7.22.14 – Blog Will Resume Thursday

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7.21.14 – Looks Can Be Deceiving

The scat is hitting the fan in the mid-East and the world is shaking a collective finger of shame at Russia, yet the stock market’s retreat today was mild and on low volume.  The Dow Industrials slipped 48 points to close at 17,051.73.  The S&P 500 Index was off .23% and the Nasdaq Composite off even less, only .17%.  Precious metals and crude oil prices closed higher.

RUSS, the 3x leveraged Russia Bear ETF, gained 6.60%.  Volatility is on the upswing again so UVXY, the leveraged VIX short-term futures ETN, rose 4.96%.  Natural gas prices continue to slip and KOLD, the leveraged short natural gas ETF, worked its way 3.97% higher.  URA, the uranium ETF, popped up 3.37% and is resting against its 200-day SMA for the first time since the end of April.  Please click on the symbols for details.

Normally, a pullback on light volume is a good thing…but don’t let that be the only thing you look at.  When you investigate deeper you might find rot setting in behind the scene; that things look good on the outside but not so good on the inside.  That’s where Walid Khalil’s Volume Zone (VZO) and Price Zone (PZO) Oscillators come in handy.

Long-time readers of the blog are familiar with the oscillators.  For new readers or if you’re not familiar with VZO and PZO, they indicate overbought and oversold levels and help identify at which zone (bullish or bearish) price is positioned.  The oscillators are useful in uptrend, downtrend, or sideways market conditions.  During a bullish trend the oscillators tend to move between zero and +40.  During a bearish trend they tend to move between zero and -40.

Please review the charts below of SPY, the S&P 500 Index ETF.  The PZO chart is on the left and the VZO chart is on the right.  You can make the charts full-screen by clicking on them:

SPY

Today’s range was completely engulfed by Friday’s range.  This is known as an inside day or in Japanese candlestick parlance, a harami bar.  Inside days/harami bars indicate indecision on the part of market participants.  Friday’s range was entirely engulfed by Thursday’s range although Friday’s high traded above Thursday’s open.  Indecision within indecision.

But take a closer look at the oscillators.  PZO is leading VZO (1.51 versus -7.17), which is bearish.  During bullish action volume leads price, not the other way around.  Next, look at what VZO has been doing the past week – it fell below zero and attempted to get back above zero but failed, and now is back below zero.  Failure to get back above and stay above zero is indicative of selling pressure, not buying pressure.  In other words, bearish market action.

You can see from the chart the market has been moving sideways since peaking on July 3rd.  We know from VZO and PZO, however, that looks may be deceiving.  Watch your stops and don’t be afraid to take partial profits if/when the opportunity arises.

I’ll be out of the office tomorrow and Wednesday so I’ll see you again on Thursday.

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7.18.14 – The Blog Will Resume On Monday

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7.17.14 – Fear Is A Great Motivator

There’s no way of predicting when a tragedy like today’s shooting down of a Malaysian Airlines jet is going to happen.  The only thing that can be predicted is that market players will head to safer assets, like Treasuries, when it happens.  Gold and silver usually rally as well while stocks tumble.  The S&P 500 Index fell the most in three months with today’s event coming on the heels of an escalation of the battle in the middle east.  The Dow Industrials shed 161 points to close at 16,976.81 while the Spooz lost 1.18%.  The Nasdaq Composite Index dropped 1.41%.

Volatility shot up through the roof, as you would expect on a day like today.  VIIX, the VIX short-term ETN, rocketed up 9.72%.  GDXJ, the junior gold miners ETF, soared 7.33%. AGQ, the leveraged silver ETF, was up 4.10%.  KOLD, the leveraged short natural gas ETF, gained 6.38%.  BZQ, the leveraged short Brazil ETF, rose 3.33%.  Please click on the symbols for details.

The VIX (CBOE Options Volatility index) did something today it hasn’t done since January 24th of this year – it rose up to its +4 Standard Deviation Bollinger Band, reflecting significant fear on the part of market participants.  The +/-2 standard deviation bands typically applied in a Bollinger Band includes 95% of all the data while +/-3 standard deviation bands includes 98% of all the data. At +4 standard deviation bands, you’ve included virtually all the data.  Usually it takes a few days of the VIX bouncing up against the +3 Standard Deviation band before the SPY has bottomed.  What happens when the +4SD band is reached?

