A Little More Time

Thanks for the requests to resume posting.  I appreciate the positive comments.  I will be coming back this fall.  I apologize for the inconvenience.

It does look like the current rally will fail soon.  Market breadth is not confirming the rally.  Look for a restest of the summer lows this fall with a possible low-risk long entry into the spring of 2013.  There may be some shorting opportunities, but don't overstay your welcome.  The short side has not been too kind to intermediate-term traders over the last 3 years.

Hiatus

I wish it weren't so, but I've had to take a hiatus from writing this blog due to the enormous amount of things going on in my personal life at the moment, not the least of which is my oldest getting married next month.  I will return to posting, probably in June when things settle down.  Thanks.

In The Same Place

Little has changed since the last post.  It looks very much like the market is in the later stages of its current rally, as the McClellan Oscillator remains below zero, and the Summation index continues to fall.  The equity only put call ratio has quickly moved back into overbought territory, which is another concern.  As we watch the likes of AAPL go parabolic, it can be hard to sit idly by, but I still believe that is the best course for now. A correction of 4 or more weeks is what we are waiting for now in order to have a low risk entry point.

At the same time the IWM looks like it wants to breakout, but if it does don't expect much follow-through since it is lagging.  A quick 2% to 4% pop may be all that can be expected.

Oil looks like it is ready to move higher again after testing support.  I am looking to go long the OIL with a target of around 30.

As a side note, I realize there are a lot of things on this blog that need to be updated including the layout and a number of links, but this is perhaps one of the busiest times in my life that I can remember with lots of changes going on - marriages, graduations, anniversaries, new jobs, and much more, so unfortunately, a much needed overall will have to wait until perhaps later this year.  Thanks for your patience and support.

I do appreciate the positive feedback that I get from time to time.  As much as I want to be able to offer some valuable insights, one benefit in writing this blog for me is that it keeps me grounded, and forces me to re-examine my perspectives before I take a position.  This has saved me more than a few times.  One perspective that has recently come to light is the view of the 2011 correction as an expanded flat, which I first proposed last year.  I now see that a number of other market analysts have adopted the same view.  The only problem is they are still seeing things through a bearish lens, and that is just not the place to be right now.

Patience Required

It is at times like these that a trader wonders if the only way to make money is to keep buying breakouts, but as surely as one gives in to that urge a significant reversal will occur.  It is only a matter of when.  Looking back at the initial rally from the 2009 low, we can see that the Qs pulled back to the 12 week ema several times providing new entry opportunities.  When that will happen now is anyone's guess, but it will happen.

Is It Time To Short WYNN

WYNN has completed a very clear upward double zigzag from its December low.  It is tempting to go short here.  The risk would be above the 3/2 high.  However, my past experience says this would not be a good choice.

While the daily chart shows a completed pattern, the weekly chart shows that WYNN is trading above its moving averages and the MACD has turned up.  It seems more likely that WYNN's upward correction could continue even if it is a corrective pattern.  If WYNN moves below the 2/14 low, the probability of success would be greater, assuming the broader market is also in decline at that time, so in my opinion it would be best to wait.

Ripe For A Selloff

While the selloff in equities seemed to be averted with a 3 day rally into the weekend, there are now several clearly negative divergences that have set up.  The MACD, MFI, RSI, and Volume are all indicating that the rally over the past 3 days will fail.  That doesn't mean we won't see a new high on Monday, but that new high may just be wave (b) of [iv].  If so, then wave (c) of a flat, expanded flat, or triangle should follow.  In the expanded flat scenario, the downside target is in the 1310 to 1320 zone.  If a flat is underway, then we may only see a retest of this week's low.  If it's a triangle, then more sideways trading is likely.  In all three cases, a 5th wave with a target of around 1450 should follow.

A sharp 3 day selloff would probably be a good time to exit any open short positions, particularly if the support zone is hit.  At that point the long side will be in play again.  While it is possible that a 5th wave is already underway, I am skeptical due to the negative divergences, and the fact that the summation index has continued to decline, and the McClellan Oscillator is still below zero.

