Last Thursday was a so-called 90% down-day for American stock markets (and many other bourses also recorded downward dynamics). A 90% down-day is defined as a day when downside volume equals 90% or more of the total upside plus downside volume and points lost equal 90% or more of the total points gained plus points lost. The historical record show that 90% down-days do not usually occur as a single incident on the bottom day of an important decline, but typically on a number of occasions throughout a major decline. As far as the very short term is concerned, 90% down-days are often followed by two- to seven-day bounces.
The stock market is on a knife’s edge at the moment as seen in the chart below, showing the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And 2010? With the ROC delicately perched just above the zero line, the primary trend is still bullish, but barely so.
Regarding seasonality, I have done a short analysis of the historical pattern of monthly returns for the S&P 500 Index from 1950 to August 2010. The results are summarized in the graph below.
Source: Plexus Asset Management (based on data from I-Net Bridge).
As shown, the six-month period from May to October has historically been weaker than the period from November to April as seen in the average monthly return of 1.05% for the “good six months” compared with 0.25%% for the “bad six months”. Importantly, when considering individual months, September (-0.18%) and October (-0.19%) have historically been the only two negative months of the year. (A word of warning, though: one should take cognizance of seasonality but understand that it is not a stand-alone indicator and it is anybody’s guess whether a specific year will conform to the historical pattern.)
Where does this leave us at this juncture? Considering an array of indicators, we are somewhat in no-man’s land regarding whether the bull or bear will…
The SPX continues to trade below both the 50 and 200 day moving average (MA) but yesterday rallied to close above the once solid support level of 1040. The market bounce off the lows of July 2 also correlated with the Dark Cross formation which occurs when the 50 Day MA crosses the 200 Day MA downward. As we discussed in the Dark Horse Hedge, this has not traditionally held up as a good foreshadower of bearish activity. Nonetheless, it is worth noting that it took place.
With a low volume rally on Wednesday, and the lack of any follow through midway through Thursday, combined with the rally lacking any real quantifiable economic basis, the charts lead us to believe that Wednesday’s action was a relief rally so far. To begin even a modest short-term uptrend, the SPX will need to hold above the July 2 close of 1023 on any downward close and then break the close of Wednesday at 1060 or close today, whichever is higher. The 14 day RSI is slightly bearish at 41.68 and would need to cross 50 to become a bullish technical signal. As one other confirmation of the weak technical chart, I have added the 12-26-9 MACD which is currently -17 with the bullish signal line being a break of 0.
So in conclusion, the SPX had a earnings foreshadow or relief rally on Wednesday, with Volume below the 50-day MA. The index itself is remains securely below both the 50 and 200 day MA which have crossed. The confirmation by RSI and MACD lead us to believe that based on our reading of the current chart, the rally of Wednesday will have to retest 1040 and more importantly 1022 before it can move higher. If the next down move breaks 1022 and seeks what should be technical support from Sept 2009 of 995, we are technically in a downtrend.
The DDH started with a 67% SHORT tilt last Thursday which is confirmed through this chart analysis. On Tuesday, both LONG positions were up and the 4 SHORT positions were down creating the “Perfect Storm” for that day. DDH attempts to build a L/S portfolio with the best fundamental companies held as LONG positions and the worst fundamental companies held…
Small Caps again took charge and dragged Tech indices with the help of the semiconductor index. Bulls used rising support to launch their attack as the Russell 2000 added another percentage point. Supporting technicals made modest gains but are mapping bearish divergences with lower highs – but bulls won’t be complaining too much.
History tends to repeat itself, and trend lines, triangles, and other patterns do work in TA. Charts show the collective opinions of all market participants for that day, month, or whatever timeframe that is used. Charts are direct evidence of the trader’s beliefs and feelings, and each movement reflects a bit of human emotion (or at least it did before speed trading – HAL9000). So, it should be no surprise that patterns repeat themselves over and over.
In Figure 1 below, typical up trends and down trends are shown. These zigzag patterns are seen all the time, but why do they form? Let’s say someone bought a stock at a certain point. If that stock went up, but pulled back to the original purchase price, they will often think that it’s an opportunity to buy more at their original price, thus adding to their position. This is also the same for shorts when they are able to short a stock at the same price they shorted previously. Then why do peaks form? People sell (or cover) to take profits. Obviously, any increase in selling will pull the stock back. Those who bought at a lower level may start buying again. This repeats and repeats until 1) there is no more stock left for people to buy, or 2) there is too much supply and not enough buyers. On a larger scale, this is how bull and bear markets begin and end.
