Trader's Tips Stock Market Newsletter
Published January 09, 2011 ...by oextradingresources.com
Market Outlook 2011 Report
The stock markets made its second positive year in a row. From it's 514 level at the end of December 2009, 1 year later the OEX (S&P 100) stood at 566, up roughly 52 points, + 10.1%. The Dow 30 advanced 1149 points, + 11%. The S&P 500 gained 12.7% and the tech market, Nasdaq Comp ended 16.9% higher.
P/E - Price/Earnings Update
As of Dec. 2010, the below P/E chart gives support to the view that a possible Grand Super Cycle degree bear market from 2000 is still active, with a P/E ratio around the 23 mark. As mentioned in the 2010 report: ..."It would take a reading between 5 - 10 to change this view. Compared to the 30's great depression low, even a P/E of around 5 - 6 is probable, before the bear market is likely over. Especially because a bear market of Grand Super Cycle degree could be underway from the 2000 peak."...
The S&P 500 had a big drop in Earnings bur nearly fully recovered in mid 2010.
The dividend yield is deteriorating towards the levels we saw at the 2000 major top.
Although entering the new year on a positive countertrending market, personally i'm still in the long term Bear camp, as the stock market still trades below the important October 2007 high. If broken, it would force a revision on the long term wave count.
The Outlook 2010 Report didn't rule out some countertrend advances and after a pull-back in the Spring/Summer, the market finished the year in new high territory, caused by apparently still unfinished business in the Primary degree wave 2 from the March 2009 low. Which probably for many traders, (the author included) resulted in triggered Short positions Stops held in the Fall 2010, before the bulls forced prices through important pivot and Elliott Wave related highs.
Key markets are currently trading within long term bullish channels, so downside breakouts from these channels, would be a stronger signal & confirmation of a change in the long term trend. The Monthly MACD was a good guide to follow throughout 2010, keeping those using it for timing longer term stock investments on the right side of the trend, despite the roughly 93 OEX points Spring - Summer pull-back, before recovering.
So the special setting of this MACD (Signal Time Periods: 5) has proven useful through numerous bull and bear trends. In fact, by looking back, it would have kept the investor out of serious trouble from most of the bear trends experienced in the decade we have just left.
So in my view, this could be a workable strategy for 2011 as well, by riding the current positive trend and let monthly MACD guide when it's time to exit Long positions in stocks, for the long term. Bullish sentiment extremes, overbought long term momentum and a poor technical/fundamental condition in general, i.e. a double NYSE New High - New Low bearish divergence, points to a larger market top coming.
As for an update on the tech market, below represented by the QQQQ Monthly chart, the RSI 25 is nearly entering its overbought territory and at the same time tracing out a mild bearish divergence, compared to the 2007 peak. It looks mild since this Nasdaq 100 index tracking stock has a few points left before reaching the 2007 high level. When this RSI 25 entry occurs in the monthly time frame, its usually an alert to start looking for a larger top formation.
In this market i don't rule out a larger "Double Top" formation from 2007. Technically, Double Tops can be very bearish in nature, when correctly identified. And because of the current sentiment extremes (see Sentiment section below) the upside potential beyond the 2007 peak is probably limited. So this is another reason a Double Top could be the outcome. At minimum, it should at least go through some mid term weakness first, if it intend to go well beyond the 2007 high.
If the QQQQ climbs beyond this high, it would question the validity of the ongoing Primary wave 2 development in the S&P markets. More Elliott Wave analysis below. Since the QQQQ has established a bullish channel from the March 2009 low, any downside breakout from it (monthly closing basis) within the first half of 2011, would be stronger evidence of a long term top in place.
Updated Nasdaq Comp and Dow 30 charts.
Current mid/long term Volume patterns suggest the overall positive market trend is intact, as of Friday's close. It would take an SBV Osc. reading below 33% to indicate the market is peaking in this time frame.
Elliott Wave Analysis
Long term, after the Primary degree wave 1 impulse structure ended at the March 2009 low, the market has since then traced out a possible a-b-c wave 2 zig-zag pattern of same degree. The ongoing wave C part of this pattern still looks a little unbalanced and short, compared to the rest of the zig-zag pattern formation but the daily chart below shows a clear five wave structure. So even a potential termination at current levels, would make it a valid count. Because of the look of the pattern, another possible scenario that comes to mind, is the advance from the March 2009 low, could be only the wave A part of this potential zig-zag wave 2 structure.
