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.

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.

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.

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.

QQQ Outlook

Dow Reaches Lower Channel Line

The Dow has reached the lower parallel channel for the entire rally from the March 2009 low.  The channel lines were created using the Andrew's "pitchfork" method with the November 2008 low as the origin and the January 2009 high and March 2009 low for the base.  It is easy to see how well the Dow has followed the channel lines over the last two and half years.  There is every reason to believe that some sort of intermediate term low is imminent near term based on this chart.  A rally to the median line somewhere around 12,000 by late this year or early next year is the most likely next move.  

I expect that after that rally the currently developing low will be retested by mid 2012.  If that test is successful, another leg up in the stock market should follow.  At the risk of sounding repetitious this process will last several more months.  Be prepared for difficult choppy conditions and use more conservative trading targets.

IBD Calls Market In Correction

The SP500 failed to reach (my) expected upside target zone before rolling over.  It's possible that a 5 wave decline can be counted for the SP500 from the July high if wave 5 down completes as an impulse, standard or ending diagonal.  However, it is also possible that the current action could be wave B of (X) in an expanded flat correction.  This is likely a lower probability, but one we should keep an eye out for.

Regardless, the action this week has set the market up for at least a short term short trade on any rally next week.  Targets should be conservative as some markets are developing a positive divergence that could lead to a buy signal very soon.  I am still looking for another tradable bottom by the end of next week or early the following week, so no intermediate term short trades.

This is one of the most difficult and frustrating trading environments in years.  It is tempting to abandon one's strategies and methods in order to adapt to the increased volatility and frequent reversals, but that is how the market conditions you to not hold for larger profits once a solid trend actually does materialize, so don't change proven methods - just be patient.

How I Traded VRTX

Watching For Double Bottoms

With many markets expected to fall 2% to 3% today, traders should be on the lookout for double bottoms.  For example, the IWM is only 2.83 points away from its August 9 low.  While the Transports are only 1.7% above the August lows.  At the least we would expect a bounce from these levels.  Momentum indicators such as the MACD will also be setting up positive divergences on the retest of the August lows.

We knew a pullback in the Qs was very likely.  A 3 wave affair would be the most probable outcome, so a near term low may not be far away followed by a rally into mid next week and then another decline into early October to setup a better intermediate term long opportunity is what I'm thinking at the moment.  There's no proof that such an outcome will occur, but the governing analog right now appears to be late February 2008, which if correct means we are only days away from an important low.

Selling The News

The market sold off hard after the Fed announcement, which was to be expected for the most part.  Most knew what was coming, and today was a classic sell on the news event.  It doesn't, however, mean that a resumption of the intermediate downtrend is a given.  

The 12ma of the Qs is crossing up the 50ma, which has been followed by a positive resolution each time it has occurred this year.  Even if the selling lasts a few days like it did in early April at least a rally attempt should follow if not rally highs.  The TRIN closed above 4.0 today suggesting the selling is already a bit overdone, and the McClellan Oscillator is quickly moving to oversold territory.

There are some tempting short setups.  They may work out, but I think it is premature to be thinking that way.  Patience for a renewal of the uptrend may be the best bet until there is a lower high in the Qs.

Not Much Going On

Markets feel a bit tired now.  We'll see if the Fed's comments today will have an affect either way, but regardless they may be a good excuse for some selling.  The Qs have closed successfully above the 200sma 3 days in a row, and are well above the 200ema.  A pullback into rising shorter term ma's is the likely course for the time being.  It is probably best to keep the powder dry until then.

A good example of what happens at this point in a weak rally is the action in PCLN yesterday which attempted to breakout but closed below the pivot.  BIDU also tried to breakout, but closed poorly on higher volume.  These are signs that it's time to sit on one's hands.  Things will probably look better in a few more days.  If not, we'll adapt.

Expect More Consolidation/Pullback

Markets are showing some resilience this morning after yesterday's selloff and recovery.  Expect more of the same until the SP500 can close successfully above the 8/31 high of 1230.71.  The Qs continue to lead and may be challenging the summer highs by the time the SP500 reaches resistance at 1250 to 1260.

Markets are doing a great job of generating pessimism while going nowhere, which is building the base for the next major leg up in the cyclical bull market.  Unfortunately, this process may last many more months as I have said before.  The risk is to the upside, but short term gains are the highest probability right now with few exceptions.