One Way Or The Other

The NYSE McClellan Oscillator hit an oversold level on Tuesday.  There appears to be two cases following when this occurs.  In the first case, the oversold level marks the end of the pullback/correction, which is what happened in March of 2011.  In the second case, which is the more common outcome, the market continues lower after a bounce, and the McClellan Oscillator makes a higher low as occurred in May of 2011.  One clue as to which way it's going to go is the MACD of the NYMO.  If it remains below zero, then we probably have Case II.  If it moves back above zero, then we probably have case I.  We should know fairly soon.

The futures this morning seem to be screaming Case I, as in we should see new highs soon, but it's too early to tell.

How I Traded Solar Winds

More Evidence For A Top

The absolute breadth indicator has been quite reliable over the past few years at signaling tops and bottoms in the stock market with few false signals.  Extremes in the indicator point to significant imbalances between the number of new highs and new lows.  These imbalances tend to occur at market turning points.  Today the absolute breadth indicator reached a low level that has marked several prior tops and one bottom.

Several other breadth indicators have been signalling that a top is imminent as well including the McClellan Summation Index.  This doesn't mean that the top need be greater than minor degree, but a top is likely nonetheless.

Though there are few good setups, I am looking for shorting opportunities in stocks and a reversal in the E-mini futures.

VIX Pointing Toward Correction

Perhaps today's high completed the rally from the December low, or perhaps the market needs another push higher.  Either way exhaustion seems to be setting in.  IBD continues to note that leading stocks haven't really participated on the up days recently.  

The VIX is showing a positive divergence with a higher low against the SP500's higher high.  This alone is a strong indication that the long awaited correction is near at hand.  A move back to the 1300 to 1340 level +/- would be the expected outcome.  I think we will know before the end of the week if it has come to pass.

One problem that I see is that there are few stocks to short unless you want to try to pick tops.  My recent stab at AAPL was a failure, as such top picking efforts usually are.  However, there a few possibilities.  AMZN is one of them.  It was down 7.6% in February versus a gain of 6.4% for the Qs, and it is on the verge of breaking a 3rd trendline.  The head and shoulders top formation gives a target of around $130.

As long as the October highs hold as support in the indexes, this correction will be another buying opportunity.

TLT Forming A Triangle

The TLT appears to be forming a very long triangle that should lead to an upside breakout later this year.  If so, the target is 132 to 140.

Very little has happened this week as the market has stalled out with the SP500 just below the 2011 high.  It looks like the SP500 will try to breach that high next week before rolling over, but the selling could begin from the outset on Monday.

Stalling At The Median Line

The SP500 is stalling just above the median line for the rally as negative divergences continue to develop.  Failure to reach the upper channel line suggests that a return to the lower channel line or to support at the October high will be the target for a correction.  A break of 1337 should be the first indication that the correction is in progress and a short term top is in.

Setup For A Correction

Oftentimes the terms pullback and correction are used interchangeably, but perhaps it would be better to make a distinction.  Let's use the term pullback to describe a minor decline of smaller degree within an ongoing uptrend and a correction as a larger decline that concludes an uptrend at the current degree of trend.  It appears that we are near the conclusion of minute wave [iii] of minor wave 1 of the current uptrend from the December low.  The November low, though higher than the October low, was probably the orthodox low of the 2011 correction, so technically the rally began off of the November low.  It is a small distinction that is not of immediate importance, but it may be important later.

The positive divergence in the VIX suggests that the wave [iv] correction is near.  It should be proportional in time and price to the correction into the December low, or about 65 points in 8 to 10 days.  The clear resistance zone in the VIX should not be violated if the correction is to remain contained.  A move above resistance would indicate a larger correction is underway.

After the correction ends, we may expect another 8 to 10 day rally to complete minor wave 1 followed by a deeper correction into the April/May time period.  Based on this view, it may be best to take profits early after the next rally begins with a possible double top to end it.

AAPL Sports A Bearish Engulfing Candle

A huge reversal today in AAPL along with the Qs pushing into the target zone probably means the long awaited pullback is finally upon us.  The Qs will most likely retest the 2011 high at 59.83.  I am not planning to short the indexes unless the Qs break and sustain below the 2011 highs.  I am short AAPL from 498.64 with a target in the 427 to 443 range.

