May 032013

I got off to a late start today and once I booted up and noticed the markets were about to gap up I started to put together the charts and my thoughts on the previous post as I wanted to share my thoughts in advance of the two reports issues at 10:00 was only barely able to get that post off before then.  No surprise, both Factory Orders and the ISM Non-Manufacturing Index came in below expectations with both at the low end of the range.  None of that seems to matter lately as the market has a very strong bid beneath it but unless the clearly deteriorating trend in the macro-fundamentals begins to reverse soon, the reversion to the mean will almost certain begin to manifest in stock prices sometime in 2013.

As IWM has now moved above the downtrend line off the March 15th highs as well as exceed the two previous reaction highs (and TZA has exceeded it's suggest stop level) that trade will be considered stopped out.  I'll also work in cleaning up the trade ideas as I had planned to recently but have once again been side-tracked with the recent PC and website issues that I thought were resolved.  Today will undoubtedly clear out a lot of short interest and will short interest already at or near record low levels, that creates the potential for a very sudden and swift move lower should any bad news or HFT glitch hit the market.  As such, regardless of today's bullish action and unwinding of a lot of the bearish technicals that were in place, the R/R to establishing new long positions remains unfavorable at this time.

May 022013

IWM 60 min 9This chart is the same 120 minute IWM chart that I've been posting with the descending broadening top pattern only zoomed into a 60 minute time frame for clarity.  I measured the retracements on the counter-trend mini-rallies following the two impulsive sell offs that ensued immediately following prices kissing the top of the pattern.  It is very common to see counter-trend moves within a larger trend retrace between 38.2% - 61.8% of the previous move. In fact, we often see these counter-trend retracements actually turn down right at or very close to either the 38.2%, 50% or the 61.8% retracement levels (all key fibonacci ratios).  The two previous initial counter-bounces stopped at the 61.8% & 50% retracement levels.

As this chart show, IWM has now retraced about 61.8% of the previous move down which began at the top of the pattern, which also coincides with that previous reaction low put in on Tuesday.  If prices do exceed this level, we'll need to watch the top of that pattern as so far, that downtrend line has capped all advances since the small cap index peaked back back in mid-March.  Therefore, any solid break above the top of the pattern, especially a move exceeding the April 11th high, would be a bull technical event and call the current downtrend into jeopardy.  Until then, the small caps remain in a confirmed downtrend but the current short trade faces some tough headwinds due to the strength in the more important, large cap indices.  Even though the Russell 2000 has has been in a downtrend since short entry back in mid-March, the choppy, back & forth action has caused TZA to suffer from price decay so I will likely have to make a slight adjustment to the suggested stop and profit target to realign those figures with IWM.  When trading leveraged ETF's, I prefer to use the 1x (non-leveraged) tracking etf or the actual index itself when determining profit targets and stop level.  Those updated levels will follow soon.

May 022013

IWM 120 min 5Not much to update other than the fact that all the major US indices did sell off today, which was (is) pretty much the 11th hour as I had stated one week ago today: By my interpretation, the recent technical breakdowns and/or sell signals in these key stocks and indices are still intact or close to triggering (as in the case of the $SPX).  However, any significant additional upside in the markets from current levels will begin to rapidly negate these sell signals/breakdowns and therefore, the market needs to reverse very soon, lest the bearish scenario will begin to rapidly diminish.

At this point, I'm still focusing my efforts (and current positioning) on the indices and sectors with the most bearish technicals (small caps, financials, energy) but that's not to say that I am not keeping a close eye on the other major US & global major indices.  The $RUT/IWM remains in an unmistakable downtrend that began with the highs on March 15th and today's very impulsive, high-volume drop of nearly 2 1/2% from the top of the descending broadening wedge pattern only helps to validate the bearish scenario and increases the odds that the current short trade will meet it's price target.  However, with that being said, the S&P500 and Nasdaq Composite still have a lot of work to do in order to help firm up bigger picture bearish case.  From a technical perspective, the longer-term charts still remain bearish but in the near-term, the overall trend still remains up for now and a lot of the bearish divergences and recent sell signals may soon be reversed if today's sell off proves to be just a one-day wonder. Therefore, what happens over the next week or so will hopefully give some clarity as to where this market might be headed over the next few months and possible throughout the remainder of the year.  More specifically, if we do start to get some traction on the downside, I'll be trying to assess the likely scope of such a correction.  Will it be a relatively shallow pullback and a buying opportunity on the long-side or will it be the beginning of a much larger and sustained move lower?