Small Caps and Tech continued their good form. Technicals continue to support the move higher for Small Caps (Russell 2000) with new highs for the MACD and +DI line. The Russell 2000 would have to give up 25 points (or 4%) just to test breakout support at 650.
The prior underperformance of the semiconductors was undone with today’s 2% gain.
This revival helped keep the rally in the Nasdaq ticking over
But Large Caps didn’t quite live up to the gains of Tech and Small Caps
Last Friday’s breakout gap remains the most tempting pullback zone.
This morning the market soared higher after the Gross Domestic Product (GDP) report by the U.S. government. Reportedly the GDP increased 5.7 percent in the final quarter of the year. This news was much better than economists had expected, and a rally was underway to start the day. This was another day when the good news just kept pouring in and the media headlines looked great. Then one might ask, why did the market reverse after making a 10:30 am high? Please realize that the NASDAQ was trading at 2202.00 during the morning peak and is now below 2175.00, and negative on the day.
Often when a "buy the rumor, sell the news" type event takes place it is usually because price is already built into the market. However, today many leading technology stocks have rolled over intra day even as they are at major daily chart support levels. Leading stocks such as Apple Computer (NASDAQ:AAPL) have reversed to the negative side by selling off more than eight points intra day from today’s early session highs to the recent intra day low. Sandisk Corp (NASDAQ:SNDK) is another leading stock that is getting punished today by traders and investors. However, this stock gapped lower and has continued to sell off into its daily 50 moving average at 25.80 which should be some short term support. Microsoft Corp (NASDAQ:MSFT) is another stock that supposedly had very good earnings and was trading higher to start the day. This stock gapped up higher at the open by trading at 29.90. Since that opening print the stock has sold off and reversed to the negative side.
What is this telling us when good stocks can’t hold their gains after good news? Often it tells us that conditions have changed. The market has obviously priced in the good expectations from earnings and even the economic data. It is prudent to remember that the market is similar to a pendulum. Often the markets swing to one side too far, and then to the other side too far, and rarely finds that common middle ground or equilibrium point.
With that being sad one should always realize that you can’t fight the tape and the market is always right. Therefore, price action is king and…
Here are the leading options as I see them. Again, there are no slam-dunk winners here and still several ways to count this rally.
First is my preferred count:
Pros: Listed here (Alternate Count Possibility - now the preferred count)
Cons: Wave 1 is now much longer than is proportional to the size of the A wave it will be part of in this count (I believe the long term wedge trendlines are *extremely important* and will be mostly respected until the final finishing wave where we might get an overthrow).
Alternate Count 1 – Columbia’s Option
Pros: Very elegant. Look at the trendlines for this count in his post (Week-end thoughts, A Fresh Prospective!!!)
Cons: None. I really like this count. And am really thinking about making it my preferred. Col’s trendline observation is the most insightful analysis yet I have seen on this rally.
Alternate Count 2 – Large Ending Diagonal
Pros: I think a huge wedge *wants* to end with a diagonal (Alternate Count (Very Speculative))
Cons: That is one big freaking wedge. It is way out of proportion with the rest of the waves in the rally
So did today’s action give any clues?
Like I mention above, **if** the move today is a Minute degree Wave 1 completion (as opposed to a A wave or a completed C), this has a few implications.
1. This will be the start of a very large rally, and will likely take us past the 7-month wedgelines.
2. I believe the wedgelines are *extremely important* will be respected, with only minor excursions, until the final move. If we get a significant break to the downside, I believe P2 will be over. If we get a significant break to the upside, then that will be the final rally before P2 is over.
I, of course, may be completely wrong. But this is a key assumption I am making.
So before jumping into some counts, lets look at Weekly and Daily charts.
For me, trading is not a hobby, not a game of chance not some intellectual odyssey filled with clashing egos and chest pounding pissing contests. No, for me, trading is a way to make a living, doing something I love and am good at. So my approach is a little different then some of you may be used to.
Yet every so often a communication from one you impacts me with frustration and dismay. By now I would think that if you have been with me for six months, or a year, or longer, you would be making money trading, using some ideas and techniques that I have described over the months and years of writing AllAllan. But I hear something else from these communications, I hear that many of you are not getting it.
