Market Makes Little Progress

Major US markets made little headway this week, advancing just 0.1% on SPY to close at 207.93.

While momentum appears to be slowing, price is still holding the 4 day moving average. 

As price has changed little, so have my observations, on the weekly basis.

The standard deviation chart still remains within the channel I've been watching for the past couple of weeks. 

Price continues to respect the head and shoulders neckline as seen on the weekly line chart.  It might have been testing the neckline during the day however, price broke down in the final hours dropping from 209.44 to close near the lows of the day.

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The data shows price continuing to muddle along to the upside with no real evidence that a top might be near other than the possible resistance areas demonstrated above.  One other observation that might add to a downside case is the short term monthly chart.

I'm always looking for three period tests of something, and often they prove to pan out.  If we look at October's monthly close, it failed to take out the close of three months ago, 210.45.  That's not really a lot to go on though.  Monthly momentum has been strong so does it reflect genuine strength for the long term?  Or is it one of those "bear market rallies" that are short and swift?

The daily data shows that even as prices have stayed elevated, momentum is quickly dwindling.  Yet on the very short term, price continues to hug the 4 day moving average even on the quick move down at the end of the day/week/month. 

I closed out my November long calls Friday and established an initial position in SDS, a 2 time inverse ETF on the SPX index.  I'm still maintaining the long January 200-215 call spreads acquired when SPY was below 195.  Not really sure what will happen next.  My gut tells me that we are near the end but seeing how markets often react sharply to any Central Bank activity, anywhere in the world, and how it tends to ignore seemingly important negative situations, it's hard to totally commit to the downside.  I suppose that if the Fed read that comment, they would be thinking
MISSION ACCOMPLISHED!

Mother of ALL Head and Shoulders

Predicting that the market could fall to 7,000 a few years ago was not that much of a challenge. Anytime you get a well-formed shoulder, as happened from 1998 to 2003, and the market then takes out the high level for that period (12,000), one has got to start thinking of the head and shoulders formation. While it is often difficult to time the market top, one can remain confident in the notion that the market will eventually fall.

And fall it did. My biggest surprise was when prices continued to run through this neckline. Now, the runup we have witnessed seems incredible for many but if we view things in the context of the head and shoulders formation, it shouldn't have been improbable that the market could climb as high as 12,000. Even now, with the Dow average breaking below 10,000, if we view the trading action that occurred between 1999 and 2000, we can see that there was a relatively long-term trade range between the 10,000 level and above 11,000 almost touching 12,000.

Normally we see the right shoulder reflects the activity of the left shoulder. This means that this market formation is usually very symmetrical. Chances are we are going to see another market meltdown with the Dow average dropping down to 7,000 or lower. But an important thing to remember is that it could take three or four years for this to occur!. In the meantime, there will be great profit opportunities. But as markets again test high levels, you might want to establish short positions in equities, and perhaps selling long term puts or buying long term calls, at the bottoms. But only be selling puts against stocks that you are short.

Normally, we project the downside target of a head and shoulders formation by measuring the neckline to the peak of the head. Since this is a symmetrical formation, we can expect the price to fall by a similar amount. Notice though that the neckline to peak is 7,000 points (from 7,000 to 14,000). A 7,000 point retracement would bring the Dow to 0! Ouch. A look at a log chart though shows a price target down below the 4,000 level.

It's always good to have a long term philosophy in the overall market when positioning your trades. We will be looking or a bottom in this market move and provide some buying ideas both for individual stocks as well as for diversified portfolios. If you have a special interest in following our ideas, be sure to contact me at gary@assetdesigncenter.com to be sure that you receive all updates and ideas.

Higher Interest Rates Coming Soon?

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I've been talking about the US Dollar as a "flight to quality" move as the debt of Greece and other European nations have recently been downgraded by debt rating agencies. And it seemed that the dollar would have to stage some kind of upside move as everyone has been bearish on the dollar. The huge run on gold has shown that there is very little faith in the dollar as the printing presses in Washington have been operating at maximum capacity. But maybe, just maybe, the dollar move is foreshadowing a real move in the dollar, not caused by a global crisis, but instead, higher interest rates?

The dollar has been subdued not only by dilution coming from the printing of more money, but also by the extremely low interest rates kept in place by the Fed. What would happen though, if interest rates were to break out of these low levels and move to say 6% on the 10-year note? I'd bet that there would be a strong demand for the dollar. Is this possible?

It sure does look like it. The chart above clearly appears to be reflecting a reverse head and shoulders pattern. And with a low on the rates at 2% and the neckline at 4%, should 10 year rates break out above the 4% level, there is a strong chance, based on technicals, that the rates will move to 6%.

It appears that for now, rates may fall a bit further, especially if there is a "flight to safety" move going on. Or perhaps it is just trying to gather enough steam to push it through the strong 4% resistance that is sure to come.

No matter what, it appears that the dollar should be moving higher. Those of you who have married their gold position, be careful. You may be in for some great pain.

Boeing Breaks Out

Shares of Boeing (BA) soared this morning, rising more than $3 after an announcement that the 787 Dreamliner will make it's maiden voyage by the end of the year. Boeing has been underperforming the market and appeared to be ready to explode.

STILL AN INTERESTING PLAY PLAY

When we view Boeing's price action on a weekly basis, the first thing to note is that the price has clearly passed the three-week test. It has easily blown through the price of three weeks ago and is now poised to test the neckline of a very obvious reverse head-and-shoulders formation. As the chart above illustrates, should the price break through the neckline, which comes in around 52.65, one can expect the price to rise to $75!!

Earlier today, Boeing shares reached $52.26. We will have to watch and see how things play out at this level.

POSSIBLE INSIDER ACTIVITY??

Several days ago, it was hard not to notice the mania that was occurring in Boeing stock. There had been a huge rush into the stock and it really spooked me. With today's news unfolding, it makes me wonder if the previous days' activities might be tied to insider trading. It appears so obvious at this point that someone knew something. If time allows, I will contact regulatory agencies to present this and see how they react. I will post any letters and responses I receive on this blog.

Is Dow Topping?

I'm always in search for recognizable patterns that can give me some clue as to what might happen going forward. One thing that I am always searching for is a neckline. I suppose that whenever a market breaks out of a consolidation period, we will see a neckline. Only when the head of the Head and Shoulders pattern is formed, that is, when the price falls from peaks to a bottom, can we have a better idea of what could be happening.

All I know is that the market has turned in a stunning performance to the upside. Everyone is starting to love the market and yesterday's surge could have been short sellers capitulating.

Not yet calling a top, although I am lightening up and buying a little more DXD. Only want to make you aware of what might be happening. A 10% drop from the current levels could be in the cards!