Market Prices Fall

Markets fell sharply this week.  SPY, an Exchange Traded Fund that mimics the SP 500 index, fell 16.24 points (-5.92% on the week).

While the downturn appeared severe, technically, the damage appears minimal so far with support coming in at the 40 week average, just as previous downdrafts did.

For trend buyers, buying at or below a chosen long term trend is a good strategy.

From a cycle perspective, the timing of this decline is similar to the previous decline.  Not to say that the decline is over, but Size, my view of volatility over the past 20 week period, continues on a downtrend and is easing to the moving average.  Further declines and an increase in this indicator would push me to reevaluate my current thinking, that we are at or close to the bottom of this wave.

On Thursday and Friday, I began purchasing call options.  On Thursday, I purchased options with an early May time horizon, anticipating that SPY will make a three-month test of the recent highs.  The test occurs at the end of April.  Throughout this bull market, prices easily cut through the previous highs.  Not saying that this is what I expect, but I am positioned for it.  Should price meet with resistance and it fails to make new highs, at that point, it would be a good time to begin positioning for a downturn.

Analysis, that I will present at a later time, shows that the wave 5 can run for quite awhile, like longer than a year.  More to come.

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.

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 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. 

ON THE BORDER

My morning commentary discussed how a 62% Fibonacci retracement would bring SPY to 195.48.  For most of the day, SPY attacked this level, often falling back.  In the end though, the Bulls managed to push SPY through that level, closing at 195.55.  But then as soon as the closing bell rang, after hours trading pushed SPY up.  No telling what news could have added more impetus to the already overbought market.

The next solid resistance comes just slightly above 196.00.  As we see, the level has been attacked (in after hours trading) but thus far, appears to be holding.

If you click on the chart to enlarge it, you will see that I added some small Roman numerals to indicate what some believe the current wave count is.  This move would be wave (iii) of Wave 5, the final wave, of this Bull Market move.  Estimates of the ultimate high (wave v of Major Wave 5) come in anywhere from 200 to 220.  To see some well done wave counts, I refer you to http://caldaro.wordpress.com/ or http://danericselliottwaves.blogspot.com/.

As the Stochastics indicator on the bottom of the chart shows, price action has been very strong and has been trying to roll over and fall.  If the wave count is correct, the fall will be very minor and will be a mere pause in wave (iii).  A breakout above the solid overhead line will probably mean that the market will test the highs and most likely continue moving much higher.

Part of the news today driving the markets was economic weakness in Europe.  There is no growth happening in Europe despite negative interest rates in Germany.  China's economy is also exhibiting weakness.  Based on this news, US interest rates fell dramatically today, indicating that the world will continue to be awash with cheap money.  Despite any perceived strength in the US economy, the Federal Reserve will be cautious to raise interest rates any time soon. 

The stock market is built on cheap credit and the cheap credit will be continuing indefinitely.  So hold on tight and make sure that you have some calls or other bullish position in your portfolio to take advantage of what is sure to be a quick move to new highs. 

That being said, keep a few puts on hand as well.  There are still a few in the camp that this current move is a mere part of the consolidation of the recent selloff and that the selloff will soon resume.

Good luck!

SP to Test . . . but what?

Stocks never did come down to make a test of the lows on Tuesday but instead, rocketed ahead, now rebounding up close to the SPY's 20 day moving average.

The average rate of change for the 20 day moving average is down .20 per day, so if the trend is your friend, one might consider adding some puts here. 

For Elliott Wave fans, while I am not an expert in this area, I do keep my eye on what the bloggers are saying.  Of course, there is no concensus and even the wave counts are all over the place.  It could be that we are in the process of making another strong wave down which could at the very least hit the 190 level.  My gut tells me though that we might break down even further to the 186 level before then turning up.

I myself am conflicted as where the market will be going.  I see the tried and true three-week-test of the highs developing and it seems that each time we have tested this, we broke through and made new highs.  Yet the case for the downside is convincing as well.  On a Fibonacci retracement, with a SPY coming in at 199.09 and the low at 189.61, a 62% retracement brings SPY to 195.48.  In premarket trading, futures rallied and SPY came close to this mark before turning around.

That being said, I am long term bullish and short term Bearish.

Comments welcome

Bulls Win Again

A final spurt in buying pushed mahor averagees to new highs for the year. The S&P surpassed the prvious weekly closing high level of 1068, closing at 1071.49. Televison commentators were giggy with delight watching every final closing adjustment as markets set new highs.

Still looks pretty toppy to me but I wouldn't be surprised if the market continued rallying some into next week's option expiration day. I for one had expected a fallback in October but purchased Put options out to next year. Those who had been playing for an October fall using October expiration options may be headed for total loss. I can remember many times though seeing the start of major market moves the DAY AFTER my options expired. Can you ever buy enough time?

Well, my days of crying WOLF are over. Twice now I have blasted e mails out warning of a top and it appears that twice my signals are falling through. There is probably too much money out there still looking for a home for any market fallback any time soon. Just today, a major brokerage firm called another stock to go $100 higher! Brings me back to the late 1990s when absurd price targets were floated out there by the investment banks and the stock immediately soared to those levels. I suppose we are just at the beginning of irrational exuberance. Even Alan Greenspan was so early with his Bearish call. The market went considerably higher after his call but long gone are the days where markets reflect reality.

