Trader's Tips Stock Market Newsletter
Published July 13, 2008 ...by oextradingresources.com
OEX (S&P 100) Long Term
In the May issue it was mentioned that: ..."The friend is in the trend, so it would take a monthly MACD MA crossover though to change the view on the current overall dominant bearish trend from Oct. 07. Using weekly closing prices only, the special 13 - 34 EMA combination mentioned in the previous update, is also still in a bearish mode."...
The March - May OEX market reaction up brought prices to the 50% retracement zone only (of the Oct.07 - March 08 decline) before resuming it's overall bearish trend and made a June monthly close below important trendline support. Monthly MACD barely reacted and firmly stood in bearish mood throughout this Spring rebound.
But there is still hope that current levels will hold (at least temporary) because this monthly close came at another trendline drawn through the monthly highs from Oct. 07. So this old broken trendline now act as support instead and could be strong enough to at least cause a short/mid term reaction up. Because of the steep decline from May, this reaction may come in the form of a consolidation, a choppy, sideways market with an upward bias.
The S&P 500 Monthly market once again found support on the first 38.2% Fibonacci retracement level, of the 2002 - 2007 advance. Despite it's third attempt to break through since March, it closed in June right at this support. The longer it holds, the stronger this support should become. But let's see what happens after the July trading month closes, because as of 07/11 S&P 500 Weekly closed below this support.
A recent S&P 500 COT Chart (Commitment of Traders) shows that Commercial Future Traders (Smart Money) are bearish, being net Short. Chart courtesy of buythebottom.com
Another technical observation which could mean trouble for the market longer term, is the fact that the Dow has broken a long standing 34 year old trendline, as seen on this long term Dow chart courtesy of ElliottWave.com The Dow's decline below it's Jan. 2000 high, is leaving this market with a loss for the past 8 years.
From an Elliott Wave Principle (free tutorial) point of view, since June closed below the March OEX low, this gives support to the current preferred wave count, with the view that the market is working on a major five wave impulse C structure to the downside, from the Oct. 07 high, with the waves 1-2 already completed. Another technical point is that the March - May advance looks like a text book three wave, which gives additional support to the view that it really was a wave 2 we saw ending in May. Excerpt from the previous issue: ..."Wave two's typically terminates at either the 50% or the key 61.8% Fib. retracement level."...
Even in the case this is a normal A-B-C corrective zig-zag, (alternate count) developing from the Oct. 07 high, as part of an ongoing Bull market from 2002, it could still do serious damage to the market in wave C, although this count has less magnitude to the downside than the current preferred count.
As for the tech market, here represented by the QQQQ Monthly it shows that this Nasdaq 100 index tracking stock has been through a typical snap-back move up towards an earlier broken trendline, before resuming it's overall bearish trend from 2007. The soon reached RSI trendline support must hold to not open up for even more weakness. Using the RSI 25 as a guide, the tech market still has plenty of room to the downside before it's considered oversold, long term, like it was in 2002.
Mid & Short Term
RSI 25 & DGL (Dynamic Gann Levels)
As suspected in the previous update the RSI 25 peaked right below the 60 level. The conservative strategy opinion at that point: ..."For market entry, a more conservative approach would be to wait for a weekly Cycle 10 reversal and enter when that weekly bar low has been broken."...
This approach would have given a market entry on the Short side at around 637, which was right below the 05/05 weekly bar low, the one which caused the weekly Cycle10 reversal at that point. Now in July, roughly 70 OEX points lower, weekly Cycle10 is bottoming out with the OEX at the same time testing a trendline drawn through significant short term bottoms since 2007. In addition, daily RSI 25 is at an oversold extreme and even weekly RSI 25 dipped below 40 at Friday's close. Using S&P 500 weekly closing prices only, the market is about to test strong channel support too.
So because of the current technical situation, this could be a set-up for a positive market reversal of minimum short term degree, in my opinion. Again, a less aggressive strategy would be to enter the market on the Long side when weekly Cycle10 has made a reversal and when that weekly bar's high is breached. Cycle10 updates are available here (usually updated weekly, except for holidays or when away from the office).
On the daily RSI chart above, the OEX has followed the L2 (50%) DGL lower for nearly two weeks but still holds. Any clear move beyond trendline resistance (daily closing basis) would be a confirmation of a bottom in place. This would also be another possible market entry point, with less risk involved but also with less return.
For new subscribers, here is a download link (.zip file) to a hopefully useful RSI 25 & Market Timing Report, in case you don't already have it.
RSI 25 touched the 40 level in early July, with QQQQ Daily prices at the same time reaching the key 61.8% Fib. retracement zone. After a brief reaction up, it's now back at this support area, with RSI 25 forming a bullish divergence vs. lower low in prices. So a near term bottom could be forming here.
