Trader's Tips Stock Market Newsletter


Published October 01, 2006



Economic Facts

September Consumer Confidence (104.5) recovered after the dive it took in August to 99.6 but has met a trendline resistance challenge. Here is also a chart overview on current Home & Auto Sales.

Transport Sector Chart Update ..."The Transport Sector can give clues about the development in the economy. I.e. more activity in transport companies often reflect more activity and orders for companies in general, which is positive for the stock market and vice versa."...

consumer confidence

Chart courtesy of market-harmonics.com


Stock Market

Long Term

The September advance brought prices to a new multi-year high and up for another test of the tremendous Wedge resistance, (built up since 2004) which caused the high for the month, in the S&P 500 market. The advance in recent months is not backed up by MACD though, which is instead forming a bearish (lower peak) divergence warning, compared to the May peak in MACD and prices. Updated Monthly Cycle Chart which also shows the upper Bollinger Band is reached.

As this COT Chart (commitment of traders) shows, another concern for the Bulls, should be the fact that "smart money" (commercial traders) is heavily net short (in blue) the S&P 500 futures market, despite this multi-year high.

The QQQQ Monthly is in a favorable upside pressure phase, as indicated by the Cycle10 indicator. Strong resistance comes in at 43, for this Nasdaq 100 index tracking stock.

In my opinion, a larger top may occur in the late October - November time frame. A clear monthly (closing price) breakout from the wedge pattern would confirm a larger top in place. Until then, the overall wedge pattern trend from 2004 is treated as still bullish.

From a Volume point of view, the two significant buying surges during the decline in July and mid-October of 2002, have yet to be surpassed by any selling surges (during the market advance since then) of a similar magnitude, that would oppose the strong accumulation of buying volume seen in 2002.

volume

Chart courtesy of marketvolume.com


To come up with time target candidates for a larger top:

  • The next significant WCA Model (Zig-Zag) top is due 10/28.

  • The next weekly Gann Angle convergence is due 11/24, +/- 1 week. This GA marks 90 trading weeks since the March 2005 high and 270 trading weeks since the Sept. 2001 low... both important numbers in the Gann Angle technique. When found together they are even more powerful.

  • The next expected Bradley turn of importance is 11/28, which happens to be near the above GA date.

    Bringing the Elliott Wave Principle into consideration, the market development from the Oct. 2005 low is best interpreted as a last wave 5 of a five wave impulse structure from 2002 or a wave C as part of an A-B-C zig-zag from 2002. On the same chart, despite the multi-year high in prices, see how weak MACD is, compared to it's readings in 2004... a classic bearish divergence warning of long term & larger degree.

    For other Elliott Wave opinions and more from experienced traders, Dominick's Trading The Charts Forum is just out with a monthly update.

    Mid Term
    I have already covered the Wave part of it above. The move above weekly trendline resistance could be an overshoot, which may occur if fifth waves. After all, for the broader market, a close above the important Wedge resistance on the monthly chart, has yet to occur.

    Another fact, by using weekly closing prices only, the OEX ran into another trendline from early 2005 this week, with RSI 25 at the same time climbing above 60. As the chart proves for the past years, when this indicator moves above 60, larger tops can be expected. For new subscribers, as for why a 25 setting is used for the RSI, see my article "A Stock Market Timing Secret Revealed", as featured on isnare.com and ezinearticles.com (takes you directly to the article).

    Here is also another interesting chart, showing the current long term Murrey Math picture, where the major 5/8th MML (murrey math line) is now reached. The 3/8th MML support area caused the major OEX bottom in 2002. In this theory, in all time frames, the 3/8th - 5/8th range is often difficult to come out of, once the market has entered it. So i would be surprised to see prices breaking through the 5/8th MML right away, without at least going through a correction first.

    Here is also an updated Weekly Cycle10 chart, showing a deterioration, in the face of the multi-year high and is still in it's sell territory. The 10% more accurate but slower WB BLine indicator has yet to make a reversal but is at levels where it would normally do so.

    Weekly VIX (volatility) is preparing a break out from a triangle looking pattern. With oversold momentum, the odds are greater this will occur to the upside and as a result, put pressure on the stock market, as higher volatility (fear) usually means lower stock prices.

