Trader's Tips Stock Market Newsletter

Published November 01, 2009 ...by oextradingresources.com
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Stock Market

Momentum has peaked on the OEX monthly chart, the market was not able to overcome trendline and L1 Dynamic Gann Level resistance, for the second month in a row (closing basis). In addition, the candlestick formed after the October trading month is of the reversal type. When found up against strong resistance like now, odds are good a correction could be the outcome. This view is supported by the modest down close for the month, which turned the overbought Stochastic into bearish mode. All major indexes closed below the 50-day moving averages Friday.


OEX  monthly chart



A recent COT Report shows that (as of 10/27) "Smart Money" (Commercial Futures Traders) are net Short with - 56,470 contracts. Chart courtesy of timingcharts.com

The S&P 500 Monthly nearly reached the 50% retracement area, at it's high for the month. The etf, SPY Monthly shows a Cycle10 overbought extreme. The last time it reached such a level before reversing, was in 2004, when a nearly year long consolidation phase started in this market.


OEX  monthly chart



This time is different, as a Primary degree wave 2 from the March low this year, may have already ended. Volume has been thin during this text book three wave looking pattern to the upside, (best interpreted as a w-x-y wave) which is in line with what the Elliott Wave Principle says about wave 2's in general.

So the first ripples (from the October high) of a huge wave 3 impulse to the downside, is not out of the question. More evidence of this will show up, when/if a clear breakout from the Rising Wedge pattern is seen on the weekly chart.

One never knows for sure though, this wave 2 could also turn into a more complex pattern and resume on it's upside path, after a market pullback. That's why i'm setting a mental stop right above the October high, which is the point where i have to revise my wave count and realize the wave 2 has more unfinished business to the upside.

But the loss will be small compared to the potential reward, by getting on the wagon of a wave 3 of this degree and it's going to be a rough ride before it's destination is reached and the dust is settled, in my opinion. Wave 3's and C's are the sharpest waves in the Elliott Wave Principle.

My Short strategy is to invest in index CFDs on a snap-back move towards the potential broken Wedge, which often is an excellent market entry point. This because you can quickly know if you are likely wrong, in case the market is closing inside the Wedge pattern again or breaks the swing high, which in this case would be the October high.

I know this strategy would go against the currently bullish monthly MACD but breakouts from Rising Wedges are such strong signals, combined with what the wave position, volume analysis, monthly trendline resistance and now also bearish monthly momentum says about a high probability trend reversal. So i'm willing to take the chance this time.


OEX weekly chart



And the potential reward? Well, if this wave scenario really turns out to be correct, the market should fall below the March low, sooner or later. But even if only the key Fibonacci zone (61.8% retracement of the March - Oct. advance) is reached, i would have moved my stop to break even or into some profit at that point, so any risk will be erased, in case i'm wrong about this wave 3 scenario.

So this would be a very aggressive strategy but which makes it possible to keep the stop quite tight, with the help of the Wedge pattern. A more conservative and safe approach would be to wait for the next MACD bearish mode, before shorting stocks or indexes. But this would also give a later entry.

Another strategy considered, in an attempt to catch larger chunks of the coming impulse moves to the downside and possibly the big one (wave 3 of 3) would be to enter the market whenever the 5-day Exponential Moving Average crosses it's 20-day EMA to the downside. Many traders will remember the Fall 2008 price collapse, which also was a wave 3 of 3 but the coming one will be even bigger, in my opinion. This strategy catched most of the 2008 price crash, as seen on this daily chart.

So how can traders know when the next big one will come? Well, the wave counts should give a clue but when the overall trends are confirmed bearish, even taking every 5-20 EMA signal on the path lower, could work out over time, although there probably will be whipsaw signals on the way lower.

But the point is that a Primary degree wave 3 of 3 doesn't come around often and this could be one possible way to not miss out. It would be a big opportunity at that point in time and can outweigh those earlier whipsaw losses, especially if making an exception of using this strategy, when it's suspected the # 1 whipsaw patterns are about to start, which are the more or less sideways going wave four's.

Another good way to catch large chunks of stock market trends is to use a 3-day MA of the NYSE Summation index, as this chart shows.

