Remember that old TV commercial?  That was my thought watching the market action today as strong pre-opening indications gave way to sideways action most of the day after the employment numbers came out, followed by a “get the heck outta Dodge” reaction in the final hour.  Moody’s Investors Service’s warning that it may downgrade Spain certainly didn’t help matters, either.

The Dow Industrials ended up losing 96 points to close at 9,774.02.  The S&P 500 Index posted its first quarterly loss in over a year with a decline today of 1.01%.  The Nasdaq Composite fell 1.21%.

Despite the last-hour sell-off there weren’t any out-sized gains in any ETFs.  The falling stock market once again boosted treasuries and hurt financial stocks, as evidenced by FAZ, the 3x leveraged short Financial ETF, climbing 3.57%.  DRV, the 3x leveraged Real Estate bear ETF, added 3.44%.  QID, the leveraged short S&P 500 Index, rose 3.14% and closed above its 200-day SMA for the first time since March 23, 2009.  QID was above its 200-day SMA from September 3, 2008 until March 23, 2009, a few weeks after the market bottomed and QQQQ began a run that gained 70% at its peak.  Please click on the symbols for details.

I’m not finding a lot of opportunities on the short side right now, what with the market becoming extended to the downside.  If anything I’m finding short opportunities on short ETFs, like the SIJ (leveraged inverse Industrials ETF) short I blogged about on Monday.  I suggested that shorting this inverse ETF also can be accomplished by going long the forward ETF, which is UXI.  So far the first long trade would have been bought at 31.43 and a second buy (scale-in) at 29.03, so with today’s close at 28.60 they aren’t work out too well…yet.

A similar signal using the MDU strategy went off today to short SRS, the leveraged inverse real estate ETF.  You can synthetically short SRS by going long URE, the leveraged real estate Bull ETF.  Today’s entry would have been at 35.67.  Interestingly enough, URE is above its 200-day SMA and fired off its own buy signal using the MDD strategy.  Please review Monday’s blog for details about the strategy.  This gives both a long forward ETF and short inverse ETF signal on the same day.  The unleveraged real estate Bull ETF IYR has given off several Connors buy signals the past few days using various strategies.

Yesterday I discussed the Volume Zone Oscillator (VZO) and its interpretation in trending market conditions.  Today I’d like to discuss its interpretation in non-trending conditions, using GLD as an example.  Please review the chart below, which you can make full-screen by clicking on it:

The 14-day ADX on GLD is well below 18 (the divider between trending and non-trending conditions in the VZO), at 11.56.  When the ADX is below 18, the relationship between price and the 60-day EMA is ignored.  The first buy signal is when the VZO crosses up from below -40 to above -40.  A second buy signal (which could be used to scale-in a second trade) is when the VZO crosses up through 15.

The first sell signal is when the VZO crosses from above 40 to below 40.  The second sell signal (which can be used to sell additional shares or scale in a second inverse ETF buy) is when the VZO crosses down through -5.  Note that the second sell signal is not the reverse of the second buy signal (unlike when ADX is above 18, when the sell and buy signals are the reverse of each other.  See yesterday’s blog for details).  Now let’s look at the GLD chart with annotations.

On March 3, 2010 the VZO rose above +15 when the ADX was below 18.  That was the first buy signal (yellow rectangle).  The VZO fell below -5 on March 8 (blue rectangle) so the trade would have been sold for a loss of 1.56% before transaction costs.   The VZO issued a second buy signal on March 29 (yellow rectangle).  GLD rallied from here and by April 9 the VZO was above 60. The ADX was still below 18, though, so you want to ignore the relation between price and the EMA.  The VZO fell below 40 on April 13 (green ellipse), which was the signal to sell.  This second trade would have been sold for a 3.9% gain before transaction costs.  Of course, these trades are merely hypothetical and there’s no guarantee they would work out like this in the future.

One important point to note is the VZO strategy does not incorporate a stop-loss methodology.  There are some technicians like Larry Connors who eschew using a stop-loss on the basis that it hurts more than it helps.  These technicians exit a long position when the system issues a sell signal, and they manage risk by adjusting their trade size.  Other technicians will not enter any trade without a stop loss.  There are pros and cons for both sides of the argument so you have to make that decision for yourself.

There have been numerous buy signals on GLD since June 7, when ADX fell once again below 18 and the VZO rose above 15.  The VZO has not risen above 40 nor below -5 since June 7 so there have been no sell signals.

More conservative swing traders would probably want to see the VZO fall to -40 or rise above +40 before buying or shorting when the ADX is below 18.  The problem is that by the time the VZO rises or falls to those levels, the ADX will probably be above 18 so you would need to monitor the relationship between price and the EMA before taking a directional trade.

Another possibility is to use periods where the ADX is below 18 to buy or sell (write) option straddles or strangles.  These are neutral option strategies used when you believe the underlying asset (the ETF) is very stable and you don’t believe it is going to make a large price move.  An ADX move above 18 would be a signal to exit the straddle or strangle.

