a few days.  Maybe this time will be different, but I doubt it.  As they say, that's my story and I'm sticking to it.

5 Waves Up In The GDX

Waiting For Confirmation

We are waiting for a close below 1311.74 to confirm that a top is indeed in place.  It is premature to call a top, but even if yesterday's high isn't the top, I think it would take only one more retest of the high to finish it off.  We have a completed wave count, very low volume and bullish complacency.  All the ingredients of an impending change in the trend.

For those who may not go back and look at previous posts for comments, there was a question about the results  in my post from January 1 - A Look At The IBD 100. I used a hyphen between the numeral and results which some may have interpreted as a minus sign.  All of the results were actually positive. However, the point of the post was that using the IBD 100 seriously underperformed using the top 10 relative strength stocks of the Russell 3000.  Regardless of your trading strategy, one should not blindly accept a list of "top" stocks.

Bottom In The TLT

Turns in the TLT have preceded turns in the stock market by a few days since the rally began in 2009 with a negative correlation.  We now have a setup for a bottom in the TLT with a completed thrust out of a descending bearish triangle, falling volume from the momentum low that occurred in November and rising momentum.  If past is prologue then a top in the stock market should be imminent if not coincident.  To confirm the turn we need to see the TLT close above the 12/15 low of 90.47.  Since we have a completed pattern, or at worst one more new high to complete a pattern, in the stock market, coupled with a possible bottom in the Dollar and the TLT, it is time for top in stocks.

In reviewing the commentary on various blogs, trading websites and the financial news media, the outlook for stocks crosses a spectrum from the extreme bear case to the extreme bull case.  The extreme bear case is well known and is a call for stocks to top now and begin a steep decline to multi-decade lows.  The extreme bull case is that we are cycle wave 5 up to new all time highs and currently we are in the early stages of primary wave 3 up in cycle wave 5.

The problem with both of these extremes is that they disregard a number of facts that contradict them.  With respect to the bull case, it is fairly clear from past history that secular bear markets have lasted at least 12 years if not 16 to 18 years.  If we are cycle wave 5 up, then this last secular bear market from 2000 to 2009 would be the shortest in history.  For the bear case, there are two problems.  First, we have exceeded retracement levels both in price and time that would have been expected for primary wave 2 up.  While 2nd waves can theoretically retrace up to 99% of the previous 1st wave, it really doesn't seem consistent with the fundamental arguments for primary wave 3 down for this to occur.  Secondly, longer term cycles point to the rally continuing well into 2012 or 2013, further reducing the likelihood that this is a 2nd wave.

Readers of this blog know that I have been calling this rally an x wave since 2009 with an expectation that we could retest or exceed the 2007 stock market highs.  Unfortunately, I have underappreciated the potential for this rally to continue without the typical retracements.  I fully expected that we would see a deeper and longer wave [B] or (B) from the April 2010 high.  The continuation of the rally in 2011 has eliminated the likelihood, though it is still possible, that the current rally is wave (B) or B of an expanded flat or running triangle.

I would caution you to be careful and not draw dangerous conclusions.  There are several possible outcomes still on the table.  The most bullish is that we are completing wave (1) of [C] up.  I don't like this option because of the "wedgy" character of the rally, but it is possible.  Thus, we could see a 38% to 62% retracement of the rally from 7/1/10 in wave (2) down with a 50% decline taking the Qs back to the April 2010 high.  We could also see an (X) or [X] wave of undetermined length as wave x morphs into a double zigzag.  There are others, but these two seem the most likely.  The difficulty is that an (X) wave often doesn't have any clear relation in time to the preceding waves.  It is more like a knot that binds the two parts of the larger correction together.  Wave (X) could last 4 weeks or all of 2011.

Regardless which outcome prevails, the time for heroic shorting is long past.  The action in leading stocks suggests that this rally will continue after a correction and money is to be made primarily from the long side.  That is not to say that shorting is out of the question, but it should be done from the view of a hit and run trade, not a trend trade.

Performing well in the current market environment has been and will be difficult for most traders, but we cannot ignore the larger trend.  For those who have missed out on the recent rally there is no reason for regret.  That will happen from time to time.  This cyclical bull market could continue for another 2 years.  This latest rally has only lasted 7 months, so no worries.  Trading is for a lifetime, not just a few months.

Conditions For A Top Satisfied

At this point all of the conditions for a top have been satisfied.  The upper trendlines of the wedge patterns have been overthrown.  The last movement from the 1/28 low has completed in 5 waves.  Today is a possible cycle turn date according to several different methods of calculation.  All that is needed is for a decline to begin.  A close below yesterday's low of 1311.74 would be the first indication that a correction is underway followed by confirmation with a close below the 1/28 low of 1275.10.  For the Qs the levels are 57.49 and 55.39, respectively.

Volume today has been on the light side, another indication of a lack of conviction.  In addition, we have not seen a serious decline since August, a period of almost 7 months, which is quite atypical.  The bottom line is that given all of the necessary conditions for a top have been met, if the market continues to rise, we have to conclude that something completely different is going on.  A correction will occur at some point, but the higher the level from which it occurs, the less likely serious damage will be done as the longer term 50 day and 200 day EMAs will approach and move above the 2010 highs, solidifying support at those levels.

Approaching A Top

It appears that the long awaited for top is near at hand as a (likely) small degree 5th wave is in progress.  This should complete the rally from the July 1 low.  There have been quite a few close calls (apparent tops that weren't) along the way, but the current pattern has all of the characteristics of a final impulse to a top.  It looks like the SP500 will double its 2009 low before it rolls over.

