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Archive for June, 2010

Market Signaling Is Mixed – Head And Shoulder Pattern Could Get Tricky

June 24, 2010 Leave a comment

I might be over thinking the situation here, but I have reason to believe the head-and-shoulders pattern that EVERYONE is watching won't materialize as the bears are hoping. This wouldn't be the first time an overly popularized pattern fails to act as it "should". This does not mean that the pattern won't come to fruition, I just think that the formation will end with less than ideal symmetry.

Don't get me wrong, I am indeed bearish heading into the 2nd half of the year, and very much so! However, I have my doubts as to whether the past four days of selling is the kick-off to the next leg lower. The volume didn't spike and the breadth was not as dismal as I would like to see if indeed we were starting leg #2. 

Furthermore, one of my favorite indicators for timing intermediate term turning points is just coming out of oversold territory. Even during the 2007-2009 downdraft the market never rolled over with real meaning while this indicator was at its current depressed levels. The "Intermediate-Term Indicator Score" created by Sentimentrader, as evidenced by the graph below, has proven to be a very reliable tool for market timing.

ITS

The Euro, global equities, and commodities haven't experienced any real significant selling pressure. In fact, the EURUSD has been positive the past two days.

What this all means to me, is that the market is likely to continue to gyrate for the foreseeable future. Today we closed on the bottom side of a possible upward channel. An ideal scenario to take place in coming weeks would be to see a channel form while all oversold conditions are completely removed from the market. Then at some point, possibly in July, the market breaks the channel with all assets declining in harmony. May or may not happen in this exact manner, it could be some other variation of this scenario…..only time will tell.

One could even make the argument that an inverted head-and-shoulders pattern is taking shape and the market will soon attempt another rally. It is most clearly visible in the Russell 2k.

SpxR2k

 

The fundamental landscape is shaping up for another signficant decline – now its just a question of getting a more clear picture of the technicals and timing. Very shortly, I will be publishing my thesis for H2 2010 and beyond. Inside, I will examine the fundamental, technical, and sentiment aspects of the global marketplace and what I beleive it means going forward.

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S&P 500 Due For A Rest, Pattern In Gold Could Spell Trouble

June 21, 2010 Leave a comment

Today's gap-n-crap action should not come a surprise as the S&P 500 just rallied 90 handles with little interruption. Today's gap took the S&P slightly over its 50% retracement level from the April peak. I expect the upside to be muted in the short-term. Trade could get choppy for a few days as there may be attempts to push the market higher, however; the risk has become skewed to the downside. It's possible we may soon be looking at the beginning of a new leg lower if this recent rally turns out to be the right shoulder of a head-and-shoulders pattern.

S&P 500

Gold (GLD) is close to failing last week's breakout from a triangle pattern. If the underside of the triangle is undercut this could turn into an excellent short trade. The concept behind this trade is that the ascending wedge has shown increasingly bullish interest with the higher lows and flat top. This pent up buying pressure should result in an upside breakout given that the prevailing trend is up. However, when the pattern fails to bring fresh buying interest in upon the breakout, a sharp reversal can take place. Today's reversal, if the underside of the triangle is not held, could mark the beginning of a rush for the exits by the bulls.  

Gold failure

Gold Triangle Indicating Explosive Move Is Imminent

June 17, 2010 Leave a comment

Gold has built a very well defined triangle pattern over the course of the past month. The pent up price action should resolve anytime now. Given the range of the triangle, a $70 move is in the cards – or $7 in GLD. The prevailing trend is up so I expect an upside break to occur, however; I will wait for confirmation before making any moves.

GLD

Equities Due For Pullback, But More Upside Should Follow

June 16, 2010 Leave a comment

S&P 500 Index

Since last Tuesday, equities have experienced a solid move off the successful retest of the 1040 level in the SPX 500. Several short-term guides have moved into overbought territory suggesting the market could use a rest/pullback before attempting to make any further gains. The 50 day EMA lies just ahead at 1120.

1. Breadth Oscillators such as the McClellan Oscillator have cycled into overbought territory

2. Yesterday, the CBOE Volatility Index (VIX) close 1.67 standard deviations below its 10 day moving average. VIX spikes above the 2.0 std dev threshold can be common place during a sharp market sell-off, but moves of greater than 1.5 std dev below the 10 day on rallies are less common and signal short-term complacency.

3. My proprietary Cumulative Tick model has extended up to a level which often coincides with pullbacks and consolidations at best.

A pullback from these levels could create a very well shaped Inverse-head-and-shoulders pattern from which another leg up could begin.

Spxhs

The Euro (EURUSD)

On Monday, I made a suggestion that if the Euro could cause a failure in the bearish breakdown from a descending wedge that it would be a bullish signal and a short covering rally could commence. Well indeed, that failure was created this week and we should see further upside over the next few weeks as the "Johnny-come-lately" short sellers run for cover to pare losses.

Euro

British Petroleum (BP)

I don't normally trade or discuss a lot about individual stocks but this opportunity looks compelling.  British Petroleum (BP) looks like a high percent "buy the big bad news" play.  The stock has been trounced for 50% since late April and today Obama slapped them with a $20 billion bill to clean up the mess. Stock gapped lower, closed higher….I like it.

The least risky way to get involved is through the options market. Implied volatility has absolutely exploded as it has risen approximately 80 clicks from 20% to 100% (1 click = 1% vol). If the stock rallies, vol is sure to crater, so implementing strategies such as buy-writes or call spreads are more ideal than naked call buying. Nothing will suck more than if you buy some calls and nail the move only to watch the vega portion of the premium (volatility) collapse in your grill. BP closed around 32 today, I don't see why a move up to 38-40 couldn't happen in fairly short order. If the low breaks, then all bets are off and it will be time to abandon ship…pretty simple….that low is 29.

