10.31.14 – Take A Memo


“In the next day or two either yields should continue higher or equities turn lower”

That’s what I wrote yesterday and even a stopped clock is right twice a day: Yields rose as equities caught fire yesterday and fanned the flames today.  The Dow Industrials raced up another 195 points to close at a new high of 17,390.52.  The S&P 500 Index made a new closing high by gaining 1.17% while the tech-heavy Nasdaq Composite was up 1.41%.  Biotech, which has been moving almost straight up the past few weeks, cooled off today.  Gold and silver were crushed.

EWJ, the Japan Index ETF, gapped open hugely higher and closed with a 4.96% gain as an unexpected boost in stimulus from the Bank of Japan spurred optimism in the global economy.  JDST, the 3x leveraged junior gold miners Bear ETF, soared another 20.57%.  XSD, the semiconductor SPDR, rose 4.73%.  ZSL, the leveraged short silver ETF, was up 3.83% but closed just above its low, indicating its run may be coming to an end for now.  Please click on the symbol for details.

GLD, the gold ETF, looks to have given up the ghost.  For ten months it held above a 50% retracement of the rise from the 2005 low to the 2011 high.  There was also a double bottom around 114.50 and a long-term rising support line just above there.  All of that went the way of the nickle beer and the Burma Shave today:

GLD monthly1

At this point it looks likely that GLD will pull back to its 61.8% Fibonnaci retracement level, around 96.35.

Even though the stock market has been on a huge run I’m not seeing any technical signs calling for an imminent end to it.  The VIX (the CBOE Options Volatility Index) closed today at 14.03, well above the 12.11 it set in mid- September a day after the market topped out.  The VIX is also well above its -2 Standard Deviation Bollinger Band.  Typically there isn’t a market pullback until after the -2SD Band is reached, as happened twice in June of this year.  The market can pull back substantially without falling to this Band, of course; e.g., the VIX never touched the -2SD Band on September 19:


Point in fact, I’m seeing technical signs that this run may be just getting started.  On the SPY the Price Zone Oscillator (PZO) and Volume Zone Oscillator (VZO), developed by my friend Walid Khalil, is nowhere near the levels where you would expect to see the market take a rest other than a few days of light profit taking:


The price is above the 60-day EMA (red line) and the PZO on the left closed today at 26.47 while the VZO closed at 17.23.  While it’s preferable that the VZO have a higher value than PZO, it’s not uncommon in the early stage of an advance for Price to lead Volume.

The present price trend probably is not sustainable although I can see a few more days of today’s kind of action.  Use pullbacks to accumulate new swing trades positions, using the Larry Connors and Dave Landry techniques I’ve written about many times.  If the market action is sideways like it was last Friday/this Monday, use Dave’s Trend Knockout (TKO) technique to buy breakouts.  If you’re unfamiliar with the TKO you can use the search box at the top of the blog to find past entries where I’ve written about them.  Type “TKO” (without the quotation marks) in the search box and click on Search.

I’m taking the next two weeks off although I will update Subscribers Only! each day.  Enjoy your weekend.

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10.30.14 – On Fire

This market is on fire, even with news out the the Fed intends on ending QE soon.  Better than expected data on economic growth fueled today’s blastoff.  The Dow Industrials closed up 221 points at 17,195.42, while the S&P 500 Index gained .62%.  The Nasdaq Composite lagged, rising “only” .37%.  What I did not like despite today’s great upside action is that Treasury bond yields closed lower.

Long and strong was the watchword for today.  ERUS, a Russia Index ETF, rose 4.83% albeit on below-average volume.  EWZ, the Brazil Index ETF, gained 4.01%.  JDST, the 3x leveraged junior gold miners Bear ETF, shot up a staggering 26.23%.  ZSL, the leveraged short silver ETF, jumped 6.65%.  Please click on the symbols for details.

There is usually a strong correlation between interest rates and equities.  A rising market is usually met with rising interest rates.  On one level, it’s simple supply and demand.  When rates are too low, the historic risk-adjusted return for equities is greater than it is for bonds, so money shifts to equities.  Equities therefore rise over time as institutions allocate more money to equities compared to bonds.  When existing bond positions are sold so the proceeds may be repositioned into equities, there are more bond sellers than bond buyers.  To attract bond buyers, yields need to be higher, ergo, lower bond prices (prices and yields are inversely correlated with each other).

Usually, there is a positive correlation between stock prices and interest rate yields.  A positive correlation indicates that two assets tend to move in the same direction. A negative correlation indicates a strong tendency for two assets to move in opposite directions. A correlation value of near zero indicates there is very little correlation between the two assets.  The highest positive correlation is 1.0 and the lowest negative (inverse) correlation is -1.0.