In order to confirm a top, we will have see a break of the January 31 low coupled with a 5 wave decline.  Until then any top will just be a pullback in a still ongoing uptrend.  The level of complacency has reached such an extreme that it is hard to fathom how a correction would not occur soon.  However, this market has fooled just about everyone - even the bulls who have called for minor pullbacks - so who knows if the craziness will continue.

Triangle In AAPL

Although it is not textbook, the triangle in AAPL suggests the current advance may be the last before a correction gets underway.  The target is around 361.  It is pretty clear that the Qs will not top until AAPL does.

Breakout Failure But Oil Still In Uptrend

While oil's recent breakout can be deemed a short term failure, it is still holding support above the February 2008 low of 86.25, which was resistance in April 2010.  As long as that level holds, the uptrend should continue to at least the lower target zones.  The trendline for the rally from 2009 is currently around 82, so that would be the lowest legitimate area of support for the uptrend.

The SP500 closed right at the trendline connecting the August and November 2010 highs today.  It is rare for a market to power through such a long established trendline.  The price pattern still looks like it wants to make another high, but that should be it.

Overthrow In Progress

Previously I suggested that we might see an overthrow of the rising wedge patterns.  That overthrow appears to be in progress with perhaps another down-up sequence or two to go to complete.  In reading and listening to various market commentators and analysts the consensus seems to be that a correction may be coming but it will only be 3% to 5%.  Regardless whether or not we retest the July low, the rising wedge patterns imply that the coming correction will definitely be greater than is expected.  Of course, volume continued to decline again today.  I am looking for a close below 1289 to indicate that a correction has started.

Changes Coming?

The front page of this morning's IBD confirmed what I was saying about the unemployment rate with a chart showing labor force participation at a 20 year low of 64.2%.  The 35.8% of people not participating in the workforce are either depending on family and friends for support, using up their life savings, are being supported by the government, or all of the above.  This is not sustainable.

Parket Binion has a presentation on a 14 week cycle in market tops at Terry Laundry's T Theory site - http://www.ttheory.com/.

For those interested in the astrological viewpoint, there is a view that we are in a time band for a market top that could lead to a correction of 10% or more.  See Raymond Merriman's work at http://www.mmacycles.com/.

My own calculations show a potential for a market top around February 11.  However, I haven't nailed a turn in a while so I am not banking on it.

The problem as I see it at the present time is that most trend following strategies are long, but in my opinion market risk is extremely high, so there is just nothing to be done except wait for potential short setups or new long signals after a correction.  I do think there are opportunities in the precious metals and mining stocks on the short side, but at the moment there are not new entry setups, although there could be in the very near future.

We still have a long way to go in 2011.  This should be an exciting year to be in the markets.

Possible Scenario Developing

So far, attempts to divine the top of this rally have been futile, but the clear fact remains that the market continues to rally in what appears to be a rising wedge (ending diagonal) at 3 degrees of trend as volume continues to contract.  Oftentimes we will see at least an attempt, if not an outright overthrow that convinces the last stragglers to the party all is well and this really is an ongoing bull market.  However, the market action is so anemic, I doubt we will see much of an overthrow attempt.  If the rising wedge interpretation is correct, the downside will be surprisingly swift.

For the Qs, the MACD short signal is still in force and we now have the Dollar trying to put in a bottom that could lead to a 3rd of a 3rd wave rally.  This should take the wind out of the stock market's sails, as well as precious metals.  Oil's breakout attempt failed today, but I wouldn't call a top yet.  It should still try to grind higher over the coming weeks.

For all of the talk about an improving economy the jobs report today is probably a more accurate gauge of economic reality than the talking heads were willing to admit.  Now that we've had two subpar reports back to back there is all of this talk about an upside surprise in the near future and lots of excuses to explain why the jobs report does not show what is really happening.

The unemployment rate fell because people are giving up - not because they found jobs, and the projections of future hiring expectations are based on increasing growth above the current lackluster level.  Even the slightest decline in demand lead to more layoffs and job losses.  We are on thin ice here, and I think most people feel it.

The stock market has gone up for one reason only:  excess liquidity chasing yield, but that can only last so long, and if investors perceive any loss of upside momentum they will be fighting to get out to protect what little they've made.  Even if the market continues to rally another two weeks, the condition of the market will not change.  All that will change is that the downside risk will be even greater than it is today.

Squeeze Setting Up In The Qs

The last long squeeze fired off on 1/6/11 when the Bollinger bands moved back outside of the Keltner channels. DI+ was greater than DI- confirming the uptrend.  The rally lasted 9 days before a pullback began.  Now the Bollinger bands are once again moving back inside of the Keltner channels.  While anything is possible, it is not typical to see a breakout when the upper Bollinger band is contracting toward the price moving average.  Also, although there may be additional upside the contracting Bollinger bands tends to keep a lid on a market advance until the contraction is over and the bands begin to expand again.

In the present case, we have DI- trying to cross up DI+ which would indicate the likelihood that a squeeze breakout would be to the downside.  Since it may take a few days for the setup to develop, if the market is in the process of topping, next week may continue the top building process in preparation for a more decisive breakdown.

I have to admit, however, that just looking at price alone the chart looks pretty bullish.

New Highs Don't Change The Outlook

While the SP500 and the Dow made new rally highs today the IWM just managed to make a second retest of its broken trendline. Volume lagged on today's rally as well for most indexes. It may seem that a top will never come, but this rally is getting well beyond the average time and gain for stock market rallies, and there will be a top of some kind.

It is likely the Qs will make at least a token new high, but it is not a certainty.  Friday's low remains the key level for confirming the downtrend.

The MACD remains on a negative divergence sell signal until it rises above its January 18 high.