Thursday, June 30, 2011

Valid Breakout

The market has been showing strength yesterday on the upside break-out.

First, yesterday was the second day in a row with 80% up volume. Second, the last hour of trading was strong and closing at the high of the day. Third, it was financials that led the market higher, along with materials, while defensives have been lagging.

I will establish long positions today if we get a pull back towards support at 1300 (red line above) or next week on a pull back around the employment report. The market may anticipate some weakness for the NFP number and also the ECB is expected to serve the markets another rate hike.

Meanwhile the put/call ratio is suggesting any early correction is a buy today, since with all the strong market in the last two days, the ratio has moved down on my chart, indicating some stubborn bears holding to their positions. As soon as they bailout, which may happen even today, the market is ready to correct a little more.


Wednesday, June 29, 2011

Update

It looks like the Greek parliament has adopted the austerity plan, which means no Greek default for now. I will be more confident holding longs from here.

The recent rally does not look strong enough with low and decreasing volume and with yesterday not being a 90% up day. The 200 DMA was not really touched, also. Thus, I am not ready to buy pull-backs yet, but a decisive break above 1295 SPX would mean the current multiday range is resolved to the upside and would make me start going long.

Tuesday, June 28, 2011

First Sign of Economic Strength

For the series above, pace of change means 3 month average of the monthly percent change.

Notice how this measure of capital goods new orders made by US companies has accelerated its average monthly rate of growth in May. This is the first good economic datapoint in a while and it suggests the expansion can continue.

Friday, June 24, 2011

Intuition Pump

The market is refusing to touch the 200 DMA. It is the second time in a few days that the SPX reverses from just above it. I looked back into history and there was never a time when the market got this close to this moving average without breaking at least a little below it. These reversals from the edge might mean there are a lot of impatient longer term bulls and they are probably going to get burnt before any meaningful move to the upside.

I also looked back until the 80s and tried to find out a similar context for the daily SPX and what a day like yesterday meant for the short term market behavior. I defined the context as a longer correction, followed by a few days rally and then by another attempt to sell off.

Here are some similar instances I found. They do not exactly fit the whole pattern since I looked especially for a day similar to yesterday.

> dec19 1997, aug22 1997, oct5 1990, oct24 1989, mar13 2008, aug10 2007, may17 2011 <

In all these cases the market started falling again over the next few days, sometimes faster, sometimes slower. A bottom was near every time but it happened very close or a little below the recent lows, in our case around 1260 SPX.

The chart below is just one of the examples, August 22, 1997:

I recently found a good name for this method of looking at similar past instances in order to get some guidance for the future: "intuition pump". It was used by Paul Krugman in a speech. Mr. Krugman was talking about something else, namely equilibrium models, but I think the term can be applied to my method as well, since it does the same thing as the models for Mr. Krugman: puts things into perspective.

Thursday, June 23, 2011

Correction Over or Almost Over

The chart above depicts the average rate of change for the SPX, obtained as an average of rates of change calculated for 3 different periods. I first saw this indicator on Will Rahal's blog. Although discontinued since 2009, this blog is the most informative source on the internet when it comes to learning trading. I highly recommend reading all the posts from 2007 until the end to anyone who is still defining their trading style.

Back to the indicator, notice how it got oversold recently, touching the upper horizontal black line. That's the oversold level during bull markets. The lower line, if touched, would suggest a bear market has started.

Since we currently still are in an expansion that is expected to accelerate in the second half of the year and the market is oversold, the bottom of this correction is already in or very close.

I am contemplating two scenarios:

1. the market breaks lower than the recent lows at 1258 SPX and forms a bottom there.
2. the market goes down for a few more days from here, piercing the 200 DMA but then starts its move up.

I think today will provide precious info as to which scenario will play out. If the drop is contained and there is not much weakness after lunch-time, then scenario 2 will be favored. Otherwise the other scenario might play out, which would put a bottom somewhere between 1230 and 1250 SPX.

