Thursday, March 31, 2011

Crude Hurtles Resistance

West Texas crude broke above resistance today at $107.  My next target is just shy of $120.  It might take a few weeks to get there, but unless there is a solid close below $102.70 it should get there nonetheless.

Corn was limit up today - another commodity showing strength.

The first couple of days of the month should be positive for stocks, probably into Tuesday at least.  Then we should see a brief pullback.  At the moment the best interpretation is that we are in an impulse wave up - either minor wave 5 or minute wave [iii] until proven otherwise, although none of the proposed corrective patterns has been invalidated yet.  A sustained move above 1330 in the SP500 should lead to an acceleration.  If an impulse is indeed underway, the move should last until at least the end of May, if not the end of June.

Wednesday, March 30, 2011

RAX Breaks Out Today

RAX had a solid breakout today on almost double its average volume.  I mentioned RAX on Monday as a potential buy candidate.

Before considering RAX as a long opportunity I first evaluated the potential for the market to resume its uptrend and how leading stocks have performed during the recent correction.  Since my overall view has been that once the correction was over the market would resume its uptrend, and since leading stocks have held up well during this correction, I concluded that it was worth my time to scan for buy candidates.  I found RAX featured in IBD last week.

Looking at its chart I noticed several characteristics that were very positive.  These are noted on the chart.  I don't take the time to label charts this way for myself.  After years of scanning charts, these features just stand out to me after a few seconds.  If it looks right I may investigate further.  I liked the look of RAX's chart so I studied it for about a minute, decided on an entry point and placed an order to buy with a stop limit entry at 39.75, which was filled yesterday.

One thing I know I used to be guilty of, and I imagine that others are as well, is trying to force fit a particular view on the chart.  The fact is that there many positive characteristics that a winning stock could possess that would make it a worthwhile trade.  The key is to have more than just one or two.  In this case we have at least 7.  One that I didn't show is that it formed a long squeeze setup as well.  If there are enough technical qualifiers, and if the market is in or near to confirming a positive trend, and if the stock has good fundamentals,  and if I have capital to take the trade, then I take the trade.  If there are several candidates to choose from, then I rank them mentally and choose the ones that I like the best.

I believe it was Van Tharp that demonstrated that one could actually make money with a 3 ATR trailing stop loss and random entries without consideration of technical or fundamental conditions.  If that is true and we see a number of other positive reasons to take a trade, there should really be no reason to hesitate.  That is truly about as much as anyone can do.

IBD Calls Market In Uptrend

IBD called the Market In Uptrend in this morning's edition.  Even though there has been no follow-through day, the action in leading stocks and the extent of the retracement of the February/March correction has led them to conclude that the uptrend has resumed.

Both the equity only put call ratio and the VIX are confirming the uptrend.  I would have preferred to see the PPO of the EPCR fall to the deeply oversold area around -20 as it did in May 2010, but the recent low around -17 matches the lows of other pullbacks since the cyclical bull market rally began.  Now the PPO of the EPCR has broken out above its recent downtrend line, which is a fairly convincing confirmation that the correction is over.  The rally should continue until the PPO reaches +15 to +20.

If the T calculations are correct at Terry Laundry's T Theory the rally should last until at least the end of May to the end of June.

Tuesday, March 29, 2011

Constructive Action For The Bulls

The bears just can't seem to get things going in their direction for very long.  Today's action was very constructive for the bulls.  However, it still doesn't rule out any of the potential corrective patterns.  Today the SP500 closed back above its median line.  If it holds this level, we would expect an assault on the February high at 1344.  We could then still see a flat, expanded flat, triangle or running triangle corrective pattern.  Or minor wave 5 or minute wave iii could now already be underway.  No matter what, unless the market caves tomorrow the near term outlook is up.

Monday, March 28, 2011

In A Holding Pattern

A number of market leaders have set up nice bases and are ready to breakout, but I have the feeling we need another scare to really cement the bearish sentiment before the April/May rally can begin.  We are also at least a few days, if not a couple of weeks, from completing a corrective pattern.  Until there is more information there is not a lot to be said.

Some stocks I am looking at are:


Friday, March 25, 2011

A Few Possibilities

I see four realistic possible outcomes for the current market action.  The first is that we are close to completing wave [x] of a double zigzag correction which will retest the March low in April to be followed by wave 5 or wave [iii] up to new highs.