Regardless of the lower degree wave development, following the Elliott Wave Principle the major wave 2 possibility can't be ruled out anyway, as long as the October 2007 major high stays intact.
So only a break of 734.51 would prove me wrong about this long term wave count and at that point it could mean an A-B-C huge Flat correction actually ended at the March 2009 low, as part of an ongoing Bull market. If this turns out to be the case, as stated before: ..."a final major Bull market top in the 2010 - 2012 time window is probable."...
Excerpt from the 2010 Report, which is still applicable technically: ..."This article excerpt from a 2007 issue of Trader's Tips, reveal additional valuable information why that time window is in focus, in case a Grand Super Cycle wave 5 is (surprisingly) not yet completed. The price structure could also very well take the form of a lower top (i.e. a more rare, deep retracement wave 2 from the March 2009 low) or even as a triple top, (2000 - 2007 - 2010-->12) only time can tell for sure."...
Well, as of the December 2010 monthly close, the supposed wave 2 has nearly reached the key Fibonacci retracement (61.8%) level in the OEX, calculated from the 2007 - 2009 debacle. As mentioned in the 2010 report: ..."A typical wave 2 would do this, before the wave 3 takes over. Any move beyond the key Fib. zone, would start to put pressure on this wave count though, reducing the chances of being a correct one and would be fully excluded as a valid count, by a break of the Oct. 2007 high."...
So any monthly candlestick of the reversal type, i.e. Hammer formed up against this key Fib. zone, after the January trading month, could be a warning of a possibly peaking market.
If the countertrend advance continues beyond that point, (test of upper channel line?) another possible time candidate which could mark a major top, is the upcoming weekly Gann Angle cycle convergence due March 04, 2011 (+/- 1 week). With past GA's as proof, significant market reversals are expected, when these weekly GA convergences occurs. In this case, it marks 90 trading weeks from the summer 2009 low, 135 TW from the August 2008 high and more important... 180 TW from the major October 2007 high, a strong GA convergence which has the power to cause a change in the market tide, if the mid/long term positive trend is still intact at that point in time.
On the other hand, any strong mid term sell-off going into this time window, would instead make me look for a significant low.
Neural Nets (Artificial Intelligence)
As for what Neural Nets (artificial intelligence) thinks the first 3 trading months of 2011 may contain, below is a S&P 500 forecast to April 1, courtesy of chartsedge.com
NN forecast for Gold into April. More analysis available in the Gold section below. Inversions can happen in these Neural Net outputs too, like in the Bradley, so it should be used with other indicators.
As for the current NN Signal, my Neural Nets system is still Long on the OEX weekly, after it turned positive on this market in mid December 2010. These weekly Neural Nets signal charts, are more frequently updated on the site.
Mid & Short Term
The weekly 13 - 34 EMA and the daily NYSE Summation trend charts are all in bullish mode after this week, although just barely so on the NYSE Summation daily chart, which turned flat Friday. A tip on NYSE Summation, put a 3 day EMA on it, to better see the true trend in prices. Also, any divergences observed in this indicator, gives stronger technical indications of tops and bottoms forming. A good example is the bearish divergence observed these days.
On the OEX weekly chart, RSI 25 has climbed well into the overbought zone and at the same time showing a full five wave structure C from the July 2010 low in prices, which also came close to the key Fib zone this week. So this could be an alert about a mid term top forming soon. Any clear weekly close above this 62% retracement level, could open up for even higher prices ahead, possibly going for a test of the upper channel line, before a top is finally in place. Cycle10 is also found in its sell zone (above 70) but has yet to reach levels where it would normally make a bearish reversal.
The daily chart below shows the ending five wave structure and test of important trendlines better, here with RSI 25 at an overbought extreme. So i would be surprised to see this strong resistance area overcome right away, before going through some near term weakness first, towards trendline support. If this support fails to hold, it would most likely confirm a wave C termination at that point, even more so, if the wave 4 low is broken later on.
