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.