Friday, December 19, 2008

Double Top in S&P; Dec. 19, 2008

Very tough tough couple weeks analyzing this market. With failures to push higher to my 950 target in the S&P in a timely manner and the momentum indicators trying to turn down, the VIX falling on complacency, and now the above double top formation in the S&P, it starts to beg the question if the market is getting ready to roll over very soon.

Breadth is strong and the Nasdaqs are still outperforming the blue chip indices so I'm not diving in fully short yet. But I'm not sure being long now is a good idea. It's options expiration day today and that brings about large volatility at the open and close of the markets. With the VIX in complacent mode, breadth strong, and the Nasdaqs very strong, I'm going to make an educated guess that the volatility later today at the close will be to the upside. I will exit half my long position on an S&P break of 877 and exit fully on a break of 850, but probably sooner.

With that said, if we get a huge rally today, I will use that as an opportunity to close most or all of my long positions and to start establishing short positions. Keep in mind it's possible we could see the market float higher during the holdays towards 1000, so I will apply position sizes accordingly. But the way I see the market now, a big rally today is an opportunity to take profits on long positions and start getting short.

VIX Decline Showing Market Complacency; Dec. 19, 2008

Attached is a daily chart of the VIX. The VIX is essentially a fear indiator. The higher the VIX, the more option put buying and therefore more fear. The lower the VIX, the less fear in the market. VIX lows and low fear can accompany market tops because people have become overly optimistic and complacent. Granted the VIX is much higher than it's "normal range in the 15-20 area, but it has come down significant this week as you can see in the chart. This doesn't tell us that a turn down is coming now, but it does tell us that the market is setting itself for another big sell off soon. The more bullish/optimistic the market, media and all the financial news pundits are, the more bearish this market becomes. I think sometime after Christmas, or perhaps after New Years, we'll see this market start to roll over again. I'll be watching closely during those times for signs of a turn.

Despite Modest Sell Off, NDX and Breadth Still Strong; Dec. 19, 2008

Despite the sell off after the opening rally, breadth is still positive on the NYSE and Nasdaqs are well outperforming the S&P and Dow. These are not the characteristics of the downtrend resuming. This doesn't mean I'm a staunch bull, but I don't any signs or reasons to get aggressively short. I'm still long the S&P and short various ETFs (XLE, XLU and XLK), plus short gold.

Utilitiies ETF Bearish Triangle; Dec. 19, 2008

Using options going long the market did not work well with volatility shooting lower and completely eroding my option premium making it very difficult to make any gains regardless of how big the market rallied. So I've decided to get long the S&P with a double long ETF (SSO) and short the market through various ETFs that are showing bearish formations. One of those is the above utilities ETF (XLU).

The above chart is a daily of the XLU and you can see that the trend is clearly down and it drops right into a consolidation that is clearly a triangle. Also notice the MACD below is showing a bearish push down. According to EWP, triangles like this result in a sharp thrust in the direction of the previous trend. The rules are clear as to how far it can rally as well. In short, if the bearish triangle scenario is correct, this ETF should thrust sharply to new lows before it rises above $30.18. It's trading now around $28.95 so I'm risking 4.2% to get to a new low at $23.28 which is at least 19.5%.

That's a risk/reward ratio I'm jumping all over.

Daily S&P Bearish; Dec. 18, 2008

Just wanted to take a minute and step back to look at the bigger picture and keep focus on my main projection; which is that the stock market will fall to new lows on the year in the coming weeks. The chart above is a daily S&P futures chart that shows a rally very hard faught with overlapping choppy waves which is clearly a correction, not a trend change. Also, the daily stochastics have been in overbought territory for a while and keep trying to cross down.

This all tells me that the market will sell off hard pretty soon. The hard question is when? and how much higher does it go before it does sell off? All I can do is look at the short term structure and try to find 5 wave drops and rallies. So far, I find none either way.

Despite the fact that the near term is unclear, I want to make sure I don't lose focus of the big picture above; which is that the larger trend is still down and that we have new lows to achieve on the year.

Market Structure Uncertain; Dec. 19, 2008

The market structure is unclear so I just wanted to repeat myself when I say that my positions are much smaller now and any good gains I get I'm taking profits on them. THE QUICK AND THE BROKE!