Wednesday, June 22, 2011

The Economic Joke of the Day

From the ECB June monthly bulletin, page 19 (red markings are mine):


So the guys at the ECB try to praise the Baltic states for their very successful adjustment process, while, on the same page, they provide the employment situation which contradicts their brilliant analysis. This is really hilarious. And it is more hilarious when they say in the next paragraph that the bad employment situations is somehow due to emigration! So, it was never the peg to the Euro... it was emigration...

It looks like they are preaching macroeconomic orthodoxy for the sake of some indicators. They seem to forget that economics is the discipline which is supposed to help people live a better life, and this is certainly not the case given the way it is applied in the Baltic states.

Monday, June 20, 2011

Out at 1272

The market is weak near the close. Also, the next couple of days are tricky to play with the FOMC coming and with the untouched 200 DMA nearby.

Long at 1272

I will exit if the close is weak

Friday, June 17, 2011

Out at 1267

Long at 1271.25 ES

Stop is at 1267

200 DMA

The market played a nice trick yesterday. While probably everybody (myself included) was waiting for a pierce of the 200 DMA to go long, the market reversed just about 1 tick before touching it. Now it has everybody chasing it if they dare. I will have to apply Tuesday's motto again.

I got some longs yesterday around 1257 (September contract) when I saw the market coming back up after the initial drop to new lows, but just 1 third of a full position because it was quite late in the session. I will look to add today after the release of the University of Michigan Sentiment number at 10. There is still a risk of a sell off because the market doesn't just come this close to the 200 DMA without breaking below it a little, but I think this will come after the Fed meeting next week.

Thursday, June 16, 2011

Next Bull Leg To Start This Summer

I think the market is close to another bull leg up above 1400 SPX. The economy has been slowing down after accelerating at the end of 2010 and this puts some economic indicators at the lower bound of their intervals of variation. Also, the stock market has been correcting since May and is now oversold, especially when looking at sentiment. This correction has been benign until now, meaning that a bull market top has not been registered yet.

Indeed, yesterday's retail sales report puts the average monthly pace of change in real retail sales between the horizontal green lines from where it has turned in the past:

Also, the latest report on China PMI suggests economic strength from here, as the series is at levels that represented inflection points in the past:

These are just two but the most important of some indicators I watch. I will present others as the data comes in, especially at the end of the month for capital expenditures and personal consumption of durable goods. Meanwhile, I will also note that the latest inflation data suggests the deflation peril was avoided and that core inflation is rising towards more benign levels for a deleveraging economy.

This economic context finds the stock market near the 200 DMA and oversold. The correction was not too damaging until now with breadth still not reaching bearish levels, as suggests the New 52 Week Highs-Lows Indicator.



If the economy starts to accelerate in the second half of the year, this suggests a buy points is not too far. In the chart above I marked two important support levels. Also, when the 200 DMA is so close, usually, the market breaks it and stays for a few days below it before a significant advance so I expect the bottom to develop somewhere around 1230 SPX. It is important to remember that this bottoming process can last for a few weeks or more.

Looking closer, over the short term I expect a bottom today and a move up until the Fed meeting next week, followed by a decline to 1230-35 SPX. The market looks ready for such a bounce because the put/call ratio has spiked a lot yesterday. Also there was not an hourly close to new lows after lunch time yesterday and the last hour of trading was not very weak for the first time after many sessions.

Tuesday, June 14, 2011

Out at 1282

Very weak last hour of trading, again. I am taking my small profit here and will look to buy again tomorrow.

Added the second half at 1279

Long at 1278.5 - September contract

This is about half of my desired position. I am rushing a bit to buy because the market is at support. Generally, I will exit my longs today if the market goes below 1273 (September contract).

Looking To Buy No Matter How High

This will be my motto today as the last couple of days of market action remind me of the last year's August and November bottoms.

Yesterday's action followed by a sustained move up in pre-market overnight suggests the bottom is in. I waited to write after the retail sales report because the market could have changed course easily in case of a bad number.

Looking back at yesterday, I failed to notice that the market had touched support from March (on the hourly chart) and, as a consequence, I did not think the 1-2 pm rally was a valid turnaround.