VIX-SPY

Back in January the S&P 500 Index continued falling for eight more trading days before bottoming.  Prior to January the last time the VIX rose to the +4SD band was April 15, 2013 and the SP fell for three more days before bottoming.  February 25, 2013 was an anomaly – the VIX reached +4SD and the next day the SP bottomed out.  Back on December 21, 2012, the +4SD band was reached and the SP kept falling for six more days before bottoming.

This extreme a level of fear doesn’t happen often enough to draw hard and fast statistical conclusions as to how the S&P 500 Index reacts but I’m comfortable in saying I don’t think the selling is over yet.

The monthly chart of DIA shows that the Dow Diamonds ETF reached the 138.2% Fibonacci extension level since bottoming in March 2009.  Such an extension is typically found at or near a top:

DIA monthly

The Nasdaq-1oo Index ETF QQQ has formed a rising wedge pattern, as seen on the weekly chart below:

QQQ

Rising wedges are more commonly seen during a downtrend but they can form during an uptrend. The pattern usually breaks out to the downside but failures are common and many pull back to the former support line if they do breakout to the downside.  There’s still room to go before QQQ pulls back to the support line of the wedge.  If the breakout to the downside is successful the target objective is the height of the wedge at its widest point subtracted from the breakout price.  The wedge high on week-ending March 7, 2014 is 91.36 and the wedge low on the week ending April 18 is 83.28, a difference of 8.08.  Subtract that from the support line around 92.68 and you have a price objective of 84.60.  That’s likely to change, however, because the support line could be higher before QQQ breaks out to the downside, assuming it does.

All in all, the ball is in the Bulls court to prove the market hasn’t topped out for now.  I’ll be out of the office tomorrow so this is my last post of the week.  I’ll update Subscribers Only! tomorrow morning with updated CAGR figures.  There’s a new swing trade recommendation in today’s report so if you’re a subscriber, you’ll want to check it out.

Enjoy your weekend.

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7.16.14 – Are Things As Good As They look?

A new high in the Dow Industrials and the S&P 500 Index is getting close to a new high, thanks to large cap companies like IBM and Time Warner, as well as China’s economic growth accelerating for the first time in three quarters.  Everything is hunky dory, clear sailing ahead, right?

Right?

Maybe, maybe not.  Certainly not across the entire spectrum of U.S. equities.  While the Dow closed up 77 points at 17,138.20 and the S&P 500 Index gained .42%, the Nasdaq Composite rose only .22%.  Treasury yields were slightly lower.

EWI, the Italy Index ETF, rose 2.53% on very light volume after bouncing off its 200-day SMA yesterday.  UCO, the leveraged crude oil ETF, gained 2.49%.  Biotechs continue to fall as the sector rotates out of favor, reflect in BIS, the leveraged short biotech ETF, rising another 2.45%.  Please click on the symbol for details.

I received quite a few e-mails about yesterday’s blog entry and that’s a good thing.  I heard from Ed Carlson, who writes extensively about Lindsay’s work, and he commented that “the current pattern is interesting but when it has gotten so far beyond the standard template it is of no use in actually timing the top of the market – it only tells us that the top is coming.  i.e. using the pattern in isolation would have led one to believe that the 12/31/13 was the high of the bull market.”

Food for thought.

Both yesterday and today, QQQ (the Nasdaq-100 Index ETF) closed below its open, letting us know that distribution is underway in its component stocks.  It’s here that I find the Forecast Oscillator (FO) to be helpful.  Developed by Tushar Chande, it plots the percentage difference between the forecast price (which is generated by an x-period linear regression line) and the actual price. The oscillator is above zero when the forecast price is greater than the actual price. Conversely, it’s less than zero if it’s below. Actual prices that are persistently below the forecast price suggest lower prices ahead. Likewise, actual prices that are persistently above the forecast price suggest higher prices ahead.

Chande also suggests plotting a three-day moving average trigger line of the FO to generate early warnings of changes in trend. When the oscillator crosses below the trigger line, lower prices are suggested. When the oscillator crosses above the trigger line, higher prices are suggested.