Running Out Of Steam

The McClellan Oscillator has now made a lower high from its October peak which was the initial thrust off of the low for this this rally.  At most we might expect one more push higher in the NYMO to form another lower high as the SP500 pushes into resistance in the 1360 to 1370 zone.  The momentum of the NYMO has turned sharply lower, which suggests that a correction may come sooner than later.  

This is not the time to be the hero as a multi-week rally into old highs rarely breaks through on the first try, just as it could not in November 2010.  I will be selling short-term and intermediate-term long positions this week, and looking for shorting opportunities in individual stocks, but not in the indexes, in anticipation of a correction lasting 2 to 8 weeks that should bring the SP500 back down to the 1300 level, which will probably be a great place to get long again.

So far, this has been a great year for longs, and I expect it will continue to be so.

In The Zone

Looking For A Pullback

We haven't seen a pullback in some time, and there is no way to predict exactly when a 3rd wave will end, but we should be on the lookout for a pullback between now and the early March.  The most likely pattern for the pullback would be a triangle with wave [v] to follow up to new rally highs afterward.  Calls for a major top continue to build, but the technical support for it is waning.  I would only alter my view if the Qs fell below the 2011 high.  For now, it's time to tread lightly until there is another buying opportunity.

A Market That Just Won't Quit

Despite attempts by many, including myself, to find a top in this rally, the market seems content to keep marching higher.  Since August I believed that we were in wave (X) of [X], but the action in the Qs this week seems to negate that view as almost the entire weekly bar is above the 2011 highs.  And now we have a weekly squeeze long signal in the Qs as well to go along with already existing signals in the SP500 and the Russell 2000.  The last time there was such a confluence of weekly signals was 2010, which led to a 19 week rally after the signal week.  

I will look at a new wave count next week, but the best interpretation is that the November low completed the combination correction.  This means the Qs are now in wave [iii] of 1 of (A) of [Y].  Wave [ii] ended at the December low.  Typical fib projections of wave [i] put a target for the Qs at 65.58 to 69.94.  I suspect 65.58 will be seen at least before wave [iii] ends.  A 2 to 3 week correction in wave [iv] should follow as a flat, expanded flat or triangle (I would bet on a triangle given the market strength), and then wave [v] with a target between 69.07 and 74.47.  If wave [Y] = wave [W], wave [Y] will end somewhere around 90, but if speculative fever takes over, we could see a retest of the 2000 highs.

  

There will be pullbacks of course, but until we begin to see some distribution the only place to be is long, with perhaps a few exceptions.  As things heated up this week I began to add new long positions and will continue to do so until I see a reason not to.  I had exited STX with a 26% gain off of its pullback to the 50ma, only to see it rocket higher another 30%.  This was a pretty good clue that my original view was wrong.

There are those who continue to wait for the mythical wave [3] down, but I believe those hopes will be dashed when the SP500 eclipses the 2011 highs over the next few weeks.

Oil Closes Off Its Low

Oil closed off its low today (sic-not in the upper half of the range).  The main problem with the short perspective is failure to accelerate to the downside.  The action since the high on 1/4 now looks more corrective than impulsive, which negates the possibility of a flat correction and raises the probability that a triangle is underway.  The existing squeeze setup may turn out to trigger long.  If so, the first target is around 102.  Only a break of today's low with a close under support would change this view.

Oil Fails To Breakout

Oil tried to breakout above its 3 day high this morning but quickly reversed to close near the low of the day.  This action is confirming the likelihood for a downside breakout with a squeeze short setup that could trigger soon.

Crude Set For A Big Move

The Bollinger Bands have formed a six day flat squeeze pattern in crude oil.  This is the most explosive type of squeeze setup.  Presently, momentum as measured by the DI+/- is negative suggesting that the move will be to the downside.  However, oftentimes this setup will lead to a fakeout in the opposite direction of the final move, so be prepared to re-enter the trade if stopped out.

Another reason to think the move will be to the downside is that the Dollar is oversold at trendline support with the Euro at resistance.  A sharp retracement rally next week would be expected, which should be a negative for stocks and commodities near term.

Pullback Imminent

The SP500 has stalled at the median line for the rally for the second time since the rally began in November.  Short-term momentum is rolling over with short-term sentiment at extreme bullish readings.  It seems a pullback is likely, but there is support at the October high and at the lower trendline.  

