Oct 152014

I’ve fielded a few questions recently inquiring as to when I plan to cover my shorts or start hedging for a meaningful reversal in the broad market. I’ve repeatedly stated, including in this update a few weeks ago, that the broad market short entry back on Sept 25, based on the partial rise into the broadening top pattern, would likely be a short-term catalyst for a longer-term sell signal, as the breakdown of that 60 minute pattern would likely trigger the much more important breakdown below the daily & weekly primary uptrend lines on the major US stock indexes as well as the likelihood of triggering death-crosses on the 20/50-day ema pairs.

With all of the those larger, more powerful sell signals above now clearly in the rear-view mirror, my focused has turned to the downside targets on the daily charts (which were all updated over the weekend). When managing my portfolio positioning (i.e.- net long or net short) based on the technicals of the broad markets, I will typically begin to reduce my market exposure (i.e.- close positions and/or hedge) when the first of the major US indices (e.g.- $SPX, $NDX, $COMPQ, etc…) look poised for a reversal. In other words, although my downside targets for the $SPX, $NDX, & $COMP (daily time frame) are roughly aligned, I will usually position for a reversal as the first of these targets is reached. When the markets become this near-term oversold (keep in mind that the weekly charts are FAR from oversold), the odds for a very sharp reversal starts to climb at a very rapid rate with each tick lower. Most often in sell-offs like this we get a final thrust down, blow-off move, typically at support and often just briefly overshooting that support (due to the powerful downward momentum). However, at times these sell-off end with the relatively muted thump vs. a quick BANG!

Therefore, I find it best to start gradually reducing short exposure as we start to approach the first downside target, which at this time, will likely be T1 (the 4000 level) on my $COMPQ chart, which is about another 3% below current levels. As always, trade (or stand aside) according to your trading plan & risk tolerance. Also remember that the markets (and therefore the charts) are dynamic, not static, and therefore, my plan today may or may not be my plan tomorrow or even 30 minutes from now. The SPY did tag a decent horizontal support level that comes in around 181.65 and has so far reversed off that level so there is the possibility that we get some short-covering & dip buying to fuel a quick snap-back rally here. However, other than some 15-minute bullish divergences and very oversold near-term readings, including a recent $TICK extreme, I don’t see any reason to cover any shorts other than those that have reached a preferred or final price target.

Oct 152014

The yield on the U.S. 10-year Treasury bond dipped below 2% for the first time since June 2013. For anyone that might have missed an opportunity to refinance over the last few years this could be the last trough in rates before the train leaves the station for good. As today, the average rate on a 15-year mortgage is hovering just above 3% and with today’s plunge in rates (a drop of about 5 1/2% on the 10-year rate as I type and that’s well off the lows earlier), we could very well see 15-year mortgages below 3% soon, barring any strong reversal in rates from here (30-year fixed mortgages are currently hovering around 4%).

$TNX weekly +15 year mortgage rates Oct 15th

$TNX weekly +15 year mortgage rates Oct 15th

Oct 152014

As recently discussed, the intermediate-term trend, as defined by the 20/50-day EMA pair, triggered a sell signal last Tuesday and that signal remains solidly intact at this time. The same 20/50-day EMA pair has also done an excellent job of defining the intermediate-term trend (bullish or bearish) on other major US indices as well, such as the Nasdaq Composite (see chart below) & Nasdaq 100. The Nasdaq Composite ($COMPQ) triggered a death cross of the 20/50 EMA pair on Thursday with the Nasdaq 100 following suit with a 20/50 day EMA death cross on Monday of this week.

The fact that the intermediate-term sell signals triggered in conjunction with the breakdown below the primary bull market uptrend lines in many of the major US indices means that there is a strong likelihood that we are looking at more than a typical run-of-the-mill correction like we’ve seen over the last couple of years. More active traders might consider adopting a short-bias with a “sell-the-rips, cover-the-dips” strategy (opposite of the buy-the-dips strategy in an uptrend). Longer-term swing & trend traders as well as investors might consider keeping things light for now as we still have the longer-term trend indicators (weekly & monthly trends below) solidly entrenched on buy signals at this time.

