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.