Outside Reversal Day

Thursday morning started with pre-market e-mails between a trading buddy and me discussing the possibility of a false upside breakout leading to a reversal.  It looks like we got that little piece of the puzzle right, now lets see if we can fit the rest together. 

(Click charts to enlarge them)

I don't really use candlestick charts that much, but they do provide a better visual of the action within price bars themselves.  The pattern we are going to talk about in the chart above is a bar pattern that is easily seen with the candle chart.

Thursday's action was an outside reversal.  Both the high and low of the day exceeded that of the prior price bar before closing lower than the previous close.  Early buying briefly pushed prices higher than the highs of previous bars, but was unable to successfully defend against competing selling, which brought prices down for most of the remainder of the session.  This is considered a bearish indication, which fits in line with Our current S&P outlook.  

I am actually thinking of adding to my bearish, or "short", position in here.  A break of Thursday's low might be enough to convince me.  I will also consider selling any further push up / retrace against Thursday's intraday decline.

Check out the very very short term chart of the Futures above.  Looks like some possibly clear Elliott Waves to me.  Where I have "[1]" labeled, could just as easily be an "[A]" wave of a correction, but the larger picture has me leaning towards the more bearish interpretation for now.

Tightening Stops on Gold Trade 9/28/10

Gold continues to go in the direction of our position.  I am again tightening the stops on this market.  Today, my exit stop has been moved up to 1276.10.  

While this remains a profitable trade for us at the stop level, I have concerns about this market right now.  My concern is all the talk I hear about gold and silver out there.  It seems everyone is bullish on the metals right now.  Usually that is the time to be looking for a downtrend to emerge.  Also, volume is not expanding with the price trend's upward movement. 

I'll let this winning trend run for now, but my thought is that a downtrend could emerge in the somewhat near future.

S&P 500 Week Ending Chart

Crude Oil Week Ending Chart

EURO Week Ending Chart

You can click charts on this blog to expand them or zoom in.

Video: Prechter On Market Rally

Video: Prechter On Market Rally

(Note: This interview was originally recorded on September 20, 2010)
In the video below, Robert Prechter talks to Yahoo! Finance Tech Ticker host Aaron Task and Henry Blodget about extreme readings in various indicators that confirm his bear-market forecast.



Get Up to Speed on Robert Prechter's Latest Perspective — Download this Special FREE Report Now.

Mike Maloney Schools Bankers on Deflation, Gold and Silver

Here are two pretty cool videos of Mike Maloney talking to bankers in Russia:

Stock Market Candle Burning Out?

Today's price action leaves an interesting candle pattern.  Prices closed very near to their open after bulls were unable to sustain an intraday push to higher levels.  The actual intraday range to both the upside and downside was much wider than the range between open and close.  

First, let's refresh terms for those not too familiar with candle charts.   "Real body" is the name given to the range between open and close.  The real body is the wider part of the price bar you see.  When the real body is filled (usually either black or red), then the session close was lower than the open.  An empty (usually white) real body means the session close was higher than the open.  

The term "shadow" or "wick" is used for the intraday range that lies outside of the real body.  Shadows are therefore the thin lines above and below the real bodies in the price bars that you see. 

A high-wave candle has long upper and lower shadows and a small real body.  If there is no real body, then it is a long-legged doji rather than a high-wave candle.  Because the pattern above has such a small real body, it could really be considered either or, and there is no need to be dogmatic about the term used.  

There is not much difficulty in realizing what the high-wave candle is telling us.  The market as a whole was indecisive today.  There was no ability to sustain the intraday high, and there was no ability to reverse out of the uptrend.  However, these types of patterns can indeed indicate that a market is losing the preceding directional bias.  In this case, that bias has been up.  

It is possible that this pattern is indicating a transition point for this market.  For now, the candles simply tell us that it is just considered a confused market that has provided an alert or warning to keep in mind.  Will the market now end the current uptrend?  I don't know.  We'll have to wait and see what the next few sessions bring to answer that question.  

Proposed in UK: All Paychecks to Go to the State First

CNBC says that:

The UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.

Hopefully not many across the pond will accept or go for such a thing quietly.  

One of the disturbing themes in the article is that its focus seems to be on how mistakes might be made by the agency in charge.  Really!  That's the concern?  What about the fact that people should not be slaves to the governments claiming jurisdiction over them?  What about the idea that the people who earned the money are its rightful owners, not any government? 

I find this to be a disturbing proposal advocating collectivism, the state, and authoritarianism rather than individualism, liberty, and free markets. 

Mutual Funds Are 'All In' on the Market Rally, Should You Be?