The earliest reliable trend indicator that I follow in order to determine the primary trend (i.e.- bull or bear market) is the 43/17-week EMA pair. Logically, this pair will trigger earlier buy & sell signal than the extremely reliable 10/6-monthly EMA pair but as with using any moving average pair for identifying trends, the faster (lower periods) the averages, the more prone they are to whipsaws (false signals). For example, as you can see in the $SPX quad-trend chart below, the 43/17-week EMA triggered only one sell signal since confirming a new cyclical bull market on the week ending Sept 4th, 2009. That sell signal came the week ending Sept 2nd, 2011, towards the tail end of the very sharp correction in the $SPX around the 3rd quarter of 2011. That was the largest correction during the entire bull market and it was technically a bear market in the Nasdaq Composite (defined by a drop of over 20%). However, the 43/17-week pair remained on a buy signal in the Nasdaq 100 during that correction & in fact, has never triggered a bearish cross-over since signaling a new bull market at the close of the week ending July 24th, 2009.

Remember: The trend is your friend and depending on what type of trader or investor you are, you might engage (or disengage) this market differently. For example, if you are investing for your retirement in 20 years, and you believe this to just be another correction in an ever-lasting Fed induced bull market, then your strategy might be to sit tight on your positions and maybe even adding on any weakness in the upcoming weeks/months (until/unless the weekly & monthly trend indicators roll over). More active traders might consider selling the rips (i.e.- shorting bounces back to resistance) and buying the dips (i.e.- covering or reducing short exposure when the prices fall to decent support & the charts indicate a bounce is likely). Typical swing traders might just position short & stay short until some decent evidence of a likely near-term & intermediate-term trend reversal starts to develop in the charts. Overall my bias remains short equities, long select commodities with a cautiously bullish bias on precious metals & the miners. However, just remember that nearly everything gets sold during panic sell-offs and this market has been a bubble in the making for years now make sure to adjust you position size on any longs commensurate with your risk tolerance.

Oct 132014

The previously posted FISV (Fiserv Inc) short trade setup broke down below the daily uptrend line last Tuesday & went on to print a weekly close below the ascending price channel on the weekly chart last week, a more powerful, longer-term sell signal. With prices still in close proximity to the breakdown, this trade still has plenty of meat on the bone & still offers an objective short entry around current levels. I’ve added one additional price target at 59.34 (actual support around 59.30) & have re-sequenced the previous two targets as T2 & T3. Suggested stops would be based on a 3:1 R/R to one’s preferred targets or slightly above the recent highs if targeting the final target, T3 at 47.77.

click here to view the daily chart of FISV       click here to view the weekly chart of FISV

Oct 132014
FRC daily Oct 13th

FRC daily Oct 13th

FRC (First Republic Back) was added as an Active Short Trade back on July 31 at a price of 46.88 with a relatively tight suggested stop of 48.10. The stock bounce a little further than I had anticipated (in sympathy with the broad market) and went on to slightly exceed that suggest stop level for a relatively minor loss of 2.6%. Therefore, that previous trade on FRC will be considered stopped out for a loss and that previous short-entry post will be re-assigned to the Completed Trades category where it will be archived indefinitely for future reference.

FRC will also be added directly as a new Active Short Trade here around the 47.42 on this break below the bear flag pattern which follows the breakdown below the 3-year primary uptrend line. T2 (40.50) is the current final & preferred target with a suggested stop above 49.50 or lower, if only targeting T1.

Oct 132014

Here’s a couple of questions that I received over the weekend regarding when to act on a buy/sell signal and how to recognize divergences on a chart:

Q:  I have found your comments and advice to be extremely helpful. While reading your column this weekend, I noticed you talked about 6/10 monthly EMA long term signal for SPX. Do you have to wait till the end of the month for this signal to be valid or can one act on it any time when 6 ema crosses 10 ema, say in the middle of a month. Or does it even matter. I am always confused on this. Thanks for your help.

A:  I’ve found that waiting for a print on a close of the period of the chart of whatever signal I am using will greatly reduce the chance of a whipsaw or false signal. On that 6/10 monthly ema, yes, waiting for the 6 ema to close below the 10 ema on the last trading day of the month would be best. The same holds true for breakouts and breakdowns using candlesticks. E.g.- On my weekly charts, I’ll usually wait for a candlestick close on the end of day Friday since intraweek breakdowns are fairly common, only to see prices move back up above the support level by the end of the week. Waiting for prices to print a close above support/resistance on the time frame you are trading even works well with breakouts on intraday charts such as 15 or 60 minute charts (wait for a 15 or 60 minute close above/below the pattern that you are watching). Also keep in that the 6/10 monthly ema pair defines bull & bear markets and those signals typically last over a year once triggered. Therefore, it’s more of a confirmation of the primary trend than a timing signal, more useful for helping to align your trades with the primary trend than a “time to get short” signal as the market will already be well off the highs by the time that it triggers.