The second is that we are currently in wave [i] or (i) up already to be followed shortly by wave [ii] or (ii) down and then wave [iii] of 5 or wave (iii) of [iii] up to new highs.

The third is that we are in wave [b] of a 4th wave triangle to be followed by wave 5 up to new highs.

The last is that we are in wave [b] up of an expanded flat correction in wave 4 or wave [ii] to be followed by wave 5 or wave [iii] up.

I think this week's market action is sufficient to rule out the more bearish views.  The one thing that all of these have in common is that we will see either a sharp decline or a pullback within the next week or two, and there is only a small chance that the market will fall significantly below the March low to complete the correction.  Also, in 3 of the 4 cases we can expect a move toward the highs if not a retest of the highs by mid-April.

In my opinion the weight of the evidence is on the side of the bulls.  While short term traders can consider short positions, the best outcome will likely be in taking profits in short positions at reasonable targets as opposed to a developing trend trade.  A number of stocks are beginning to build the right side of their bases and going long early may be a good strategy.

Thursday, March 24, 2011

Just Testing The Median Line

The SP500 has rallied over 62 points since the March 16 low, and in some respects it is beginning to feel like the correction is over.  Even so the tenor of the rally is not impulsive and the volume is lacking.  We can see from the chart below the index has swung from a high at the upper inside channel line to a low at the lower inside channel line and now back to the median line.  Having tested the median line from the underside the most likely course is for another decline to follow.  Whether or not that decline makes it all the way to the lower outside channel line remains to be seen, but in order for the correction to be declared over, the SP500 will need to hurdle and sustain back above the median line.

Tuesday, March 22, 2011

New Highs - New Lows Do Not Confirm Rally

The 10ma of NYSE new highs minus new lows does a good job of confirming rallies and corrections.  The MACD of the $NYHL  also works well.  At the moment the MACD is trying to turn up but the 10ma is still headed down.  The fact is it is headed down in spite of a 3 day rally, which suggests the rally has problems.  If the 10ma and the MACD both turn up while the market holds up above the March low, then we could begin to consider that the larger uptrend has resumed.

Monday, March 21, 2011

Light Volume Spoils The Rally

Markets rallied today but on below average volume.  Overall the rally from the March 16 low has the appearance and feel of a countertrend rally, i.e. a rally within the context of a larger correction.  The SP500 negated the likelihood of a 5 wave decline today which raises the probability that were are in wave [x] of a double zigzag.  There are no real limits on [x], but usually would expect no more than a 62% retracement of wave [w].  For the Qs that would be around 57 and for the SP500 it would be around 1308.

I expect the 50dema will be tested next for the Qs.  Afterward expect another zz decline to the 200dema +/-.

Friday, March 18, 2011

QQQQ Correction Proceeding As Expected

So far the correction has proceeded as expected.  On March 14 I showed the same chart below after support level #1 had be broken.  See  Now support level #2 has been broken and the Qs are holding at support level #3 which is the November 2010 high.  After retesting the line at #2, the Qs appear ready to break below the November 2010 high which should lead to a quick climax selloff toward the lower channel line at #4.

While I don't think that primary wave 3 is actually unfolding as many are presently calling for we have to be cognizant of the fact that if the lower channel line and the April 2010 highs are breached, then all bets are off with respect to a continuation of the rally.  We also have to be on the lookout for a clear 5 wave impulse down on the daily charts which would signal a change in the trend as well.

At the moment, however, the most likely interpretation is that the market is in wave [c] down to complete a correction.  At 2.618*wave [a], wave [c] would terminate at 50.74, which is just .09 above the April 2010 high and the maximum extension that we would expect for a [c] wave.  Next week should give us plenty of insight, but for now there is no reason to believe that the cyclical bull market will not resume after the correction is over.

Thursday, March 17, 2011

Cabot Tides Goes To Sell

The Cabot's Tides system has issued a sell signal as of today as 3 of the 5 indexes followed in the Tides are below their respective 50demas and the emas are down at least two consecutive days.  You can learn more about their system at Cabot Tides. Cabot called the market in correction a couple of days ago based on this and other indicators they use.  However, they do not use the system to trade index ETFs as I am doing here.  Also, I have found that there interpretation of the system is sometimes off from mine by a couple of days.  Do they calculate their ma's differently?  I don't know.  In any case the system works.  It is easy to follow, does not produce a lot of whip saws and trades only a few times a year.