Volatility, (fear) seems to wake up again these days, as reflected by the VIX Index. It has consolidated at channel support for several months, before the October trading month brought some life into it. This rising channel from 2006 point to higher Volatility ahead, which normally leads to stock market weakness.


vix monthly chart
Chart courtesy of stockcharts.com



Nasdaq
The tech market also seems to form a top, with the Nasdaq Comp. monthly prices now making a retreat from trendline resistance, with Cycle10 readings at very overbought levels. From a QQQQ index tracking stock point of view, it has oscillated higher within a sharply Rising Wedge pattern. Any monthly downside breakout from this pattern would most likely confirm a top in place. The high for the month came exactly up against trendline and key Fib. resistance. With this in mind, any index or stock wants to reach the key Fib. retracement level, before changing trend, 60 - 70% of the time. So the odds of a top are now greater.


qqqq monthly chart



Mid Term
The OEX seems to break out from the weekly Rising Wedge pattern but one more lower close is needed to make it a crystal clear breakout. This week's roughly 18 points lower close came on a Volume level which breached it's 50 week MA, reflecting heavy distribution going on. First Fib. support comes in at around 440, a minimum downside target mid term, when the breakout is confirmed.

The same developement is observed for the QQQQ Weekly chart as well but with a more clear breakout here. First Fib. support is at 37.

Short Term

On the daily chart, the OEX market closed below strong trendline and key Fib. support Friday, on heavy Volume and near it's low for the day. This technical situation suggest there is more to come to the downside next week.

The blue 38.2% Fib. support area is calculated from the July - Oct. advance and is one likely target short term, before a snap-back move towards the broken trendline could be the next event to look for in this market. But if it fails to hold (closing basis) even more weakness is not ruled out, short term, before seeing this move to the upside.

The wave structure from the Oct. high looks like a five wave impulse to me, which gives support to a possibly completed wave 2, from the March low.


OEX daily chart



RSI 25 gave an early warning about this market weakness, tracing out a strong bearish divergence versus the Oct. new high in i.e. the QQQQ daily chart .

To new subscribers, more frequent updates of charts and market comments than this Trader's Tips newsletter can offer, are available on the website, below is the page URL. Comments are posted below the chart on the page, which is usually updated every weekend or the next, depending on the market situation or if i'm out of office.

http://oextradingresources.com/trend-trading.html

DGL - Dynamic Gann Levels
From a DGL point of view, the OEX closed below the L2 DGL Friday, with RSI 25 yet to reach oversold readings, so a test of the key L3 DGL is likely next week. If a reversal bar is formed down there, a snap-back move may start from this support area. If it fails to hold, (closing basis) more weakness could be in the cards.

Gann Angles
Important numbers used in this cycle technique: 90, 135, 144, 180, 270 and 360, counted from important lows and highs in the past, using trading days or weeks only, not calender days. Trading weeks are used for the mid to long term time frame. The directional trend going into these GA's, would indicate a reversal in the opposite direction, more often than not.

11/19, +/- 1 day, is the next daily GA cycle convergence coming up. It marks 90 trading days from the July low, 135 TD from the May high and 180 TD from the March major low. This is a powerful GA with a good chance to mark a trend reversal.

As for the weekly version, the mid term market came within the 10/30, 2009, +/- 1 week time window, before heading lower. So this GA could mark a mid term top or even larger degree, time will tell. The next weekly GA will be published in the Market Outlook 2010 Report, which should be out at the end of the year.

Murrey Math Lines
The OEX closed below the weak 7/8th MML Friday, so more weakness towards the next 6/8th MML support (470 area) is likely, next week.

A look at the long term MM chart, shows that the market is heading lower from this major MML resistance zone.

Individual Stocks
Google monthly prices have climbed higher within a Rising Wedge pattern and it closed for the month against the upper wedge line. But Stochastic has turned bearish despite this advance. So any breakout from this wedge would confirm a top in place for this stock. 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:

  • November 09


    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 10/27, 2009 the II Chart shows:

    48.3 % Bulls
    22.5 % Bears




    Charts courtesy of market-harmonics.com


    Bullish Percent Index
    10/30 - BPI Daily closed at 78 Friday, breaking below trendline support. See the description for this sentiment indicator.


