Trader's Tips Stock Market Newsletter
Published August 31, 2008 ...by oextradingresources.com
OEX (S&P 100) Long Term
The broken long term trendline discussed in the previous issue, caused the August monthly High in the OEX market and it's Close in the lower part of the range, near the August Open, formed a reversal type Hammer looking candlestick. The advance this summer was a classical snap-back move towards an earlier broken trendline, a pattern often observed in the market, before it may continue in the direction of the dominant trend, which in this case is bearish. It would take a clear monthly close above this trendline, to turn me more positive on the market.
So when the longer term (monthly) market picture stays bearish, mid/short term trading opportunities to the Short side is looked for. In my opinion, one simple way, compared to finding Short candidates in stocks, is to buy a few in-the-money Put options or LEAPS Put options, (which one can afford to lose) when the market has reached an important weekly trendline resistance zone, forming a swing high and weekly Stochastic (5-3-3) is at the same time overbought and has entered bearish mode.
A Stop is placed above the trendline or the swing high. A risk/reward ratio of minimum 1:2 is used. So if my Stop is i.e. 10 - 15 points above my entry point, my Profit target would be 20 - 25 OEX points or more. This way i could more or less break even, even if i turn out to be wrong in picking these swing highs roughly half of the time. An entry is only considered if weekly MACD Histogram is below zero, when these set-ups shows up.
When this condition occur, i first check to see the monthly trend is bearish or the weekly 13 - 34 EMA Chart is in bearish mode. This would increase the odds of a successful trade, only trading in the direction of the dominant trend.
One such trading opportunity and set-up is observed right now, see chart. Although ideally prices should have reached trendline resistance, in this case prices hovers around the 50% Fib. retracement area and an overbought Stochastic has also turned bearish. So this would be a more aggressive trade entry in this case. A more conservative entry would be to wait for the recent weeks lows to be broken first. On the same chart, a recent example of a good trade using this approach, is the May swing high which formed up against the trendline and MACD Histogram was also below zero.
The 38.2% Fib. support on the S&P 500 Monthly chart still holds (monthly closing basis) after the August trading month. This market has established a bearish channel or slightly wedge looking pattern, so it would take a clear upside breakout from this channel, to turn positive on the longer term, broad market.
A recent S&P 500 COT Chart (Commitment of Traders) shows that Commercial Future Traders (Smart Money) are barely net Short. Chart courtesy of buythebottom.com
As in the OEX Monthly, the same situation can be seen on the Dow Monthly chart, with prices testing two earlier broken trendlines from below, which makes a continuation of the overall bearish trend from the Oct. 2007 high a probable outcome, signaled by any break of the summer low. In case these trendlines are overcome on a monthly closing basis, it would turn the market picture more positive though.
It will be interesting to see what this Fall brings. Historically, September - October are not the best months for the market during a year. This chart courtesy chartoftheday.com, shows that since 1980 September has been the worst month for stocks, with Dow average monthly gain below -1%. From 1950 it's slightly better but still in negative territory.
QQQQ - Nasdaq 100 Index Tracking Stock
As for the tech market, the QQQQ stock is getting closer to the Apex of a Symmetrical Triangle looking pattern, forming on the monthly chart. A breakout from it, whether bullish or bearish, should occur before the Apex is reached. So this event will most likely come before the year ends and set the tone for the tech market in the month(s) thereafter.
The longer term SBV volume oscillator is climbing higher in the S&P 500 and Dow but stays flat in the Nasdaq 100.
The preferred count is still intact at this point. The advance from the summer low could be a wave two, as part of a wave 3 Impulse (one degree higher) developing from the May high, better seen on this updated weekly chart.
If this really is the case, many Elliotticians knows what impact it can have on the markets and stocks, once a third of a third wave of this degree kicks in. In any time frame, the wave three and C impulses are the most powerful ones, within the Elliott Wave Principle.
Given the current situation on the monthly chart, a scenario like this is in fact not out of the question at this point. Any advance above the strong monthly resistance at around 610 in September, would make this scenario less likely though and technically negated if the May high (652.97) is broken, as a wave two cannot retrace more than 100% of wave one, to remain a valid count. At that point it would also most likely destroy this sharp wave 3 impulse scenario to the downside, if we exclude the less likely chance of an Expanded Flat wave 2 possibility, developing from the March low. Time will tell.
Mid & Short Term
The OEX Weekly chart shows a toppy Cycle10 but no reversal yet, so the question is, could the market once again reach the upper trendline (like in May) before heading lower? Well, in addition to the formation of the above August monthly Hammer, up against tremendous resistance and the OEX being near the 50% retracement area on the weekly chart, see the daily section below, as for more reasons why weakness from current levels, is probable.
On the daily chart, the OEX broke out from a Rising Wedge looking pattern in August and has just been through a snap-back move towards it and the 50% retracement area. Often observed in the market, a continuation of the new trend is a likely outcome, once these snap-back patterns comes to an end. A few points below the previous week's pivot low (581.15), is a good entry point for i.e. a Put position, in my view. And that level would also be stronger evidence the August high was significant and marked a short term peak. It would be a late entry but a more safe one, because Cycle10 has yet to make a weekly reversal.
By the way, Cycle10 updates are available on the website at oextradingresources.com/oex-weekly.html (usually updated weekly, except for holidays or when away from the office).