The daily chart of QQQ with the FO is below.  You can make it full-screen by clicking on it:

QQQ

The forecast oscillator line is blue and the trigger line is red.  With the exception of two days since July 7, the FO has been below its trigger line.  This was the case even though yesterday and today, QQQ made higher highs.  Definitely a confirmation that we’re seeing distribution.

Compare this with the SPY chart and the Forecast Oscillator:

SPY

Although both yesterday and today SPY closed below its open, the FO remains above the trigger line.

The divergence between QQQ and SPY could continue; QQQ’s breadth could improve and the FO rises back above its trigger line; or SPY’s breadth can weaken and distribution takes place in the large caps.  Which one of these scenarios are we going to see?  The answer to that question is something we will know, in the fullness of time.

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7.15.14 – Does The Bull Market End This Week?

Several stock market made new all-time highs today but pulled back this morning and closing decidedly muted.  The Dow Industrials gained but five points to close at 17,060.68.  The S&P 500 Index lost .19% and the Nasdaq Composite fell much harder, down .54%.  Gold and silver continue getting hammered.

DUST, the 3x leveraged gold miners bear ETF, did it again by jumping another 8.93% on double average daily volume.  BIS, the leveraged  short biotech ETF, gained 4.79%.  Volatility is still high so TVIX, the leveraged VIX short-term ETN, gained 4.04%.  KOLD, the leveraged short natural gas ETF, floated 2.84% higher.  Please click on the symbol for details.

Quite a provocative subject line today, isn’t it?  But according to a forecasting technique pioneered by George Lindsay, this is the week.  Lindsay was a commercial artist who began publishing his thoughts on the stock market beginning in 1950.  He is best known for developing long-term timing methodologies.  Lindsay published a market advisory newsletter from the 1950′s through the 1970′s and was a well-followed market forecaster back in the day.  What he’s best known for is identifying a pattern he called “Three Peaks and the Domed House .”  According to market historian George Schade, the two formations have appeared at major tops in the DJIA at least 35 times since 1885.

Schade explains the pattern very succinctly in an article he wrote for the Market Technicians Association:  “In simplest terms, the Three Peaks represent a flat shape with three tops in the same general price range. A Separating Decline separates the Three Peaks from the Domed House.

“The Separating Decline is divided into two selling waves. The lowest point of the Separating Decline is always lower than the two prior lows of the Three Peaks. Some type of base formation marks the bottom of the Separating Decline, but there must be two dips.

“There must be two tests of the lowest point before a Domed House begins. A fast advance follows, forming the Wall of the First Story. The Roof of the First Story consists of five reversals. Then, an advance forms the Wall of the Second Story, followed by a Cupola or Small Dome at the top, hence, the name of the formation. The Roof of Second Story is an abrupt decline, which is followed by a recovery, but the downward trend is inevitable.”

The tops and bottoms form a total of 28 peaks and valleys.  Here is what the pattern looks like, taken from http://www.sandspring.com/graphs/threepeaks.jpg:

http://www.sandspring.com/graphs/threepeaks.jpg

The Three Peaks Pattern

The Three Peaks part of the pattern is very straight forward where points 1-2 form the base before a sharp rise to point 3, points 3-7 then form the three peaks pattern before a separating 3 wave decline into point 10. – See more at: http://www.tradersdaytrading.com/3-peaks-and-a-domed-house.html#sthash.qj6KFgrq.dpuf

The Three Peaks part of the pattern start from a base (points 1-2), before a sharp rise to point 3.  Points 3 – 7 form the subsequent three peak pattern followed by a decline shown at points 8 – 10.  The next action forms the Domed House.  A rise up from point 10 is followed by two corrective waves at points 11 – 14.  This is followed by a sharp rise to point 15 where the pattern moves sideways through point 20.  There is then another sharp rise to point 21, followed by a low at point 22, a new high at point 23, a second low at point 24 and then a lower high at point 25.  Points 21 – 25 form a head-and-shoulder top pattern, which is followed by a swift decline to point 28.

You can find a chart of the Dow Industrials with the 28 points labeled here.