Mutual fund cash levels were at around 3.4% in July.  That means mutual funds have have very little reserves and have put most of their money to work in buying stocks.  Mutual funds are bullish right now; historically so.  Lets look at some history of these cash levels and see what it can tell us. 

Roy Ashworth (never met, just found his web page) has a nice little web site that tracks this information.  I will be borrowing a lot from that page.  

King World News has also picked up on the low mutual fund cash levels.

Much of the following data comes from Mr. Ashworth's page that is linked above.  May of 1972 saw a mutual fund cash level of 3.9%.  Later that year -December- The stock market began a decline that eventually equaled a 46% loss to the S&P 500 index.  March 2000 saw a low 4% cash level.  We all know what happened later that year.  After a top later that year, the S&P eventually lost 43% before finding a sustainable bottom.  Cash levels of 3.5% were seen in the summer of 2007.  The market topped out later that year in October, and prices eventually declined by 56%.  

Notice that the most recent reading of 3.4% is lower than all the examples mentioned above.  What do you think that indicates for the market?  Do you think there is more risk to the upside or the downside?  If you have been following this blog, you know what I think.  

Ashworth's page also notes that mutual fund cash levels of 11% were registered before several major market rallies.  It seems like mutual funds have a habit of being either all in or light at the worst possible times.  

Here is a chart from Ashworth's page:

Is the Great Recession Over?

One of my best friends called me from FL today to let me know the recession was officially over.  He is also a trader, and he was looking to share a laugh out of sarcasm.  

But that is what CNN.com's front page is claiming today.  A full article on the topic is found here.    

Times when statements like "Great Recession officially over" are being made are typically not the best time to buy stocks.  This is the same type of thing they were saying in 1930 before the Dow Jones Industrial index lost most of its value and the term Great Depression was eventually adopted.  

Here is another link to an AP article about the claim. 

FOX "news" is on top of it too.  Here is a link to their write up.

CNBC claims that the "longest post-war recession ended in June 2009". 

When I hear statements like the one on CNN.com's front page, it makes me think we should all look out below.  My response to the phone call was that I'm thinking of adding to my short positions during the current rally. 

Hat Tip to Bryan Keen for the phone call.  Thank you.  I don't usually scan these sites or watch TV before the trading day, and would have probably missed it.

Crude Oil End of Week Elliott Chart

EURO End of Week Elliott Chart

S&P 500 End of Week Elliott Wave Charts

The swell is coming in; and surf's almost up.

I am wrong about this if prices break above the April 2010 intraday high. 1219.80 in the cash index is the negation line for this scenario.

Confirmation would be indicated by a break below the low in August of 1039.70.

Will Grains Gain OR Wane? Find Out For FREE

Over the past few months, leading grain prices have climbed up the commodity wall like a "mile-a-minute" kudzu vine. From late June to early August, the big three grain markets (wheat, corn, and soybeans) soared 40%-plus in a coordinated rally to multi-year highs before leveling off. 

The question on the minds of market participants is simple: Is the grains' uptrend set to end?

Well, according to the mainstream experts, the answer is a definite NO -- and an equally definite YES. See, according to recent headlines, grain prices are as likely headed for strong gains as they are for a world of pain. On this, following news items capture the very conflicting grain complex picture:

• "Wheat futures decline, fall most in two weeks after Egypt looks elsewhere for supplies... We have a bearish tone." (Wall Street Journal)
• "Wheat Soars Despite Reassurance On German Crop." (AP)
• "Corn Above $5-per bushel mark; prices expected to pull back." (Cattle Network)
• "Corn (Soybeans) Still King... the bull market is intact for now." (Farm Forum)
• "Grain Markets Are Hot: But Is It Too Late? One money manager believes the dance will soon be coming to an end." (Minyanville)

I rest my case. 

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S&P 500 Updated Count -Still Bearish

 

The updated alternate-1 count above is reason enough for me to hang on to short through the 1129/1130 levels if prices should breach them.  The next pull back proportional to the current rally off the late August lows will tell if these two counts are correct or not.  It is either during or following that pullback that decisions will be made to exit or hold onto the short S&P 500 positions. 

While my systems trading (not blogged about, yet) always follows a specific set of algorithms for entry and exit, this trade has been discretionary from the start and I have not been convinced against the bearish case yet.

In committing to strategies like this, it is sometimes necessary to reduce position size, or simply accept more risk.  Those final decisions are up to each and every individual trader.  However, this post provides my discretionary opinion about the price action and its implications in this market.      

Tightening Stops On Gold Trade

Following today's sizable rally in Gold, I am tightening our stop-loss levels in this market in order to lock in more profits. 