Sometimes I will jump the gun and take a breakout before we get a closing print above the pattern. I’ll do that if I have a lot of supporting technical evidence that it will play out and I feel strong about the trade. Right now might be a good time to get an early jump on short trades with most short & intermediate-term signals in the broad market currently bearish. Really it’s just a matter of preference: Aggressive traders might opt to position on any break of support/resistance or on the first crossover of a moving average pair while more conservative or conventional traders, typically those with longer-term time frames, might opt to wait for a solid close below/above the pattern on the time frame that they are trading.

Q: Nice job on the short call. Just curious to whether or not you think a short position should be initiated on FISV. Also, do you use a specific set of rules when drawing Divergence lines? It seems when I’m drawing my own Divergence lines, sometimes I can draw the lines to suite the trade I’m entering(if that makes sense).

A: Absolutely. I’m personally short FISV and plan to highlight it as one of the more promising short trade ideas at this time. FISV just recently broke below the daily uptrend which also defined the weekly ascending channel so it still offers a very nice R/R if shorted around current levels. With that being said, even the most promising trades don’t always play out so always use stops & never get married to any trade.

Regarding divergence, the rules are pretty straight-forward: Using negative divergence, the price of the securities needs to have made a higher high against the indicators or oscillators that you are using (MACD, RSI, CMF, etc..) making a lower low. I will say that although I’ve never read this anywhere, when using the MACD, I consider divergence as only “potential” until we get a bearish cross-over on the MACD while prices made a higher high. In other words, if prices are making a higher high and the MACD has yet to move above its previous reaction high and is still below it, the potential for divergence does exist but it is also possible that the stock keeps moving higher as does the MACD with the MACD eventually moving above the previous reaction high & thereby, negating or eliminating the potential divergence (which tends to happen in strong uptrends). From my experience, if you wait to see the bearish crossover on the MACD (fast line moving below the slow line) at a point that is below the previous reaction high, then the odds of a correction are very high at that point. As far as positive (bullish) divergences, everything that I said above holds true but in reverse (prices making a lower low against the indicators making a higher low).

Oct 102014

The SPY closed right on the bottom of my 3rd & final near-term target zone which was based off of the short-entry from the partial rise into the broadening wedge pattern on the 60 minute chart. In a vacuum, I would have covered all or most of my short positions as the SPY has positive divergences in place on the 60 minute chart on the initial tag of this support level (ideal ingredients for a bounce). However, as discussed recently, the bigger picture has the S&P 500 printing the first weekly close below this primary bull market uptrend line generated off of the March 2009 lows. Therefore, we have a mixed picture in the charts right now with potentially short-term bullish developments against a cross-current of longer-term bearish developments.

I say potentially short-term bullish developments because although prices are at support with bullish divergences in place on the 60-minute time frame, the near-term trend, by all accounts, is clearly bearish at this time with no signs of a reversal yet. With that being said, until this support (the Aug 7th reaction low) is clearly taken out and the bullish divergences are negated (i.e.- burned thru), the potential for a bounce is elevated. On the flip-side, the longer-term (weekly charts) take precedence over the shorter-term charts and today’s weekly close below the bull market uptrend line in the $SPX has the potential to open the door to a much deeper correction or more. It is also worth noting that we printed a weekly close below the Wilshire 5000 Composite Index bull market uptrend line as well as a solid close below the base on the double-top pattern on the Russell 2000 Small Cap Index. However, keep in mind that this market has been plagued with false breakdowns & whipsaw sell signals for years now so it might be prudent to wait for some downside follow-through before making any substantial positioning changes. Also keep in mind that although the 20/50-day ema intermediate-term trend indicator went bearish earlier this week, both the 43/17-week ema pair as well as the 10/6-monthly ema pair on the $SPX are still very solidly entrenched in buy signals (these two pairs do a great job of defining cyclical & secular bull & bear market trends). More on those later.

The bottom line is that we are still most likely in the early stages of a much deeper correction although we do have some conflicting signals in place at this time. If I had to venture a guess, I’d say that we are likely to see a pop (rise) in the market on Monday, maybe moving higher to backtest the weekly uptrend line from below (even moving above it intraday, possible even a couple of days), only to turn back down with some impulsive selling to kick in next week. That’s just my best guess but I wouldn’t be surprised to see the markets gap down & continue to move down sharply next week either. With the near-term picture somewhat obscure at this time, my plan is to wait to see how we trade early next week before making any considerable changes to my positioning. With the trade ideas now updated, I will turn my efforts into finding new trade ideas as well as highlight many of the existing active trades that still look compelling. Have a great weekend.