We’ve now covered the use of the VZO in both trending and non-trending market conditions.  I’m very enthusiastic about this strategy and intend to incorporate it into my swing trading analysis.  When I’ll next have the opportunity to take advantage of its signals is something I will know in the fullness of time.

The trading range of the past five weeks came to an end today as the market broke out to the downside on concerns about weakening growth in China and a slump in U.S. consumer confidence.  Treasuries soared (the two-year note slid to a record low yield) as the Dow Industrials tanked 268 points to close at 9,870.30, a drop of 2.65%.  The S&P 500 Index fell 3.1% and intraday made its lowest low since November 2009.  The Nasdaq Composite dropped 3.85%. Ominously, volume rose dramatically on the indexes…don’t forget, price tends to follow volume.

Anything short was a winner today.  CZI, the 3x leveraged China Bear ETF, soared 14.69%.  BZQ, the short Msci Brazil ETF, climbed 10.56% to close above its 50 and 200-day SMAs on heavy volume – had its ADX been slightly lower it would have made a PopSteckle.  FAZ, the 3x leveraged short Financials ETF. tacked on  10.90%.  EPV, the leveraged short Msci Europe ETF, gained 8.05% – it too would have made a PopSteckle had its ADX been a little lower.  Please click on the symbols for details.

Yesterday GLD fell back into its triangle and closed below the former rising support line.  Today it made a lower low but rallied to close up for the day, yet today’s high was halted at the former support line.  Please click on the chart to make it full-screen:

The former support line having been broken is now acting as resistance.

TLT, the 20+ Year Treasury Bond ETF, broke above its triple-top and rose to its highest high (meaning, lowest yields) since May 2009.  I find it interesting that volume, while up today, is still below the 50-day volume average:

I have written several times in the blog that the stock market possibly was setting up an Elliott Wave ABC retracement.  Today the S&P 500 Index undercut the lows made around 1040, which could be signifying the start of Wave C.   A common target calculation is the length of Wave A equals the length of Wave C.  In the case of SPY, Wave A developed from April 26 to May 25, for a height (high – low) of 17.74 points. Wave B developed between May 25 and June 21.  If A = C then C should drop 17.74 points.  The top of Wave B was 103.20 so the target objective is 103.20 – 17.74 = 95.46.  As they say, a picture is worth a thousand words:

Wave A took four weeks to develop so potentially Wave C could also last four weeks, until around July 21.

There is a new technical indicator I found out about last week that I am finding very useful.  Plotting volume as an oscillator, Mr. Waleed Khalil is a Certified Financial Technician (CFTe) who developed a methodology for discerning bullish volume from bearish volume.  His Volume Zone Oscillator (VZO) is useful for identifying at which zone (bullish or bearish) volume is positioned.  While the VZO is not dissimilar from the Volume Flow Indicator (which I’ve blogged about several times) developed by Markos Katsanos, VZO offers better guidance as to buying and selling levels.

The VZO is useful in either uptrend, downtrend, or sideways market conditions.  Today I would like to discuss its use in trending conditions.  Please review the SPY chart below:

The price crossing the 60-day EMA is the determinant between bullish (above the EMA) and bearish (below the EMA) conditions.  When the 14-day ADX is below 18, the action is considered to be sideways regardless of whether price is above or below the EMA.

There are five zones in the VZO: Above 60, above 40, 0, below -40 and below -60.  When price is above the 60-day EMA and ADX is greater than 18, buying signals are issued when when the VZO crosses from above to below -40 or when the VZO crosses below zero and then crosses back above zero.  There are three selling conditions during a long position:

1.  When the VZO goes above 60 and starts to go down.
2. When a negative divergence appear at extreme level and VZO breaks below 40.
3. When price goes below the 60-day EMA and VZO goes below zero.

When price is below the 60-day EMA and ADX is greater than 18, sell short signals are issued when when the VZO crosses from below to above 40 or when the VZO crosses above zero and then crosses back below zero.  There are three covering/closing conditions during a short position:

1.  When the VZO goes below -60 and starts to go up.
2. When a positive divergence appear at extreme level and VZO breaks above -40.
3. When price goes above the 60-day EMA and VZO goes above zero.

With this background explanatory information, now let’s look at the SPY with VZO chart again, only this time annotated with buy and sell information:

Back in mid-February SPY rose back above its 60-day EMA (blue ellipse) while the VZO crossed up and down through the zero line.  The price close above the EMA on February 17 was accompanied by the VZO closing 7.80 (blue rectangle), it’s highest close since January 19.  The position would have remained long until March 18 when the VZO closed well above 60 and then headed lower (blue rectangle).

The next buy opportunity came on March 29 when SPY closed above its 60-day EMA (blue ellipse) and the VZO rose back above zero (blue rectangle).  This trade was also profitable, exiting on April 16 (blue rectangle) when the VZO clearly made a bearish divergence with price and after rising above 40, closed below.

