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.