StockMarketAlchemy

New TLT Trade

noreply@blogger.com (Pete) — Mon, 09 Nov 2009 20:33:00 +0000

Click on Chart to Enlarge

Quick post in favor of time.....

This is a long term bond ETF. Generally moves inverse to stocks. Showed a bullish hammer reversal at support Friday and is holding up today. Buying now offers a good reward to risk and is pretty clearly worth the chance from a charting perspective.

New Trade:

Buy TLT today with a market order. Place a GTC sell stop at 92.00 immediately after entry and use that value for position sizing. Follow money management for trades with stops. 93.26 is the current price and will be the blog entry price.

Non-Confirmations Galore

noreply@blogger.com (Pete) — Mon, 09 Nov 2009 17:00:00 +0000

The Dow Industrials have broken to new highs this morning. However, out of every major index (S&P 500, Russell 2000, Dow Transports, Nasdaq) it is the only one making new highs. While these types of non-confirmations are not magic and the other indexes could catch up, it usually pays to watch whether various indexes are confirming breakouts or breakdowns both on daily and intraday time frames.

The short-term model for the S&P 500 is now solidly in overbought territory. On that note an inverse trade could be taken right now with stops corresponding to the Oct highs in the indexes. However, so far today, the market has been an ideal trend day, and these tend to close near their highs. So unless there is some breakdown of the strength today, I will probably not post a new trade, at least until right near the close.

From a qualitative perspective, I think this move up is likely to complete a complex upward pattern in the S&P and Dow since March (I view this as the 7th wave/leg). But it will take a downward move to retrace this move up in less time than it took to form to confirm that. Short-term technicals are overbought but without divergences, so right now, a little bit of patience should be in order. And then it will be a decision on whether to anticipate a reversal and just get in on this strength or to wait for some type of price confirmation to the downside.

So, anyone planning on participating in the next trade, you may want to check for a post before market close at some point, but I'm not positive there will be a trade today.

A New Proprietary Indicator

noreply@blogger.com (Pete) — Sun, 08 Nov 2009 02:20:00 +0000

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This post will be the first part of probably 2 or 3 concerning a new indicator that I have come up with. I have closely followed put/call ratios for quite a while and have come up with a few insights here and there which I feel add to or expand the existing ways in which the data is used as a timing indicator. Also, in the past I have worked on developing a multifaceted indicator based off of several observations of the VIX, however, I have never got anything that I felt was quite what I wanted.

Most indicators based off of the VIX or put/call ratios compare VIX to VIX and P/C's to P/C's. So it's apples to apples. My idea with this indicator was to compare the VIX to P/C's. So more like a fruit to fruit comparison. The VIX is used as a contrary indicator, and the equity and total put/call ratios are also used as contrary indicators.

There were several observations regarding the VIX, equity put/call ratio, and total put/call ratio that led to a hypothesis regarding a relation between them that might prove useful. Some of the observations....

-The VIX tends to rise in tandem with market declines and spike at market bottoms

-The equity put/call ratio tends to rise in tandem with market declines and spike at market bottoms

-The total put/call ratio tends to rise in tandem with the market declines but often tends to diverge at market bottoms

-The total put/call ratio factors in a significant portion of "smart money" volume trading on index options, and this group may be diverging from the general trend (and dumb money) as the market gets stretched too far in any direction and hence near inflection points.

-There are ample ways to track whether the VIX is "too high" or "too low" and whether the total put/call ratio is "too high" or "too low", but I have never seen the question asked "Is the VIX too high or too low compared to the put/call ratio?"

Taking some of these ideas into account, I set out to try to answer that question. I decided to use the total put/call ratio in the study rather than the equity put/call ratio, because it seemed to me that conceptually I wanted to see if the fear premium on options was excessive or inadequate relative to the sentiment of the market at large (smart and dumb). My hunch was that while the fear premium (VIX) was hitting an extreme in one direction the smart market participants would actually consistently be taking a contrary position and thus causing the VIX to be too high at market lows (and vice versa) in relation to the total market sentiment as evidenced on the total put/call ratio.

After toying with some different ideas on how to draw this out, I decided to build on a commonly used method for evaluating the VIX which is to compare the closing value of the VIX to its 10 day average. So I calculated that out and also did the same thing for the total put/call ratio. so now I had numbers showing how stretched the VIX and total put/call ratios were from their 10 day averages. Then I subtracted the value calculated for the put/call ratio from the value calculated for the VIX. By doing this, times when the VIX was more stretched from its average than the total put/call ratio was, would lead to positive numbers and vice versa. My hypothesis was that relatively large positive numbers would be correlated with lows in stocks of some degree in that fear premiums had gotten ahead of things. The opposite would be the case for relatively large negative numbers. In other words, I was hoping to be able to identify an efficiency of sorts between two data sets that should be strongly related. Then you could take a position betting on a quick re-balancing of the data.