I suspect the pullback will terminate in this area.  By the rule of alternation this may turn out to be a triangle or a flat correction lasting about two weeks.  There are some stocks setting up for short trades.  The easiest way to find them is to look for stocks that have not participated in the rally forming lower highs along with missing earnings and/or lowered guidance.  A good example is UA which is down 16% from its high, and missed earnings expectations today, and lowered guidance.  Any short trades would be hit and run at the present time.

Another rally should follow the current pullback with the SP500 tagging the median line or exceeding it with a target between 1340 and 1360.

Rally Continues

There is no evidence other than extreme sentiment readings that an end to the rally is near.  Momentum remains positive, and AAPL's results will only help tomorrow.  It looks like the Qs could very well reach the next target zone around 63+/- before a top is seen, which could take another 2 to 4 weeks.  This is consistent with the lag from extreme sentiment readings seen in the past.  Traders should be mindful of sudden reversals and trail stops appropriately.

Sentiment Has Reached An Extreme Level

Sentiment as measured by the equities only put/call ratio has reached an extreme.  This doesn't mean that a top will follow immediately.  A decline could start tomorrow or in 2 to 4 weeks.  However, prudence dictates that it's time to take some profits.  I would be willing to leave some long positions on if they are working, but it's time to lighten up.  The Qs breached the July 2011 high, closing above that level by only 3 cents with a doji candle.

I will be selling half my position in the Qs and raising the stop on the remainder to this week's low at 58.48.  I have sold two swing stock positions that reached target zones, and I will be selling two more tomorrow.  I will be tightening stops on the remaining positions, and not taking any new positions until we see a healthy correction.  Once a decline is underway, swing short positions may be taken if setups are available.

GOOG Has Topped

GOOG is down almost 10% after reporting earnings this afternoon.

See my post from Monday January 9:  http://tradercraig.blogspot.com/2012/01/goog-has-topped.html.

GOOG rallies are shorting opportunities with a target below 475.00

Solidly Above Resistance

It's time for the various viewpoints to put up or shut up.  The SP500 closed solidly above resistance today while the Qs are only 34c away from an 11 year high.  The squeeze long signals that triggered two weeks ago show no signs of weakness.  However, the High Low Logic index is flashing a warning sign as it has turned back above 1.00 for the second time this month putting it in neutral territory.  A move above 2.0 usually precedes or coincides with a top.  It still look like this market has further to run, but it may be a choppy ride.

A Bullish Perspective

Tom McClellan and the Ratio-Adjusted Summation Index

Tom McClellan has written an article in support of the continuation of the rally which has technical significance. He suggests that the current move in the ratio-adjusted summation index above +500 indicates that the rally will continue, and that the top of the rally will probably occur with a lower high in the RASI below +500.  If this is correct, we might be looking for a negative divergence developing in February or March as an indication of a top for wave (X).  See http://www.mcoscillator.com/learning_center/weekly_chart/rasi_above_500_says_bull_market_not_done/.

Various Perspectives

The market has arrived at a critical juncture.  The SP500 has stalled at critical resistance around 1295, the April and July 2011 swing lows.  These resistance levels have been tested before, so they are structurally weak and should be fail.  However, a simple price Tee, as shown below, has governed the swings in the rally since the October low.  I had indicated in previous posts that the rally should continue to at least mid to late January, and it has.  Now, the market has reached symmetry with the May 2011 top in conjunction with resistance.  We should expect some choppy action over the next two weeks as attempts are made to overcome the current resistance level, and even if it is exceeded, there will be pullbacks to test that level.

I have shown my proposed wave count with the current rally being wave (X) of [X] of an approximately year long combination correction.  If this view is correct, then wave (Y) down will begin sometime between now and March 22, with an expected low sometime in May.

There are a variety of reasonable perspectives on how the market action will unfold this year.  However, the best course would be to let price be our guide.  For now, the trend is up, albeit weakly, and we can reasonably conclude, regardless of the overall view, that the current rally is corrective in nature.  So, it will end soon enough, and perhaps dramatically.  That suggests it would be prudent to be taking profits over time between now and March as opposed to adding new positions, or at least adding new positions with only short term gains in mind.