Overall, this stock has oscillated lower within a Falling Wedge looking pattern from May. Completed Falling Wedge patterns usually breaks to the upside therafter, so if/when that happens, (daily closing basis) it would most likely confirm a bottom in place and a good entry point for conservative traders. Another possibility is that it will break out but trade within a tight range, given the possibility of a wave 4 developing in this stock. According to the Elliott Wave Principle wave four's often turns into a complex, sideways pattern.
Because of the sharp and persistent trend lower, recent Gann Angles haven't had much impact on the market. The next calculated 07/24 Gann Angle (+/- 1 day) marks 45 trading days (half 90 cycle) since the May High and also 90 TD's since the March Low. The 90 number is alone strong enough to cause near term market reversals. When found in convergence with other GA numbers, especially the 180, a stronger impact could be the outcome.
Using the normal approach for finding tops and bottoms the GA way, the directional trend going into these projected GA time windows, would indicate a reversal in the opposite direction. So i.e. a short term advance into a GA would indicate a bearish reversal and vice versa. Looking at past GA's on the historical charts, these GA's don't always leads to market reversals but can give good clues of when some of them will occur. So it's just a tool in the toolbox for market timing.
According to Murrey Math theory, in a strongly trending market, it can sometimes "overshoot" strong resistance/support zones, which the major (blue) 8/8th MML (Murrey Math Line) usually represents. In this case, the OEX has overshooted down to the -2/8th MML support. And is hitting a larger 8/8th vertical Time Line within a few days. This and the clear Stochastic bullish divergence now forming vs. lower lows in prices, makes odds good that early next week could be a turning point for the OEX market, near term.
The Google stock has pulled back towards the 50% retracement area, of the March - April advance into trendline resistance. Trendline support is also around this level, so with Cycle10 at the same time bottoming out these days, a breakout to the upside from the two converging trendlines is likely. This should occur before the Apex of this symmetrical triangle looking pattern is met, in August at the latest.
More chart updates:
Cycles & Neural Nets
Cycle LT Model
The Zig Zag Diagram turned bearish from 07/07. The Cycle LT Model (courtesy of cyclelt.com) is an original cyclical method for predicting the US Stock Market. Using the ZigZag Diagram technique, see his revised hypothetical profit test.
The actual May high came weeks earlier than the projected June 07 Bradley turning point, possibly because of a inversion into the 05/24 date. With no more inversions, the next projected turning points are in September and a more important one in mid December.
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 larger tops and bottoms."...
Bradley dates indicating market turning points in 2008, dates in bold marks more important turning points:
Artificial Intelligence (Neural Networks) is another helpful tool in finding potential tops and bottoms. Here is a recent output with a market projection into October (chart courtesy of chartsedge.com). Inversions can also occur in neural network patterns, so it should be used in combination with other indicators.
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 reversal is due. Readings below 20% reflect extreme pessimism and a positive market reversal is likely.
As of 07/08, the II Chart showed:
Bullish Percent Index
BPI closed at 28, as of 07/11, so the market is getting oversold. See the description for this sentiment indicator.
Forex - Currency Market
The EUR/USD pair consolidated for several months near the major 8/8th Murrey Math Line, before climbing higher. Any monthly close below trendline support would indicate a larger top in place. Until then, the overall bullish trend is viewed as intact.
US Economic & Fundamental Condition
As of June 24, CC is at 50.4 - 7.7
CC is in a sharp down trend, the 2003 Low support was ignored.
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, May 2008)
- 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
Monthly TYX rates closed down in June. An important trendline coming in from the 80's, is up at around 5. If clearly broken on a monthly closing basis, it could open up for much higher rates, long term. Strong support is around 4.10.
After finding trendline support in early Spring, the buck have made higher highs i recent months but pulled back and closed down in June, forming a bearish Hammer reversal candlestick. So a test of the June low (72.04) at a minimum, could be in the cards for the dollar.
The Dow Jones REIT Index Weekly has pulled back towards the Dec. 2007 low, after once again failing to overcome the 50 EMA in Spring. It's oscillating lower within a widening bearish channel from 2007.
Oil advanced to a new high this summer, oscillating higher within a still intact bullish channel. But it was not backed up by RSI 25 strength which instead is forming a double bearish divergence since 2005, vs. the new high. So the XOI could be working on a major top, which would be confirmed by a clear breakout from this channel. Until then, the long term bullish trend is viewed as intact. June was an Inside Month, trading within the range of the previous month, which reflected indecision among investors. Channel roof resistance is around 1700. Support, 1400.
Despite a pullback since the Spring peak Gold is still within a huge bullish channel. So although currently advancing mid term, (possible b wave) any test of the channel floor later this year, could lead to the next push higher for Gold, if this support holds. Charts courtesy of stockcharts.com
After a brief dip in the XAU Gold & Silver Index, this market is probably going for one more test of the strong trendline convergence resistance area at around 205 - 210.
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