The chart above shows a 3 day average of the (VIX deviation - TPC deviation) spread in blue. Then there are +/- 1 standard deviation (from the 21 day average of the spread) bands around the data which help to filter out relatively high and low values. I have put a chart of the S&P for the corresponding time frame there as well.

After going through the data, it seems that only taking signals in the direction of a moving average like the 20 day average of price, will help to stay with the larger trend. I have placed arrows indicating approximate buy sell signals from the indicator, but have only put pink lines connecting successive signals in the direction of the 20 day average.

Of note is that price has consistently responded quickly to these signals. Because of this, my next post may look at the data without a moving average, and simply use the raw daily data with some standard deviation bands and then see what happens to price just 1 or 2 days out rather than waiting for an extreme in the opposite direction to exit the trade.

Thinking of Wading Back In

noreply@blogger.com (Pete) — Sat, 07 Nov 2009 00:32:00 +0000

Click on Chart to Enlarge

Some notes are on the chart above. Basically price has retraced this move down to a point where I would expect the advance to stall if new lows are in store below the last week's. Now it would not be surprising at all to see price move back toward the recent lows only to rebound and move back up into this area or a little higher again to form an ABC type move. Anyone who has followed the blog for quite a while may remember some posts regarding the general expectation after an important high....

1) an initial move down to undercut the first support level (from the prior rally)
2) a rebound back to the middle of the the initial move down, often 50% retracement or so
3) often the rebound takes an ABC (up down up) type form

On the chart above the first support (on the S&P) was never undercut. However, several indexes did: Russell, Nasdaq, Dow Transports. So, as long as price doesn't move up much at all from here, the general fit is still good.

The technical indicator set-up for a bearish trade is improving but not glaringly obvious to take the trade yet. One thing of note is that volume has basically fallen every day for the last 5 days on the NYSE as during this advance. I am not a volume guru on these types of things, but I can't see this as supporting the case that there will not be further lows below last week's. Now a major advance type of day early next week could change that in my mind, but right now, I view it as a suspect bounce, and see no reason not to sell into it soon.

I plan on posting some charts of some good longer term short sale candidates, but for now any avid chartists may want to check out GMCR, CTB, FMC, SHLD, VTR for starts.

High OEX Reading Today

noreply@blogger.com (Pete) — Thu, 05 Nov 2009 21:04:00 +0000

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I had considered recommending a new SPXU trade today, but for a few reasons I didn't. For one thing, I don't see an obvious stop point that is close to current prices. So I would rather see weakness re-emerge and then use the peak of the recent advance as the stop. Also, the candlestick today didn't show any stalling or weakness, closing right at the highs.

On the other hand volume was low which may be a sign that the big money was not convinced that this will last and did not participate. On that note, the OEX put/call ratio looks to be quite high today, which shows the smart traders are taking the precaution of hedging/betting on downside risk from this level. I don't have the exact figure for today, but it looks to be one of the higher readings we've seen recently.

Technically the move up the last few days appears as a rising wedge on the 15 min chart. That is typically a bearish continuation pattern. So until price actually breaks out one way or the other, it is just something of note, but not really actionable. Besides the top of the wedge, there are also the base trendline from the highs as well as horizontal resistance from the 10/29 highs that are potential resistance at this level.

Basically I will be looking to enter a new bearish trade at any time from here, but need to see some better signs of reversal or at least stalling/divergence first.

General Update and Gold Rage

noreply@blogger.com (Pete) — Thu, 05 Nov 2009 05:14:00 +0000

The EUO trade was stopped out (basically breakeven) today during the erratic post FOMC action. I anticipate re-entering this soon, maybe tomorrow.

I also plan on re-entering SPXU soon, most likely tomorrow. The cash S&P showed a shooting star type candle that reversed off the now declining 21 day exp. MA. When these types of candles happen in a trading range, I don't put as much emphasis on them as opposed to at the end of a trending move, but it does offer a nice clear stop point for a new trade entry, so I will probably see what things look like in the morning and then decide whether to enter right away, or see how the early part of the session goes.