As Above - So Below

The SP500 closed right at the low of the January range yesterday as large speculators and institutions probably stepped to defend what's left of their gains for 2011.  A sharp bounce from here would not be unexpected, but the now declining 50dema will be resistance.  We've seen this play before.  In fact it is exactly what happened last year as the flash crash initially took the SP500 down to its January 2010 low.  A rally followed and then another decline which took it down below the January low an approximately equal amount to the rise above the January high.  Such a move this time would bring the market right back to support at the April and November 2010 highs.

If this is minor wave 4 down, then the market needs to hold up in this area without sustaining below the January low, otherwise we would then be left with four possibilities:  1) a minute wave 2 correction of the rally from the November 2010 low, 2) an intermediate wave 2 correction of the rally from the July 2010 low, 3) wave [X] correcting the entire rally from the 2009 low is underway, or 4) primary wave 3 down is indeed in its beginning stages.  For the time being I would lean strongly toward the first two possibilities if minor wave 4 is eliminated.  It would take some time to be sure of either of the last two.

In any case, I think that somewhere between yesterday's low and the above target we will see a tradable low.

Wednesday, March 16, 2011

At First Support

The Qs fell to the first expected level of support at the November 2010 high at 54.04 closing at 54.15, and the SP500 closed at 1256.88 only 0.10 below the March 2008 low of 1256.98.  Both indexes closed below the 100dema, and it would be surprising at this point if the 200dema is not seen next.  However, a least a small bounce will occur before another leg down.

The McClellan Oscillator has reached oversold levels, but that doesn't mean that the market can't go lower.  I am looking for a test of the 200dema before a significant rally begins at this point.  It would be nice if we were to see a wash out right now - meaning tomorrow and Friday.

Expect More Selling This Afternoon

We have a clear 5 waves down from yesterday's afternoon high on the 1 minute chart with a 3 wave rally underway.  Expect some intense selling this afternoon.  This may be wave c of (b) of [x], which will be followed by wave [y] up, but more likely is a small degree 3rd wave of wave [c] down to complete the correction.  We will know soon enough.

Tuesday, March 15, 2011

Another Corrective Rally (Updated)

Update - The PPO of the equity only put/call ratio has yet to reach the level that would be associated with a lasting bottom.  We should continue to look for further deterioration in this indicator over the coming days.

Earlier Post
The rally in the Qs today appears to be another 3 wave rally.  If this is the beginning of primary wave 3 down, then tomorrow or the next day should be a doozy (is that a word?).  Anyway the more likely interpretation is that this morning's low completed wave [w] of a double zigzag correction, and we are now in wave [x] up which may last another day or two.  This would place the real end to the correction sometime in mid-April.  The next best interpretation is that we are still in wave [c] down which should complete by the end of the week.  If the market thrusts higher tomorrow, the correction is probably over, but I don't think that will be the case.

The McClellan Oscillator has reached oversold territory.  Now we will be looking for a rising bottoms pattern  as denoted by the 1s & 2s to indicate that the correction has run out of steam.

The % stocks above the 40ma is beginning to reach the oversold zone, but has further to go.

On a severe down day, Rubicon attempts to break out of a double bottom pattern.  It may need a couple of more tries, but this stock is showing relative strength.

Although gold and oil sold off today as well, these are probably pullbacks in the overall uptrend.  It is too early to conclude that the uptrends in these commodities are over.

What To Do Today?

Best answer:  probably nothing.  If you are not already short, it is too late to get short.  If you are long, you may be stopped out of positions today.  For some positions experienced traders may want to pull stops for the first 30 minutes of trading and then reinstate them at the opening range low.  Don't do this impulsively, but only if you have it planned out and have the discipline to go ahead and reinstate the stop and take the loss if necessary.

Our hearts go out to those affected by the earthquake and possible nuclear reactor failure in Japan.  And yet we cannot let that affect our trading decisions.  History shows that markets do not typically begin bear markets or extended corrections after such events.  Even after 9/11 markets bottomed just a few days later on 9/21/01.  After Katrina it was about six weeks later.  Chernobyl and Three Mile Island occurred at the beginning and early parts of a major bull market and you probably can't even tell on a chart of the markets when they happened.  Even the onset or wars tends to be bullish, so we must put aside our fears and expect that after the initial shock, markets will resume their uptrend.