Until I get clarity of what market structure is unfolding where risk is clearly identified, I'm quick shootin the market up and down.

Thursday, December 18, 2008

Market Uncertainty; Dec. 18, 2008

The market broke my control point and the near term structure is unclear to me. This rally is a correction but it's a 4th wave and there are several possibilities, and a few of them would take the S&P to 950-1000. Other possibilities take the S&P towards new lows on the year. With this uncertainty, I closed most of my long positions and have reduced all my position sizes except for my short gold positions. Tomorrow is options expiration day so it should be a wild one. But if the market follows through with more selling on weak breadth then it's possible the next decline phase is underway.

All I can say what I'm going to do is take the thinking of "the quick and the dead". I will look for short term opportunities and keep stop losses tight and positions size small until I get more certainty as to what exactly is transpiring. I will take profits when available fairly quickly and trail my stops. But I don't have confidence taking a strong stance either bullish or bearish right now. But I can assure you that rallies above 920 in the S&P I will start adding small short S&P positions gradually as the market rises. The lows of 2008 of 740 will be broken in my opinion.

The quick and dead..............or maybe I should say, the quick and the broke!

Gold Haulted at Resistance; Dec. 18, 2009

Above is a daily gold futures chart that shows a fibo resistance of 78% and a down sloping trendline from the previous two highs haulting gold's rally. This is significant because any follow through on the rally through that resistance would mean a new high for gold and it would break the downtrend of lower highs and lower lows. I expect gold to undergo a corrective decline over the next few days/weeks.

Brief Correction Possible, Then Rally to New Highs; Dec. 18, 2008

Above is a 15min chart of the S&P and I posted a possible wave count unfolding. It has us in a small wave 4 down and once complete we should shoot up towards 950. If this count is correct, this current decline should not go below 885, which is the wave 1 peak. Doing so would violate one of EW's rules.

The EUR/USD seems to have broken down and should be in a corrective phase down. Gold is falling with it.

Wednesday, December 17, 2008

Dollar Getting Hammered; Dec. 17, 2008

Above is a 4 hour chart of the EUR/USD. It moves the opposite of the dollar. You can see that the euro has spiked straight up over the past few days and according to Jamie Saettele at, the EUR/USD has undergone it's largest move in one week over it's entire history in existence! This is why gold has rallied so strongly as well. But this rally has moved too much too fast so a correction is due, and it should be a large correction to the downside. If you look at the chart above you'll see I circled the severely overbought stochastics and RSI that show the extreme level this pair is currently trading at. But I tried shorting this rally twice and got stopped out immediately. I'm not getting in the way of this trade again. I do have a short gold position which has been extremely painful to have, but I'm waiting for the EUR/USD to correct and gold to fall so I can close my gold positions.

As for the stock market, breadth continues to get stronger and is almost break even. I'm unsure of the immediate near term direction, but the direction over the next few days/weeks is up.

Profit Taking Underway Then More Rallying toward 950; Dec. 17, 2008

Nothing interesting on the charts this morning. Today we appear to be seeing some profit taking from yesterday's surge higher. Most people are too nervous to hold stock for a long time so when big gains occur, they tend to sell. This is actually a contrarian indicator and tells me that a top is not in. Once people get complacent and very optimistic and hold stocks longer, that's when a top is forming. Also, it's good to note that despite the declines today, breadth is not too bad with only 59% of volume to the downside and 1.26 decliners to advancers. So no heavy selling across the board is occuring today; just light profit taking.

Once this correction is complete, look for the market to shoot higher.

Tuesday, December 16, 2008

Market Rallying as Projected, Still Has Further to go; Dec. 16, 2008

The market is playing out as expected with the strong push higher today of 5% in most of the major indices. The S&P is entering resistance areas and the general target of 950 as I've stated many times. Big moves like today call for profit taking or establishment of new positions so I added a small amount to my short S&P position.

The Fed cut rates to almost zero, showing the desparation of the Government to help this doomed economy. So they really have no more bullets left in their gun as every lending facility they've set up has failed, and their interest rate slashing campaign has done nothing to stop one of the sharpest stock market declines in history. Looking at the above S&P 15min chart we can see the strong rally that transpired today which was accompanied by very strong breadth spikes as seen from the indicators at the bottom of the chart. The last time I looked, 93% of all volume on the NYSE was to the upside. This was obviously a broad market rally and due to the strength and structure of the market, it should chug to higher levels in the near future. It's quite possible the rest of the week will be one big rally. But this is all guessing, the goal is for the S&P to get to the 950 area and I can then start aggressively getting short in preparation for the next declining phase.