I occasionally give updates on gold on this blog, typically noting times of extreme price highs. I take this approach because the sentiment was so uber bullish last year, that it smacked of a major long term top and just wanted to help any would be gold buyers out there steer clear of buy the top ticks of an inflation fearing gold mania. That remains my main emphasis with mentioning gold now, and even more so.

The latest Commitment of Traders data shows that large speculators are by far and away more bullish than any time in years. It is similar but not as extreme with small specs. Both groups tend to be wrong at the extremes. Additionally, the "smart money" commercial hedgers are way more net short, and thus bearish on gold, than any time in years. I know that at times like this, some percentage of people will be convinced of the next best thing, which is gold this time. But like with housing a few years back, when everybody thinks its the next best thing, it probably won't be for very long. In any case, I'd really warn anybody who's thinking about investing in gold or who may have a major investment in it to realize that the real money data like the COT and Rydex fund data, are consistent with very significant highs in gold. It looks like a little mania is ending - not the time you want to invest in it.

Also today showed a gap up on GLD and a doji at the close which could be indicative of some degree of topping. If tomorrow gaps down and falls, it may end up being an Abandoned Baby candlestick pattern which is one of the more rare and more reliable patterns, in this case a topping pattern.

SSO Trade Exit

noreply@blogger.com (Pete) — Wed, 04 Nov 2009 16:13:00 +0000

Short-term model for the Nasdaq is quite overbought. S&P not quite there yet, but I may be out later today and unable to post, so I'm going to post the exit now so that everyone could get out around the lunch time prior to the FOMC news at 2:15 pm ET.

Exit the open SSO trade today with a market order ASAP. Current price is 34.40 for almost 4% gain from the blog entry price.

Bullish Engulfing on Russell 2000 ETF

noreply@blogger.com (Pete) — Wed, 04 Nov 2009 03:54:00 +0000

Click on Chart to Enlarge

The indexes look to be in a solid short-term bullish set-up here. The Russell 2000 and Nasdaq have both undercut first support on this decline. The S&P and Dow have not. For those that have followed the blog for quite a while may recall prior posts highlighting the break of the first support as a target after an intermediate high. Often that support is undercut and then there is a rally back to the middle of the leg down from the top. On the IWM etf above that would translate to a move back to the 59 area.

The index etf's basically formed doji/harami's yesterday indicating indecision and possible consolidation or reversal ahead. Today, they mainly formed bullish engulfing patterns of yesterday's small real bodies. So short-term I think the odds favor a bounce, which is why I suggested the trade on SSO.

There is as FOMC announcement tomorrow afternoon, so there could be a large market move. Also, recent history would suggest likelihood of a gap up in the morning. I expect to exit the SSO trade tomorrow at some point, and possibly reverse the trade back into SPXU if conditions look good. From an indicator standpoint I think a choppy range would be likely for several days at least. Also, for anyone new, there has been a very consistent tendency for FOMC day strength to be reversed over the following 2-3 sessions, so in the event of a large gain tomorrow, that would be an added historical tendency to support consideration of a new bearish trade. In the event that the market moves down substantially, it will be important to see if any new lows get reversed back into the recent 3 day range quickly before reconsidering a bullish trade.

On an intermediate term basis the basic trend indicators are signaling a new down trend in stocks. Both the DMI and Aaroon indicators show bearish trends in the Russell 2000. Also the Bollinger bands are in the most bearish configuration. They are expanding with multiple recent closes below the bottom band after a horizontal channel and double top price formation. The text book target for the double top would put the IWM etf above down into the 53 to 54 region which is just under next support. So that may be a level to keep an eye on for any shorter term traders.

For what it's worth, I think the price action and pattern on this chart suggest that price is likely to move back to or below the July lows some time this month or early next month. Obviously we'll take it one step at a time, but whenever you see price completely retrace a leg of the prior
trend in less time than it took to form, you are usually looking at a larger trend change.

Also, historical studies I referenced in July and August suggested that after periods of such incredible trend persistency the norm was for them to experience very sharp declines that nearly or completely wiped out all those gains in a short period of time. In the Chinese market we saw it happen a few months back, and on the Russell 2000 chart above we've already seen the last 2 months of gains erased in 2 weeks. There is still some work to be done in that regard on the S&P and Dow, so I still expect further sharp declines, though at least a brief rebound looks likely.