The best interpretation of the current market action is that it is wave [c] of 4 or (c) of [2].  The most likely support levels are the November and April 2010 highs and the 200demas.  At this point the 200dema is a huge target.  Wave [c] = 1.618*wave[a] for the SP500 at 1243.  But lower support is at 1227, 1220 and 1211.  For the Qs, we have support at 54.04, 52.90 and 52.56.  These seem like the most likely targets, but will probably not be seen today.  Volatility on the other hand may reach its maximum today so some option trades may hit their highest levels today.

Of course the selloff today will have those calling for P3 down saying this is a 3rd wave.  The problem is that you cannot tell the difference between a 3rd wave and a C wave and for stocks the 5th wave after a panic usually only retests the 3rd wave low, so logically one should not be counting on that 5th wave.  If it happens then you can adjust your plan accordingly because there will most likely be a retracement.

Monday, March 14, 2011

QQQ Support Levels

Corrective Rally

I've learned that it doesn't pay to look at the elliott wave picture at very short time frames as the number of potential permutations becomes ridiculous, but nevertheless today's rally seems to be a double zigzag.  Note the triangle that occurred before the last leg up and the overlap between waves 4 and 1.  These are the telltale signs along with weak volume that there is more downside to come.

Friday, March 11, 2011

GLD Setting Up For Another Leg Higher

The GLD has formed a very nice cup with a high handle.  Volume has declined in the handle which is a nice attribute.  A breakout above the high of the handle targets 147.02 at a minimum.  A breakout would also bode well for a continuation in the uptrend for oil.

No more posts until Monday.  I'll be on a 30 mile canoe/kayak trip with my two youngest boys this weekend.  I hope you will be enjoying the nice weather that we are expecting.

Wave (b) of [b]?

There has not been any real follow-through to the downside as we might have expected for wave [c] today.  We have to consider that this morning's low was possibly wave (b) of a larger [b] wave triangle, which will extend the correction for another week.

NYSE % Stocks Above 50ma Confirms Correction

A correction is definitely in progress as confirmed by most indicators including the NYSE Percent Stocks Above The 50ma indicator as it has broken below its previous swing low in the neutral zone.  Stock markets are most likely in wave [c] down to complete either a 2nd or 4th wave correction depending on the degree of trend.  Most now believe it to be a 4th wave correction, but we should keep an open mind.

The market is becoming oversold rather quickly but there is still plenty of room for downside in the indicators such as RSI 14, Williams %R 30, and the McClellan Oscillator.  For the SP500, wave [c] = wave [a] around 1273 which is only 22 points lower than yesterday's close.  Wave [c] = 1.618*wave[a] at 1243 where there is confluence with a lower channel line.  There is also minor support at the March 17, 2008 low of 1257.  These levels could easily be achieved in 1 to 3 trading days, so traders holding bearish positions should be vigilant in looking for signs of reversal.  In this type of market gains in short or put positions could evaporate rapidly as volatility falls sharply on a reversal.

The minimum upside target for the SP500 once this correction is over is the recent high of 1344, but more likely targets are 1431 to 1461 with a possible gain on the order of 15% by late May.  At that point many will consider the rally to be complete, but more upside potential exists after a 4 week +/- summer correction.  Only if there are significant changes in market character this summer would a bear market be considered.

Thursday, March 10, 2011

Possible Outcomes

Markets have retested the March 2 lows this morning.  There is a slight chance, though unlikely, that this retest will be successful and end the correction.  However, the more likely scenario is that the current retracement is a small degree 2nd wave to be followed by more intense selling tomorrow toward the previously cited target zones.  If this does not develop, then today's action may have completed wave (b) of [b] of a triangle that is still in progress which means more sideways action before wave [c] down.

One thing we do know is that the bullish triangle interpretation that many have counted on has been invalidated by today's action, and unless the markets rally directly from here, there will be more downside to complete the correction.

Signs Of A Bottom For The Correction

It is a little early to tell yet, but the action in the futures this morning would seem to indicate a break down out of the triangle pattern that has developed over the last two weeks.  A number of indications can point us to the likelihood that the correction is over.