Some other perspectives on the potential market action this year are:

The Presidential Cycle - Election Year


The presidential cycle suggests that we will see corrective action with a couple of swings between now and a low in May followed by a substantial rally.  This view is often correct in form if not in value.  See http://seasonalcharts.com/zyklen_wahl_dowjones_election.html.  I think the recent action in the banks and home builders supports this view, which is consistent with my proposed wave count.

Robert Prechter and Elliott Wave

Robert Prechter has argued that the May 2011 top was the top of Primary wave 2, the October low was minor wave 1 of Primary wave 3 down, and the market is now completing minor wave 2 up.  If this view is correct, a severe decline is imminent, and we should all pack it in and head for the hills.  Not to be flip, but Mr. Prechter has been wrong a few too many times.  However, see http://www.danericselliottwaves.blogspot.com/ for a well written commentary that is consistent with Mr. Prechter's view.

Harry Dent and Demographics

Harry Dent became popular in the 1990's with his book The Great Boom Ahead, but he really got off track in the 2000's with his prediction of Dow 40,000 by 2007 to 2010.  Now, he has reversed course and argues that we are headed for a catastrophic depression with similar descriptions of future outcomes as Robert Prechter.  See http://www.youtube.com/watch?v=6mbxfGT0o84.

Terry Laundry and T-Theory

Terry Laundry, inventor of T-Theory, says that Mega-T #13 completed in 2011 and there is no accumulation of buying power available to drive the market higher.  Mr. Laundry's theory makes a lot of sense in many ways, and has more of a "scientific" underpinning than elliott wave or demographic projections, but Mr. Laundry is often too quick to speak with absolute certainty about what will transpire.  While he has often been accurate, he has often gone for long periods when he was wrong when he spends a great deal of time rationalizing his forecasts.  Nevertheless, his Best Bond Strategy seems to be a good one, and easy to enough to implement for a much less stressful approach to the markets.  See http://www.ttheory.com/.

Raymond Merriman and Astrology

For the truly eccentric like me, Raymond Merriman offers some straightforward forecasts based on astrological correlations.  At the moment he is calling for a 4 year cycle top based on Jupiter entering the first degrees of Taurus, which it does every 12 years.  Mr. Merriman has an uncanny way of being accurate in the short-term, but his long term forecasts seem to be biased toward his personal views.  For example, a review of the ephemeris shows that the market does not always top when Jupiter enters Taurus.  See http://www.mmacycles.com/weekly-preview/mma-comments-for-the-week/mma-comments-for-the-week-beginning-january-16,-2012/.

Bradley Cowan and Astrology

I came across Mr. Cowan's site quite by accident a few years ago when I was doing research on W.D. Gann.  As with Mr. Laundry, Mr. Cowan often speaks from a stance of certainty.  While I don't fully understand his theories even after buying some of his books (You'll have to be willing to by all of his books if you want to understand his theories.), he has made some quite accurate forecasts.  His theories, while obtuse and arcane, do actually seem to explain some of the correlations between planetary movements and stock market action.  Presently, his work is calling for a low or high in May of 2012, another low or high in May of 2013, and a bear market low in 2017.  His projection of a low in May of 2012 fits with the presidential cycle forecast.  Note:  he did nail the top last year, and he is calling for a similar event next year with a worse outcome.  See http://www.cycle-trader.com/.

Conclusion

Other than the presidential cycle perspective, the above viewpoints represent the extremes of market analysis.  It would not be prudent to give too much weight to any one perspective, but it does help to see that the usual approach by conventional financial advisors cannot prepare us for events like 2008 or 2009.  Right now, it seems, most of the conventional advisors are arguing for more of the same this year when they speak in the media, in contrast to the polls.  However, a few are now beginning to see the potential for a rally this year with the rebound in the financials and the home builders.

My personal goal is to able to follow the price action without respect to forecasts, mine included, and that is something we will continue to work on this year.  Having collected 4 years of data on a few trading strategies, we will examine them from a risk and money management point of view.

Contrarian Of Contrarians

Some measures of sentiment are beginning to move toward optimistic extremes, but the overall evidence points to bearish to neutral sentiment at present.  While some analysts and advisors are starting to see the light at the end of the tunnel, most in the media seem to be focusing on less favorable outcomes, and the elliott wave crowd are convinced that a second wave is near completion.