EUO Stop Adjustment

noreply@blogger.com (Pete) — Tue, 03 Nov 2009 16:46:00 +0000

On account of the move in EUO above the recent consolidation, I think this is a good time to move the stop up. I think it is not very likely to get stopped out if the recent bottom in the US dollar was a major low. If it does get stopped out, then there may be a chance for re-entry soon after, but right now, removing the risk on the trade will make it much easier psychologically to allow things to unfold.

Modify the GTC sell top on the open EUO trade to 17.50, which is basically breakeven or a little better.

Blank Post Earlier Today

noreply@blogger.com (Pete) — Mon, 02 Nov 2009 21:22:00 +0000

Earlier today there was an accidental publish as I was posting the SPXU trade exit. So I re-posted it. Did everyone receive that post? This has happened before and I thought it always sent the new publish out when republished. If anyone did not get that post, or has missed one before in that situation let me know in the comment area, so I can maybe just delete the accidental publish and make a completely new one, and that would probably solve the problem.

Anyway, please check the blog site for that post if you did not receive it via RSS feed or email, etc. And if you didn't get out today on that, just place a market order for tomorrow to sell it in the morning. I suspect a significant move up by Wednesday, so I would just get out ASAP and then wait for a new trade.

New SSO Trade

noreply@blogger.com (Pete) — Mon, 02 Nov 2009 20:39:00 +0000

I am going to post a new bullish trade here as the technical indicator set-up looks very good with a clear stop level.

This will be a little more active than the last trade. The exit could be as soon as tomorrow and almost definitely by Wednesday.

New Trade:

Buy SSO with a market order today before the close. Current price is 33.31 which will be the blog entry. Place a GTC sell stop at 32.00 immediately after entry and use the money management post for guidelines on position size.

P.S. If you don't get in today and want to tomorrow, use a limit order of today's closing price on SSO to buy tomorrow. I suspect a gap up and if it's big, I don't think you should chase it.

SPXU Trade Exit

noreply@blogger.com (Pete) — Mon, 02 Nov 2009 18:13:00 +0000

I am going to take this trade off right here. I won't go into detail right now on it. I will be willing to get back in quite soon if there is no rebound, but the mid day sell off to new lows was immediately bought and moved back into the recent range, and looks to me like it will rebound. Also, there is a very glaring bullish divergence on the hourly oscillators on SPY.

Sell SPXU with a market order today or ASAP. Current price of SPXU is 46.98 and will be the blog exit price, about 15% gain.

SPXU Stop Adjustment

noreply@blogger.com (Pete) — Mon, 02 Nov 2009 17:43:00 +0000

While further stop movement at this time will increase the likelihood of a stop out, with the FOMC announcement Wednesday and still mostly short-term oversold readings, I am going to move the stop, and then if it gets hit will be looking to re-enter when indicators suggest.

Modify the GTC sell stop on the open SPXU trade to 44.45 until further notice.

The EUO trade still needs room in my opinion, so leave the stop as is for now.

Using Bollinger Bands to Indentify Parabolic Moves - Breakouts and Breakdowns

noreply@blogger.com (Pete) — Sun, 01 Nov 2009 16:31:00 +0000

Click on Chart to Enlarge

The chart above is Bank of America, ticker BAC. The previous post highlighted AIG and this one is similar, but had at least one set-up that was more obvious that I wanted to highlight. So first off I will highlight the main concept of what to look for in bollinger bands to identify good parabolic trading opportunities. You may be able to program some scan software to find these set-ups, but mainly you should have watchlists that you check basically every day and get to know a stock or 2 in every main sector and also have some idea of the fundamental outlook for certain industries to know ahead of time what stocks will likely lead or lag the market up or down.

1) Identify a range bound period in the stock. The bollinger bands will both point sideways and form a horizontal channel. This will coincide will declining volatility which is an added benefit if buying long call or put options.

2) Identify price then move and CLOSE above the upper band or below the lower band at least 2 and probably even 3 days in a short period of time. The two bollinger bands should be expanding (top band going up and the bottom band going down) during this period.

3) Price should basically stay above or below the 20 period moving average (in the direction of your trade), and then eventually the upper band will curl down if dealing with a bearish breakdown or the lower band will curl up after a bullish breakout. At this point the bands will be roughly parallel and form a channel that slopes up or down in the direction of your trade.

4) After an uptrend, eventually the upper bollinger band will flatten or curl down. After a downtrend, the lower band will flatten or curl up. This indicates that the parabolic move is probably over or at least weakening. This would be the simplest pure exit signal using the bands themselves as the indicator.

Basically all price movement will fall into one of the above stages of bollinger band activity and can be useful in reading a chart.

