Trader's Tips Stock Market Newsletter
Published November 02, 2008 ...by oextradingresources.com
OEX (S&P 100) Long Term
As discussed in the previous update, after a snap-back move towards an earlier broken long term trendline of importance, the market never looked back and entered a sharp wave 3 Impulse sell-off, which nearly reached the 2002 low before the dust settled. That's roughly a 200 OEX points move within a few weeks time, which normally could take a year to see.
Here is a Dow Monthly chart, which shows the heavy Volume generated during the Oct. sell-off. At the low, the Dow was down 44% since the top in Oct. 2007. In the Dow, Oct. 28 was the second biggest one day gain on record, attracted by investors looking for stock bargains. So the question is, are stocks really cheap by now? This long term dividend yield chart, courtesy of elliottwave.com shows that in terms of dividend yield valuations, stocks are in fact still closer to a top than a bottom, despite this 44% decline. The Dow has to fall below 5000 to equal the average dividend yield at earlier bear market bottoms.
This monthly VIX Chart shows the Volatility (fear) level, at the low of the price collapse. The VIX broke decade highs and RSI 25 has climbed above the 70 level, because of this volatility explosion. A reading above 70 is often a warning being near a top and a peak in volatility usually means a higher stock market. A move back below the 70 line would be stronger evidence of a volatility top in place. Chart courtesy of stockcharts.com
See the Gann Angle section below for the reason why a reversal around the week ended 10/24 (+/- 1 week) was looked for in the previous update. Whether this GA marked the early stages of a wave 4 corrective structure (which has limited upside potential, following the Elliott Wave Principle) or a stronger move, only time will give an answer. By the look of the pattern now, ideally we should see a test of the recent crash low or even a break of it, to fulfill the need to clearly see the yet missing wave 5, which would complete a five wave structure from the May high. Next on the list of likely events, would then be another countertrend move to the upside.
Anyway, at this point, the long term market trend is still considered bearish, with OEX monthly MACD still firmly in bearish mode and the same is a fact for the weekly S&P 500 13 - 34 EMA trend chart.
So a more conservative strategy would be to still stay in cash and consider buying stocks again, only when these key indicators have turned bullish. With these charts as proof, this simple approach would more often than not kept investors out of trouble, quite a few times in the past and most likely these days as well. But because of the Wave situation, there is now a greater chance of getting a whiplash signal but if so, it should cause limited damage anyway, taking the bigger picture into account. An earlier example of limited damage was the Oct. 2005 MACD whiplash signal, on the OEX monthly chart.
The broad market collapse resulted in an oversold RSI 25 reading on the S&P 500 Monthly chart. As in the OEX, the sell-off brought prices nearly down to the 2002 low, a long term support area coming in at 768.63. So this technical picture suggest a rebound from this support area is likely. Any break of it would probably negate a double bottom pattern, with the wave 5 apparently having more unfinished business to the downside.
A recent S&P 500 COT Chart (Commitment of Traders) shows that Commercial Future Traders (Smart Money) net Short positions are recovering from a new low reading, near the -30 000 mark. Chart courtesy of buythebottom.com
The longer term (1.5 year) SBV volume oscillator shows a flat reading for S&P 500, while the more short term based 60 day SBV shows advancement.
QQQQ - Nasdaq 100 Index Tracking Stock
The QQQQ Monthly broke out from the earlier mentioned Symmetrical Triangle to the downside and sold off sharply this Fall. But still managed to recover enough to make an Oct. close at key Fibonacci support, with RSI 25 at the same time about to enter it's oversold zone.
Mid & Short Term
Mid term, Cycle10 on the OEX Weekly chart has bottomed out and just made a bullish reversal. So any break of this week's high (471.98) could mean even higher prices ahead but i'm not ruling out a pullback first, near term. A strong trendline resistance area is at 518 next week.
More frequent Cycle10 updates than available through this newsletter, can be found on the website at oextradingresources.com/oex-weekly.html (usually updated weekly, except for holidays or when away from the office).
On the daily chart, the OEX broke out from a Falling Wedge looking pattern this week. Friday's high came close to the first Fib. retracement resistance, (of the August - October decline) with daily Cycle10 at the same time at levels where it would normally reverse. In addition, Friday's candlestick was a reversal type, so a pullback from this resistance zone is possible. See the Murrey Math section below for another technical point, which supports this near term view.
An updated Breadth chart, shows i.e. the NYSE New High - New Low extreme reading, at the low in the market.
As in the OEX, the tech market, here represented by QQQQ Daily, broke out from a Falling Wedge looking pattern this week. The bullish RSI 25 divergence vs. prices, observed in oversold territory, was an early warning about a move higher and possible breakout. First Fib. resistance is at 36, although the less frequently used 23.6% resistance has already been met.
For new subscribers, here is a download link (.zip file) to a RSI 25 & Market Timing Report, in case you don't already have it.
The overall bearish trend continued into the important weekly 10/24 GA. For details about this GA, here is an excerpt from the previous update:
..."A more important GA can be observed on the weekly chart these days. Contrary to the daily chart, which tend to mark short term tops and bottoms, the weekly chart is used in an attempt to find mid to long term tops and bottoms. Odds are good the week ending 10/24 (+/- 1 week) could mark a mid or even longer term market reversal. It will be interesting to see if the overall bearish trend will continue until that point. If so this could very well be the next larger low in the market. On the other hand, any mid term advance going into that GA, could mean a high is in the cards instead. Again, the key is to try determine the directional trend going into it and look for a reversal in the opposite direction, the usual technique for the GA.