May 012013

IWM 120 min 3This chart was made just before the open today and shows that IWM continues to remain in both a downtrend as well as below the short entry back on March 22nd, despite the $NDX & $SPX having gained 2.5.- 3.5% since then.  Although my expectation of a quick move to my downside target on the $RUT/IWM did not pan out, this trade still has a good chance of playing out IMO.  However, a move above the April 11th highs in the $RUT/IWM will call the downtrend into jeopardy.

As far as the broad markets, I still don't advise "shorting the market", the market being the broad market...i.e. S&P 500 or any other broadly diversified large cap index.  However, I do think the recent shorts on the $RUT (IWM/TZA), $NIKI (EWJ), financials (XLF or select TBTF banks) and energy (XLE or XOM & CVX) do offer an attractive R/R at this time, regardless of the recent resiliency of the $SPX and $COMP/$NDX.  On a related note, irrespective of the current strong bid under the large cap indices, I am just not seeing many long setups offering objective entries at this time and I'd suggest being very selective on any new positions at this time, long or short.

Apr 242013

Posted below is the updated $RUT weekly chart preceded by the previous $RUT weekly chart that was posted two weeks ago today.  In that previous chart, I had noted how I was waiting for confirmation of the negative divergence that had been building over the last two years.  The confirmation that I was waiting for was a bearish crossover on the MACD, which we did indeed get last week and so far this week, the MACD has continued to fall further below the signal line which helps to solidify that sell signal.  At the time I had pointed out the fairly reliable history of bearish MACD cross-overs on the weekly time frame as a stand-alone sell signal.  However, as this updated chart illustrates, these weekly MACD sell signals can also be used a confirming sell signal following the aforementioned weekly overbought (RSI 70+) sell signals.

As often discussed, overbought on a weekly time frame is not a sell signal in itself.  In fact, it is not uncommon to see an index or sector move into overbought territory and remain there for weeks while prices continue higher.  Typically, the sell signal comes once the RSI has crossed back below the 70 level and/or backtests that level from below.  However, in technical analysis, many buy and sell signals can be improved upon by using a second, confirming signal.  If we look at the updated $RUT weekly chart above, you can see that the small caps actually had two bear markets (20%+ drops) within the larger bull market that began back in March 2009.  As the highlighted circled areas show, this weekly RSI-MACD crossover dual sell signal triggered in the very early stages of those corrections.  Again: The first signal is a cross of the weekly RSI back below the 70 (overbought) level followed by the second (confirming) signal of a bearish MACD crossover, which is best viewed using the MACD histogram.

As a side note, these same "dual sell signals" can be applied to the $SPX and most other diversified indices.  Currently, the $SPX weekly chart has triggered the RSI sell signal but has yet to confirm via a bearish MACD crossover.  However, with the MACD line having recently turned down and the histogram now below a reading of 3, any additional sideways action or downside movement over the next week in that leading large-cap index will almost certainly trigger that confirming signal as well.  I know this market fells like it will never go down again and maybe it does manage to continue to build on it's gains for another few weeks or months.  However, I'm watching many different recently sell signals on both the broad markets as well as leading stocks such as AAPL, XOM, and the TBTF bank stocks.  By my interpretation, the recent technical breakdowns and/or sell signals in these key stocks and indices are still intact or close to triggering (as in the case of the $SPX).  However, any significant additional upside in the markets from current levels will begin to rapidly negate these sell signals/breakdowns and therefore, the market needs to reverse very soon, lest the bearish scenario will begin to rapidly diminish.