What is the reality? If the markets start falling again, will the government again step in and add even more liquidity? They say that only 40% of the stimulus money has been used. If this could cause a 400 point runup in the S&P, imagine what could happen if all of the money was deployed. NEW HIGHS????

Merck Poised for Break-Out

Despite early morning selling across the board in stocks, the averages have rebounded from the day's lows and are pretty close to unchanged as we move towards the stock market close. The resiliancy of the stock market continues to amaze. The numbers don't lie and the long term statistics show that momentum continues strong even while shorter term momentum is running out of steam.

As stock indices were making new yearly highs several weeks ago, I reviewed the list of Dow stocks and could find only a few that were also breaking to new highs. One such stock was Merck and we took some long-term call positions to take advantage of any additional market gains. After falling back some from new high levels, the stock is challenging its previous highs several weeks ago. As the stock market overall seems destined for still higher prices, and as most likely any changes in health care policy will, as usual, turn out to be a blessing for drug and other healthcare companies, a close above 33 could be a signal that Merck is also destined for much higher prices.

This stock could be worth a look if you are still wishing to participate in potential future market gains. Be sure though that you review the addition of this stock to your portfolio with your financial planner to make sure that it fits well into your overall investment strategy.

HAPPY DAYS ARE HERE AGAIN!!

Just a few more weeks to go until the end of the third quarter. Investors around the country will soon after be receiving their quarterly statements and will be thrilled to see that in the past quarter (should trends remain as they are today) every asset class gained in value! Investment advisers will be calling clients to show them how exceptional they are a picking stocks and funds.

If you've been brave enough to get into REITs, despite the warnings that commercial real estate is the next "shoe" to drop, you will be a real hero as REITs rose nearly 7% just in the last week alone! Over the past 10 weeks, REITs have soared nearly 35%. There's no real estate crisis here.

Foreign stocks posted "modest" gains last week rising between 4% and 5%. Even bonds, which have been the laggards so far this year, advanced this week.

WHAT'S THERE TO UNDERSTAND??

I've been writing since June, thinking that the market is due for a correction but it acts as if nothing really happened in the past year. Even Treasury Secretary Geitner recently bellowed out Mission Accomplished (well not in these exact words but you know what I mean). My index of 208 industry leaders showed an impressive week rising 3.3%. Advances led declines 173 to just 34. Only six stocks were in overbought territory.

It won't be long before the buy and hold group starts boasting how the buy and hold strategy is still the most effective method of taking gains in the stock market. Only time will tell. For our part, we added Dec SP 1050 short calls to our portfolio with an income of $4,650 for each $100,000 portfolio. Should these calls expire worthless at the end of the year, our core portfolio gain will be right around 20% for the year. There is plenty of time premium to burn in these options and we expect that even if the market continues to rise, come the end of the year, people are going to want to take some money off the table, at least for Christmas presents???

Dow Surges - BULL MARKET?

Dow Surges – New Bull Market?

The Dow Jones Industrial Average surged from a March 9 low of 6,440 to a high of 7,969 before falling back on Friday to close at 7,776, up nearly 500 points for the week and up nearly 1,100 points over the past three weeks! Virtually every sector of the market rose this past week with the exception of bonds and gold. Many commentators began stating that with the Dow’s upthrust of over 20%, “we are now in a BULL MARKET!”





In an effort to keep things in perspective, notice how the Dow average has rallied to the four-month moving average. A review of my universe of stocks reveals that many stocks are following this pattern. Will this be a level of resistance?

As I mentioned in my last post, it appeared that volatility levels were finally reversing indicating that the market could be starting to moderate. Be careful however not to get sucked into the euphoria that dramatic market moves instill. Be patient and wait for solid chart foundations to appear before making a move. Also consider that the 7,600 level on the Dow had previously been a strong support area. Before any sustained move can develop, the Dow will probably have to come back and successfully test this level.



TECH STOCKS ROCK

While many stocks and market averages appear to have risen only to a falling trendline, many TECH STOCKS are showing different patterns.





PowerShares QQQ Trust (QQQQ – 30.82). Notice how the QQQQ, an exchange traded fund that represents the top NASDAQ stocks, has tested its previous price lows and is now rallying. Notice also that it has risen well above it’s four month moving average, indicating strength. A review of technology stocks shows that quite a few have not only tested lows and established a base, but are at or above RISING four month moving averages.



Qualcom (QCOM – 38.94) is a prime example of a stock that made a three month test of the lows. The stock price has surged 16.5% so far this month. Strong base, rising trendline, I would expect this stock to continue rising.




Research in Motion (RIMM – 45.01) has jumped 12.7% this month after successfully testing the December lows. Even a move back to its recent high of 60 would generate a 33% return.


RETAIL STRONG

In our March 1 posting, we said that there were opportunities in Retail as well as Technology and recommended Kohls Department Store. As the chart shows, we were right on with our pick. Kohls (KSS – 43.14) has surged 22.8% this month. Other retail stocks have also done well: Gap (GPS – 13.05, +21%) and Best Buy (BBY – 38.04, +32%) were also on our client pick list.





WHAT’S TO COME?

Next week offers more excitement as President Barack Obama is expected to release details of a new $22 billion bailout package for General Motors and Chrysler. How the market will react to this and other news is anyone’s guess at this point. With the Dow just 100 points or so above the important 7,600 support level, my guess is that the Bears aren’t done yet and will try to drive prices back down.

With the end of the month falling on Tuesday, look for my end of the month blog that will include not only the US stock market, but also the Mexican market and the Mexican Peso.