Trader's Tips Stock Market Newsletter

Published July 05, 2009 ...by oextradingresources.com
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Stock Market

On the monthly chart, the OEX is getting closer to it's first Fibonacci (38.2%) resistance area, calculated from the Oct. 2007 - March 2009 decline. However, using the May 2008 wave 2 high as the starting point for the calculation, the OEX high in June actually touched it's 38.2% Fib. level.

This, in addition to the reversal type of candlestick formed after the June trading month, technically this indicates some market weakness ahead. The Doji candlestick is often found at the end of trends in all time frames and it usually reflects indecision among investors, opening and closing at nearly the same level. And when found near resistance/support levels, the odds of seeing a reversal is even better. There are also other factors suggesting some weakness coming, i.e. see the weekly based Gann Angle section below, for a comment on an important weekly GA cycle convergence, which was due 06/26, +/- 1 week.


OEX  monthly chart



Despite the roughly 130 OEX points move from the March low, from a conservative point of view, the dominant long term trend is still considered bearish, with monthly MACD yet to come out of it's bearish mode and the weekly 13 - 34 EMA trend chart also shows no crossover. So in my view, the optimal market condition for investing in stocks, longer term, is not yet fulfilled. And the fact is, using the chart history as proof, when the fast MACD (red) line comes back up to test its moving average like now, often a resumption of the overall trend is instead the outcome.

In the current market situation, using the Elliott Wave Principle (free tutorial), the next event in the market could be a wave b (preferred count) or 2 (alternate count) taking prices lower, short to mid term. Typical targets for wave b's and 2's, are the 50% or 61.8% Fib. retracement zones, of the previous advance. So in this case, calculated from the March - June advance, it could take prices back down to the 380 or 360 area, to come up with probable price targets.

This wave b is likely part of an ongoing a-b-c corrective wave 2 (one degree higher) of C to the upside, which will reach it's negation point if the Oct. 2007 high (734.51) is breached. The alternate view is, if a major Flat correction from 2000 ended at the March low, then a wave 2 is probably coming, short to mid term, which should reach it's terminantion point above the March low, to remain a valid Wave count, as wave 2's can't retrace more than 100% of wave 1, according to this principle.

Smart Money (Commercial Futures Traders) is still positioned on the Short side, despite the overall market advance since the March low, reflecting what they think about the dominant trend. As of 06/23, the COT Report (Commitment of Traders) shows they are net Short with - 45,184 contracts. Chart courtesy of timingcharts.com

Volatility, as reflected by the VIX Monthly chart, is resting at channel support, likely preparing for a reversal. The still intact long term rising channel, is in line with what the Elliott Wave Principle suggests is coming after the end of wave 2 of C. Higher Volatility (fear) usually means a lower stock market. Chart courtesy of stockcharts.com

QQQQ - Nasdaq 100 Index Tracking Stock
The tech market, as reflected by the QQQQ monthly stock chart, has also reached it's first Fib. resistance zone, with monthly Cycle10 climbing into it's sell territory (above 70). Any monthly close below minor trendline support would confirm a top in place. Until then, the trend is not fighted.


qqqq monthly chart



Short Term

On the OEX daily chart, after a snap-back move towards the broken trendline, the overall bearish trend from the June high resumed this week. These snap-back moves are typical observations, after breaking below trendline support and offers a good second entry opportunity on the Short side, often at a better price. The early stages of a downside pressure phase in Cycle10, should be a challenge for the earlier established support area, which is already nearly reached.

DGL - Dynamic Gann Levels
The market closed at the L2, 50% DGL support Thursday, this L2 has caused several upside reversals since May. If it fails to hold this time, more weakness towards the 23.6% DGL (400 area) is possible. This 23.6% DGL is not officially part of the DGL technique but has proved it's ability to sometimes give support in the past, so an eye is kept on it. These new drawn DGL's are projected from the January closing high. The example on the other daily chart is projected from the February closing high. The RSI 25 bearish divergence vs. the June high in OEX prices, was a technical warning about a likely market peak forming, especially when observed around overbought levels (60 and above). These divergence patterns works out more often than not, so they are worth looking for.