Stops are now at 1242.2.  

A break of this level would leave the current intermediate term uptrend in question.  At the same time, there is nothing that says Gold cannot continue to rally.  In that regard, we are letting a winning trade run. 

There are several things that do worry me a little regarding the current behavior of this market.  Everyone seems to be excited about Gold and Silver.  Hey, I recognize the fact that they are real value vs. the fiat paper we are coerced into using, but the fact is that not everyone was excited about these metals several years ago at a low.  As I tend to be somewhat of a contrarian, all this excitement and near religious fervor over the metals has me concerned.  Still, I'm long and letting the market lead. 

Volume is not expanding in this rally.  That is an indication of weakness.  Also, MACD, which is a price velocity, or momentum, indicator is showing signs of a bearish divergence in its histogram.  Today's action could be the kick off to positive resolution of both of these issues, or it could be a last gasp before a trend change.  

I have no crystal ball, so knowledge of how these things will be resolved is out of my grasp.  What is known is that there is an uptrend.  We are long the uptrend, so we are letting the trend run while moving our stops right along with it. 

S&P 500 Becoming a Victory For Bulls

It seems like the S&P 500 is likely to become whipsaw land soon.   If the stops are hit, I will probably still use a pull-back to exit positions.  

Volume has been light.  Crude and the EURO, which have recently been tracking with the S&P 500, still look like a bearish set up.  The Dollar Index still looks like a bullish set up.  It is my current thought that the likely next few steps will be stop levels being taken out right before a significant pull back or return to the downtrend.

 



I've posted the video above before.  It's useful therapy when the market takes us out for a loss.

If taken out, we will need to use whatever pull back that follows to clue us into what side of the market to take next.

Its All About the Dollar

As has been mentioned in several posts, it seems that Crude, the EURO (duh) and the S&P 500 index are all inversely taking cues from the Dollar Index right now.  To me, it looks like the Dollar Index is in a short-term downward correction that is likely closer to its end than beginning.  

While the S&P is really testing my patience in holding shorts, I currently would expect it to join Crude and the EURO in turning back down when and when the Dollar Index breaks back to the upside.  A move above 83.315 in the Dollar Index would be something I would expect to coincide with intermediate term downward pressure in those other three markets mentioned.   

Green Police -Outlet for Bear Market Authoritarian Desires

Socionomics has shown us that one of the social trend dynamics we can expect from large bear markets is for there to be growing authoritarian desires.  A sense that something must be done.  

According to The Economic Collapse website, there is a rising trend in employing "Green Police". 

A growing number of U.S. cities are actually putting RFID tracking chips in trash cans and recycling bins and are starting to fine residents who do not recycle "properly".

Meet the "Green" police, another part of the growing authoritarian trend in the current bear market.  

So far, the worst city of all for snooping on the trash of citizens is Cleveland, Ohio.  The truth is that Cleveland should be worried about how to put hundreds of thousands of people without jobs in the region back to work, but instead city officials seem obsessed with enforcing the radical green agenda of the United Nations.  The new RFID chips being installed will allow Cleveland officials to monitor exactly how often residents roll their carts out to the curb for collection.

Buying More Money With Oil

In recent posts (click "Crude Oil" under labels) , we stated a plan to increase our short position in Crude during an expected rally above 75.58.  That rally has come, and we have sold more Crude Oil short this morning.  We still have a little dry powder left for this trade should Crude rally a little more. 

John Stossel - The Case for Private Roads

As we wait for several markets to set up or show their hand in regards to our various trading strategies, its a good time for a free-market oriented post.  

It has been my personal experience that whenever I discuss getting the government out of our lives including eliminating various taxes, a common response is "what about roads".  This is the easy go-to for statists of all types.  After being provided for by the state for so long it is hard for many to imagine a free and voluntary solution to this need.  

I usually ask if the other person is suggesting we would not travel or have places like roads to travel on without government?  They usually reluctantly answer "no", that they are not suggesting that we would not travel without government.  OK, progress and agreement.  Then it is usually my suggestion that competition and private property rights would likely deliver better roads at lower costs, and without the immoral behavior of threatening force to get paid for the service.  

In the video below, John Stossel takes on this very same issue, and provides some free (or more-free)-market examples of success in this area.  

Let's get the government out of our lives, including the roads business. 

A Line In The Sand - Sometimes You Have to Draw One

OK, so I have to admit that our current intermediate term bearish case in the S&P 500 index is being tested.  Although we have done well in selling the rallies which have preceded declines in price, prices have repeatedly rebounded into new rallies.  