As far as the chart above, I have indicated two bearish breakouts and one bullish breakout using red and green diverging trendlines respectively. I have indicated 2 clear horizontal channels with pink lines which should be an alert to watch for a breakout. One subtlety is that before a true breakout there will often be a false breakout in the other direction. So before a bearish breakdown, price will usually move toward the upper band and may even close a day above it. However, weak volume, a reversal candlestick, or bollinger bands not diverging will be clues not to trust that move.

There is a near perfect example of this indicated on the chart in mid-October. A shooting star formed on modest volume at the upper band and then reversed off the upper band to now form a nice looking bearish break last week. The failed breakout would be the ideal time to enter a trade in the opposite direction, assuming you get good at recognizing them. Study of market sentiment, indicators, and chart patterns should help in that regard. The stop point in that case is simple - a penny above or below the reversal candlestick. You could possibly choose to wait to see a close above or below the reversal candlestick as a stop out signal if you are disciplined to exit at that point or have it programmed into a trading system. That could avoid a few whipsaws but is certainly not necessary to still get many good trades.

So how do you manage a trade on a break out? Here are some guidelines.

1) Enter the trade at the end of the day (or on the open the following day) of the 2nd or 3rd close outside the band

2) Immediately set a stop loss above/below the most recent swing high on the chart. That defines your initial risk. As an alternate, when the breakout occurs with a very large candlestick and heavy volume, you can place your stop a penny below/above the low/high of that candlestick. I would do this if such a candle exists, particularly if the most recent swing high/low is quite a bit away making the likely risk to reward ratio less than fantastic.

3) As price moves in the direction of your trade, modify the stop order to a penny above or below the most recent swing high/low. In waterfall declines with no swing highs/lows using the Parabolic SAR indicator will be a good choice to objectively move the stop.

4) The exit is certainly the most difficult part to do consistently well for the typical retail trader. Everything is straight forward on the entry, but now that you have money at stake, the emotions come into play of fearing the trade going against you or hoping that it goes your way forever (greed). If you do everything up to this point so far, you will be in good shape and almost certainly profitable. If you can simply look at the chart and forget about everything else the rest will come along as well.

- Using the BAC chart above, we have identified a bearish breakdown. Assuming the trend continues for a while, there will come a point when it ends. The lower bollinger band will then curl up. This may be a day or more after the low, and price may be strongly rebounding already. That's OK. Price is confirming the reversal that it's time to get out. So staying with the bands as the primary indicator on BAC, the curl up in the lower band is the exit signal. Plain and simple - regardless of how far it is up from the bottom tick already at that point.

- If you are a good at candlestick analysis, then you will often see a candlestick reversal which is classic and can exit immediately (at the close or on the open the next day) without waiting for the band to curl up. In my experience, the bottoming candlesticks will be easier to identify because volatility will be higher fear is a stronger and shorter lived emotion than the complacency at the end of up trends.

Another assuming you stay in a trade and haven't exited via one of the other methods, there is another subtlety of the bollinger bands which many people don't typically look at. You can use the bands to identify divergences like with oscillators. So if price consolidates and then makes a new low, but the lower band does not make a new low, that would be like a bullish divergence adding to the evidence that your exit will be soon at hand. A good example of this can be seen comparing the February and March low on the chart above.

This chart shows BAC with a parabolic SAR overlaid. If you look at the breakouts shown in the prior chart, then you can see how the SAR level can be used as a trailing stop level to exit the trade. So it can be used as a completely objective way to manage the trade and is designed for parabolic moves.

Signs of Price Confirmation of a Trend Reversal in Russel 2000

noreply@blogger.com (Pete) — Sat, 31 Oct 2009 17:04:00 +0000

Click on Chart to Enlarge

The chart above is the Russell 2000 index which is a more small cap growth index. I have put some figures on the chart showing that the recent decline has completely retraced the last leg up in less time than it took to form. Also, it is about 1% away from being larger than the June-July decline of 11.2%. That decline took a month, and so far this decline has only taken 2 weeks. So if prices fall further next week, that will make the decline both larger and faster than any decline since the March low.

The S&P is at 1035 right now and needs to drop to 1020 to completely retrace the corresponding leg up. But it has the entire next week to do so and still take less time than the move up. From a candlestick perspective, there is no sign that the decline has bottomed yet even shorter term. The bears are owning the close, volatility is expanding, minor gap ups have been filled and closed below, and the next support is at the 1020 low on the S&P 500. So I think it is likely that level will be undercut next week. I may consider a bullish short-term trade after that level is undercut, but will require at least a one day reversal candlestick to consider it.