There was another potential buy opportunity on April 28 (unmarked) but with the bearish divergence and price now below its rising trend line, I would not have taken that long trade.

A few days later came the flash crash on May 6 that sent SPY below its 60-day EMA.  Time to watch the short side!  The VZO never quite reached -60 so there was no buy (oversold) signal.  The VZO did move above -40 and chopped around for a week in late May-early June, offering some potential short trade opportunities.  The next strong signal came on June 11 and the following few days (yellow rectangle) when with price still below its 60-day EMA (yellow ellipse), the VZO start crossing up and down through zero.  Once the VZO undercut its June 14 and 16 lows on June 21 – the day it rose above but closed below the EMA – that was the signal to sell short.  Today’s VZO low still hasn’t reached -60 so absent the development of a bullish divergence, the short signal still would be in force.

Of course, by now you know you don’t have to actually short the SPY – you can buy SH, the inverse S&P 500 ETF, or double your pleasure double your fun by buying SDS, the leveraged short S&P 500 Index ETF.

Is TA not cool?  LOL!!

The market wandered again this way and that after yawning about the G20′s plan to reduce deficits in half.  The Dow Industrials see-sawed from positive to negative territory before closing the day down five points to close at 10,138.52.  Volume contracted to its lowest since April 5th.  The S&P 500 Index fell .20% and the Nasdaq Composite dropped .13%.  Volume on the Naz was the lowest of the year.

BHH, the thinly traded B2B Internet HLDR, rose 8.05%.  EWL, the Msci Switzerland Index, jumped 4.98%.  Silver fell again and ZSL, the leveraged short silver ETF, added 3% while DUG, the short oil & gas ETF, gained 2.72%.  Please click on the symbols for details.

According to a news story on Bloomberg today, the S&P 500 Index and 10-year Treasury bond rates posted a correlation coefficient of 0.84 in the 60 trading days through June 16, showing a high degree of linkage between stock prices and bond yields.  A correlation of 1.0 is perfect (two assets moving exactly in sync with each other)  and -1.0 means they move exactly opposite each other.  The last time the relationship was almost this strong during an economic expansion was at the beginning of the 2002 to 2007 bull market, when the stock market doubled.  Will it happen again?  That remains to be seen.

When prices go up, yields go down.  TLT, the 20+ Year Treasury Bond ETF hit par again at today’s high and formed a triple-top.  Please click on the chart to make it full-screen:

The three moving average lines on the chart are from the bow-tie crossover I’ve blogged about before.  If the correlation mentioned on Bloomberg continues and TLT’s price keeps rising, that may be signaling the start of a stock market rally.

With the market indexes still below their 200-day SMAs, you’ll get more bang for your buck by going short a “forward” ETF or going long an inverse ETF.  And to confuse you even more, if you get a short signal on a short ETF, you can capitalize on by either shorting the short ETF or buying its long counterpart.

Clear as mud, eh?

SIJ, the leveraged short Industrials ETF, fired off a short signal on today’s close using the Multiple Days Up (MDU) strategy.  Larry Connors and Cesar Alvarez, in their book High Probability ETF Trading, presented the Multiple Days Up (MDU) and Multiple Days Down (MDD) strategy for trading oversold and overbought ETFs.  Use the MDU rules when the ETF is below its 200-day SMA and the MDD rules when its above its 200-day SMA.

The short entry rules for the MDU are simple:

1) The ETF is trading below its 200-day SMA.

2) The ETF closes higher 4 of the past 5 days.  This means closing prices are higher than the day before for 4 out of of the past 5 days.

3) The ETF closes above its 5-day SMA on the entry day.  When this happens you short the ETF on the close today.

4) Aggressive version – Buy a second unit (scale-in) if prices close higher than your initial short entry anytime you’re in the position.

5) Exit on the close when the ETF closes below its 5-day SMA.

The chart below shows recent MDU trades on SIJ.  Looking back at both long and short trades on SIJ since inception through today’s close, there were 53 trades of which 25 were long and 28 were short.  The % Winners of all trades was 73.58%.  Long trades were more profitable than short, with longs having 88% Winners and shorts having 60.71% Winners.

Rather than shorting SIJ (something you can’t do in an IRA account, for example), you can go long UXI, which is the leveraged Industrials ETF.  You are creating a “synthetic short” of a short ETF by going long the “forward” ETF.

And having confused the heck out of you I’ll say goodnight and turn my computer off before the storm outside knocks out my power.

The markets are counting down both the end of the quarter and the upcoming long weekend for Independence Day.  The indexes wandered up and down today as investors pondered the impact of a banking overhaul bill that was less strict than had been feared.

The Dow Industrials dropped nine points to close at 10,143.81 on its highest volume in a month.  The S&P 500 Index gained .29% while the Nasdaq Composite rose .27%.  The Midcap Index was a nice gainer, up 1.07% since many financial issues are in this index.