Pullback Still Likely But Rally Continues

There's not much to add tonight technically speaking.  The market continues to chop its way higher.  There are some cycle lows due in late September and early October.  It seems that all that will happen is a pullback into those cycle lows.  The SP500 has successfully closed above the median line for the decline for the second time in two weeks, which means the probability of rising to the upper channel line around 1260 is now significantly higher.

Unless you were short NFLX or RIMM, short has not been a fun place to be for the most part since August 22.  I suspect it will remain that way into the end of the year and possibly January.  The bears continue to hope for the mythical 5th wave down that will validate the beginning of primary wave 3 down.  However, when the SP500 challenges the June 16 low that hope will be thrown out the window.

The best scenario for traders right now is long with conservative targets until we see more stocks set up with sound bases and better breadth numbers.  This may come in late September and early October, but there's no reason to rush it.  There are a lot of triangles and flags right now for long entries, but a dearth of larger bases.

Be prepared for several more months of this type of market action before the uptrend resumes.

Qs At Resistance - Expect A Pullback

Bears Seem Surprised

One nagging problem with the current rally is the fact that small cap stocks are lagging badly as shown by a the relative strength line against the Qs.  However, there is a positive divergence developing in the MACD of the RS line.

On the other hand the QQQ relative strength is making new highs.  In fact it is at multi-year highs.  This is a significant positive.

The pattern in the rally is not impulsive overall, so the view of an extended correction is still on target.  There will probably be some more downside testing at some point near term, but the intermediate term trend is looking up for the foreseeable future.

Still Looking For Higher Prices Overall

While the market was higher on lighter volume today than yesterday, I think the choppy upward bias will continue with a couple more shakeout attempts.  By the end of month and maybe as soon as early next week the upward trend should strengthen.

I could be all wet, but I am not seeing the development of a major leg down at the moment.  Nevertheless caution on all long positions is advisable.

Alternate To A 5th Wave

While so many are counting the 5th wave down, now with a [i] [ii] i ii setup, I want to suggest as I have earlier that something less bearish and a lot messier is probably going on.  I continue to believe that the current structure is likely an (X) wave of wave [X].  Either wave X of (X) of [X] bottomed today or wave X will extend into the latter part of September or early October.  This would be followed by a more exaggerated wave Y up to complete wave (X) up, or possibly only the first leg of wave X up.

The reason I think this is the more likely course is because of the momentum study that I presented in my previous post.  The current momentum profile doesn't really fit with a 5th wave down.

It is certainly possible the market is in a 5th wave down, and if so, we will know soon enough.  Either way, it is probably a little early to be getting long.  We need to see more advance followed by a pullback or a retest of today's low.  This may take a few more days.  In either case, a buying opportunity will become available soon, but an impulsive structure off of today's low would be encouraging for an earlier entry.

Is The Market About To Collapse?

Or, why I'm not short this market.  The first chart below shows the Nasdaq 100 index in 2008 with a vertical line at the point that the waterfall decline began around the first of September 2008.  What is clear is that the market had made a lower high over many months and as it rolled over the 5 day, 10 day and 21 day price rates of change were falling and negative. 

Moving to the current situation, the next chart shows that the current rebound is only two months away from the most recent high and price rates of change are rising/positive.  In particular the 21 day price rate of change is positive and rising.  So, even if there were to be another waterfall decline/crash scenario, we are probably weeks to months away from it happening.

So, in the scheme of things where are we?  I think the current situation is more like January/February 2008, and a two month plus rally is about to begin.  Perhaps there will be a retest of the August low, or perhaps we will just see some backing and filling before the rally gets moving.  I'm not suggesting that after the two month rally is over, we will see another crash setup like 2008.  Far from it.  I think the pattern will be so close that it will make people believe it, but instead we will probably see another 2 year rally.  I know that sounds far out to most, but we are just not witnessing the convergence of factors that would lead to a crash at the present time, IMHO.

Covered Shorts

I just covered short positions in both the QQQ and the SP500 E-mini futures.  While we may see lower lows on Monday, the pattern is very ambiguous, and the Qs are showing some relative strength.  I don't think it is worth the risk to hold over the weekend.