Lower highs are still on the board, so the trend is down.  However, we now have a higher low on the board too.  We should never allow ourselves to get to complacent or too confident in trading, so now is a good time to see what the basic price action is saying.  

When I say "basic price action", I mean it is time to simply get out the straight edge and start drawing some lines.

A downtrend-line is drawn across the lower highs in this market.  If prices penetrate significantly above, close and then hold above that line, there is a good chance our stop-loss orders (thick blue horizontal line) for sold short positions will be taken out. 

Two lines parallel to the upper downtrend-line are applied to the lower lows this market was previously registering.  These lower parallel lines seem to form a possible price channel.  If prices do not take out the two upper lines mentioned above, then we can watch that channel in relation to future price action.  

A thick red line is drawn upwards across the two most recent lows.  If prices break below this line, the odds will strongly be back in favor of the bear trend we have been positioning in. 

Selling More EUROs

We increased our short position in the EURO this morning with further short sales into the EURO rally.

S&P 500 - Fresh Opportunities for Formerly Reluctant Sellers

It comes as no surprise to regular readers that this blog (and its author) is currently bearish on the S&P 500.  One look at the open positions page will illustrate that for you.  It should also be no surprise that we have often times mentioned the idea that strong and fast rallies should be expected in the current bear market trend.  Just such a short squeezing rally is just what the market has delivered over the last couple of days.  

So, I thought that maybe a new S&P 500 post would be in order.  Below is an updated S&P 500 chart with Elliott Wave labeling.  

A fresh wave two is probably nearing its end.  

Using prior posts and your own charting sources, take a few minutes to notice the current pattern relationship between the S&P 500, the EURO, and Crude Oil.  Also notice the inverse pattern relationship to the Dollar Index.

Fall -its in the air. 

Moving Stops Up the Yellow Brick Road

What do you do when you are in a winning trend, the price pattern becomes a little uncertain, and your stop is at a loss?

I try to let winners run and cut losers short as a practice.  Oftentimes, there is enough information in the price action to allow you to tighten a stop in order to lock in a profit, while at the same time giving the trend some room to run further if it wishes. 

We are moving our stop in the gold market up to 1233.4. 

If prices were to break that level without first moving higher, the internal price pattern would be more confusing to me at this point.  Therefore, 1233.4 is a good place for our current long gold stop.  This locks in a slight profit.  

However, if prices were to move to a new high above 1266.5 without first taking out 1233.4, we would then have the opportunity to either take larger profits or tighten stops further.  In this way, we are protecting our current unrealized profits while allowing for them to grow if the market continues the current price trend.

If prices broke below our new stop, but put in a corrective pattern (see Elliott Wave), then we would have a new signal to reenter after taking a slight profit.

I like win-win scenarios in trading.  

EURO Chart Update 9/1/10

As mentioned in previous posts and notes, we are selling short the current short-term rally in the EURO.  Here's a chart:

One of the most important question in trading is where will you know you are wrong.  Our strategy will be the incorrect one if the EURO contract rallies above 1.3333.  The short-term portion of our outlook will be confirmed if the EURO falls below 1.2587.  The larger pattern we are watching would be confirmed if the EURO broke below 1.1874.

Black Gold? -a little update on our Crude Oil strategy

What does it mean to everyone's economic models if crude oil were to undergo a significant downtrend?  


Who cares about the economic models!  It is price trends we are interested in.  That's how we make money.  We react to price action and try to harness trends.  Let others rationalize the why's, what's and how's after we are already well positioned or even out of a profitable trend. 

In recent posts concerning crude oil, we have suggested two things: 1) A downtrend is most likley beginning; and 2) A rally against the recent downtrend kick off could be expected and should be sold short.   We are just using simple tools and principles.  No clairvoyance is being claimed or suggested, but the price patterns and trends we have been following seem to currently be going along as expected.  

Trust me, it does not always work out like this. 

Our intermediate term outlook is negated if prices in the black gold rise above 82.97.  Confirmation is if prices ultimately break below 64.24.  Early Indication that the overall outlook is correct will be a break below 70.76.  

We plan to increase our short position with any price movement above 75.58.  If we do not get the proposed wave (c) of [ii] up above 75.58, then we will increase our short position with a break below 70.76.  

EUROs and Crude -just a quick note

We are now getting the rally in the EURO that we have been planning to sell short.  The main question I have now is if Crude's little rally will push up above 75.20 for better selling prices there too.  I'm also wondering how far the EURO retracement will push.  The EURO is approaching typical minimal proportional retracements levels now.

The S&P 500 is going right along, so it seems the relationship we had been watching before is still intact.  Its the same story inverted on the Dollar Index.