Today I am going to present to you three ways to trade using the simplest of strategies based on end of day prices and a minimal of necessary hardware or software. I am going to use an unleveraged ETF and remove all of my more sophisticated (read: expensive) tools, using only Market Club Triangles and 3 Line Break Point charts, both very similar in their construction and entirely objective in their application.
You can trade this going forward on XLF and probably not need anything else to be successful month to month, quarter to quarter and year to year. But it is my hope you will instead, glean from this the very basic premise of a simple rule-based system that can be applied and tweaked to any number of tradables, a simple trend following trading system from which anything is possible if you only have the discipline and desire to make it work.
XLF – Market Club Triangles -Daily Chart
Their are actually two systems shown on the chart:
(1) Enter trades on appearance of WEEKLY TRIANGLES and exit on appearance of reversing DAILY TRIANGLES. If flat, RE-ENTER on appearance of DAILY TRIANGLE in direction of most recent WEEKLY TRIANGLE;
(2) ENTER/EXIT on appearance of WEEKLY TRIANGLES (disregard DAILY TRIANGLES).
The fallout from the monetary policy machinations in Europe over the last two weeks are far from over. After notable weakness last week, the Swiss Franc collapsed 2.7% today against the USD - its largest single-day drop since Sept 6th 2011. Whether this is SNB re-intervention, natural kneejerk reactions to the massive move on SNB day, covering of positions as FX brokers try to unwind positions, or Swiss recession fears is unclear; but one thing is obvious, higher-er margins and lower-er leverage is on the way as these moves are colossal on a historical volatility basis...
Biggest single-day drop against the USD since Sept 2011...
“You keep on using that word. I do not think it means what you think it means.”
– Inigo Montoya, The Princess Bride
“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible eff...
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Last week, the S&P 500 put an end to its streak of weekly losses, despite giving back some gains on Friday. Thursday provided the big catalyst, with the ECB’s announcement of its bold new monetary stimulus plan. Investors were cheered and soothed for the moment. And U.S. fundamentals still look strong. But with Greece trying to turn back time, with volatility elevated (and likely to continue as such), and with the technical situation still dicey, the near term outlook is still worrisome.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart...
Summary: The Sentier Research monthly median household income data series is now available for December. The nominal median household income was up $537 month-over-month and $2,072 year-over-year. That's a 1.0% MoM gain and a 4.0% YoY gain. Adjusted for inflation, the numbers were up $738 MoM and $1725 YoY. The real numbers equate to a 1.4% MoM increase and a 3.3% YoY increase, thanks to -0.37% drop in the Consumer Price Index.
In real dollar terms, the median annual income is 5.1% lower ($2,900) than its interim high in January 2008 but well off its low in August 2011.
Background on Sentier Research
The traditional source of household income data is the Census Bureau, which publishes annual household income data in mid-September for the previous ye...
In a report published Monday, Albert Fried & Company analyst Rich Tullo initiated coverage on TubeMogul Inc (NASDAQ: TUBE) with an Overweight rating and $23.00 price target.
In the report, Albert Fried & Company noted, “While TUBE shares are up 120% since the IPO the lock up expired on January 14, 2015, which means insider stock is potentially for sale. Despite the overhang, we think there is room for share growth as TUBE expands domestically, and globally and also as TUBE launches new applications such as Performance TV Ad buying. While the TUBE revenue model is complicated, we think investors will growth comfortable with the model as several industries such as Internet Search and the Oil Industry also have pass throughs. TUBE has less than 1% media buying ma...
An interview with John Ehlers of Stock Spotter and Mesa Software
Ilene: John, in our last discussion about trading systems in general and yours in particular (Can trading be reduced to cycles, stresses and vibrations?) you mentioned Monte Carlo simulations and their use in measuring performance. Can you explain more about how you measure the performance of a trading system?
John: Let's start with comparing trading with gambling. The two have several things in common. In both ...
So as I was saying yesterday (Bitcoin: The Biggest Clown Show In History?), Bitcoin has several obstacles on the path to potential success as an alternative currency. But I forgot to mention hacking and theft at Bitcoin exchanges and other technical problems. This is related to the lack of government backing and the fact that the value of Bitcoins is based entirely on confidence.
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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