The calculation shows 90 trading weeks from Feb. 2007 high, roughly 144 TW from the June 2006 low and nearly 360 TW from the Jan. 2002 high, all important GA numbers. When found together more or less in the same week, it's even more powerful."...
With a fresh look at the market now at the end of Oct., another likely scenario, because of the current Wave development, is that this GA could also have marked the early phase of a wave 4, which often turns into complex triangle patterns, with an upside bias.
Murrey Math Lines
Near term, the OEX has climbed towards the strong 8/8th MML (Murrey Math Line), which now acts as stiff resistance, when tested from below. The 8/8th and 4/8th MML's are considered one of the strongest resistance/support lines in this theory. Friday's reversal candlestick briefly penetrated this 8/8th MML at it's high but closed for the day below it. With Stochastic just reversed in it's overbought zone and OEX closing up against this strong resistance, odds are good for a pullback scenario, early next week.
A longer term MM chart, shows a nearly reached 3/8th MML support. In this theory, the 3/8th - 5/8th MML range is considered difficult for the market to enter, from both sides. But once inside, it can be difficult to get out of it, often resulting in a ranging market.
Weekly Google prices reached it's trendline target and even broke below this support. And because of this, this area (440) should now be strong resistance instead. Especially because two trendlines meets here, which should make it even more difficult to overcome.
Cycles & Neural Nets
Cycle LT Model
Zig Zag Diagram 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 hypothetical profit test.
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 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 late January, 2009. Chart courtesy of chartsedge.com - As in the Bradley, inversions can also occur in neural network pattern outputs, 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 10/28, the II Chart shows:
23.1 % Bulls
52.7 % Bears
The pessimism among Bulls as of 10/28, was near extreme levels. This reading came at the day the OEX formed a secondary low and breaking above short term wedge resistance thereafter.
Bullish Percent Index
10/31 - BPI Daily closed at 44, facing strong trendline resistance next week. See the description for this sentiment indicator.
Forex - Currency Market
In the previous issue, more weakness was looked for in EUR/USD monthly rates. At that time, this pair stood at around 1.4650. Now, 2 months later, rates have falled off the cliff, and are already two major MML's lower, at around 1.2700, nearly a 2000 pips plunge within a few months. Because of the now bottoming monthly Stochastic, a reversal type of candlestick is looked for, which could indicate the start of a countertrend move. Until then, the overall trend still looks bearish but could be close to a bottom.
US Economic & Fundamental Condition
The September 1.2% fall in Retail Sales, was the third month in a row with a decline, not seen since the early 90's. Wal-Mart, which earlier this Fall was near a 6 year high, has fallen 23%. So consumers are undoubtly cutting back on expences in general. A slowing economy should result in less demand for most commodities, with oil as a recent example.
10/28, the positive reversal earlier in the Fall apparently was short lived, making an all time low in October, now at 38, - 23.04 - the lowest reading in it's 41 year history.
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
Intra-Month TYX rates penetrated important trendline support in recent months but managed to close above this support in both of them. Long term, still looking for a clear breakout (closing basis) from this huge, many years long Descending Triangle looking pattern, either to the upside or downside. This could set the tone for Yields for a long time thereafter. A breakout should occur sometime before the Apex of this pattern is reached.
After the RSI 25 dipped below the 30 level in Spring and the USD Index breakout from the huge Falling Wedge earlier this Fall, the advance since then has been explosive.
First trendline resistance in sight, comes in at 92.5. Because of a not yet overbought RSI 25, it may reach this zone before pulling back. I would look for a monthly reversal type of candlestick, like a Doji or Hammer etc., as a warning about a pullback coming. At this point, the market picture still looks bullish to me.
Some countries see the buck as a safe haven, in times of financial trouble around the world. This could partly be the cause behind the soaring greenback. Another reason, is an increasing demand for dollars as investors sell assets to raise dollars, to pay debts.
A sharp sell-off (wave 3 impulse) in the Dow Jones REIT Index with the Oct. intra-month low nearly reaching the 2004 low. The price collapse resulted in a mildly oversold reading in the RSI 25 but has yet to dip below the 30 level. To some extent, this market managed to recover at the end of the month and closed right above the key Fib. retracement level, (61.8%) of the 2000 - 2007 advance, a positive indication for the next trading month.
The several year long RSI 25 bearish divergence observed in this market, was like a compressed spring which had to be released sooner or later. Oil prices have collapsed this Fall and broke below the 2005 low, intra-month Oct. but the XOI recovered to some degree and closed above the key Fib. retracement support, calculated from the 2000 - 2008 advance. RSI 25 is not yet oversold, so there is room for a test of the recent low.
The minimum downside target (730) as mentioned in the previous update is reached, with Gold dipping below 700 intra-month October. Gold found support at a trendline drawn through monthly lows since early 2006. RSI 25 has yet to reach an oversold reading, long term. Larger trendline support comes in around 600, in case the weakness continues. Gold is most likely working on a series of corrective three waves to the downside. Any break above trendline resistance (monthly closing basis), would be stronger evidence of an already completed corrective phase and a resumption of the long term up trend. Charts courtesy of stockcharts.com
The XAU Gold & Silver Index also reached it's target down at 110 and fell below this strong support. So this broken trendline should now be stiff resistance instead. The XAU found support on another trendline drawn through the 2004 & 2005 lows and closed here. This with RSI 25 at the same time about to enter it's oversold territory.
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