Oil, China numbers Rattle Markets

Who would have guessed that the markets would finish the week up after experiencing tremendous volatility during the week.  China reported slower growth than expected, while Oil kept collapsing, reaching low levels not seen in years.  But again, world Central Banks did what they could to throw the market a bone.  China added stimulus to their economy while the EU jawboned the market up with the same rhetoric we've been hearing for quite awhile now from Mario Draghi, we will do whatever it takes!

As we can see in the SPY daily chart, we hit lows low enough to cause market panic.  Then just as quickly, the market recovered to close up on the holiday-shortened week.  SPY, an exchange traded fund that replicates the Standard and Poor's 500 index, finished at 190.52, up 1.41% on the week. 

Where we go from here is a harder call.  In the above chart, it appears that the 20 day moving average can act as a magnet and pull price up to it.  The trend is falling though and we all know, or should know, that the trend is your friend. 

My normal expectation in this scenario is to loo for a drop, probably as early as Monday, that would test Wednesday's closing low price of 185.65.  Should we hold that level, I would expect a move higher.

Another reason for some level of optimism is the Size chart.  It reversed ever so slightly.  My general rule is that as long as this Size indicator is increasing, you stay with the trend.  When the indicator is declining, prices tend to drift towards the trendline, sideways.  Still as we can see in the previous move to similar levels, there were a few bumps in the road before the indicator finally turned lower.  So I'm not convinced based on this.

I do see some trend line support, on line charts

As this weekly chart shows, we may be holding a channel, albeit a downward channel.  It does provide some reason for hope that the market will provide a decent rally from current levels.

Finally, we continue to remain within the long term monthly channel.

I had been waiting for a test of the August monthly low around 191.60 but it didn't happen in December, as I anticipated.  Yet, despite daily noise that has whipped the market all over the place, the monthly view shows that we are either testing the previous lows or at worse, testing the bottom of the long term channel.

If I wasn't exposed to all the noise or various market commentators, I'd say that the market is still in pretty good shape. 

I like to see test of low levels that provides support.  First level of support would be the daily view.  A successful test of the 185.65 close would support a short-term bounce.  And, a positive close on the week would provide support on the monthly basis.  Should Friday's (12/29) close be at 191.61 or better, I expect to be buying.  Should it fail, expect lower lows.  But I'm still not convinced that a major downtrend is in place until we break below the monthly trendline just below the 180 level.

SP Hits New Highs But . . .

Yes, yes.  Major Markets surged to new highs this week before backing off on Friday.  SPY, the ETF proxy for the S&P 500 closed up to 200.70, still holding below its weekly closing high of 201.11, set two weeks ago.

As mentioned last week, I was anticipating a top to play out this coming Friday.  The concept I propose is nothing new if you look at closing prices and don't get caught up in all of the noise that happens throughout the day and week.  If you look at weekly close prices over the past two years, you can see a number of these "tests of the highs" play out prior to nearly all of the declines we experienced. 

The last three week test of the high, that occurred starting with July 3rd's closing price of 198.20 and completing on July 25 failing with a Friday close of 197.72.  What followed was the last decent down move we've experienced in a while.  Usually, the moves are much more obvious such as the first three tops circled in the chart above.  Last time, the scenario was much as it is now.  The market topped, then dropped down but regained most of its loss during the subsequent week.  The third week bounced a little but was otherwise a very boring week.  Yet it was SIGNIFICANT!

The same could be happening now as all of the market fireworks exploded last week with Scotland's vote for independence, Alibaba's IPO and so forth.  Those of us who lived this past week know it was quite volatile with a lot of emotion for both Bulls and Bears.  But if you only have the above chart to look at, who could guess how explosive the week was?

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Yes, I was excited as well but when I look at my daily and weekly statistical data, I have such a hard time buying into the Bull scenario.  This chart illustrates SIZE.  It is the statistical 20 day standard deviation of the price data.  Most people observe it as the width of the Bollinger Bands.  This chart shows the size of 1 unit of standard deviation.  My rule is that when Size is going up, you go with the trend.  When Size reverses, usually one of two things will happen.  Either the price will then drift to the trend line and at that point, explode again in the primary direction.  OR, price could go express from one extreme, such as the top band of the Bollinger band, to the other extreme.

So with Size declining, price should either drift to the moving average, currently at 195.64 or go to oversold levels.

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With this Size value declining on nearly every time frame I track, I can't take a bullish stance at this moment and believe that a bear stance is a better option.  This is only based on my projection of the potential three week test of the high.  I believe that from a time standpoint, the market should experience a cycle low at the end of October.

Out of respect to the powerful underlying currents that continually prop up the market, I did add some October calls to balance out my bear positions for October and January.  There have been a number of times when I saw this three week test of the high coming and price exploded through to make still more new highs.  While this could happen, decline Size measures tell me that the power just isn't there.

S&P Refuses to Retreat

Equity markets gapped down at the open this morning but once again, a late afternoon push emerged, rallying the SP500 and its ETF proxy SPY to modest gains today.  SPY closed up 0.23 to 200.30, closing just below the 10 day moving average which posted at 200.35.

