Trader's Tips Stock Market Newsletter
Published September 06, 2009 ...by oextradingresources.com
The OEX market has reached the minimum upside target ( 38.2% Fibonacci and L1 DGL resistance ) for the Primary degree wave 2 scenario, which started at the March low. That said, a more common Fib. retracement for wave 2's is the 50% or 61.8% level.
Volume has dried up to some extent during this wave 2 advance, which gives support to this currently preferred wave count. According to the Elliott Wave Principle a wave 2 can retrace 100% of wave 1 and still be a valid count. So in this case, the wave 2 possibility can't be ignored before the Oct. 2007 high ( 734.51 ) is broken.
The personality of second waves:
..."Second waves often retrace so much of wave one that much of the profits gained up to that time are eroded away by the time it ends. This is especially true of call option purchases, as premiums sink drastically in the environment of fear during second waves. At this point, investors are thoroughly convinced that the bear market is back to stay. Second waves often end on very low volume and volatility, indicating a drying up of selling pressure."... Source: Elliott Wave Principle
This is from a Bull market environment. Since we most likely are dealing with a Grand Super Cycle Bear market from 2000, in the current wave 2 scenario to the upside, investors may start thinking that the bull market is back to stay. Second waves in bear markets also often end on low Volume and Volatility, indicating a drying up of buying pressure. Technically, that's exactly what is observed in the markets now.
Monthly MACD entered bullish mode after the July trading month and this is a fact for the weekly 13 - 34 EMA trend chart as well. So with the trend as your friend, this situation would normally be more favorable for buying stocks these days. But in this case, if the wave count turns out to be correct, the upside potential could be limited.
In addition, the SPY Monthly Cycle10 has reached levels where bearish reversals occurred in the past. So personally, i would prefer staying in cash or consider some short term Index plays, using Call/Put options.
There are other technical signs that the overall uptrend from the March low is under pressure, i.e. the recent distribution days in the market, a Volume & Price pattern which reflect institutional selling. September is also historically a weak month for the markets.
"Smart Money" (Commercial Futures Traders) is still positioned on the Short side, despite the overall market advance since the March low. As of 08/25, the COT Report (Commitment of Traders) shows they are net Short with - 23,326 contracts. Chart courtesy of timingcharts.com
Another bearish setup for the mid & long term, Volatility, (fear level) as measured by the VIX Index once again closed at channel support. So a reversal from this support area is still likely. The intact long term rising channel, is in line with what the Elliott Wave structure 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 shown by the QQQQ monthly chart, closed up against the 50% retracement level and the high for the month also touched strong trendline resistance, forming a Doji looking candlestick. This is of the reversal type, especially when found near resistance/support levels. With Cycle10 at the same time reaching levels where bearish reversals occurred in the past, odds are good a pullback is in the cards for the tech market too. Any monthly close below trendline support, could open up for even more weakness thereafter.
After an upside cycle pressure phase which has lasted from mid July, weekly Cycle10 turned bearish this week, as seen on the OEX chart below. It's the same situation on the QQQQ Weekly chart. The low for the week was caused by lower Wedge support. The recovery and close near the high, formed a Hammer candlestick also in this market.
The mid term outlook seems bearish to me. But given the situation on the daily charts, one more brief push higher is not ruled out. The Hammer (reversal) candlesticks formed after this week also suggest this. Although not expected, a weekly OEX close above the 50% retracement level and trendline resistance, could mean it's going for the key Fib. retracement level ( 61.8% ) before a mid term top could be in place. These Fib. levels are calculated from the May 2008 - March 2009 decline.
Using weekly closing prices, a trendline drawn through several closing highs from 2007, was strong enough to cause a market reversal this week.
09/04 - An update on the simple mid term based Stochastic & MACD trading system. Another trading opportunity would have shown up these days, if the dominant long term trend was still bearish from a monthly MACD, etc. point of view but it's not, although i expect the Grand Super Cycle Bear Market from 2000 to resume sooner or later, if the current Primary degree wave 2 count turns out to be correct. Time will tell.
I admit it's tempting to try a mid term Short trade anyway, given the current wave situation which has fulfilled the minimum Fib. upside target these days and the strong trendline convergence the market has reached and all the technical signs and sentiment readings which smells of reversal, in this time frame and the long term as well. After all, an entry at current levels would only give a roughly 10 OEX points loss if wrong, using the recent August swing high (483 area) as a Stop Loss point. And with weekly trendline support in the 450 area, ( a minimum downside target, mid term ) that would give a sound 1:2 Risk/Reward ratio for this potential trade.
The OEX broke out from it's Rising Wedge pattern in the first trading week of September. Now likely making a classic snap-back move towards the broken wedge, which now acts as a resistance area instead. It's a common pattern often observed after such breakouts, ( breakouts below/above regular trendlines included ) before resuming it's new dominant trend and often is a good setup for a trade.