As shown below, even if optimism reaches an extreme, it doesn't mean a coincident top will occur.  Oftentimes,  tops take weeks to form afterward.

However, the point that is being missed is that the Qs are less than 3% away from an 11 year high, which is bullish - not bearish, and the SP500 only needs to close above 1303 to put money managers back in the black for 2011.  If we see a close above the level, it is quite likely that a quick move to 1340+ will follow.  The Dollar appears ready to break down from a rising wedge, which would probably support a continuation of the rally.

GOOG Has Topped

GOOG fell over 4% today confirming a wave B top of a very large flat correction that began January 19, 2011.  The target is below the wave A low of 473.02, possibly down to 450, but it should not fall below 433.63.

While GOOG has topped, the SP500 still has room for upside with targets between 1300 to 1340.  However, we need to see a solid close above 1300 to feel confident that the rally will continue.

Approaching Resistance

The SP500 is approaching resistance at the underside of its median line and swing lows from 2011 around 1295.  The current rally is not likely to stop until that level is reached at a minimum.  The Qs have resistance around 59, the IWM around 77, and the Dow from 12644 to 12785.  It would be prudent typically to be taking some profits at these levels, but the Qs just triggered a squeeze long on the daily chart following signals in the Dow and SP500 two days prior.  So, it could be that all we see is a minor pullback at these levels followed by a break above resistance.

From a minor cycles point of view the next intermediate term low is not due for another 5 to 7 weeks, though we could see a pullback into the full moon Monday, so it is quite possible that resistance will be overcome more easily than would otherwise be expected.  I will be watching for signs of exhaustion at resistance.

Qs Lagging But Set To Pop

The Qs have been lagging the broader market for some time, but are now setup in the squeeze with positive momentum.  The last squeeze proved to be bearish which was foretold by the negative momentum before it triggered.  We now have the opposite situation.  The SP500 long squeeze triggered today, which suggests that the rally has further to go, and the Qs will follow suit.

Of course this squeeze setup may prove to be a dud, but what is most interesting is the increasing number of bloggers and analysts who think 2012 will be another year like 2011, or worse, become a bear market.  If so, this will be one most highly telegraphed bear markets in history, which makes it all the more unlikely.

The more likely course is that we will see sideways to up action near term followed by a short pullback and then more upside to complete wave Y of (X) in mid to late January.  Only immediately failure with a move under last week's low would change this outlook.

Happy New Year!

The trading environment in 2011 was one of the most difficult in many years.  It was somewhat similar to 2004, but with larger price swings.  It was also more difficult than 2010, which at least offered a couple of decent trends.  It is not likely that 2012 will be more of the same despite the consensus opinion.  Instead, 2012 will most probably follow the typical election year pattern with corrective action into March and May to complete the larger correction that began in May 2011.  Afterwards, the trend should be mostly up into the end of the year.

What is most perplexing at the moment is the disparity between investment advisors and the general media.  Investment advisors are mostly bullish at the moment, which is in sharp contrast to the tenor of media stories that have focused on the seemingly dire situation in Europe and the US budget problems.  This suggests that although the trend is up for the moment, the sentiment of investment advisors will need to return to a bearish outlook before a solid trend can emerge.  This should be the job of wave (Y) [not labeled].

Currently, the market is in wave Y of (X) up.  Whether wave Y completes immediately in the first two weeks of January or there is another shakeout first, the target zone near 1310 to 1320 should be hit either way.  Then a 4 to 5 month correction in wave (Y) should follow.  There are many who are calling for a major bear market to begin at any moment from a variety of perspectives, but the problem is that not all markets are aligning with the same wave count as was the case in 2007 and 2008, and also unlike 2007 and 2008 the sentiment of the general public is far more negative.  I think we will see an erosion of sentiment in the beginning of the year, which will allow the market to climb the proverbial "wall of worry."

I will be looking to exit short and intermediate term long positions at the target zone in January.  I will then be looking for shorting opportunities.  I will be onto long term positions into the expected 2013 or 2014 long term top.

This promises to be an exciting year for those who have not given up on basic trend following methods.  If the expectations do not materialize, we may see a pattern inversion like we saw in 2008, but there will plenty of time to change gears if that is the case.

I wish you all the best of trading success in the coming year.