OEX daily chart



Murrey Math Lines
This is a good example of the strength of the 4/8th MML (one of the strongest in this theory), as after a struggle since early June, the market has failed to clearly overcome it and is now once again making a retreat from it. Any move below the 06/23 pivot low (416.75) next week, would signal more weakness towards the red 2/8th MML support (406 area), as a minimum downside potential, near term.

Mid Term
As on the longer term charts, im holding on to a bearish stance for the mid term, as long as the trendline coming in from 2008 remains intact. Any clear weekly close above this trendline, would be a sign of market strength and could turn the picture bullish again. The break of the smaller trendline support a few weeks ago, could go in favor of the bears, especially if the pivot low is broken.


OEX weekly chart



Using weekly closing prices only, the June top came up against a trendline drawn through several lows and highs since Fall 2008. As the chart shows, the advance from the March 2009 low came on poor Volume.

An update on the simple mid term based Stochastic & MACD trading system i have written about in an earlier issue, shows several profitable trades since Spring 2008. This system only makes entries in the direction of the long term dominant trend (currently bearish) and only when the market has reached important resistance/support areas, like trendlines and Fib. zones.

I.e. for a valid bearish signal, the 5-3-3 Stochastic must also first reach it's overbought territory and then reverse into bearish mode, with a standard MACD histogram staying below it's 0 level at that point, before an entry can be done. After entry, a stop is placed right above the swing high.

An example is the swing high made a month ago. The Stochastic indicator entered bearish mode at overbought levels earlier this year too but the market had not yet reached weekly trendline resistance at that point, a crucial part for this strategy to work out over time. Another part is to use a 1:2 Risk/Reward ratio, so the winning trades will be twice the size of the losing ones. This way, the system can be wrong about 50% of the time and still break even.

Divergence signals can be even more powerful, like recently when the market tested important weekly trendline resistance, making a higher high at that point, while Stochastic traced out a bearish divergence peak, before entering bearish mode thereafter. So this simple model is currently Short on the market.


OEX Stoch system



Gann Angles
Important numbers used in this technique: 90, 135, 144, 180, 270 and 360, counted using trading days or weeks only, not calender days.

As mentioned in the previous issue, the next daily GA is found on 07/17, 2009, +/- 1 day. It marks 90 trading days from the March low and 144 TD from the Aug. 2008 high, a GA cycle convergence powerful enough to be worth keeping an eye on, for a potential market reversal.

Now to the more important weekly GA which was due 06/26, with the usual leeway of +/- 1 week given. Well, since this is more of a mid term based version, the mid term trend going into this time window was no doubt bullish (from the March low). So using the normal technique, we would look for a reversal in the opposite direction, when the market enters the given time window.

In this case, the market top came a week early, outside the preferred time window of +/- 1 week but when taking into account these signals can last for months, (like the May 2008 bearish signal) it may not have much impact on how much of the trend can be catched. That is, when the signals turns out to be correct, as with most systems out there, it's not perfect. At this point it's too early to tell the outcome of this one. Keeping a mental stop above the June swing high, is one strategy to use.

Individual Stocks
Like the broader market, the Google stock met resistance at it's June high, produced by two trendlines. This could be too stiff resistance to overcome on the first attempt, so a pullback is likely in this stock, a view supported by overbought momentum and the reversal candlestick formed after the June trading month. Chart courtesy of stockcharts.com

Bradley Indicator
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 2009, dates in bold marks more important turning points:

  • July 14
  • September 14
  • October 22
  • November 11


    bradley

    Chart courtesy of amanita.at



    Sentiment

    Investors Intelligence
    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 06/30, 2009 the II Chart shows:

    41.4 % Bulls
    29.9 % Bears




    Charts courtesy of market-harmonics.com


    Bullish Percent Index
    07/02 - BPI Daily closed at 67 Thursday, an overbought reading. See the description for this sentiment indicator.