DRN, the 3x leveraged real estate ETF, bounced off a test of its 200-day SMA and gained 8.15%.  UCO, the leveraged crude oil ETF, rose as the euro recovered and tacked on 7.12%.    It has formed a rising wedge pattern which is potential bearish – according to research done by Thomas Bulkowski, author of the book, Encyclopedia of Chart Patterns, 69% of the time the rising wedge breaks out to the downside.

Since financials were stronger today, UYG, the leveraged financials ETF, added 4.88%.  Like many bullish ETFs, it is still trading bellow its 200-day SMA.  UYM, the leveraged basic materials ETF, rose 3.38% but is also well below its 200-day SMA.  EET, the leveraged Msci Emerging Markets ETF, tacked on 4.45% but stalled today at its 50-day SMA which is below its 200-day SMA.  Please click on the symbols for details.

GLD broke out – for the second time – through the resistance line of a rising right triangle.  Volume was incredibly weak at only 53% of average daily volume and today’s bar was a doji bar.  A “doji” bar is a Japanese candlestick term describing a bar where the open and close are the same price.  In the case of GLD the difference between open and close today was one cent.  Please click on the chart to make it full-screen:

Doji’s are usually part of a larger or multi-bar pattern so we’ll have to see what happens next week.

The weekly chart of  QQQQ, the Nasdaq-100 Index ETF, is speaking volumes to me.  The chart below shows daily simple moving averages, even though its a weekly chart.  That’s easy to configure in almost all charting programs: 200 days = 40 weeks and 50 days = 10 weeks.  You can see the 200-day SMA has been strong support for several weeks now but this week’s bar is a bearish engulfing bar on higher volume – and that ain’t good:

I annotated the pattern as a diamond top.  Found in the distribution phase of an asset’s life-cycle, according to Bulkowski these also break out to the downside 69% of the time.  The price objective is the height of the diamond at its widest point and add or subtract that from the breakout price .  If QQQQ breaks out to the downside that would be 9.1 points subtracted from the support line around 45, for a target around 36.

Contrasting with this gloom and doom is UUP, the bullish dollar index which I blogged about last Friday.  UUP broke through a Fibonacci extension line acting as pretty strong support and is now likely to pull back  to its breakout price around 24:

For several months now a falling dollar has been met with a rise in the U.S. stock market.  Whether that relationship continues over the next few weeks is something we will know in the fullness of time.

Enjoy your weekend.

Pilots landing a plane in weather where there is a low ceiling (the bottom of the clouds is close to the ground) or at night utilize a system of lights on the side of an airport runway threshold to provide visual descent guidance information during the approach to a runway.  This lighting system is called VASI (Visual Approach Slope Indicator) and it consists of two sets of lights.  Each set of lights is designed so that the lights appear as either white or red, depending on the angle at which the lights are viewed. When the pilot is approaching the lights at the proper angle, the first set of lights appears white and the second set appears red. When both sets appear white the pilot is flying too high and will “overshoot” the runway; when both appear red the pilot is flying too low and will crash short of the runway.

Training for a pilots license includes night flying and that means learning how to “read” and interpret the VASI lights.  My instructor told me to remember the following: “White over white, fly all night.  Red over red, you’re gonna be dead.”  That’s what the market felt like today because every time it tried to stage a recovery it was met with selling. My quote platform, like most, displays price data in either black (up) or red (down).  I saw a lot of red on the screen at the close – red over red, you’re dead.

The Dow tumbled 145 points today to close at 10,152.80.  The S&P 500 Index fell 1.68% and the Nasdaq Composite lost 1.63%.  The Big Three  indexes have now pulled back after failing to punch through their respective 50-day SMAs and are below their 200-day SMAs again.  Support for all three are their respective double bottom lows made on May 25th and June 8th.

You pick the inverse ETF or ETN and it made some nice gains today: FAZ, the 3x leveraged inverse financials ETF, climbed 6.11%.  SDK, the leveraged short Russell Midcap Growth ETF rose 5.22%.  SMN, leveraged short basic materials, rose 5.09%.  SSG, the leveraged short semiconductor ETF has been trading sideways for almost seven weeks; it’s moving back toward the top of its range with a gain today of 4.92%.  Please click on the symbols for details.

VXX, the S&P 500 Vix Short-Term Futures ETN discussed in yesterday’s blog, rose 6.14%.  It halted at a descending trendline that happened to coincide with the 38.2% Fibonacci retracement level.  Please click on the chart to make it full-screen:

Should VXX close above the resistance line then a test of the 50% retracement level – and lower stock prices – is likely.

There was something going on today that at first I thought might have been a bullish divergence between stocks and bonds but now, I believe my initial thought was incorrect.  As a rule of thumb, bonds and stocks move opposite to each other.  Bond yields tend to rise when the market is rising, as asset allocaturs and others find stocks offering a better risk-adjusted return.  Since price ultimately is determined by supply and demand, if the demand for bonds drops because money is flowing into equities, the price of bonds will drop/yields will rise until prices are low enough/yields are high enough to attract the allocaturs again.  Think of it like a department store trying to get rid of out-of-season merchandise – they keep dropping the price until the bargain hunters start buying.