Plans For The Short-Term

The next couple of days could be tricky as quadruple options expiration
can cause the market to do some unnatural things. Even though the
market is overbought and I would normally expect a pullback to commence
almost immediately, I must respect the options market and so I am
prepared for the market to stay propped up through Friday with a
pullback beginning early next week. I am not particularly interested in
selling the market too aggressively, but rather looking for a possible
high percentage long set-up should the Inverse H&S pattern come to
fruition.

Longer-Term Take

Looking at the big picture I see the market biding time right now before another whoosh lower. The peak before the next wave down may come as soon as July. I have mentioned on a couple of occasions that I am putting together a research piece and I have set a deadline for June 30th. So stay tuned…….

Markets Bouncing Around, But Show Signs of Stabilizing

June 14, 2010 Leave a comment

Equities found their footing last Tuesday as the SPX held 1140, however; the trend still remains down leaving me with a feeling that the market has work to do before market participants are convinced higher prices can evolve. There have been some positive developments on the technical front which suggest the market should at the least hold recent support and possibly work its way higher over the next few weeks. Tuesday, I cited the divergences in the Volatility Index (VIX) & breadth relative to the price of the SPX along with positive divergences in momentum indicators such as the RSI. If the multi-week downtrend line, where we closed friday can be overtaken then it should help strengthen the bullish case. On the fundamental front headline risk has abated to some degree as things appear to have simmered down a bit in Europe (for now).

The safe haven play in King Dollar appears to have exhausted itself for the time being with sentiment hitting a historical extreme while the Dollar Index (DXY) bumped its head up against a long-term trend-line. Click here to read my recent post regarding the Dollar  A Dollar pullback will likely give risk assets a lift, or at least keep them afloat.

With the DXY bias in mind, I am taking another look at a long opportunity in the Euro. The EURUSD broke down out of a descending wedge last week, but quickly reversed course and is close to creating a failed pattern scenario. Failed patterns can be just as powerful as successful patterns. The bears are stacked mightily against the Euro, with record short positions in both the cash and futures market, but price action has given the bears no need to fear.

However, if the Euro can begin to climb higher nullifying the recent wedge formation and ripples from across the pond diminish it may spook the "johnny-come-lately" crowd into covering, sparking a short-covering rally. Don't get me wrong, I am in no way a long-term Euro bull as I have been highly suspect of the Eurozone experiment for several years now. I am simply looking at the current supply/demand side of things and believe the boat has exceeded its capacity for bearish passengers and due to capsize.

All in all, in the absence of further fundamental shocks, equities and other risk assets should keep their heads above water. Trading will likely continue to be bumpy but with ample opportunity to make trades from both sides of the tape.

Dollar Index At Major Resistance, Sentiment At An Extreme

June 9, 2010 Leave a comment

Currently the Dollar Index (DXY) is beginning to back off a major trend-line extending back to late 2005, which consquently is the neckline to a long-term Inverse-head-and-shoulders pattern developing on the weekly/monthly charts.

There also exist an extreme amount of bullishness surrounding the Dollar's rise as evidenced by the 'Public Opinion' indicator's score of 79.2% shown below. The current level is the 2nd highest reading since the data began in 1999. You can see from the chart, the last time sentiment rose to this level was back in November of 2008, which coincided with a top and drop of over 10%.

Dollar index         
Image004

According to Jason Goepfert at sentimentrader.com when the Public Opinion crossed over 70% the Dollar struggled mightily. This is what he has to say: "During the next three months, the Dollar's average maximum gain was 1.5%, while the average maximum loss was -5.6%, so a huge difference between risk and reward there – it just wasn't often able to maintain additional short-term upside."

Table From Sentimentrader:


Date

1
Week

Later

2
Weeks

Later

1
Month

Later

3
Months

Later

05/05/00 -0.7% -0.2% -3.9% 0.0%
05/19/00 -2.1% -4.4% -3.6% 0.0%
03/30/01 -2.2% -1.0% -1.8% 1.8%
06/01/01 0.3% -0.5% 0.7% -5.1%
07/06/01 -0.5% -2.2% -2.9% -5.5%
01/25/02 -0.1% -0.7% 0.0% -4.0%
03/01/02 -1.2% -1.8% -1.2% -6.4%
06/03/05 0.7% -0.4% 2.7% -1.7%
11/11/05 -0.1% -1.1% -1.7% -1.6%
10/22/08 -0.4% -0.9% 3.0% -0.3%
02/25/09 0.7% -0.2% -4.3% -8.9%
Average -0.5% -1.2% -1.2% -2.9%
% Positive 27% 0% 27% 18%

In conclusion, evidence looks stacked heavily against the Dollar going forward. The long-term price resistance coinciding with the extreme bullishness suggest a favorable risk/reward opportunity for bearish bets against the dollar. A Dollar correction could also help bolster beaten down risk assets as money managers shuffle their portfolios.

     

Categories: Commodities and Rates

Two Divergences Worth Watching

June 8, 2010 Leave a comment

There are two interesting developments coming to my attention.

1. The VIX isn't anywhere near the fear level seen a couple of weeks ago despite the S&P closing at fresh multi-month lows the past couple of days.

2. Breadth Indicators, like the McClellan Oscillator, are also showing similar types of divergences.

Divergences

 


 

 

Categories: Short-Term Trader