    Chart courtesy of stockcharts.com



    Forex - Currency Market
    The overbought monthly Stochastic has turned bearish in the face of higher rates in the EUR/USD pair, so a bearish divergence is forming. This pair climbed well beyond the earlier 7/8th MML target intra-month but made a retreat and closed in the lower part of the range and near this MML for the month, forming a reversal looking candlestick. Any monthly close below trendline support, would most likely confirm an EUR/USD top in place. Until then, the overall positive trend from the March low is still treated as intact.

    An update on IvyBot - The Professional Forex Trading Robot. In September i opened a demo account for this automatic EA (Expert Advisor). The MT4 software with this EA runs on an external VPS (24hour) server, so it lives it's own life, i just check it now and then, to see that everything works correctly.

    This EA doesn't trade often it seems but has so far been profitable, currently using 1 mini (0.10) contract.
    1 pip = $1. Here is the result report from this demo account, as of 10/30. I'll try keep you updated on this demo phase, so you can get a clue as to how reliable IvyBot is over time.


    eur/usd monthly chart



    US Economic & Fundamental Condition

  • US Unemployment rate is at 9.8%, the highest in 26 years.
  • The economy has lost nearly 5.8 million jobs over the last year.
  • Savings rate, as a percentage of disposable income climbed slightly in Sept., to 3.3%.
  • Incomes were flat vs. a year ago.
  • As in the stock market, commodity prices have advanced in a three wave looking pattern from the early 2009 low, suggesting the overall bear market and deflationary pressure from 2008 will resume, once this upside corrective phase has ended. This should be good for consumers to some extent but not so good for some companies over time.
  • crb

    Chart courtesy of bullandbearwise.com


    Consumer Confidence
    As of 10/27, CC is at 47.7 - 5.7

    Sept. spending fell 0.5% compared to Aug., the first fall in 5 months.

    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 briefly breached the support line drawn through several important lows made this decade, before managing to close above it again in October. However, with Cycle10 in the early stages of a downside pressure phase, the overall bearish trend from the summer high could still be in force.

    USD Index
    The USD Index fell below triangle support earlier this Fall and is still deteriorating. It would take a clear monthly close above trendline resistance, to indicate the bearish trend from the March high has ended.

    Real Estate
    An Inside Month is observed in the Dow Jones REITs Index which reflect indecision among real estate investors. Overall, this market is getting closer to the earlier discussed trendline resistance. Any positive breakout from this indecision (signaled by a break of the Sept. high) would indicate more price strength towards this trendline.

    REITs



    OIL
    The XOI index broke out from the triangle to the upside but ran into trendline resistance, which caused the high for the month. So this market is currently stuck between this resistance and the triangle pattern, which now acts as support instead. So a clear breakout (whether bullish or bearish) from this range is needed first, to get a clue as to where this market is heading thereafter.

    Gold
    Gold closed for the month above the important 2008 high but has yet to overcome a triangle line drawn from the 2008 secondary high. In addition, the move was not backed up by RSI 25 strength, which instead shows a significant lower high, a strong bearish divergence. This underlying weakness suggest a correction is coming sooner or later. The evidence of a top in place would be stronger with any monthly close below trendline support. Charts courtesy of stockcharts.com

    As seen from this GLD Monthly etf chart too, the Gold market climbed to a new high but with an overbought Stochastic at the same time forming a bearish divergence.

    XAU - Gold & Silver Index
    The XAU market still trades within a rising channel or slightly wedge looking pattern, so the overall positive trend from 2008 is still intact at this point, with RSI 25 yet to reach overbought levels. It would take a downside breakout from this channel, to indicate the trend has changed.

    PSP Review
    An update on the PSP, here is a collection of some of the past alert messages sent to me, so you can get an impression of how these signals worked out over time.

    ..."The Penny Stock Prophet - Accurate Penny Stock Picks.
    This once broke MIT student discovered a secret strategy that made him a millionaire in just 13 months, investing in small and micro-cap stocks. According to his website, he claims turning $1000 into $1.4 million within this period. Personally, i signed up for the picks because of it's one time fee only. And he has delivered so far. Here is a screen shot of email alerts he has sent me up to date. Video proof of an example pick is available on the site and also photo & video testimonials can be found. He offers a 8 week 100% Money Back Guarantee."...


    Best wishes,
    -AM
    info@oextradingresources.com
    http://oextradingresources.com

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