With the market down this afternoon I was expecting to see bond yields moving down as well, but that wasn’t the case.  TLT, the 20+ Year Treasury Bond ETF, fell .59% today, which means yields went higher.  That made no sense to me until I realized what’s probably happening was with the end-of-quarter window dressing going in, portfolio managers are throwing out their losing stocks but hording cash, not going into bonds.  That could have bullish implications for July.

While I still see the equity indexes as being in the middle of an ABC pullback (see the June 21st blog for a description), it wouldn’t be the first time I was wrong and the market starts rising again.  If that turns out to be the case then SDY, the S&P Dividend SPDR, is one ETF worth watching.

The weekly chart shows SDY pulled back 38.2% of the rise it made between March 2009 and April 2010.  Since then it has formed a symmetrical triangle which attempted a breakout on Monday but has pulled back to the rising support line:

Note the stochastic indicator.  It has made a bullish crossover (the light blue line crossed over the red line) around 48 and it had started higher when the rug was pulled out of the bottom Tuesday and today.  The weekly stochastic indicator is still bullish, which is surprising.  SDY even pays a respectable dividend of 3.6%.

I’m seeing more and more evidence the market is flying red over red.  Let’s hope it corrects this condition before it’s dead.

I kept thinking this afternoon of that “famous” line from the Three Stooges – “Wake up and go to sleep!”  That’s what today’s action felt like.  After wandering hither and yon, to and fro all day, the Dow Industrials closed with a mighty gain of almost 5 points, at 10,298.44.  Meanwhile, back at the ranch the S&P 500 Index dropped .30% and the Nasdaq Composite fell .33%.  Stocks fell after the Fed signaled that European debt levels may harm American growth and new-home sales sank to a record low.

Those holding treasuries were happy campers today as the Fed promised to keep rates low through 2011.  The talk of a weak world economy knocked back commodity prices and SCO, the leveraged short crude oil ETF, rose 4.53%.  Today’s action on stronger (albeit still very light) volume sent SCO up through a descending resistance line and a close above its 20-day EMA.  ZSL, the leveraged short silver ETF, gained 2.81%.  What surprised the heck out of me was that ITB, the U.S. home construction ETF, gained 1.52% – I would have thought with home sales falling to a record low, ITB would have dropped again.  Of course, it’s been falling since May 1 so today may have been short covering.  Please click on the symbols for details.

The Fed announcement sent money scurrying into Treasuries.  TLT, the 20+ Year Treasury Bond ETF, has traded the bullish side of a bow-tie crossover since late April (see the April 28 blog for a full description of the crossover) and a few days ago broke out of a symmetrical triangle.  It looked like that breakout was going to fail this past Monday but TLT rallied and closed above the resistance line of the triangle.  Please click on the chart to make it full-screen:

Today’s closing price is approaching the highs set the day of the May 6 flash crash and the subsequent test of that high on May 21st and 25th.  Note how volume has been increasing.  A successful close above the highs should send TLT to the 102 area.

GLD‘s triangle breakout from last Friday failed spectacularly on Monday and GLD continues to trade back within the boundaries of the triangle.  Volume today and yesterday (up days) is lower than the previous two days (down days) so GLD may end up breaking out to the downside:

According to research down by Thomas Bulkowski, author of Encyclopedia of Chart Patterns, 53% of the time an ascending triangle breakout will fail.  However, 86% of the time the asset will recover from the failure and ultimately move higher.  UUP, the bullish dollar index ETF I blogged about last week, is another example of a failed ascending triangle breakout:

As a rule of thumb, when the market is rising volatility levels tend to fall and when the market is falling, volatility tends to rise.  Most traders and even many investors are familiar with the “VIX,”  the Chicago Board Options Exchange Volatility Index.  It is a measure of the implied volatility of S&P 500 index options.  A high value corresponds to a more volatile market and therefore more costly options.

We can buy the VIX by buying or shorting VXX, the S&P 500 Vix Short-Term Futures ETN, and VXZ, the S&P 500 Vix Mid-Term Futures ETN.  The 50- and 200-day SMAs have been good support and resistance levels for buying or selling these ETNs:

Another way to use this is as a proxy for the stock market – if VXX runs up to resistance and stalls, then trades lower like it did at the 50-day SMA in February (yellow ellipse), expect the market to begin rising.  If VXX closes above resistance (May 4, red ellipse), expect the market to decline – the S&P 500 fell from 1173 on May 4 to 1087 on May 21.  When you saw VXX double top on May 21 and 25 and closing near the lows on both bars (green rectangle), you could have gone long the SPY after May 25th.  VXX found support on June 18 and 21 (blue ellipse) as the market topped out  – former resistance at the 50-day SMA once broken acted as support when tested – and is now starting to rise as the market falters.  If VXX keeps rising then expect resistance at its 200-day SMA and the market to continue dropping.