However, in this case, any clear daily close inside the Wedge again, can mean a fake Wedge pattern and would be a signal to close any Short positions, because it would be an indication of some strength and likely higher prices ahead, possibly a test of the August high.
NB. 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.
It's the same situation in the QQQQ daily chart, also here about to test a broken Wedge pattern from below. See the bearish RSI 25 divergence versus the recent new high in this stock, it warned about weakness coming and it later broke out from the Wedge.
DGL - Dynamic Gann Levels
From a DGL point of view, the OEX once again found support on the L1 DGL like it did at the mid August near term low. Any move beyond the August Pivot high at 482.75 would indicate further advance towards the larger key L3 DGL, projected from Nov. 2008. Or the larger 8/8th MML ( see Murrey Math section below ). In any time frame, the markets wants to reach the key L3 DGL, 60 - 70% of the time, before reversing.
Important numbers used in this 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.
09/18, +/- 1 day, is the next daily GA coming up, it marks 180 trading days from the January high this year. The 90 and 180 numbers alone, are strong enough to cause reversals.
As for the weekly version of the GA, 10/30, 2009, +/- 1 week, stand out as the next important time window to look for a market reversal of mid & long term degree. ( Chart ) This GA marks 180 trading weeks from the May 2006 high, roughly 270 trading weeks from the Aug. 2004 low and 360 trading weeks from the Nov. 2002 high. As usual, the directional trend going into this GA time window, would point to a reversal in the opposite direction.
Murrey Math Lines
In the Murrey Math theory, when a stock or index fails to overcome what is considered a weak MML, ( the yellow 7/8th MML ) it's an indication of lack of strength and would be a warning to watch out below. A good example is the recent August high in the Murrey Math Chart, a peak which was also warned by the bearish Stochastic divergence observed at that point.
It's the same for Long side scenarios, when these 7/8th MMLs are tested from above and holds in a consolidation phase, sharp upside reversals are often seen thereafter.
A look at the long term MM chart, shows that the major 4/8th MML at 500, should be a tough resistance to overcome on the first attempt. I.e. the significant sell-off in 2001 found support on this MML and the market failed to overcome it from below in 2002 and 2003, proving it's strength.
The Google stock failed to penetrate resistance produced by several trendlines, with overbought longer term momentum at the same time turning bearish. Any monthly close below the Wedge pattern, would confirm a top in place for this stock. See the decreasing Volume during it's advance from the 2008 low. For it's outlook, this is not a healthy sign. So this stock could face selling pressure soon, in my opinion, based on the market situation in general. Chart courtesy of stockcharts.com
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:
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 08/25, 2009 the II Chart shows:
51.5 % Bulls
19.8 % Bears
Bullish Percent Index
09/04 - BPI Daily closed at 88 Friday, a very overbought reading and trendline resistance is met. See the description for this sentiment indicator.
Forex - Currency Market
Momentum is peaking on the EUR/USD monthly chart, so it's just a question of time when this pair is heading lower. Especially if the USD Index breaks out from it's Triangle to the upside, see the USD section below for details. A monthly Stochastic entering bearish mode would be stronger evidence of a mid to long term EUR/USD top in place.
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US Economic & Fundamental Condition
A few facts about the economy:
As of 08/25 CC is at 54.1 + 6.7
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, 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.
From the May 2008 Update
- 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
A pullback from the larger trendline has brought the TYX down for a test of the support line drawn through several important lows made this decade. Any monthly close below this area, could open up for even lower rates thereafter.
The directional breakout from what looks like a Descending Triangle formation in the USD Index would signal where the buck is heading in the month(s) thereafter. So after the September trading month, we may have the answer. Any upside breakout could lead to a test of the 2008 high, A downside breakout, on the other hand, may result in a test of the 2008 low.
As represented by the Dow Jones REITs Index the current recovery move may lead to a test of trendline resistance up at around 750, as i see no significant resistance before that area is reached. Let's see if RSI 25 gets overbought at that point, if so the next top could be forming around that level.
Still waiting for a breakout from a Triangle looking pattern and the 6/8th - 8/8th MML range (750 - 1000). The directional breakout from this pattern, could set the tone in OIL for some time thereafter. Any downside breakout could lead to a test of the 2008 lows, in the 6/8th MML support area ).
Although the August trading month closed within the Triangle once again, ( see the below excerpt from the previous issue ) Gold has advanced in the first week of September ( GLD Monthly ETF ) on good Volume and a breakout soon is not ruled out, which would be confirmed if the September trading month closes above this Triangle. However, any breakout on a monthly closing basis and a test of the 2007 high, would probably bring a RSI 25 divergence with it. So a Double Top pattern formation is not out of the question either.
..."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."...
Charts courtesy of stockcharts.com
XAU - Gold & Silver Index
The XAU market still trades within a rising channel looking pattern, so the overall positive trend from 2008 is still intact at this point, with RSI 25 yet to reach overbought levels.
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