So price action has started to confirm a trend shift to the downside. From my interpretation of the likely pattern and sentiment, I believe the decline is likely to retrace the entire July-Oct advance in less time than it took to form. That is a lot more downside, and justification for holding even the leveraged inverse ETF's for that duration in my mind. Definitely trailing stops will have to be adjusted on the way down. But for the current SPXU trade, the entry was on the day of the high, so if this does end up being a major reversal, all those small stop outs trying to catch the reversal will likely be completely regained and then quite a bit more as well.

Click on Chart to Enlarge

This chart is XHB which is the main homebuilding ETF. It looks like a head and shoulders top with a textbook target around 11.75, though I have put some dashed lines at open gaps near that level as potential chart support. I continue to believe that home building and real estate (probably commercial) will be leaders to the downside as the market turns down and especially if/when credit problems resurface.

Click on Chart to Enlarge

This chart is AIG. There are any number of financials that will look similar to this but I chose this one because of its high profile. One of the most powerful signals using bollinger bands are when price has been range bound but then breaks one direction and closes outside the bands several times in a short period of time. If the bands expand (move in opposite directions) as this occurs, then that is often a great signal of a powerful new trend. In this case I have highlighted past times on the chart where the same thing happened. Charts such as this could be shorted or purchase OTM put options with a couple months till expiration hoping for a major vertical type decline in the stock.

If you wait until major news has come out on the stock, you are probably too late for a great shorting opportunity - take the early hints from the charts like above.

I don't keep track and post results of issues like this, because I give no specific trades on them for the blog, and am usually not even trading them myself. So, do your own due diligence or leave a comment if there is something else you'd like to see on the blog, but anything I post like this, I consider tradable.

SPXU Stop Adjustment

noreply@blogger.com (Pete) — Fri, 30 Oct 2009 16:05:00 +0000

Modify the GTC sell stop on the open SPXU trade to 42.95.

From some looking back at similar set-ups on the McClellan Oscillator, Sentimentrader.com suggested that today would be important in that if the market continued lower, that would suggest a weak market vulnerable and likely to experience further declines before a substantial rally. The converse would be likely as well - strength begetting future strength.

As I type the market is down significantly, so at this point I will just move the stop and hope for further weakness to benefit this trade.

Limit Order for SPXU

noreply@blogger.com (Pete) — Thu, 29 Oct 2009 11:30:00 +0000

Don't have much time right now.

Short-term is very oversold but looks to have made an intermediate top in stocks. I expect some significant rebound attempt somewhere in the next couple percent down.

Place a day only limit order of 47.00 to potentially sell SPXU today on further weakness.

We'll look to re-enter at some point if conditions are right.

SPXU Stop Adjustment

noreply@blogger.com (Pete) — Wed, 28 Oct 2009 15:14:00 +0000

Modify the GTC sell stop order on the open SPXU trade to 42.00 which should lock in 2-3% gain.

Quick Update

noreply@blogger.com (Pete) — Wed, 28 Oct 2009 11:36:00 +0000

The market seems to actually be behaving differently on this pullback than in prior ones the last few months, unable to muster strength where it has immediately in recent months. So, I would say the odds are good for a continued pullback. Also, from a candlestick perspective, bears have been able to dominate the close in recent sessions showing no sign of a reversal yet.

The 50 day MA is about 1.4% below current prices and may be an area of support. Also an unfilled gap up is still present about 2% below current levels. For those that are short/inverse, you may want to consider setting some limit orders to sell part of the position at a price corresponding to the 50 day MA on the S&P 500. For the open blog trades, I am not going to do that just yet, because of my goal the last few months of eventually getting in a large degree market turn with limited risk. I want to see how today closes and if the market will end up retracing the Oct rally in less time than it took to form over the next few days. So barring a classic reversal candlestick, I will be holding the trade.

On a purely indicator outlook the market is basically short-term oversold, and we should expect a bounce today or tomorrow if the market continues its trend. Inability to do so, particularly if there is acceleration to the downside (i.e. the market makes a larger 1 day decline than any since Oct 1st) would be another sign of changing tides. Since today is set for a decent gap down as I type, today should be telling at modest to large gaps at oversold levels in an uptrend (especially this one) tend to be bought almost immediately from the open.

My own perspective is that this is a very dangerous time to be long for anything but buy and hold (forever) investors.