The daily chart shows increased volume activity in recent days, above its 50 day moving average, while the market hasn't made any progress. So this could mean some distribution is going on, likely leading to at least a near term pull-back in prices. The increase in Volume came after i.e. the NYSE Comp. reached the important trendline coming in from the Summer 2010.
Volatility (fear level)
The VIX RSI 25 touched the 40 level in December, which also happens to be a strong support area, produced by the many RSI lows since 2009. So given the low momentum level, a Volatility explosion could be the outcome once the market top is in place.
Gann Angles - Daily
The next daily (short term) GA convergence is on 02/08, 2011, +/- 1 day. It marks roughly 135 trading days from the Aug. 2010 high, 180 TD since the May 2010 low and 270 TD from the Jan. 2010 high. As usual, the short term directional trend going into this GA time frame, would point to a reversal in the opposite direction around that time.
Dynamic Gann Levels - DGL
The OEX has some more work to do to the upside, before reaching an important L2 & L3 DGL convergence, found right above the 600 level. If the positive trend continues, this should be a stiff resistance area to break through on the first attempt.
Murrey Math Lines
From a Murrey Math point of view, the OEX climbed towards the 5/8th MML (green) this week, on waning momentum (bearish divergence). In this theory, once inside the 3/8th - 5/8th MML range, it can be difficult to exit it. So with an overbought Stochastic now entered bearish mode, odds are good for a near term pull-back, next week. The 4/8th MML is considered strong support, using this technique.
As for an update on the longer term MM chart, the OEX managed to overcome the 50% line between the major 4/8th - 5/8th MML this week, clearing the horizon for even higher prices, long term.
A look at the Google Monthly chart shows a possible Triangle looking pattern development. As the long term momentum is getting overbought and also tracing out a bearish divergence, with prices at the same time near the upper triangle line, a pull-back towards the lower triangle support, is a likely scenario for this popular stock, in the coming months. If its able to close above the upper line, it would instead open up for a test of the 2007 high.
As the below chart shows, the Neural Nets system turned bearish on this stock, after this trading week.
See this important video about The Long T Theory 40 Year Cycle
The 4 Seasons of the Kondratieff Cycle.
54 Month Cycle
The 54 Month Cycle is projected to bottom out in Spring 2012.
Statistics based Cycles
cyclelt.com's big picture cycle is bullish in the first months of the year, excluding a possible inversion which sometimes occurs.
For those new to Bradley, here is an excerpt from an earlier Outlook Report:
..."The Bradley Siderograph is a popular indicator many traders rely on, to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when major highs and lows can be expected. So using other indicators in combination with the Bradley, could give useful clues about future larger tops and bottoms."...
Bradley dates indicating market turning points in 2011, dates in bold marks more important turning points:
"Smart Money" (Commercial Futures Traders) has steadily increased positions on the Short side, during the market advance from the July 2010 low. As of 12/28 2010, the COT Report (Commitment of Traders) shows they are net Short with - 41,537 contracts. Chart courtesy of timingcharts.com
This survey report is used to determine the percent number of Bulls to Bears, to find sentiment extremes that can lead to market reversals. I.e. readings above 55% - 60% Bulls reflect extreme optimism, which can be seen with indexes at record highs. This usually means a bearish market reversal is due. Readings below 20% reflect extreme pessimism and a positive reversal is likely.
As of 01/04, 2011 the II Chart shows:
54.5 % Bulls
20.5 % Bears
A market reversal is due.
Bullish Percent Index
01/07, 2011 - BPI Daily closed at 88, an overbought extreme, a market reversal is overdue.
See the description for this sentiment indicator.
Forex - Currency Market
Predicts the fall of the Euro within 2020 - It is only a 20 percent probability that the currency cooperation stands until 2020, means british thinktank The Center for Economics and Business Research (CEBR).
The top chief Douglas McWilliams points to the big unbalances in the Euro zone and states the differences between weaker and stronger members will only increase in the future. This will contribute to undermine the cooperation in the long term.
I suspect what will break up the Euro, is that most of the countries will not be able to take the medicine which is necessary to make own economies more competitive, says McWilliams.
CEBRs analysts warns that the Euro can get significantly weaker against the Dollar in the coming year. If not the Euro is collapsing, this can be the year the Euro is weakening towards pari against the Dollar, adds McWilliams.
