Market Tests Successful!!! Now What??

In my last posting, I mentioned that the coming two Fridays would be "telling" in my world.  On Friday, January 29, we would be testing the August closing low on the monthly basis.  A successful monthly test of the lows is quite rare and could indicate a long-term basing formation.

The monthly line chart shows this successful test here.  The closing low for January was not below the August low.

What does this mean?  Simply this.  If you don't look at the market on a day-to-day basis, but only once a month, at the end of the month, it is my expectation that going forward, the market will be up.

While most seem to be guessing that the worst is still yet to come, I believe that there is a good shot for the Standard and Poor's 500 index and the accompanying Exchange Traded Fund (EFT), SPY, to go to new highs.  That surely would leave most scratching their heads.

The next important test was completed yesterday with the three week test of the low.

This, being a weekly indicator, in an intermediate-term signal, where the monthly test is a long-term signal.  I can recently remember that last year, we got a three month test of the HIGH, followed by a three week test of the high and then finally a three day test of the high before the market started going down.  It was as if the market just didn't want to go down and was trying every conceivable way to continue going up. 

This is the weekly line chart showing the recent test of the low.  If you look to the left, you can see that we previously had a similar formation, a three week test of the low that marked the bottom before a rally to the top of the range.

Of note, after the last three week test of the low, the market dropped significantly the following Monday but that was it.  The market then rallied for the next 6-7 weeks.

One must keep in mind but one important thing and that is that the weekly momentum is still increasing.

My general rule is that when the Volatility Levels are increasing, you need to stick with the trend. 

This chart is the 20 week volatility measurements.  It is at its highest point and expanding.  That is a troubling indicator.

But if I look at shorter time frames, volatility is decreasing.

This is the 20 day volatility level.  And even though it appears that market volatility has been high because of the large point moves, this can be deceiving.

How else can we look at this volatility level?

One way is by viewing a chart of the Bollinger Bands. 

Look at how these bands are moving together.  From this chart, we can expect that the daily fluctuations would range between 185 and 195 on SPY, translating to roughly 1850 and 1950 on the S&P 500 index.

The weekly volatility bands still reflect the extreme volatility level.

The weekly bands show that the realm of possibilities range from 185 (we are currently at 188) to a high of 216.

The all time weekly close high was 212.99 so there is some possibility that the market could go to all time highs here.  And if it did, it would happen in a hurry as the volatility levels are high. 

If we would see the market move higher at an orderly pace, then the volatility levels would diminish and the possibility of new highs would also diminish.

SO, I think that there are exciting times ahead.  Of course, I don't know and at this moment, I have positions both for the possibility that we experience a blood bath in the market.  But given the information that I just provided, there is the possibility that the market surges to the other extreme.

Many are saying that earnings are dismal, the Federal Reserve is no longer accommodative, etc.  But for the past couple of years, I have believed that the market would collapse because the reality of the market being an actual market has disappeared.  That reality has not returned.  The market is a casino, in my opinion, with the High Frequency Traders and institutions continually gaming the system.  Even Congress can trade based on secret information they receive.  Not too long ago, a vote came up to prohibit "insider trading for Congress" but that measure was soundly defeated.

You must realize that the cards are stacked against you if you wish to be involved in the markets.  You must buy low and sell high.  If you are not willing to be nimble, then I suggest that you shouldn't really be in the markets.

The risk of collapse is too great and when the collapse does happen, there will be no way for you to escape, unless you hedge your positions.

Think about it.  If you have other sources of wealth, do you not protect them with insurance?  Of course you do.  You determine a deductible that you can afford and protect the rest with insurance.  Your investments should be no different.  You can protect yourself.

Time For a Bounce?

The market fell today with SPY, a ETF proxy for the Standard and Poor's 500 index, fell 1.51% to 187.64.

I had been anticipating a harsher sell-off, testing the lows seen last Wednesday but the selling was moderate.

This is a common formation in my analysis.  I am always looking for 3 period tests of various time frames.  This is not to say that sometimes it doesn't go to four periods.  Or sometimes, the desired formation does pan out at all.  But as a trader by nature, I am always looking for some kind of pattern that I recognize to give me confidence to enter a trade.  Today's move gives me some confidence, on the short term. 

Should the rally begin, I would expect price to pierce the 20 day moving average, just as it has been doing during the past rallies.  Price could rise to 195-196.  Where we go from there, who can say? 

This indicator, which I call Size, appears to be reversing.  Still it's at a very high level but the reversal signifies that price will probably regress to the mean, which in this case, is the 20 day moving average, shown above in the price chart, and the target for price to move.

Another view that is of interest is a longer term daily line chart.

While it may not be too obvious what I am seeing here, price came down to the neckline and held above it.  A breakdown below this line will result in quite a nasty down move.  The target low should this occur would be around 160, or about 15% lower from where we are now. 

