November 15, 2012 - on the edge, again

The drop below 1400 on the ES only resulted in a small bounce. Conservative longs averted the subsequent crash however, because the market did not really come to the buyers. Whoever chased it, got punished on November the 7th and afterwards. Patience is indeed the key to successful trading.

Now the market has reached the 1350 level, which I think will support at least another bounce. Here is a daily chart of the SPX.

The market tends to bounce after it breaks important levels. It did so after settling below the 200 DMA and I think it will do it again after closing below SPX 1354. If the market bounced a bit without clearly committing below 1354, then it would just be ready to break lower.

Certainly, the market is oversold from a bull market perspective. Using the chart below the average momentum of different moves can be evaluated.

Any lower than this for this correction and the market is entering bear mood again! It has been quite a whipsaw during the last 2-3 years from this point of view, but this means something too. The unprecedented volatility from bull to bear suggests we are at a big inflection point.

So, the question is whether this will be just a bounce in a larger drop or a continuation of the long term uptrend. My gut goes with the first, my system with the second. The market has nothing positive to anticipate fundamentally but it is oversold in a larger uptrend. I guess if this is the start of a bear, we will first get a bigger bounce into the end of the year.


P.S. - As I have written this post the market started falling again. If it does not reverse until the close, tomorrow will be a good opportunity to go long on weakness below 1340

October 24, 2012 - time to go long

Update: October 25, 1:35 pm - I did not buy the break below 1400 and I am sitting on the sidelines at least until tomorrow. The intraday reading on the cpc is at the overbought level while the market is falling - this usually is a setup for continuation to the downside.




The bull has paused a bit after the good news in September (economy expanding, the Fed easing further). The market usually does so as the news becomes undeniably good.

This being said though,  I think the market has reached the point from where it should start rising again. The set up looks pretty good: there are many who are calling for a longer drop from here, the market looks committed to the downside, the futures contract has reached strong monthly support, indicators are oversold and the economy still looks strong

Here is a daily chart for the SPX, showing commitment below 1425

  and a monthly chart of the December contract, showing important support at 1404 being reached

There is also a buy signal from the 13 day ema of TRIN, which has become oversold yesterday:

This market setup is coming in the context of a still strong economy, one that does not yet show signs of going into recession. Here is a chart of the pace of change in real retail sales, showing a still strong rhythm of growth.

The series has a bit more to grow before a slowdown in economic activity can be anticipated.


Now I have to admit that this bullish scenario is supported mostly by technicals (breadth, market behavior, support levels, sentiment etc.). The fundamentals that lie ahead are not very encouraging: the fiscal cliff and decreasing earnings.The market has chosen to ignore these until now. Will it do so in the future too? Who knows?

Anyway, the technical setup will lead to at least a bounce from here, so the risk is very low. A drop below 1400 on the December contract is a good point to buy. This may happen as the Fed makes its announcement today.

September 14, 2012 - the bear is dead!

For the third time this bull is rising from the grave to haunt short sellers. It first happened in 2010 and then in 2011. Bernanke's black magic (read: QE) is on the job again in 2012.

Leaving jokes aside, this is good news. Nobody, except childish permabears like Tim Knight at The Slope of Hope, craved a bear market and a recession in the current context of the global economy.  It could easily have morphed into a depression with grave consequences. The sad truth, I believe, is that this depression has only been postponed.


Here is one indicator that made me ditch the bear market scenario- 52 week New Highs - Lows:

It has reached record levels for this bull. There are also other indicators that are stronger than they should be during a bear market rally.

The spike in NYHL is a sign of strength, but also a sign of exhaustion for the short term. As it happened in November 2010 after the announcement of QE2, I think the market will correct for a few days. A drop in the 1420-1430 area would represent a nice opportunity to go long.

Supporting a coming correction is the fact that the SPX settled above the important 1440 resistance and then reached the 1460 level. Usually, the market pulls back after reaching such important levels.

The intermediate term leg should be fine though. The market is up only about 16%. A 20% move would bring it to 1522 - the next important level on the upside.

Here is a monthly chart of the SPX showing these levels.

September 07, 2012 - still a bear rally

The surge to new highs yesterday looks very bullish but by my measures this rally is not strong enough to pull the market out of the bear market condition..

Here are some indicators.

> percent of SPX stocks above their 50 DMAs - this indicator helped correctly decide that the bear market thesis was not valid anymore back in October 2011. Now, the indicator is below the 80-85 bull/bear threshold.

> XLY vs XLP (discretionary vs staples) - huge underperformance

 

> the monthly ratio of cumulative advancing vs declining volume - it will have to pass the upper horizontal line to enter bull market territory.

> average momentum - the same as above

Meanwhile, the SPX is just below the important monthly resistance at 1440.

I think a top will develop as the market settles above this level, probably next week or the week after, following a short term pullback that starts today (the market has already committed to new highs - see my previous post). 

August 21, 2012 - the concept of commitment

Generally, as the SPX commits beyond an important level, an inflection point is created. Here is how this principle has worked lately.

By commitment I understand a close or a strong move far enough beyond a certain level.

This concept of commitment is nothing else than the general contrarian approach so indispensable to any trader, applied for the short term. If detecting the crowd commitment over the long term is easier, doing it over the short term is a bit challenging. The method illustrated above is an answer to this challenge and it provides an interesting way of looking at market action.

August 13, 2012 - the top is close

Even though I am not posting as often as in the past, I will try to do it at least every time something significant for the intermediate term takes place.


The intermediate term bear market rally I have been talking about has approached the previous SPX highs. This was somewhat expected given the anticipated bounce in the economy after the spring - summer slowdown.

The rhythm of the rally seems to be changing. I do not think we will see steep 1-3 days sell offs anymore. Here is a monthly SPX chart with important resistance levels drawn.

The eventual top will take place as the market becomes overbought and breaks through one of these levels. A break to new highs took place as the market topped out in October 2007. It might happen this time too.

As to being overbought for the intermediate term, there are a few indicators that are close or even already there. This tells me that a top is close by, probably in the first week of September.

Here is the 5 day ema of the put/call ratio. it reaches the red horizontal line as a bear market rally gets overbought. It can stay there for a short while before the market turns lower.

Here is the average rate of change indicator. It reaches the purple horizontal line as bear market rallies top out. This indicator going significantly above the line is usually a first sign that the bear has morphed into a bull.

As these indicators signal a top and as the market comes above the significant levels I talked above, I will make an investment on the short side. Since this should be a long term turning point, I will keep this investment and add to it as future opportunities (read: bear market rallies) present themselves.

As for a target expectation for this future bear, it is hard to say. The 2009 lows are not out of the question as things could get really ugly. Even lower is also a possible scenario.

However, for the long term, it is better to target a process, a context and not an outcome. But I will elaborate on the different scenarios in a future post.

July 19, 2012 - after the slowdown comes the acceleration

I started talking about a slowdown in the economy during spring this year. Judging by some indicators I watch, this slowdown has come to fruition.

Here is the pace of change in Real Retail Sales,

 and the CPI.

The stock market usually anticipates and accompanies these indicators as they move lower. This time was no different.

Simce the indicators reached the lower boundaries of their intervals of variation, the next move will be up. This would mean some good news for the economy until the autumn, but I do expect this bounce to be weak. Anyway, it will push the stock market higher and help lure in some imprudent bulls.