After the RSI 25 touch of the 40 level in early July, QQQQ Daily prices have since then climbed higher and tested the L1 DGL resistance in mid August. The look of the pullback pattern from this area, makes me think of a possible wave iv correction, so one more shot at the L1 DGL and also trendline resistance in wave v, is not ruled out. The signal for this scenario to work out correctly, would be an upside breakout from this small bearish channel now developing.
An alternate wave count suggests a series of i-ii's now underway lower, thus an already fully completed a-b-c pattern wave 2 from the July low. If so, it could be in the early stages of a severe, larger degree wave 3 impulse.
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.
September contains a new short term Gann Angle convergence. 09/24 (+/- 1 day) marks 90 trading days from the May high and 135 TD since the March low. The directional trend going into this GA time window, may indicate a market reversal in the opposite direction, when prices have entered this window.
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.
The market mood shifted to positive after hitting the larger 8/8th vertical Time Line mentioned in the previous update and it brought prices up for an exact hit of the weak 1/8th MML (yellow, 610 area) in the weeks thereafter. Now prices are hovering around the 8/8th MML, any weakness going below all the August lows, would signal more weakness thereafter, to the red -2/8th MML as a minimum downside potential, near term.
Weekly Google prices broke out to the downside before reaching the Apex (the point where the two trendlines meets) of the Triangle pattern i wrote about in the previous issue. These triangles portend good trading opportunities, depending on the directional breakout, going Long or Short on the first clear weekly close, out from the triangle. A natural target for this decline would be trendline support in the 440 area. A reaction up from this strong support is the next likely event for this stock.
More chart updates:
Cycles & Neural Nets
Cycle LT Model
The Zig Zag Diagram turns bullish from 09/25. 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.
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 the end of November, 2008. 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 08/26, the II Chart shows:
39.3 % Bulls
39.3 % Bears
Bullish Percent Index
08/29 BPI Daily closed at 51, it's facing strong trendline resistance around 57, which could cause a reversal. A BPI above 70% is considered overbought. See the description for this sentiment indicator.
Forex - Currency Market
After 4 months of consolidation up against the major 8/8th MML (Murrey Math Line) mentioned in previous issues, finally, a sharp sell-off brought EUR/USD rates down to an important trendline, drawn through many monthly lows since Spring 2005. The August trading month closed right at the next lower 7/8th MML. Because of the close near it's low, more weakness is not ruled out in September, at least intra-month. Any monthly close below this trendline, could open up for more weakness this Fall.
A look at a weekly chart, (using closing rates only) shows a bottoming Cycle10 and rates resting on strong trendline support. So any continued weakness may come in the first week of September but could still manage to recover and close at this support once again, before heading higher in a temporary rebound.
US Economic & Fundamental Condition
This chart, courtesy martincapital.com gives an overview of Retail sales changes, monthly Auto & Light Truck sales and monthly existing home sales since 1997.
08/26, CC reversed it's negative trend in August, now at 56.9 + 5
The broken 2003 low now instead acts as resistance, roughly at the 61 level.
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 August but still well above strong support at 4.10. An important trendline coming in from the 80's, is up at 5. If clearly broken on a monthly closing basis, it could open up for much higher rates, long term.
The outlook for the greenback is positive. After a test of April's low in July, an explosive move to the upside brought rates above important long term trendline resistance. The monthly close above this tough resistance zone, was a sign of strength and the close near it's high of the month, also bodes well for an even higher USD Index this Fall. However, because the close came near the trendline, i would like to see one more positive monthly close, to get rid of any remaining doubts that this breakout was for real. And in turn get more evidence of a significant bottom in place. RSI 25 has plenty of room to the upside, before reaching overbought levels, longer term.
A look at a Dow Jones REIT Index monthly chart shows a possible Descending Triangle being worked on. Any monthly close above the upper Triangle line would be positive for Real Estate and could even lead to a test of the 2007 high. If so, a Double Top pattern is not ruled out then. Any monthly close below the lower Triangle line, on the other hand, could open up for more trouble in this market.
The bearish RSI 25 divergence observed in 2007 and 2008, when OIL prices worked it's way towards higher highs, was like a compressed spring which had to be released sooner or later, leading to a sharp drop in prices this summer. However, important trendline support is still intact and the Hammer looking monthly candlestick closing at this support, after the August trading month, could mark a positive reversal for this market, signaled by a break of the Hammer high. Any monthly close below this trendline and first Fib. support could bring serious weakness for OIL prices.
After the wave 5 peak earlier this year, an a-b-c corrective structure is likely developing in Gold Monthly. To me, the first Fib. support at around 730 would be a minimum downside target but because of the many year long advance to this year high, a more natural target, would be a test of the major trendline in the 600 area, before possibly heading higher again, long term.
Of course, the actual level hit depends on when this trendline is reached, if reached at all. The odds would increase with a monthly close below the first Fib. support. My bearish stance is supported by RSI 25 just leaving it's overbought zone, so there is still plenty of room to the downside before Gold has reached an oversold condition. More certain, if/when the trendline is reached, it would be a high probability point to go Long Gold, because of the tremendous support found there and RSI 25 could also be oversold at that point, increasing the odds of a successful trade further. Charts courtesy of stockcharts.com
The XAU Gold & Silver Index made an intra-month secondary test of the strong trendline convergence in July, before the August sell-off resulted in a breakout from this Rising Wedge looking pattern. A test of strong trendline support down in the 110 area, is the next likely event for the XAU.
With my best wishes for the Labor Day weekend.
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