A technical look at the monthly chart of the EUR/USD shows that this pair has established a large bearish channel from 2007. So the outlook for the EUR/USD seems negative, as long as this channel stays intact. Long term momentum is also bearish and has plenty of room left to the downside before getting oversold. Support comes in at 1.27, while the 6/8th pivot resistance is at 1.3670.
U.S. Economic & Fundamental Condition
The official U.S. labor market report Friday, showed that 103,000 jobs outside agriculture were created in December, against the consensus of a 150,000 jobs growth. However, the unemployment rate fell from 9.8% to 9.4%, a lot better than the expectation of a 9.7% rate.
The U.S. needs faster job growth if the country is going to increase consumption, which is the fuel for the economic recovery. To reduce the number of new searchers for unemployment, the job growth has to be double the speed it has now, according to Bloomberg.
Bernanke states it could take 4-5 years to normalize the job market:
..."Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve’s statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully."...
Here is also an eye opening article about non-government unemployment numbers.
12/28, 2010 - CC is at 52.5 - 1.8
Consumers represent two-thirds of all domestic spending in the United States. So measuring consumer opinions is an important part in gauging future consumer spending and in turn the economic condition. High Consumer Confidence holds up the economy.
Debt - Last updated, January 2011
As of October 2010, the U.S. Total Debt (public, corporate and personal) is over $60 trillion, which is $186,000 per person or $750,000 per family. The total debt increased by $3 trillion, about eight times faster than GDP.
..."Normally in a recession, you'd expect to see total debts fall. But not here. Our government believes it can borrow an unlimited amount of money and then print more to pay it. That's like lighting matches next to gas tanks.
We can't solve our country's problems with more debt. Why not? Diminishing returns –s one of the core ideas of economics our leaders have never considered. As the debt load grows, it takes more debt each year to produce growth. In 1960, it took roughly $2 in new debt for each $1 in growth. By 1980, it took $2.25. By 1990, it took $3. By 2000, it took $3.50 in additional debt to finance $1 in additional economic growth. It now takes $5 in new debt for each $1 in economic growth.
As you will hopefully understand intuitively, we can't sustain this trend. But that won't stop our politicians from adding, massively, to our country's debts. And eventually, people will figure out we can't ever repay these debts. At that moment, the value of the dollar will simply disappear.
Once a country has used up all its credit, its Treasury Secretary begins to say things like, "We will never devalue..." That's a sure sign devaluation is right around the corner. And even though I knew it would happen here... I'm not happy to see it. It means terrible things for our country. I hope you've already acted to protect yourself."... writes The Daily Crux
The U.S. National Debt has for the first time passed $14 trillion, getting close to the roof (14,29) the Congress has set. In February 2010 president Obama signed the law that put a roof to this debt and the federal government in Washington now has to stop lending more money, if the Congress doesn't raise this level. Some republicans in the Congress have made it clear they will vote against any suggestions to open up for even higher national debt, if they are not followed by a plan for significant cost cuts. For only 7 months ago this debt passed the $13 trillion mark, while it was around 10.5 trillion when president Obama took over in January 2009.
Finance minister Timothy Geithner has warned the Congress of catastrophic economical consequences if this debt roof is not raised, fearing loss of millions of jobs. In a letter to central Congress members Geithner is warning that this roof can be reached already in March, if its not raised from today's level. Never before in our history has the Congress decided not to raise this level when needed. If it now fails, it could lead to several million job losses, writes Geithner.
He is also warning about increased loan costs for US sitizens, which he thinks could have a worse impact on the US economy than the finance crisis. The finance minister means the dollar's status as the world dominating currency is threatened and that the consequences in general would be catastrophic for the US economy if not the debt roof is raised.
01.07.11 Update - Debt roof raised after pressure
The Republicans gives in after pressure from finance minister Timothy Geithner and opens up for administration to take on more loans.
SocGen's presentation on debt: "Prepare Yourself For The Worst Case Scenario"
The chart below (courtesy of Deutche Bank) shows a US Debt to GDP comparison between 1929 and now.