Why I Sold MA Yesterday

Since I mentioned MA as a possible triangle pattern long opportunity I thought I would follow-up today on why I sold it yesterday short of the expected target zone:

Sell The Speech

The Qs reversed last week against the 12 wk and 50 wk MAs, and again today below last week's high.  Markets broke below last week's low on Tuesday, and it appears that the short term trend remains down despite the 3 day rally.  Optimistic targets are at the lower Bollinger bands around 50.00, but 51.00 would be a more probable conservative estimate.  A move above last week's high will negate the bearish potential.  It is possible that we will see lower lows, but the EW crowd seems a bit too confident of that fact.

Sentiment is finally beginning to turn bearish. Another week or so, and it may be meaningfully so.  I am looking for a low tomorrow or early next week, which may lead to a multi-week rally. into at least early December.

Cautiously Short

The SP500 returned to resistance at the median line that has been in control since the May high.  The obvious outcome is a retest of the August low near the lower channel line.  However, the obvious outcome is rarely the one that comes to pass.  I suspect that the current decline may be part of a [b] wave.  If so, the next move down will not make it to the August low, but rather somewhere in the 1120 to 1140 zone.  Another possibility is a brief decline that does not take out Tuesday's low followed by a renewal of the rally.  Either way, a move above the 8/31 high would negate any near-term bearish potential.

Keep in mind that IBD still has the market in rally mode, and the MACD is still positive.  These factors alone call for caution on the short side.  I am short the Qs from around this morning's open, but I will be looking to take profits quickly.

Working On A Retest

While on the one hand it would seem fairly clear at the moment that a retest of the August low is underway, traders should be open to the possibility that this is a [b] wave, which may or may not actually touch the August low.  Even so, shorting the indexes seems like a good probability right now.  The gap down open was too large and avoiding going short on the open was the best move.

The indexes broke below last week's low confirming the daily downtrend.  A 50% retracement of the recent decline is around 53.85 for the Qs and that is where I will be looking to get short.  A greater retracement is possible, but not guaranteed.

The daily MACD remains positive and is an obvious warning to not get greedy with downside targets.  An approach to the August low to around 50 for the Qs and 1120 for the SP500 may be the best that can be hoped for.  Certainly holding short for much lower lows does not seem prudent.  We are entering a period where a more significant low would be likely in the first part of October, so beware.  Shorting individual stocks right now doesn't seem like all that good an idea either as many are still greatly oversold.

Europe Down Hard

European stock indexes are down from 3% to 5% today so there is little doubt that US indexes will open down tomorrow and probably close down significantly as well.  If you are unable to get short near the open within 1% of Friday's close, it may not be prudent to chase the move.  After all, a retest of the August low is likely to result in another bounce, which could be a shorting opportunity or a setup to go long for a more substantial rally.

Bearish Setup

Friday's low close below resistance in the Qs sets the stage for lower prices next week.  The Qs reversed to close below the June low at 53.28 and also below the 2007 high of 55.07 after hitting resistance at the 50ma. Movement below Friday's low would be a valid short signal.  However, the daily MACD is still positive and there is also Bollinger band support.  Tuesday's after a Monday holiday and a low close on the prior Friday are down days 71% of the time.

All of that said, I think shorting with a close target would be a more prudent approach.  The market is coming off of severely oversold levels and the current decline may simply wave B of a 3 wave rally.  I would not be looking for a retest of the August low, although any retest would definitely be a buying opportunity on reversal.

Have a great Labor Day Weekend!!

Dollar Up - Stocks Down

The Dollar failed to breakout to the downside.  When such a clear pattern fails, it usually means the opposite directional move will be much stronger than one might expect.  It is early to be getting long the Dollar, but we now have to consider that all of the action since May could be part of a (B) wave triangle that will extend for weeks before wave (C) up follows.  The other option is that the entire pattern this year's low is a very large bearish triangle.  Either way, it may be awhile before a clear trend merges.

The impact on equities and precious metals is anyone's guess.  Eventually, a positive correlation between the Dollar and equities is likely to develop.  Perhaps this sideways action is part of the correlation reversal.

Today's selloff in stocks was hardly a surprise as the market had definitely become overbought, but it is too early to say the bear has returned.  I sold MAKO and IWM on yesterday's surge, but I am still holding two other short term positions.  The High Low Logic index is falling hard which indicates buying interest.  This occurred in late 2008 and into March 2009.  It doesn't mean the bottom is in, but it may very well mean the downside is limited.

Again,  I am not too interested in the short side right now.  I will be looking for another bite on the long side if conditions warrant, but caution is the key word for the time being.