1 - Holding support at the 2007 of 55.07+/- or the Nov 2010 high of
2 - PPO of equity PCR falling to or below -20
3 - McClellan Oscillator reaching oversold levels - ratio adjusted
      NYMO to -60 to -80 or traditional to -250 to -300
4 - A reversal in the VIX after a spike higher
5 - A spike lower in price with a reversal
6 - An IBD follow-through day
7 - A MACD buy signal off of support at above levels or
      moving averages

I would like to see at least two and preferably three indications that a bottom is in place before increasing long exposure.  Depending on the nature of the actual pattern that has developed for the Qs, triangle or double zz, the down leg may only last two to four days.

Tuesday, March 8, 2011

Sentiment Still Neutral

Mixed Signals

The market put in a nice up day today after the IBD "Market In Correction" call, which is why it is good to wait for additional follow-through.  However, the advance was on lighter volume for most indexes.  Oil remains solidly above $100 while the Dollar advanced, both of which are headwinds for the stock markets.

The High Low Logic index gave a false sell signal in January and has now issued a buy signal as of February 23rd.

The VIX on the other hand remains above its 50dsma with a positive MACD suggesting that the balance is still tilted toward more correction ahead.

What the above are telling me is that the overall uptrend remains intact but the correction probably has further to go.  The developing triangle probably has alot of traders looking for the obvious upside breakout, but the more likely outcome is a breakdown in a small degree c wave.  This breakdown may only last 2 to 5 days based on the initial decline.  If the VIX closes below its 50dsma, then the correction will probably be over.

IBD Calls Market In Correction

With six distribution days on the Nasdaq Composite in recent weeks and poor action in leading stocks, IBD changed its market stance from Uptrend Under Pressure to Market In Correction.  After two years of solid returns, following IBD's market calls using the Qs resulted in a return of less than 6% as of yesterday's close as compared to a return of 25% for the Qs from 12/31/2009.  This is not exactly the kind of performance you would like to see, but the fact is that 2010 was not only volatile, but traded in a range for much of the year, which is why many trend following strategies underperformed.  That doesn't mean we won't see a period of outperformance in 2011.  The fact is that it was a positive return and traders and investors would do well to be cautious when the folks at IBD are cautious whether you agree with their overall approach or not.

For those using the IBD strategy, it is prudent to wait for a 1% move in the direction of the trend on increasing volume, an additional trend follow-through, to confirm the market call before entering a trade.

Monday, March 7, 2011

Is The Correction Over Already?

I am amazed at how quickly a number of commentators have reversed their views from a correction to impending upside breakout.  Perhaps that is correct and there are supporting arguments, but what is not correct is most of the incorrectly drawn triangles that I have seen.  Even if there is a triangle underway, it is way too early for it to be over and it is possible that the triangle is a b wave that will lead to a downward thrust in wave c down to complete the correction, or it is part of a flat/expanded flat correction that will lead to a retest of the February low.  The August correction took approximately 12 trading days, and the November correction took approximately 16 trading days.  So far, we are only 9 days into this one.  There should be more action to complete this pullback before a breakout to new highs.  A break of Friday's low will be the first step in that direction.

Oil is headed to the cited targets with the next one at 107.15 which has been approached this morning.  Bearish calls on oil have been the norm over the last year and even now that oil has broken solidly to the upside there doesn't seem to be any abatement.  This bodes well for oil's chances for hitting the next target zone of 118 to 122 which, if it occurs soon enough, will leave the door open for retesting the all time high.

I just got back early this morning from a trip to Houston with my son who was competing in his first national qualifying meet as a junior elite in power tumbling and trampoline.  The trampoline is now an olympic sport but doesn't get the kind of attention that traditional gymnastics does even though some of the skills that the athletes perform are beyond what you see in traditional gymnastics.  After doing well in a home town meet in February, he unfortunately had his worst performance in years and failed to qualify for the national meet.  This was purely a case of performance anxiety and I think there is a lot we can do to correct the situation before the next qualifying meet.  He only gets two chances.