The Three Peaks part of the pattern is very straight forward where points 1-2 form the base before a sharp rise to point 3, points 3-7 then form the three peaks pattern before a separating 3 wave decline into point 10.
- See more at: http://www.tradersdaytrading.com/3-peaks-and-a-domed-house.html#sthash.qj6KFgrq.dpuf

In research done by very experienced technical analyst Mr. Ed Carlson, CMT, the stock market is currently at point 23. He is of the belief that this week will mark the top of the Bull market that began in March 2009.  Ed’s work is very well done and I encourage you to learn more about his Lindsay analysis.  He may be reached at ed@seattletechnicaladvisors.com.

I e-mailed Ed and asked whether Lindsay measured highs and lows by the closing high/low or the intraday high/low.  He responded that Lindsay wrote that he preferred the intraday high or low, but his work shows he used both.

If Ed’s analysis of the market using Lindsay’s TPADH methodology is correct, he just gave us a huge heads up.  Thanks, Ed!

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7.14.14 – Hello 17,000 Again…But For How Long?

Say hello to 17,000 again.  Better-than-forecast earnings from several major stocks sent the Dow Industrials up 111 points to close at 17,055.42, just below last week’s closing high of 17,068.  The S&P 500 Index gained .48% while the Nasdaq Composite rose .56%.  Gold and silver prices plummeted.

DUST, the 3x leveraged gold miners Bear ETF, jumped up 8.69%.  ZSL, the leveraged short silver ETF, rose 4.70%.  Volatility sank to the floor as the VIX retreated and XIV, the inverse VIX short-term ETN, was up 2.94%.  Please click on the symbols for details.

I’m not saying today’s jump was a bear trap but it smells a bit like fish paper that’s been out of the refrigerator too long.  Volume…what is that?  It was mysteriously absent today, which to a technical analyst is a big waving red flag.  This was plain to see using Walid Khalil’s Price Zone and Volume Zone Oscillators (PZO and VZO), with a bearish divergence between the two.

At any given point in time one of the oscillators will lead the other.  A basic tenet of technical analysis is that price follows volume.  When price rises and PZO leads VZO, i.e., the value of PZO is greater than PZO, that is potentially a bearish pattern because price is leading volume.  When VZO leads PZO,  price is lagging volume and that’s potentially a bullish pattern.

You can see this on the following daily charts of SPY, QQQ, DIA and IWM.  The charts can be made full-screen by clicking on them:

DIA

PZO = 24.67 and VZO = 3.97 on the Dow Diamonds.  Note today’s price bar gapped open higher and closed near its low.  This is a shooting star Japanese candlestick.  It is potentially bearish and indicate more sellers than buyers.

SPY

PZO = 24.65 and VZO = 10.92.  Note that the open on the SPY was within two cents of the close and the close was near the bottom of today’s daily range.  This is a Doji candlestick and is a component of many candlestick patterns.  If tomorrow is a down day and the bar closes today’s gap, that will make an Evening Doji Star pattern which is a top reversal signal.

QQQ

PZO = 37.18 and VZO = 15.97.  The Qubes candlestick has a close about halfway into the daily range.

IWM

PZO = .58 and VZO = -8.13 on the Russell 2000 Index ETF.  Until today you wouldn’t have considered buying IWM because it had been below the 60-day EMA.  You want to go long only when price is above the EMA.  Today’s close was well below the open and was near today’s low.  No matter how you try to sugarcoat it, today’s action was bearish.

We closed out a great ETF trade today, selling IBB, the biotech ETF, for a 7.61% gain before transaction costs in a little over five weeks.  That compares with a 2.72% gain in the S&P 500 Index.  Chest bump!  The trade was mentioned in Subscribers Only! at the end of May.  For $5/month you can find out what the current and new ETF, stock and Fidelity mutual fund selections are.  New subscribers get the first two weeks free.

So there you have it.  As I blogged last week, Vee – Volume – is crucial.  Price can certainly continue to rise on declining volume but volume is like fuel to a rocket; it can only go so high until it runs out of fuel and then plummets back to earth.  When will that happen?  The answer to that question is something we will now, in the fullness of time.

 

 

 

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7.11.14 – Are Looks Deceiving?

Lots of talk this week about how the market is FINALLY beginning a pullback.  But as we finish off what started out being the biggest weekly loss since April, not everything was bad.  The Dow Industrials reversed course and closed up 28 points at 16,943.81.  The S&P 500 Index gained .15% while the tech-heavy Nasdaq Composite rose .44%.  Crude oil prices dropped sharply.