While I don't have time for more detail right now, I believe the current situation is that the higher the market goes the more the bulls think they are correct, and oddly it may seem, the bears firmly believe they are correct as well despite higher prices and such a big rally. So both sides are confident. When confidence is high, pain tolerance and allowance for slippage against positions is high because of belief that the position is solid but needs some room to work. I think this likely means that the odds of increasing volatility are good.

UUP Charts (unleveraged version of EUO)

noreply@blogger.com (Pete) — Tue, 27 Oct 2009 14:37:00 +0000

Click on Chart to Enlarge

This chart is a UUP daily chart which is a bullish US dollar ETF, and is the one I reference most often on the blog. I have put some notes on the chart showing some a potential breakout of a falling wedge. This particular pattern is typically a very explosive chart pattern. It often ends a larger down trend and can signal major trend change. Also it is ideal for call options, because the rate of advance after a breakout is usually about 3 times as fast as the prior decline.

So, for trading purposes I am once again hoping to catch a major reversal on the dollar. There have been a few similar trades that have been stopped out over the last few months, and it is a similar situation here where I am hoping for a quick advance to get the stop up to breakeven and then let it run.

Click on Chart to Enlarge

This is just an hourly chart of UUP showing the breakout in closer detail. Usually a real breakout from this type of wedge will not have price fall back into the wedge, though it may consolidate above the trendline (in the yellow area).

Also I wanted to post a couple links to recent things I've read regarding the dollar to show two sides of the sentiment and realization of what is/may be occurring.

This first link is from Karl Denninger showing what I would presume to be the smart money acting on the reality of the credit situation in our monetary sytem.

http://market-ticker.denninger.net/archives/1539-Possible-Credit-Dislocation-Be-Warned.html

The following are links to the Web Bot Project, which I do think is a very interesting project, but really can't agree that the collective conscious should be expected to get major financial turns right. My inclination is that this is a good contrarian signal that the dollar may be bottoming, but we'll see.

Web Bot Project, Further Comments

New EUO Trade

noreply@blogger.com (Pete) — Mon, 26 Oct 2009 19:46:00 +0000

No time for details on this right now.

New EUO Trade

Buy EUO with a market order today before the close or tomorrow morning. Current price is 17.48. Place a GTC sell stop at 17.10 immediately after entry.

Move SPXU Stop to Breakeven

noreply@blogger.com (Pete) — Mon, 26 Oct 2009 15:59:00 +0000

Just in the few minutes since my last post, the market has fallen further with explosive velocity. My perspective is that this is probably a game changer and the trend will continue down (maybe significantly from here, or as a secondary possibility this could be a mini capitulation before a move to new highs.

In the first case I wouldn't expect the stop to be hit, so there's no reason not to put it in. In the second, I would expect it to get hit and have to re-evaluate if there is a good reason to re-enter soon after.

If your entry was 41.00 or less on the current SPXU trade, then modify your GTC sell stop to breakeven.

Stop Adjustment on SPXU

noreply@blogger.com (Pete) — Mon, 26 Oct 2009 15:43:00 +0000

There was a failed morning rally attempt today and an undercut of recent lows. Because of shorter term indicators and intermediate term outlook, I am going to take this opportunity to decrease the risk on the SPXU trade. The original stop was 39.30, but the new stop is....(wait for it.....)

SPXU Stop Adjustment

Modify the GTC sell stop on the current SPXU trade so that it is now 40.34.

The next open gap support below current levels is at about 105.80 on SPY which is a little less than 2% below current levels. The next open gap support below that is at 104.00ish. Those may be levels to take partial profits if the market continues down further. I will just adjust the stop level down until there is a compelling reason to exit the trade. For various reasons, I think there could be a very sharp and large decline within the next several weeks, so I may err on the side of allowing the trade to continue running if it starts off well. I will try to get the stop to breakeven as soon as is reasonable though.

Some Fibonacci Ratios to Consider

noreply@blogger.com (Pete) — Thu, 22 Oct 2009 01:51:00 +0000

Click on Charts to Enlarge

The chart directly above is the S&P 500 cash ($SPX). Most of the notes on the chart I have mentioned at some point in prior posts, but I thought I'd bring them all together.

