I don’t want to beat a dead horse on the bearish case but wanted to pass along this “Daily 13″ pending sell signal from Tom DeMark (a notable market technician) as it meshes well the current Bull-Bear Sentiment Extreme sell signal that I posted last night (yesterday’s arrow was the 2nd in a recent cluster, providing a rare & historically effective major sell signal).
For those who do not share my cautious & longer-term bearish outlook right now, I have mentioned that there have been quite a few bullish technical developments over the last few weeks and I plan to put together a video over the weekend discussing both the bullish and bearish scenarios. As far as the trade ideas, there are still plenty of short-side setups and active trades, many of which are once again offering objective add-ons as they’ve bounced back to former targets/resistance areas. I continue to search for long-side trade candidates offering strong risk/reward profiles but those have become increasingly difficult to find based on my interpretation of the charts. As such, most of the long setups that I’m finding are in need of at least a modest pullback to support or to work off the near-term overbought conditions before providing an objective entry and will be posted accordingly.
This chart took quite some time to put together so hopefully some traders & investors will find it useful and might understand why I have been very reluctant to add new long-side trade ideas despite the all the bullish rhetoric and price action since the start of the new year. I’ve often stated how I find the various sentiment surveys to be “noise” and only useful (and actually one of the most useful tools in trading IMO), when at rare extremes.
To take it a bit further, I don’t even care much about extreme bullish or extreme bearish readings by themselves but what does get my attention is when the bull to bear spread is at extremes, such as it currently is. The reason for this is that we could have a high number of bulls one week but that might not necessarily be accompanied by a very low reading of bears or vice versa. However, when the bull-bear spread on the IIAA weekly sentiment survey reaches the extreme readings of 18% or higher or -18% or lower, I find these to be some of the most reliable and timely buy or sell indicators out there. Of course, nothing has a 100% success rate in trading…not even close. With that being said, I’ll let the chart below do the talking.I started with the cluster of extreme bearish readings that marked the end of bear market in March 2009. Each green arrow marks the exact date (weekly reporting date) of bull-bear spreads of -18% or lower. Those reading come only when we have an unusually high percentage of bears vs. an unusually low percentage of bulls (i.e.- a contrarian buy signal). The red arrows marks weekly bull-bear spreads of 18% or higher, a contrarian sell signal from extreme bullishness. Note: When I come across a cluster of consecutive or nearly consecutive extreme readings, I place the arrow on the last extreme reading. Although every extreme reading did not mark a major inflection point in the market, every major inflection point WAS marked (+/-) by one of the readings and those that didn’t, typically marked at least a tradable counter-trend correction. I have included all the weekly data going back to Feb ’08 for anyone wanting to verify this data. Please let me know if you find any errors so that I may correct them.
AXP isn’t a trade idea right now but one that I’ll be watching over the next few days for possible cues to the MA & V trades/setups. AXP has been active in AH trading today after pre-announcing earnings estimates and announcing job cuts. Like most other stocks right now, I’m more interested in longer-term charts than the recent noise on this one so it will be interesting to see if AXP will be able to surmount the blue resistance line on the weekly chart below. If so, the next resistance level would be the top of the orange ascending channel and if not, I have drawn a grey sub-uptrend line within the channel that could trigger a sell-off if broken.
Zooming into the daily chart, we see the same old, same old… AXP, like so many other stocks right now is exhibiting short-term bullish price action while running into key longer-term resistance with the RSI registering overbought readings that have lead to significant corrections in the past (blue circles on daily chart). My thoughts on AXP are the same as the broad market: I don’t care if this stock is going 30% higher from here and I could care less how bullish the short-term price action is. The stock can go there without me as the risk/reward to being long, especially to establishing a new long position here is about as poor as it gets from a technical perspective (due to the aforementioned reasons). Daily & weekly charts below.
Regarding V & MA, both did exhibit some bearish price action today, closing down about 0.8% against a decent rally in the broad market. However, we still need to see additional technical evidence to help confirm a likely reversal and new short entry or add-on.
As per the notes on the daily chart of V posted last night (first one below), the price action so far today is setting up for a potential evening star reversal pattern. Of course, we are only about 1/2 way through the trading session so anything can happen before the close today. However, since I am occupied with some non-trading issues today, I just wanted to share this in advance for anyone who might choose to act on the pattern if it looks like we’re going to get confirmation (a close under 158.18…the mid-point of Tuesday’s price range). “Acting on” this bearish reversal candlestick pattern can mean different things to different traders or investors. Someone long in V with embedded profits looking for an objective exit might choose to close their position or tighten up stops while an aggressive trader might look to establish a starter short position before the close today if the pattern looks to be confirmed. I don’t put too much focus on candlestick reversal patterns by themselves but taken in light with the technical case presented last night, I figured that this might be something to monitor.
Note: One could debate whether or not yesterday’s candlestick was actually a doji or not (based on the size of the body in relation to the wick & tail, I would consider it one) but that would be moot. As you can see from notes on today’s updated chart, whether it was a doji or not does not change the net effect or spirit of the pattern (an Evening Doji Star vs. an Evening Star pattern). Also keep in mind that the third candlestick (today) is not required to gap below the 2nd day’s candlestick. As per candlesticker.com:
The first white body, while the market is in an uptrend, shows the continuing bullish nature of the market. Then a Doji appears showing the diminishing power of the longs. The strong black real body on the third day proves that bears have taken over. An ideal Bearish Evening Doji Star Pattern has a gap before and after the middle real body. The second gap is rare, but lack of it does not take away from the power of this formation.
One of the inquires that I received today was on the TWM trade posted yesterday. I didn’t even realize until I read that email after the close today that the trade fell below the suggested stop that I posted as the Russell 2000 was only up modestly today. I may have rushed that post out and in hindsight, I should have mentioned a couple other things on the trade.
First of all, as I’ve posted quite a bit lately, the Russell 2000 is struggling with MAJOR multi-year, all-time high resistance (price moves of less than a percent or so over the previous high does not constitute a breakout IMO). Add to that the fact the small caps are also backtesting the recently broken uptrend line and substantial negative divergences persist on both the daily and weekly time frames. What I should have mentioned yesterday, and my apologies for not, is that TWM or an IWM short can be entered in one of two ways here: 1) As a quick, short-term overbought pullback trade targeting a back fill of the recent gap (as mentioned yesterday) or 2) As an entry into what could prove to be a much longer-term and more profitable swing trade assuming that the Russell 2k fails to break out to new highs here (or fails shortly after doing so).
The latter trade would obviously require a larger stop… say 5% to as much as 10% above current levels (depending on your target). Regarding the shorter term, gap back-fill trade, I should have suggest a stop just slightly below the recent lows in TWM as a second, more liberal stop which would still have offered a decent R/R. Either way, I would imagine that since TWM only slightly exceeded the suggested stop today that some who took the trade are still in it and if so, hopefully this information helps. Below are the updated TWM 15 min, IWM daily & $RUT weekly charts.
Something else that I noticed tonight regarding the largest sector in the S&P 500 is this potential head & shoulders pattern forming on the XLK (shown below on a 2-day period chart). This pattern would still have some work to do but ideally, XLK would begin to reverse anywhere from current levels to not too much above the peak of the left shoulder (roughly the 30.70 area) soon while moving lower on increased volume. Just something to monitor for now as any move much above that 30.70 area would destroy the symmetry and invalid this pattern.