JNUG, the 3x leveraged junior gold miners ETF, shot up 11.41%.  There was a big drop yesterday so trading this ETF is not for the faint of heart!  SCO, the leveraged short crude oil ETF, jumped 4.11% and closed back above its 50-day SMA for the first time since the beginning of May.  SIL, the silvers miners ETF, was up 2.15%.  Please click on the symbols for details.

QQQ, the Nasdaq-100 Powershares ETF, belies the claim the market is too extended to buy here.  There was a clean Trend Knockout (TKO) buy signal today.  Dave Landry’s TKO buys after the weaker hands have been knocked out.  As always, you want to buy in the direction of the primary trend.  I recommend long trades only when the ETF is above its 200-day SMA.  Take short trades (or buy inverse ETFs) only when the ETF is below its 200-day SMA.

Here are the Buy rules for TKOs (short sales are reversed):

1.  The ETF you’re watching to buy should be in a strong trend, as defined by an ADX >= 30 and +DMI > -DMI.  You can also use rectangular bases that successfully broke out to the upside.  If you’re unfamiliar with ADX or DMI, please read my 8.7.09 blog entry for a complete description.  ADX is the Average Directional Index and it was first discussed by Welles Wilder in 1978.

2. The ETF should make at least a 2-bar low.  Buy tomorrow or the next day 1 – 2 ticks above today’s high.

3. Place a protective stop below the low of the knockout bar.  If this is more than 5% away from your entry price, risk no more than 5% of the ETF’s price.

Please take a look at the chart below of QQQ, which can be made full-screen by clicking on it:

QQQ

The ADX today closed at 37.04, well above the 30 minimum Landry looks for.  Although not shown, +DMI is greater than -DMI.  Once QQQ today rose a few cents above yesterday’s high of $95.05, that was the buy signal

It seems like there’s always something on the global front that carries the risk of upending the apple cart.  A few months ago it was Ukraine; now it’s the Middle East (again).  That’s why I don’t watch MSNBC or Fox Business News, and definitely don’t listen to shriekers like Jim Cramer…who needs their $.02 when the charts tell us everything you need to know?

Enjoy your weekend.

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7.10.14 – Blog Will Resume Tomorrow

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7.9.14 – Vee Is The Word

With apologies to the gang at Rydell High, it’s Volume, not Grease, that’s the word.  Although the equity indexes were higher today – up 79 points for the Dow Industrials (closing at 16,985.61),  up. 46% for the S&P 500 Index and up .63% for the Nasdaq Composite – all three were higher on lower volume than during yesterday’s decline.  Rising price on declining volume is a bearish divergence and likely not sustainable.  Confirming this we saw Treasury yields continue to fall even though they typically rise when equities move higher.

JNUG, the 3x leveraged junior gold miners ETF, was a big winner today, up 16.43% on 170% of average daily volume.  Indonesia was another big winner with IDX, the Indonesia Index ETF, gaining 4.75%.  SIL, the silver miners ETF, rose 2.59%.  Please click on the symbols for details.

On the Volume Zone (VZO) and Price Zone Oscillators (PZO) for DIA, SPY and QQQ, the VZO is lagging the PZO.  This is bearish:

DIAPZO = 14.91.  VZO = -2.65.  Volume is lagging.

SPYPZO = 14.90.  VZO = 5.92.  Volume is lagging.

QQQ

PZO = 34.02.  VZO = 21.98.  Volume is lagging

But look at an ETF where volume is leading – GLD, the gold ETF:

GLD

PZO = 7.44.  VZO = 23.66.

Despite Monday’s pullback, Buffalo Wild Wings (BWLD), one of the stock selections bought June 2 in Subscribers Only!, was sold for an 8.15% gain (before transaction costs) while during the same holding period the S&P 500 Index was up a meager 2.74%.  How are the other stocks, ETF’s and Fidelity mutual funds doing?  Click on the link and for $5 a month you can find out.

Follow the volume, my friends.  Should the market rise again tomorrow, watch carefully to see if the volume is greater or less than today’s volume.  Should the market fall, does it fall on heavier or lighter volume?  The answers to those questions are something we will know, in the fullness of time.

I’ll be out of the office tomorrow so the blog will resume on Friday.

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