The most important thing I wanted to point out is that the advance from the July lows to today is an almost perfect golden ratio relative to the March to June advance. For those who don't track Fibonacci relationships much or have never seen them "work" this won't mean anything. I have looked at so many charts and seen so many "harmonic" relationships in corrections, that I have no doubt what so ever that these ratios show up in various ways in stock prices. The especially interesting thing here is that the perfect 0.618 relationship of the March-June advance projected up from the July low, almost pinpoints the top of the gap down on 10/6/08. It is at times amazing how the relative sizes of various moves relate to create Fibonacci relationships between key psychological points in the market. Even more amazing is that a basically exact 161.8% (inverse of 0.618) extension of the January closing high to the March closing low coincides exactly at the level of that gap down as well (see chart below).

This really struck home this February when I saw a somewhat similar thing occur. Without going into the details, there were gaps in the decline last November that were at precise locations dividing the decline into Fibonacci based sections. Then the exact middle of that leg down became the apex of a contracting type pattern at 875.75ish on the S&P. I was then able to use the projection of the % decline of that November leg down, down from the apex in conjunction with another specific type of harmonic pattern to project 650-670 as the next likely bottoming range for the S&P. It bottomed at 666 and I posted a blog trade on the day of the low. The point of this is that when these things start to come together, it is possible to go on trading runs like shooting fish in a barrel, which was basically how it went from January through March of this year.

So, this all could be a waste of time and the market could go up forever or just make a muck out of anything I've talked about, but the Fibonacci ratios relative to the position of the gap are a fact regardless of what happens here, because it is all based on past price data. There is also an interesting breakdown of the July-present advance if a top happens here. I have basically put the info on the chart, but won't go into much on that, because I am just speculating on a top here.

In any case, I feel that the market is talking Fibonacci language and I'm listening.

Click on Chart to Enlarge

Bearish Reversal at Resistance

noreply@blogger.com (Pete) — Wed, 21 Oct 2009 21:20:00 +0000

Click on Chart to Enlarge

The chart above is SPY. It shows a pink horizontal line at the gap down from Oct 6 last year. That gap was never filled as the market crashed down and is only now recovering to those levels. However, there has been resistance over the last several sessions anytime price has tried to move into or above that window.

Today saw a move to new rally highs, followed by a wicked reversal in the last hour. On a short-term basis this makes the decline today larger and way more explosive than any since the beginning of the month, and so likely spells a short-term high. Again, on an intermediate term basis the trend is up, and the real nail in the coffin will only be a larger and faster decline than any since the March lows. Divergences have been growing the last couple months, so it would not be surprising to any technical analyst for the market to top around these levels.

I may get around to putting a video showing a bunch of charts as I like to do when I feel there are way too many charts to even think about putting in a post, and the market is showing signals of significant trend changes. As a short note, small option traders made a huge jump in bullish transactions relative to bearish ones last week, despite a relatively mild gain. Equity survey bullishness jumped dramatically in the AAII and the Consensus Inc surveys. The big four surveys are showing historically high bullish opinion collectively. Rydex traders have shown the tendency to buy the dips over the last week or so, which typically happens in clusters as a run up is topping. Also the equity put/call ratio has hit very low (too bullish) levels several times in the last week or so causing the short-term average to deviate significantly away from the intermediate term average which also typically happens at important highs.

This morning Sentimentrader.com discussed signs of a buying climax this week. We'll have to see how the week closes, but this would be the reverse concept of capitulation bottoms. In climax buying you see many stocks make new 52 week highs, but then reverse to close the week below the prior week's close. Today's bearish reversal after pushing to new highs certainly increases the likelihood of the climax scenario.

Click on Chart to Enlarge

This chart is the Nasdaq Composite. It made a classic shooting star at horizontal resistance today after pushing to new highs in the morning. There was a news influence due to the Beige Book report, but a candlestick is a candlestick. The other indexes didn't show really classic candles today, but the Russell 2000 made a bearish engulfing yesterday. While I don't have stats for anyone on this, today felt like a meaningful reversal to me, partly due to the fact of the wider range and volatility compared to the recent 2 and a half week stretch.

Bottom line is that a stop can clearly be placed above today's highs if shorting the indexes and there is a reasonable chance of reward of 2 or 3 times the risk even if only a similar 1-2 week pullback occurs from here. If it is something bigger, then the reward could be enormous compared to the risk of getting stopped out. While I didn't show it on the charts, there is only minor support below here in the form of common gaps until the lows earlier this month. So typically from a charting perspective you would see the market pull back and test those unfilled gap ups. Then wait to see if there is any legit bullish reversal at or above the next major support before considering a long side entry again (I'll call 1020 the next major support on the S&P 500- that's about 6% below current levels).