So, here is my plan to buy on strength. I will do it reluctantly since I like to fade weakness for my long entries, but I have to take what the market gives me. If this is the beginning of a bigger up move then buying strength is not a problem. Also, traders will find it difficult to buy such a big gap up and this somehow gives me some comfort because it means I am not joining the crowd in doing the obvious thing.

The market may behave today similar to the 1st of December and the 1st of September 2010. On days like these the best points for long entries are:

> immediately at the open if the market opens exactly above support (as was the case with European markets overnight);
> after the first small pull-back (no more than 3-4 points) that can come into the 10 am economic release or after it;
> on the first shake-out after lunch if the market has rallied until then.

I will use these points to build a long position. Bigger corrections (say more than 6 points) will make me sit on the sidelines. The market can go today as high as 1290 on the September contract.

Monday, June 13, 2011

Ready to buy around 1260

I think we will see a deep sell off after lunch time and I am ready to buy around 1260. The only question is if the SPX touches the 200DMA at 1255 today or if it rallies and then touches it in a few days when its value is higher.

Friday, June 10, 2011

Stopped Out at 1283.75

I had a stop loss order at break-even after seeing yesterday's weak last hour of trading.

Yesterday's close and the overnight market action lead me to believe the market is still weak. I will again look for a bounce sometime next week.

Thursday, June 9, 2011

Long at 1283.75

Still Looking for Longs

Recently, I had a number of small consecutive losses as I kept trying to go long while the market kept sliding lower. Even if it has been work with no pay, I will keep doing it as long as my indicators and my intuition suggest I should go long. It is good to always remember that this is how this business works. The market will never make it easy for anyone. The important thing is to manage risk by keeping losses small and be consistent by entering all trades that meet the required conditions. In my experience, this is the only way to beat the short term market noise.

So, I will say it again: the market is oversold by many measures and still in a bull market. As long as indicators do not reach bear market levels, I will continue to go long or stay on the sidelines.

Here are some indicators I watch that favor the long side, courtesy of StockCharts.com:

> NYHL (New 52 week highs-lows) is oversold and also suggesting internal strength.



> VIX

> S&P 500 percent of stocks above the 50 DMA

Wednesday, June 8, 2011

Out at 1278.75

The market has a fourth weak close in a row. Quite rare.

Long again at 1280.75

I know this looks crazy but the market is oversold and I have to keep trying until clearly proven wrong.

Stop is around 1276

Out at 1278.5

Long at 1284.25

Everything is oversold. Today we might see a move up to 1300. Stop loss is below 1279.

Monday, June 6, 2011

Out at 1285.5

Weakness into the close is a clear sign my rally expectations were wrong.

Long at 1291.5 ES

If 1290 was not the bottom, we are not very far from it.

Today, somewhere around 1290 ...

... I will be looking for a long position. Of course, 1290 looks good now but it can change depending on what the market does until the open. Anyway, I will be expecting a deep sell off before I go in.

This is a short term trade. I intend to take profits around 1312 in a couple of days. Then, I will reassess. A move up into the Fed meeting at the end of June cannot be ruled out.

My main reason to go long is the fact that the cpc 5 day EMA is oversold. Sure, this ema can head even lower, but for the most of this bull market the current level was a good opportunity to buy.

Another reason is that, despite the recent weakness in the SPX (black line), the New 52w Highs-Lows (blue line) failed to make a lower low.

chart courtesy of: StockCharts.com

Thursday, June 2, 2011

Ugly!

Yesterday's drop is so ugly on the daily charts that I have to put aside any rally scenario. It was the first day of intensive selling after the lunch in a very long time.

It was late anyway for a move up with the end of QE2 in sight and everybody looking for a replay of 2010. I even saw today the "double-dip" words used in the title of an article.

So, I think the market will be weak until the put/call ema reaches oversold

The next big opportunity to buy will probably arise as soon as the retail sales pace of change starts to accelerate again from the lower bound:

Meanwhile, I will try to trade shorter term, maybe post some of the trades in real time. I will also analyze stocks and build a buy list as long as the market does not give clear signals the bull has ended. Until now, this has not happened.

Wednesday, June 1, 2011

Out at 1333.25

Today's drop is surprising to me after yesterday's strength into the close. I now think the market will be weak until the employment report on Friday.