    After overcoming the key (61.8%) Fib. resistance area, Nasdaq Comp (tech market) is climbing higher within a sharp price channel. Breakout from channels are strong trend reversal signals.

    Short Term
    Since summer, the OEX has advanced within a sharp, rising wedge or channel looking pattern. Any breakout from it would confirm a top in place.

    The OEX apparently ignored the key L3 DGL (62.5% Fib. & Dynamic Gann Level) resistance zone. Given the current daily RSI 25 overbought extreme and it's reversal up against trendline resistance Friday, I've drawn the first L1 DGL support on the chart, which is down in the 596 area. Any RSI break below it's trendline support would be stronger evidence and most likely a confirmation of a short & mid term top in place.

    The OEX is completing a minor wave 5 impulse structure from the June low. This is also suggested by the Advanced Get software, click here for the chart. So this could be the last wave 5 of the one degree higher wave 5 pattern from October 2005.

    After a brief pullback from the key Fib. zone, the next attempt brought QQQQ Daily prices above this zone and is climbing higher within a wedge or channel looking pattern. Any breakout from it, would confirm a larger top in place.

    The next calculated (daily based) Gann Angle (11/24, +/- 1 day) convergence is close to the WCA Model date mentioned above. It marks 90 trading days from the June low, 135 trading days from the April low and 180 trading days from the February low. The near term directional trend going into it would indicate a reversal in the opposite direction, once the GA time frame is entered.

    This update of the popular Google stock, shows it's struggle with triangle resistance. Symmetrical triangles opens up good trading opportunities, by acting on a clear price breakout from the triangle, (closing basis) which should occur before reaching the two converging trendline's Apex.

    Sentiment
    BPI reached 59.13 Friday. Readings above 70 is considered overbought. See description below the chart, for when stronger sell signals are generated.

    AAII Sentiment Ratio is at the 60 level, as of 09/22. A move above 70% would be a bearish indication for the market. See more description details below the chart.


    Other indicator updates:
    Breadth






    Yields
    TYX has just reacted up from strong trendline and 50% retracement support, with Cycle10 in it's early stages of an upside pressure phase. A move towards trendline resistance at 4.9 is likely and if overcome, an even higher yield could be the outcome, towards the 5.2 zone. This higher yield outlook is usually a bearish indication for the stock market.

    USD
    Strong trendline support for the sleepy Dollar index is still intact. Trendline and 50 MA resistance comes in at roughly 88. The dollar is probably working on a wave four structure, which can turn into a complex, sideways pattern. But a breakout, regardless of direction, should occur sometime before the two converging trendlines meet.

    Gold
    A triangle looking pattern is also developing in weekly Gold prices. A test of the upper trendline is likely in the coming week(s). After testing key Fib. resistance twice since early summer, the XAU (Gold & Silver Index) is retreating towards trendline and 50% retracement support, in the 115 area, with Cycle10 at the same time bottoming out. This support would be a high probability zone, to look for a reversal.

    OIL
    OIL finally broke out from it's Ending Diagonal pattern, which most likely confirms a larger top in place, although a re-test (Double Top?) of the recent high is not ruled out either. First Fib. support (38.2%) comes in at 917.6, as calculated from the 2003 - 2006 advance.

    Real Estate
    RSI 25 has failed to reach new highs and even deteriorated in the face of multi-year higher highs within a channel, in the Dow Jones REIT Index. Especially the latest bearish divergence in RSI 25 vs. the Spring - Fall, 2006 Double Top in REIT, is a strong warning for the real estate market. I would get out of it, once the 50 EMA or channel support is clearly broken.

    Forex - EUR/USD Currency Pair   10 pips a day system
    Another Inside Week (range within previous week's range) is observed in the EUR/USD pair, which reflect indecision among currency traders. The directional breakout from it, as signaled by a break of the previous week's high (1.2833) or low (1.2630), could set the tone for the weeks thereafter. The Bollinger Bands still holds on to it's contraction (low volatility) mode.

    Updated EUR/USD Daily Chart & Cycle10

    Here is a longer term chart of the EUR/USD, which also includes an Elliott Wave count as currently interpreted by the Advanced Get software. The Elliott Wave Oscillator is usually good at filtering out minor price "noise" and tend to show true trends.

    Investment Strategy
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    Regards,
    -AM
    info@oextradingresources.com
    http://oextradingresources.com

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