Isn’t this fun?  Or not?  I expect the action to be spasmodic as we approach the end of the quarter and lurch into the July 4th holiday weekend.  That’s just a guess on my part but whether I guessed right or wrong is something we will know in the fullness of time.

Home sales dropped unexpectedly and the market took it on the chin as fears resurfaced about the fragility of the economic recovery.  The market traded higher on the open but quickly turned to the downside and the Dow Industrials lost almost 149 points, to close at 10,293.52.  The S&P 500 Index dropped 1.61% and the Nasdaq Composite fell 1.19%.

Real estate ETFs were crushed, which comes as no surprise given the news about home sales.  DRV, the 3x leveraged inverse ETF, was the biggest winner today with a gain of 9.27%.  Energy stocks also took it on the chin today even though the drilling ban was blocked by a federal judge; DUG, the leveraged inverse oil & gas ETF, rose 5.59%.  Basic materials were hit hard today and SMN, the leveraged short basic materials ETF, climbed 4.94%.  It has resistance at its 200-day SMA, around 43.  Smaller-cap indexes took a hit and MZZ (leveraged inverse Midcap 400 Index), TWM (leveraged inverse Russell 2000 Index), and SDD (leveraged inverse Smallcap 600 Index) all rose between 3.75% and 4.15%.  Please click on the symbols for details.

The SPY (S&P 500 SPDR) has taken a nasty tumble since it failed to close above the 50% Fibonacci retracement level yesterday.  It also failed to close above the 3 x 1 Gann Fan angle (see yesterday’s blog for a description) and appears to be heading back to the 2 x 1 angle.  Please click on the chart to make it full-screen:

QQQQ (the Nasdaq-100 Index) is looking better than the SPY but yesterday it failed to close above its 50-day SMA and has fallen back into its trading range.

With the big pullback today, several ETFs fired off buy signals using the RSI 10/6 strategy developed by Larry Connors and cesar Alvarez.  In their book “High Probability ETF Trading,” they describe this strategy in detail.  It looks for extreme pullbacks on an ETF, buys or shorts them, then sells or covers on a snapback.

The trading rules are as follows.  For buys:

1. Today the ETF is above its 200-day SMA.

2. Buy when the 2-period RSI of the ETF looks to close under 10.  This tells us the ETF  pulled back in an uptrend.

3. Buy a second unit if the RSI looks to close under 6.

4. Exit all positions on the close when the ETF closes above its 5-day SMA.

IWO (Russell 2000 Growth), IYR, (Real Estate), IYT (Transportation Average), VB (Small cap), and XLI (Industrial sector) all fired off buy signals on the close.  It sounds paradoxical to buy them when the market is down but according to Connors, that’s when you want to buy them – when no one wants them and they are oversold.  In backtests done by Connors and Alvarez using a portfolio of 20 ETFs from their inception through 12/31/08, the % winners was 81% with an average gain of .93%.

To see if these returns held up with recent volatility, I did a backtest using the past 20 years of data (or since inception, whichever was longer) on these five ETFs, through today’s close.  The results are:

1) IWO – 78.4%

2) IYR – 68.5%

3) IYT – 59.7%

4) VB – 70.9%

5) XLI – 72.1%.

The average % winners was 69.9%,not as good as the backtest results published in “High Probability ETF Trading.”  Whether or not this is due to the increased volatility in the markets is debatable but still, the average percentage of winners is nothing to sneeze at.  Of course, past performance is no guarantee of future returns.

End of the quarter shenanigans will take place the rest of this week and the first part of next week.  What its impact is on the equity markets is something we will know in the fullness of time.

The market opened with a bang and closed with a whimper today, as the major indexes attempted to push up to their 50-day SMAs but failed to hold their gains.  There were high hopes that China’s revaluing the yuan would boost the marker out of its trading range but that hope faded as the day wore on.  Commodities and treasuries suffered sharp drops on the open but made back some of it as the market declined.  The Dow Industrials lost 8 points to close at 10,442.41 while the S&P 500 Index fell .39% and the Nasdaq Composite surrendered .90%.

Despite the pullback, shares in China ETFs had a good showing.  CZM, the 3x leveraged China Bull, rose 7.91%.  Silver rose quite a bit last week but ZSL, the inverse leveraged silver ETF was a winner today as it gained 4.28%.  It’s cousin GLL, the leveraged short gold ETF, picked up 3.96%.  SQQQ, the leveraged short QQQQ ETF that started trading in February, gained 2.60% and formed a bullish engulfing bar on almost double its average daily volume.  RSX, the Russia ETF, rose 2.28% on light volume.  Please click on the symbols for details.