So the rule to follow in a downtrend is to sell the trendline.

Important support levels will be watched for over the next two Friday closes.  This coming Friday, the last trading day of January, I'll be looking for a Four Month test of the August low at 191.61.  The following week will be a three week test of January 15th's close at 187.81.  If we maintain support over these next two weeks, a substantial rally could happen.  But for now, longer term trends are pointing lower and frankly, should we get to 195-196, I'll be adding more Puts, expecting the market to break through the neck line and head for the 150 level.  I'll be buying more time, probably buying June or September puts.

Stock Market Slips

 

SPY, an ETF proxy for the Standard and Poors 500 index, fell 1.17 pts on Friday, closing down for the first time in six weeks to 199.13.

As mentioned in Thursday's report, had SPY closed at 199.32, Tuesday's closing price, a short-term bottom might have been formed and prices could have been expected to rebound.  That did not happen.  While prices did rebound, they never quite made it even close to that level.

I expect prices to continue lower, at least for this next week.  Should that occur, I would expect a rally in the week after as the market could strive to make a three-week test of the high.

But as we view the Standard Deviation chart, it appears that it is falling at a good rate.  Derivative measurements of this decline show that STD should continue to fall even further.

  
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Viewing a broader picture of Standard Deviation, we might see how the market cycles time out. 

Cycles occur roughly every 13 weeks, give or take.  The next cycle low is expected to occur on October 31.

Late Surge Pushes Markets to New Highs

Markets staged a late recovery Friday in light, pre-holiday volume to push SPY to a new high, beating the high of three days ago.  It appears that the market will make another leg higher, perhaps as high as 204-205.

Daily Size, a primary momentum indicator, also continues to expand with no signs of letting up. 

As long as my Size indicator continues to rise, one must stick with the trend.  When Size reverses, we will sell call premium above the market.

It's also possible that a topping formation, such as a failure of a test of the high, will present itself.  That would be an encouraging sell signal.  It would only mark a short term sell though as we would look for a rebound in price, in a new attempt to challenge the highs within a month.  Should a test occur and fail, At that point, we would enter into a short position in the S&P E-mini contract, expecting a sizable move down.  Until then, indicators show that there is still upside momentum that may take at least another week to resolve.

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For the week, Small Cap Growth (IWO) was the best performer, followed by Long Term Bonds (TLT) at 1.5%.  Brazil (EWZ) shot 6.5% higher.  The Brazilian Real currency (BZF) also showed strong gains,  gaining 1.7% on the week. 

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While I have started buying put spreads on SPY, and they are not faring so well at this point, my junior gold stock Allied Nevada Gold Corp (ANV) gained $0.41 to 3.82 this week, more than offsetting slippage in my put positions.

I'm wondering if hot money could be moving into the Junior Gold sector in anticipation of geopolitical turmoil.  So far, no news has been able to put a dent into the stock market but that could be because there do not appear to be ANY sellers.  There appears to be a widespread belief that should the stock market fall, the Federal Reserve will prop it up.  It's no secret that Central Banks have continued to print more money and buy stocks.  I suppose if I had a money making machine and was buying stocks, I would print more money and buy stocks on any dip. 

This could be extremely risky however as there is a general belief that if the assets held by the Federal Reserve were marked to market, it would be deemed insolvent!  One could only imagine if the Fed was buying huge amounts of securities and the market fell dramatically.  Well, I suppose that as long as we don't really know the truth, it probably doesn't matter.

But you know, the risks are pretty high.  The charade can't continue forever. 

LATE NOTE:  CENTRAL BANKS ARE BUYING SP FUTURES WITH INCENTIVES:
http://www.zerohedge.com/news/2014-08-30/its-settled-central-banks-trade-sp500-futures

SP Momentum Explodes

The statistical numbers have started to catch up with the SPY stock price movement.  While price has been drifting higher, my momentum indicator has taken off to new highs.

The rule states that as long as this indicator is rising, one must stick with the trend.  Once this indicator turns, my plan will be to sell calls/call spreads above the 200 level.

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.

 

SIGNALS I WILL BE WATCHING FOR

 

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. 

 

 

 

 

Market Finds Reason To Fall

World markets dropped sharply as US economic news added on to fears that Greece and other European sovereign debt has become the new sub-prime debt. The Dow Industrial Average ended the day below 10,000 for the first time since November, but clawed its way above the key number during settlement. It closed at 10,002. The S&P Index also made new lows. We have been following this move since the beginning when the S&P triggered the Stop and Reverse sell signal. The news doesn't really matter. The truth is, the market has been tired for a long time. Much of the run up has been due to institutional trading, employing massive amounts of liquidity injected into the system in an attempt by the government to stabilize a plummeting economy.