I have been amazed in recent years at the growth in psychology related books and blogs for trading, but how do you know if your trading problems are due to psychology and not your trading system?  I suspect that as often as not it is the latter and not the former.  To turn problems with a bad system or a typical drawdown into a case for therapy could make a bad situation worse.  First examine your trading plan.  Are you following it?  Even if you are not following it exactly, is it close?  Is your drawdown within the expected limits of the trading system.  If so, your problem is probably not a psychological one.  On the other hand, if you keep changing your trading system and plan after every loss and you have trouble accepting losses, then maybe it's time to take a break and examine the psychological motivations behind these behaviors.

In sports it can be fairly easy to determine when performance anxiety is the problem.  In trading it is not so easy.  Take a careful look at your trading system and plan before you jump to unwarranted conclusions.

Thursday, March 3, 2011

Biogen Fills The Gap

Near Term Rally Targets

Look for a near term rally lasting 1 to 3 days with targets for the SP500 of 1321 to 1341 before another leg down begins.

Wednesday, March 2, 2011

SP500 Pulling Back To Support

It took 3 tries for the SP500 to get through strong resistance at the July 2008 low of 1200, however, it went through weak resistance at the March 2008 low at 1257 like a knife through hot butter confirming the view that previous tested and penetrated levels of support and resistance are relatively weak while untested and unpenetrated levels of support and resistance are relatively strong.

The 1327 level from the May 2006 high provided strong support in 2008 as it took 3 tries to break down through that support level.  It has now proven to be resistance as the SP500 is on its way to closing below it 2 weeks in a row.  However, while it is resistance it should prove to be relatively weak resistance after lower levels of support at 1257, 1227 and 1220 are tested first.  1257 may hold, but 1227 looks to be the better candidate to hold the pullback.  The next move up should take the SP500 to 1406 to 1440.

Traders should take note that had the SP500 failed at the 1257 in January as had been expected due to the bearish wave counts and cycles, the bears might have prevailed, but once 1257 was cleared easily we had to throw out the bearish view and accept that wave [C] up was underway.  It was easy enough to catch the 2009 rally into 2010, but difficult to navigate, at least for me, the 2010 trading range.  At this point there is just not much evidence to support the bearish case.

Having broken back above the level from which the market crashed in 2008, it is unlikely that the market will fail there again near term.  Previously broken support that is regained is not given up easily.  We may trade around in the zone from 1227 to 1327 for a while, but once the recent high is taken out there is very little resistance left and the old highs will be in sight.

Tuesday, March 1, 2011

Qs Offer Up Short Term Trade Opportunity

With distribution days piling up, 3 negative divergence MACD sell signals, an impulsive move down to the 50dema, a rally off of the 50dema on declining volume with a near doji yesterday coupled with rising oil this morning and weakening futures before the open, it didn't take a genius to figure out that shorting the opening gap would be a good trade today.

The most likely target is somewhere between the 200dema and the November 2010 high, or 52 to 54, probably around mid-month.  The current decline is most likely a 2nd wave or a 4th wave pullback.  4th waves typically retrace 38.2% to 50% of the previous 3rd wave, hence the circled target area.  If and only if the decline occurs as a 5 wave decline might we then reconsider the intermediate bullish potential.  Otherwise, any clear buy signal off of the support zone would be a low risk intermediate long opportunity into the April/May time zone.

We can calculate a preliminary target for the Qs using fibonacci ratios.  The 38.2% retracement from the August low is 52.90.  61.8% of the advance from the July 1 low to the February high is 10.67.  Add 10.67 to 52.90 to project the 5th wave target of 63.57.  63.57/52.90 => 20.2% gain.

Gold and oil appear to be headed higher into the summer at this point.  IAG bounced back today from its earnings day shakeout and looks poised to move substantially higher.  SLW appears to have completed a 5 wave advance from its January low and a pullback to support may provide an entry point as the rally continues.

US Dollar Not Cooperating For The Bears

One of the arguments supporting the bearish case for stocks has been the potential for a sharp rise in the Dollar. Quite a few labeled the November 2010 rally as 5 waves up, but it really was a force fit, which in retrospect is clearly wrong.  Now, we can see the failure at the 200dema and what appears to be 5 waves down from the 11/30/2010 high, though it is not entirely clear.  The only thing going for the Dollar is the potential for a positive divergence against the 2/2/11 low or the 11/4/10 low.  Another pop in the Dollar might lead to more selling in stocks.  However, the trend in the Dollar is down, and a break of the long standing trendline from March 2008 should provide another boost to the still ongoing rally in stocks.