RSX looks interesting, having stalled at its 50-day SMA and finding support at its 200-day SMA.  Today’s high at the 50-day SMA also ran right into resistance at the 50% Fibonacci retracement level of the recovery since the May low.  There’s a lot going on with RSX from a charting perspective – both on the daily and weekly charts – so let’s start with the daily.  Please click on it to make it full-screen:

RSX has managed to start moving through various Gann Fan angles.  W.D. Gann was a finance trader who in 1935 developed the technical analysis tool known as Gann angles. Each geometrical angle (which is really a line extended into space) divides time and price into proportionate parts. The most important angle is called the 1×1 or the 45° angle, which Gann said represented one unit of price for one unit of time. If you draw a perfect square and then draw a diagonal line from one corner of the square to the other, you have illustrated the concept of the 1×1 angle, which moves up one point per day.

Other important angles were the 2×1 (moving up two points per day), the 3×1, the 4×1, the 8×1, and the 16×1. When the angles are drawn in a group, they are called a Gann fan.  The Gann Fan is made up of nine angles based on this concept.  These trend lines are used to indicate support and resistance levels. When one line is broken (by the entire days price range) prices should move to the next line. The drawing of these lines should start from either a top or bottom.  Please note that in the chart above I chose not to show all nine angles, so the chart would be easier to read.

It’s worth mentioning that opinions are sharply divided on the value and relevance of Gann’s work.  Gann market forecasting methods are based on geometry, astrology, and ancient mathematics so as you would imagine, there are some technicians who consider the methodology useless.

RSX finally closed above the 2 x 1 angle after several failed attempts (yellow ellipses in April and June) and finally succeeded on June 11 (blue ellipse), after which it attempted to close above the 3 x 1 angle (today, the green rectangle) but the pullback stymied that attempt.  One or two closes above the 3 x 1 should, according to Gann Fan theory, set up a test of the 4 x 1 angle, around 32.

It’s the weekly chart that suggests to me that RSX may be setting up for another leg down.  I don’t fancy myself as a skilled Elliottician (Elliott wave analyst) but RSX appears to have formed Waves 1 – 5 on the weekly chart and now may be approaching the end of Wave B:

Remember, on the first chart RSX stalled at the 50% Fibonacci retracement level.  Wave B normally ends at a .618 retracement of Wave A, which would be around 32.75 (as seen on the first chart).  That’s also near the 4 x 1 Gann Fan angle descending resistance line.  Should RSX rise that high or a little higher, that could set up a Gatekeeper pattern (developed by my AAPTA colleague Dave Landry)…which we’ll discuss if and when that happens.

One thing you can say about the market is that it is never boring.  I don’t yuan to play this game any more if it ever gets that way.

The quadruple witch expiration ended quietly today with the Dow Industrials adding 16 points to close at 10,450.64.  The S&P 500 Index gained .13% while the Nasdaq Composite rose .11%.  Gold hit a new high and energy stocks rose.

AGQ, the leveraged silver ETF, was a winner again today after rising 4.62%.  IDX, the Indonesia Index ETF, gained 2.83%.  A few weeks ago it closed below its 200-day SMA but it has recovered strongly since then.  OIH, the oil services HLDR, added 2.24%, albeit on the lightest volume in two months.  Please click on the symbols for details.

GLD broke out of the rising right triangle I have blogged about this week and now has a target objective of around 130 – 131.  The method for calculating an objective for any triangle breakout is to take the distance between the highest and lowest points of the triangle and add it to or subtract it from the breakout price.  In the case of GLD’s triangle, the high was 122.45 on June 8 and the low was 114.51 on May 21, for a difference of 7.94.  Add this to the breakout price of 122.45 for a price objective of 130.39.  You can click on the chart to make it full-screen:

There are several factors that makes me nervous about the strength – or lack thereof -  of the recent rally.  One is the low volume.  The second is the rally in gold, although there are times when gold moves independent of the equity markets.  A third factor is interest rates.  As a rule of thumb, if rates go lower it’s because the stock market is also going lower and money is moving into safety.

TLT, the 20+ Year Treasury Bond ETF, is one I have been following since late April when it successfully made a bullish bow-tie crossover (Thanks, Dave Landry!  See the blog on April 28th for details; search for “bow-tie” to read follow-up blog entries).  There was a downside trendline crossover on June 3, which means a possible exit.   Using the alternative exit strategy I also use, however (hold the trade as long as the moving averages don’t reverse into the proper downtrend order of 10DMA < 20EMA < 30EMA), you would still be long the trade.  TLT also broke out of a pennant formation yesterday and while it closed a little lower today, it still closed above the pennant resistance line:

These three factors suggest a drop in equities is coming soon.  There is a fourth factor as well: the euro and U.S. Dollar.  The past few weeks the euro has been rising/the dollar has been falling and that is good for our stock market.  But as I have mentioned the past few blogs entries, UUP, the bullish dollar index ETF, appears to have formed a bottom on the daily chart:

For the second day UUP has found support at the 138.2% Fibonacci extension line (see yesterday’s blog for a complete description).  A rise in the dollar could mean weakness for equities.