Market Rally is on Pace and Should Accelerate; Dec. 16, 2008

Nothing new to really report this morning. The market is rallying into the Fed meeting at 2:15 EST as projected. Again my target for the S&P is to get somewhere into the 950 range before topping and selling off sharply. The quicker we get there the better in my view. As long as the market continues to follow my projected path within the parameters allowed the more confidence I have that my wave count and analysis is correct. And of course, that means the maximum amount of profits with minimum risk. If for some reason the market does not continue this rally and it sells off sharply, breaking new lows and especially 820, then something else is going on that I'm not aware of and it will be tough to position myself for that. So all indications for now point to higher levels over the next few days/weeks.

The above 15min chart of the S&P shows that the rally today broke the previous lows and eliminate any realistic chance of counting the decline starting last week as a 5 wave affair. Therefore the decline must be corrective, and new highs should be achieved in the short term. Again, the 950 area in the S&P is the target. As the market rallies higher I will adjust the target area and start establishing short positions.

Monday, December 15, 2008

Market Should Start Rallying Tuesd./Wed.; Dec. 15, 2008

The market dragged all day to the downside and a sharp rally near the close helped bring the indices back from deep red territory. Again, the Nasdaq led the way and was down well over 2%. But no support levels I mentioned in the pior chart below were broken. As long as they remain intact, the market has significant bullish potential in the very short term. Tomorrow is the Fed rate announcement and that usually carries a lot of volatility. I expect that whatever the Fed does, it results in a strong rally phase that should last a few weeks and take the S&P to the 950 area. A strong break of Friday's lows, and especially a break of 820 in the S&P will signal the next decline phase is already underway and on its way to new lows on the year most likely. I don't expect that to happen though. Look for a strong rally tomorrow and/or Wed.

Bigger Picture and Support Levels; Dec. 15, 2008

It's always good to keep an eye on the bigger picture. Above is a 15min chart of the S&P and it shows where Friday's panic lows are. Those levels should hold because we rallied strongly off them immediately and to build on that momentum we need to stay above those levels. Ultimately, a strong break of 820 will negate the projection of the S&P to get to 950. As long as we remain above those support levels, I see this market as bullish with a target in the 950 area.

A-B-C down SO FAR; Dec. 15, 2008

Above is a 5min chart of the Nasdaq 100 showing what appears to be an ABC down so far. A break below the lows of today will make it a 5 wave drop and warn of further losses after a brief rally.

Nasdaq 100 (NDX) Rally Attempt; Dec. 15, 2008

The NDX is spiking higher and attempting to bring the bulls back into the market. We'll see if this has legs or not. Downside volume is still very weak and advance/decline ratio hasn't moved. I'd like to see a spike higher in both of those indicators to coincide with the NDX to get more excited about a more prolonged bullish rally.

Nasdaqs Leading the Way Again; Dec. 15, 2008

Again, the Nasdaq 100 is telling us where the short term market trend is. Above is a chart showing the Nasdaq 100 (orange line) and the S&P 500 (red/green candlesticks). As you can see, the Nasdaq 100 is trading much lower and therefore weaker than the S&P early this morning. This suggests further weakness in the market ahead, for the very short term at least. Until the Nasdaq cross back above the S&P, this market is short term bearish. But I'm not getting too bearish this market yet by any means. Breadth is a modest 60% down volume and 2-1 decliners to advancers. Until I see the breaking to new lows on solid breadth and volume, I have a slight bullish bias on this market.

I still see the S&P rallying to the 950 area before it tops and rolls over big. That will present the best and clearest opportunity to short heavily.

EUR/USD and Gold; Dec. 15, 2008

Just a quick side note. I have been heavily short gold and have taken a huge pounding lately as gold has rallied ferouciously. Here's one reason: the EUR/USD suprised me and a lot of people in rallying through resistance very strong as you can see from the above 4hr chart. Once the rally exhausts, which should be fairly soon, the EUR/USD will roll over to a new low which is about 1300 pips away! Gold should fall significantly when this happens. The only question in my mind is when?