Deutche Bank's view:
..."Figure 1 and Figure 2 help us understand why we are entering into unknown territory in terms of Developed market debt. These charts simply show the Debt to GDP ratio of the US and the UK. The Government part of the deficit is starting to rise sharply in both regions and although it looks within the range of historic observations we have to remember that Governments have implicitly and explicitly backed the debt of other parts of the economy. This makes Government liabilities potentially much larger. The hope is that growth rebounds strongly enough for the Debt/GDP ratio to fall naturally over time. Such a scenario would also require yields to stay low to facilitate such an adjustment. All we can say is that there are risks that the deficits of such indebted countries at some point appear unsustainable to the market. This is when far more difficult decisions than those made in 2009 would have to be made."...
From the April, 2009 update:
As pointed out in an earlier published article about the 60 year Kondratieff Cycle the purpose of the Winter part (from 2000 --- >) of that economic cycle, is to cleanse the economy of debt via payback, liquidation and usually bankruptcy. This process creates tremendous stresses to the economy and financial system. The next Spring should again bring growth and prosperity. As the below chart shows, for the first time in many decades, consumer debt has actually turned down, reflecting the ongoing cleansing process in this current Winter cycle.
From the May 2008 Update
- 2007 total debt increased $4.3 trillion (up 8.9%)
- Federal government debt (incl. added debt owed trust funds) increased $549 billion (6.3%)
- Household debt increased $877 billion (up 6.8%)
- Business debt increased $1.1 trillion (11.7%)
- state & local government debt increased $184 billion (up 9.2%)
- Domestic financial sector debt increased $1.6 trillion (11.1%).
Each sector reached a new, all-time high. As of 2006, 26% ($1 Trillion) of the total debt increase of $3.9 Trillion was owed to foreign interests, up 11%.
Source Michael Hodges
An upside breakout from the long standing falling yields channel is not out of the question in 2011, as the Bond market is probably peaking, long term. If so, we could face a sharp rise in interest rates in the coming years. The same happened in the 30s deflationary stock market crash.
In 2010 i didn't rule out a test of trendline resistance up around 88, which came in the summer, before pulling back. I'm taking a positive stance for the buck in 2011 as well and another test of this trendline is a likely event to look for this year too. Any monthly close above it, would indicate more strength ahead for the dollar. When the markets resumes their overall bearish trend in 2011, the demand for cash should increase.
The Dow Jones REIT index reached the suggested 800 target mentioned in the 2010 report. After several attempts, in the Fall 2010 it finally broke through the discussed trendline. As long as it trades within the established channel, the trend is positive. But Real Estate along with many other markets should experience weakness, when the deflationary pressure returns. A breakout from the channel and a monthly close below the earlier broken trendline, within the first half of 2011, could signal a change in the long term Real Estate trend.
A look at the XOI Monthly chart, shows that this index broke out from a Triangle looking pattern in the Fall and closed in December at the 50% retracement level, with RSI 25 yet to reach overbought levels.
Weekly Light Crude (Continues Contract) has oscillated within a channel from mid 2009, with a slightly upside bias. In recent weeks it has failed to overcome the 50% retracement level, (which was one of the likely targets outlined in the 2010 report) and is now heading lower. Minor trendline support comes in around 86.
The outlook for oil is bearish, as when the stock market is peaking, oil should fall along with it and most other assets like i.e. gold, when the deflationary pressure resumes.
Long term, the large Rising Wedge pattern development in Gold prices, along with bearish divergent readings in RSI 25, continued throughout 2010. I would be surprised to not see a downside breakout from this wedge in the first half of 2011. So my outlook on Gold would turn bearish after this breakout occurs. Gold prices should then work its way lower, with $1000 as a minimum downside target, long term. If this support fails to hold, the next likely target could be the $700 level.
Mid term, my Neural Net system turned bearish on GLD Weekly (Gold etf) after this trading week.
Chart courtesy of stockcharts.com
XAU - Gold & Silver Index
The XAU closed up against the channel roof in December, with RSI 25 at the same time entering its overbought territory and soon facing trendline resistance. A strong bearish RSI divergence versus higher XAU peaks from mid last decade is observed. The outlook is bearish also for this market.
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Day Trading: Educational Video
For new readers, download link (.zip file) to my RSI 25 Market Timing Article.
At last, a trading friend shared with me this slightly off track video but hopefully it will bring a few smiles into all this serious market talk.
Good luck trading in 2011!
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