Saturday, August 23, 2014

Stock Rally Continues

Equity markets paid little attention to the Central Banker's pow wow in Jackson Hole this week and pushed ahead higher all week, with a slight decline showing up at week's end.  The mid-cap growth sector led the way with a 2.1% increase.  The Dow Industrials, as measured by DIA, also rose 2.1% while SPY, an ETF proxy for the SP500 rose 1.8%.  Taiwan (EWT) rose the most in my ETF universe, rising 2.4% to increase it's year's advance to more than 13% thus far.  Thailand (THD) still tops my list for the year, having risen 20% thus far.

Viewing the price action on SPY on the weekly chart, we can see that it totally blew through resistance and appears positioned to power higher.  One would normally expect some sort of test of the resistance level before continuing higher.  I estimate that 197 would be the support level.

A weekly close at 197 though would raise a red flag on my momentum indicator.  And that is the question that I have about the current market is that despite the rapid advance to the highs, my momentum indicators both on the daily and weekly levels are not powering forward. 

This daily chart might express this best.  One can see that the 20 day moving average has flat-lined here and as volatility diminishes, I would expect SPY to trade within the 200 to 190 range for some time. 

Daily momentum continues to advance, albeit rather slightly, and is close to the last volatility spike that occurred in early June.  The last volatility reversal resulted in the lengthly drifting period that lasted until the recent sell off three weeks ago.
1.  Reversal in volatility.  Should the market begin to drift, I will be selling call credit spreads above the market.
2.  Three-day-test-of-the-high.  Often works as a good sell signal on any time frame:  hourly, daily, weekly, monthly.   This test should occur on Tuesday. 
Elliott Wave bloggers I have been reading are looking for some kind of short term selloff, that they will label wave 4.  With the short term momentum still rising though, we could just as easily see a resumption of the up move on Monday as traders try to push the SP index above 2000 and the Dow Jones Industrials to record high.
If nothing else, the trading week should be entertaining and exciting.
Don't forget the many downside triggers that the market has not reacted to.  Ukraine, ISIS, Ferguson MO, Ebola, Janet Yellen, world de-dollarization, etc.  If you are still in a bull mode, it doesn't hurt to buy a little put insurance just to be safe.  For those of us who have been around long enough, we could quickly see a sudden move from the top of the Bollinger Band at 200 (SPY) back down to 190, just like that. 

Thursday, August 21, 2014

SP Marks All Time Highs

After dramatically selling off several weeks ago, the equity markets have come storming back with a vengeance.  Nearly non-stop, the S&P 500 index has rallied some 90 points without barely taking a breath.  But now that we are at new highs, where are we in the cycle?  Some had expected a test of the low at the 1900 SP level.  This never happened.

I have been watching Elliott Wave technicians during this move and have found that there isn't too much agreement.  One chartist that I like is Daneric's Elliott Waves  In his post today, he shows that he expects that we are at a top for this current move up.

After a move down to iv on the chart, the SP will make one final move up to 5, marking the end of the cycle move.

Others feel that after hitting the little v mark, the market will fall back but not as far as Daneric is calling for.  They feel that there will be one more leg up taking the SP close to 2100 and then the big move down.

What most seem to agree on is that we are midway through or completing a wave iii and that there are at least two more moves coming, one down move to iv and a move up to new highs v.

My analysis is less complicated.  Last week, I was watching to see if the market would make a three week test of the high.  Although the market soared from the lows, it was far shy of the high mark.  Sometimes the three week test can turn into a four week test, so I allowed it some room to run.

Should the SP sell off tomorrow and close below 1978, some 14 points lower than today's close, that would be my sell signal. 

It's hard to say what the market will do though.  Once upon a time, there was a limit to money and credit to drive markets higher.  Now there is no limit.  On top of all the cash that the Central Banks are manufacturing, $100s of trillions of derivatives also drive the market.  That makes it hard to understand how the wave theory could really affect market movements, that is, unless everyone is watching it and making decisions based on the wave patterns they are seeing.  But the truth is, there doesn't seem to be a lot of agreement at this point of where we are in the cycle.

As for my positions, I took profits on SPY calls yesterday and missed some of yesterday's and today's move.  I have been buying put spreads since the 195 level on SPY and have been adding more each two SPY points up.  Should we rally above 200 on SPY, I will be adding still more.  That being said, I am a fan of Daneric's count, looking for a sell off to capitalize on my puts and reenter October calls. 

At the end of that rally, I hope to position myself well with longer term puts in anticipation for a larger move down.