    Chart courtesy of stockcharts.com



    Forex - Currency Market
    As suggested in the previous issue, a higher EUR/USD rate was the intra-month outcome of the June trading month, although it closed for the month lower. This resulted in a formation of a reversal type of candlestick with momentum at the same time entering it's overbought zone, so a pull-back and another test of the red 6/8th MML is not ruled out soon.

    Forex Automoney + 1215% in 2008


    eur/usd monthly chart



    US Economic & Fundamental Condition

    A few facts about the economy:

  • 467,000 jobs were lost in June, more than expected. The unemployment rate has reached 9.5 %.

    unemployment

    Chart courtesy of bullandbearwise.com


    Consumer Confidence
    As of 06/30 CC is at 49.3 - 5.5

    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.

    consumer confidence

    Chart courtesy of market-harmonics.com



    Debt - Last updated, April 2009
    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.

    consumer debt

    Chart courtesy of elliottwave.com


    --------------------------------------------------------------------------------------
    From the May 2008 Update
  • 2007 total debt per person was $175,154, up $13,065 from $162,125 in 2006. This compared to $29,722 in the late 50's, measured in inflation-adjusted 2007 dollars.

  • Last year's debt per family of four increased by $33,781, to $700,616. 2007 total debt of $53 Trillion was 11 times higher than the $5 Trillion debt in the late 50's.

    - 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

    debt



    Yield
    The TYX tested the important trendline coming in from the 80's in June but as seen so many times before, it failed to overcome it (monthly closing basis). Any breakout from this falling channel could put pressure on the stock market and could also be an alert to get rid of debt, as interest rates could explode after breaking out from this long standing channel.

    USD Index
    The USD index has established minor trendline support (currently intact) near key Fib. retracement levels, so because momentum allows more room to move to the upside before its getting overbought longer term, a resumption of the overall positive trend from the 2008 low is not out of the question.

    Real Estate
    A pullback was the outcome after the June trading month in the Dow Jones REITs Index but the close right below the May level, indicates an ongoing consolidation phase. In Murrey Math theory the 500 level is important and gives strong resistance, (4/8th MML) so this could be the reason for not being able to overcome it right away but needs to build a base first.

    REITs



    OIL
    As just mentioned above, the 500 level is important, so is the 1000 level (8/8th MML) which the XOI has struggled to overcome since mid 2008. So any clear monthly close above it and the minor trendline, would be bullish for oil. Currently it seems more or less stuck, oscillating within this 6/8th - 8/8th MML range (750 - 1000). The directional breakout from this range, could set the tone in OIL for some time thereafter.

    Gold
    As pointed out in the previous issue, Gold is trading within two converging trendlines, a triangle pattern. A breakout should occur before the Apex (where the two trendlines meet) of this triangle is reached. This directional breakout (whether bullish or bearish) could set the tone for Gold in the months thereafter. Any clear monthly close above trendline resistance and especially the all time high, could lead to an explosive advance in Gold rates. Any close below it, on the other hand, would be bearish and could lead to a test of the 2008 low, sooner or later. With the trendlines meeting this coming Fall, a breakout should occur soon. It will be interesting to see in which direction.

    The Gold ETF (exchange traded fund) GLD Weekly shows mid RSI 25 readings and trading lower on thin Volume. Charts courtesy of stockcharts.com

    XAU - Gold & Silver Index
    The XAU market is still within a rising wedge or channel looking pattern, so the overall positive trend from 2008 is still intact at this point with RSI 25 yet to reach overbought levels.


    With my best wishes for the summer holidays!
    A new issue of Trader's Tips is coming in the Fall.

    -AM
    info@oextradingresources.com
    http://oextradingresources.com

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