During the past three days, price has been consistently supported by the 20 day moving average, shown as the blue trend line in the chart.  Support at the 199 level also marks the resistance area at the end of July, prior to the sudden move down to the 190+ level.

I expect SP to move lower tomorrow, trying to break through to new lows for the move.  This is a typical setup that I look for.  We had a move down into Tuesday and over the past two days, prices retraced.  Then, on the third day, we test the lows.  Usually, at the start of a new move, there is little reason to believe that the lows will hold.  This is especially true since we have not taken out the recent highs from four days ago. 

Should buying come in, as it usually has on any dip, I would expect price to seek the 20 day moving average.  A close at 199.65 or better would be a bullish indication.

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On a weekly perspective, should SPY remain below 201.11, it will be the first week in six where SPY declined.  Normal market cycles run from 10 to 15 weeks so one would expect some weakness to show up soon.  The 10-week average for SPY marks at 197.45.  A move down of that magnitude is within the realm of probability.  Overbought/oversold levels tomorrow are 202.70/196.60.

SPX Turning Point

Three day test of the high in the works.  If we don't close above 2007.71 on the SP 500 today, this would be a failed three day test of the high and a major sell signal for me.

Right now, the sell signal is a short term one since it is made based on daily data.  Should the market decline on this signal, I would next be looking for a three week test of the high.  Should that fail, we would be starting a major move down. 

With this in mind, the market may try to stage a rally at the close.  Always have to be wary of the close as major volume enters the market in the final minute or so.

S&P Rangebound

The SPY ETF closed down 0.26% at 200.59 today, spending much of the day drifting lower as news of a potential Scotland breakaway from Great Britain sent a mild concern through the market.  As usual however, prices rebounded into the end of the trading session.  While the chart above is only a five minute chart, it looks as if the last gasp up resulted in a failed 3 period test of the high.  Chances are that some downward movement will continue in the days ahead.

 

Reviewing the daily close chart, it appears that price is being constrained by the upper band.  We might even repeat the previous sideway action that occurred during June and July, the last time price was testing the upper band.

 

My momentum indicator above shows the rapid decline of volatility over the past few days after rocketing to high levels.  You can see how low volatility got during the last sideways move.  We aren't even close to that yet.

 

My best guess is that price will continue to drift sideways for another five days until it meets the 20-day moving average.  At that point, I would expect another surge higher.

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  http://danericselliottwaves.blogspot.com/.  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. 

Shooting for the Highs

Stocks surged as soon as futures markets opened Sunday evening and followed through as cash trading opened this morning.

While most bloggers reflect great certainty that the S&P, Dow and other major indices will more than handily take out the highs, I'm still less than convinced.

One thing that troubles me, aside from everyone being so bullish, is that my statistical indicators show that momentum is still lagging.  With such a powerful surge over the past couple of weeks, I would be expecting some of my key indicators to reflect greater strength, instead of weakness.  The divergences I see in my numbers lead me to believe that either the SP will not take out the recent highs and if it does, it won't hold and we will close out the week having tested the highs but failing.

I still hold a number of October 192 calls purchased near 190 on SPY.  As we continue to move up though, I've been adding puts and put spreads just in case.  If SP goes as high as many are predicting, I'll surely make more than enough to cover the losses on the protective puts.  And should the market drop hard, I think that I would be equally as successful. 

I can't begin to say what might slow the market down.  Again this evening, futures are up across the board. 

Test of the Highs Fails

What was expected to be an “anything goes” week turned out to be just that.  After rallying close to a strong resistance area of 167, unsubstantiated reports that Ukraine held off a Russian invasion slammed the market down hard.  As future reports indicated that if there was any such attack, Ukraine in fact destroyed their own vehicles.  The markets firmed up but could not provide enough power to push it beyond 167 to test the highs of three weeks ago.

Traditionally, a failure of the three week test of the high has been the key intermediate-term sell signal.  One might expect to see the market still try to take out the high and succeed.  Other indicators provide additional information that show that momentum may be slowing and that the market will soon sell off.

Hard to say what will happen as market participants have been well-trained to BTFD, or "buy the f...ing Dip!"  And that's exactly what happened.  Some curious notes of interest mentioned how it was puzzling that the market did not react negatively to an apparent recession occurring in Europe (as this was expected anyway), but when a news report mentioned that a Russian convoy was attacked in Ukraine, the market was roiled (as that was unexpected).  But as an earlier post mentioned, this news was out there even before the market opened.  It could be that just simply, the market hit the resistance and sold off, as many wave counters have pointed out.

 

I also like how it was pointed out that the rebound took shape in a typical Elliott Wave five wave move up.  Perhaps some downward pressure will resume.

 

One rule of thumb that I developed in Grad School was in an up market, if the market is up on Friday, buy the open on Monday and sell the close.  It generally seems to work.  However, if the market is a down market, this rule does not work.  I will be watching how the market reacts Monday morning.  Perhaps this will give me an indication as to whether we are in an UP MARKET and the market could be expected to go to new highs, or if we need to see another attack at the 190 (SPY) level.