So with all these ducks seemingly lining up against equities, does that mean the end is near?  Not necessarily.  The QQQQ (Nasdaq-100 Index ETF) found support at its 200-week SMA back in October/November 2009; in February 2010; and during the May 2010 flash crash.  For the past three weeks it has been holding the 50-week SMA as support and its stochastic is making higher lows:

The weekly charts of the SPY (S&P 500 Index ETF ) and DIA (Dow Diamonds) both pulled back in the past six weeks to their respective 50-week SMAs and held.  First level of resistance on both is their respective 20-week EMAs and after that, the 200-week SMA, which held as resistance when tested the last two weeks of April.  Their stochastic has bottomed out and turned higher, which is bullish.  The DIA and SPY have almost identical looking charts:

So if forced to sum up my sentiment on the equity markets I’d have to say short-term bearish, long(er) term bullish.  Whether I’m right or wrong is something I will know soon enough in the fullness of time.

Enjoy your weekend.

Why was I experiencing deja vue all over again today?  Seems like today’s action was very similar to others we’ve seen the past few weeks.  The Dow Industrials opened strong, weakened and went into the red this morning, then rallied into the close to gain 24 points, closing at 10,434,17.  Volume was below average and a little weaker than yesterday, although higher than early this week.  The S&P 500 Index gained .13% and the Nasdaq Composite rose .05% (beats the 5 cent gain it made yesterday!)

Treasuries and gold rallied as an increase in jobless claims and reports of lower-than-estimated growth from the Philly Fed cast doubts on the strength of the economy.  Gold closed at a record $1,248.70 an ounce.

AGQ, the leveraged silver ETF, rose in sympathy with gold and closed 2.88% higher.  It’s daily ADX is a very low 9.89, suggesting that a strong move in the coming days is likely.  UGL, the leveraged gold ETF, gained 2.54%.  UNG, the natural gas ETF, gained 2.83% and continues creeping higher towards its 200-day SMA.  FXP, the leveraged short Ftse/Xinhua China 25 ETF, added 2.23%.  Please click on the symbols for details.

GLD, the gold ETF, has formed a rising right triangle (discussed in the June 9 blog) that had double-topped around 122.25 – 122.50.  That high was tested again today.  You can enlarge the chart by clicking on it:

Note how volume declines during the consolidation but increases as GLD approaches the resistance line.  That’s bullish.

I’m in the midst of an interesting on-line debate with my AAPTA colleague Tom McClellan over the merits of support and resistance lines with UUP, the bullish dollar index ETF.  Tom is of the opinion that since UUP is not an individual stock but a derivative product tied to the dollar index, the cross-currents of the vast global currency markets dampen the effect of any one trader or even a few large traders.  Therefore, asks Tom, how can any price where any one trader sees support or resistance impact the stopping price of UUP?

My counter-argument is that support and resistance lines work because they do…until they stop working.  Without getting into a discussion of group mind-think and multiple traders seeing the same thing, thus making S/R points a self-fulfilling prophecy, all I had to offer was anecdotal evidence because I haven’t conducted a study as to their efficacy.

Below is an updated daily chart of UUP with both a Fibonacci retracement and extension series plotted.  “Retracement” is just that; it shows you how far the ETF has come to approaching an old high or low.  Common Fibonacci retracement percentages are 38.2% and 61.8%.  For example, if an ETF has dropped from 20 to 10, a climb up to 13.82 would be a 38.2% retracement of the decline.  A further rise to 16.18 would be a 61.8% retracement.

Fibonacci can also be used for extensions.  Price extensions are used to set price objectives once the ETF has retraced 100% of the move.  Common extension ratios are 138.2% and 161.8%.  Continuing our example, once the ETF has traded above 20, a price objective of $27.64 could be calculated as the 138.2% extension.  These extensions can be calculated well in advance of the date they are actually reached or attempted to be reached, making them ideal targets for taking profits or setting shorts.

After closing above the old high (100%) on May 4th, UUP first raced up to find resistance at the 138.2% extension level, around 24.95 on May 6th.  Note how this resistance level held on a second attempt to trade higher, until there was a successful breakout on May 14th which sent UUP to the 161.8% level, around 25.45.  Note the pullback a few days after UUP reached the 161.8% extension – it held at the 138.2% level.  Previous resistance once broken frequently acts as support when tested.

UUP then tried on four occasions to get above this level, forming a rising right triangle (just like GLD has now), before succeeding on June 4th.  After breaking out and making a new high two days later, UUP has again pulled back to the 138.2% extension.

For the past few weeks the stock market has risen when UUP falls, and vice versa.  It has additional support at the 50-day SMA (not shown), around 24.68 and climbing.  That support line if reached may be the impetus for UUP shorts to start covering, which could send the stock market lower.  Whether the 138.2% extension/50-day SMA confluence successfully holds as support is something we will know in the fullness of time.