That party is over now and it's sure not going to be pretty. I for one am one of those super-bears who believe that the market will at least test the previous lows and possibly break through. This, in itself, is not bad if you are prepared as we are. We have not been in the market this year except for ultra short positions in the Dow Jones (DXD) and Bonds (TBT).

That the market was poised to fall had appeared obvious for a number of days. We have pointed out how certain stocks that were the favorites last year have been dropping hard and fast. If you look at the losers on the list, you'll see that the losers are not confined to a specific industry but range across all sectors. It was inevitable that the overall market would eventually follow. With many stocks down 20% already for the year and the US Market just down 4.5%, it's very likely that more significant market downside is probable.

US STILL OUTPERFORMING

As bad as it may look here at home, the rest of the world looks even worse. A lot of it is due to a stronger dollar against other world currencies. The Japanese Yen is doing even better, having gained 4.7% thus far in 2010. As a result, losses in Japanese markets have been moderated by gains in the currency. The Japanese Market ETF (EWJ) is THE ONLY world market ETF that is up. It is still +1% on the year

Market Rebound WEAK!!!

For those who watch my blog in real time, I wanted to point out that it sure does look like a time to add to shorts. But only a few minutes later the markets are turning negative again.

This is an important juncture, the test of the trend line crossing. It really supports a new negative trend for stocks and I was going to suggest if you weren't positioning yourself for additional downside, you should quickly check with your financial adviser to learn what risk management tools he or she offers. If you get the same old line, "you are well diversified, be patient and stay the course," well you might again be about to face another market melt-down. How will you feel if your portfolio drops another 50%?

If you aren't sure about your adviser, I give a free consult. Just e mail me and we will get in touch. Or just read and follow my blog. It's all here for free for the taking!

Only the Beginning!

Second and Third Derivatives Rock!!

Green shoots and second and third derivative concepts have been motivating the market to a dizzying 30%+ rally. If you believe in second derivatives, here's one that might rock your world. This is the moving average of the standard deviation level for the weekly S&P price. It might not mean anything, but then again, it might mean everything!

Usually markets move in cycles and that's why all of us believe we can trade them. If they didn't go up and down, the whole world would just be piling on to the sky! But nope, stocks go up and stocks go down. The fundamentals don't always mean anything. There are always more important issues other than whether a company will make money or not.

It hasn't been very often that this indicator begins to reverse and doesn't fall significantly.

Here is the weekly chart with today's closing SP price. You can see that we are clearly at the crossroads. Which route will we take? All of my cycle indicators show DOWN. No reason that Bears can't also have green shoots. Or are green shoots and second deriviatives only for Bulls?

As fair notice: we are long DXD (ultra short Dow) and SDS (ultra short SP) in various portfolios. Also we went short July SP 900 call at the SP 940 level receiving 56 premium for the option. Looking for 900 or less on SP by month end.

S&P Breakout?

Stocks appear headed higher this morning on news that China's manufacturing has expanded for the third straight month. Markets world-wide rallied while the Dollar and Bonds continued their declines.

Oil continued to surge, up over $1 moving in on $68. The dollar broke below 79 on the Dollar Index while 10 year rates rose to 3.59%.

Our plan is to sell S&P calls at overbought levels above 933. We remain delta neutral on the 10 years and await the Fed to come in and push down the rates before we reestablish short positions in Notes and Bonds.

Case.Shiller Real Estate Index Falls Again

Case/Shiller Real Estate Index Falls Again

S&P Case/Shiller Home Price Index data released this week showed that home prices in every region of the country continued to fall.

Tuesday’s 2.5% decline marked the 31st consecutive month that home price data has fallen. The 10-city index has been falling steadily since June 2006 with prices falling some 30% from the peak. For the year, the 10-city index has dropped 19.5%.

EXODUS FROM PHOENIX

Phoenix has been hit the hardest with home prices falling 5.5% in the month month period ending on January 2009. For the year, home prices in Phoenix have fallen 35%. Las Vegas and San Francisco have also experienced 30+% price drops in the past year.

Dallas, Cleveland and Denver have held up best in the past year with these cities experiencing moderate declines of around 5%.





While real estate has done poorly in the past five years, over longer periods it has done well, especially in New York, Washington and Los Angeles. Only Detroit, which is now depressed because of the failing auto industry, has lost value in the 10 year period.

Those who have used real estate as a long-term wealth building strategy will be happy to know that on average, residential real estate has gained 75% on average compared with a 35% loss in the stock market as measured by the S&P 500.




While the housing price index remains well above the stock market index over the ten year period, it may not yet be time to get back into either market. If real estate and the stock market are both hedges against inflation, then perhaps neither market is the place to be. In this moment, there is little worry about inflation.