The intermediate-term correlation between treasury bond yields and the S&P 500 Index is usually strongly positive.  But lately that correlation has weakened and today bond yields were down even though the stock index was sharply higher.  I expected yields to be higher as well but that wasn’t the case.  In the daily chart below the 30-year treasury bond yield ($TYX) is charted on top followed by SPY below that and the correlation between the two on the bottom of the chart:


In the next day or two either yields should continue higher or equities turn lower…should being the operative word.  Just because something should be doesn’t mean it will be.  I guess the answer to that is something we will know, in the fullness of time.

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10.29.14 – Blog Will Resume Tomorrow

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10.28.14 – Moving Sideways? HAH!

Showing once again the Mr. Market’s job is to make all prognosticators look like fools, good earnings reports and higher consumer confidence numbers sent the market sharply higher the day before a Federal Reserve Board policy announcement.  The Dow Industrials jumped just under 188 points to close at 17,005.75.  The S&P 500 Index gained 1.19% while the Nasdaq Composite was up 1.75%.  Treasury yields were higher.

EWZ, the Brazil Index ETF, shot up 4.98% on more than double its average daily volume.  It has been in a downtrend since early September.  XOP, the S&P oil & gas exploration ETF, rose 4.65%; it too has been in a downtrend for months.  FCG, the natural gas ETF, gained 4.24% while XME, the metals & mining ETF, was up 3.88%.  Please click on the symbols for details.

Gold is doing its darndest to hold on at its current price level.  GLD, the gold ETF, has been hanging on just above a long-term rising support line, easily see on the monthly chart.  You can make the chart full-screen by clicking on it:

GLD monthly

Drilling down to the weekly chart we can see GLD has been trading between its 50% and 61.8% Fibonacci retracement levels:

GLD weekly

I wouldn’t be in a hurry to buy here quite yet but if the lows around 114.50 – 115.00 are hit again, you could test the waters with a long trade.  Exit should it start trading much below 113, just below the 61.8% retracement level.  That’s about a 1.5% downside risk compared to a resistance level around 125 or so, a 9.6% gain, so the risk-reward ratio is pretty solid:

GLD weekly1

I’ll be out tomorrow afternoon so I’ll see you again on Thursday.

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10.27.14 – Marking Time

A very quiet day today as energy shares dropped with falling oil prices.  The Dow Industrials gained 12 points to close at 16,817.94.  The S&P 500 Index slipped .15% and the Nasdaq Composite was essentially unchanged, gaining .05%.  Oil prices fell.

DUG, the leverage short oil & gas ETF, rose 4.13%.  JJG, the grains ETN, gained 2.39%.  FXP, the leveraged short China 25 ETF, was up 2.15% on almost double its average daily volume.  Please click on the symbols for details.

While the equity markets had a great last week they are not yet out of the woods.  The SPY has stalled just below its 50-day SMA, seen on the chart below which can be made full-screen by clicking on it:


I’ll breather easier once SPY closes above its 50-day on solid volume.  Given that the move has pretty much been straight up since bottoming, I’ll be very surprised if this scenario plays out any time soon.  I’m not finding any bullish divergences in any of the technical indicators I follow…the good thing is I’m not seeing any bearish divergences, either.

A constructive course of action from here would be for the market to move sideways for the next few days to a week and gather strength for another leg higher.  I will be watching very carefully, however, to see what happens if/when the SPY rise up to the 197 – 198 range.  That’s the 78.6% retracement level of the recent decline, and that’s a prime area for an ETF to stall.  Dave Landry uses a retracement this high as a setup for his Gatekeeper pattern:


If you’re a Subscribers Only! client you can read about the trade if it happens.  Non-subscribers can use the search box function in the blog to learn more about the Gatekeeper.

The market is moving now on earnings reports, which to date have been good.  Will they continue as such and help support equity prices or will a major company miss and spook the market?  The answer to that question is something we will know, in the fullness of time.

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10.24.14 – Blog Will Resume Monday

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10.23.14 – Bob? Bob Who?

Never heard of him; must be some permabear or the like….LOL!

Proving once again that Mr. Market’s job is to drive you batsh*t crazy, strong earnings reports from 3M and Caterpillar as well as encouraging economic news domestically and in Europe sent the Dow Industrials up 216 points to close at 16,677.90.  The S&P 500 Index gained 1.23% and the tech-heavy Nasdaq Composite rose 1.60%.  Transports were strong with the Dow Transport Index jumping 2.1%.  Treasury yields closed higher, confirming my suspicions from yesterday.

XBI, the S&P Biotech SPDR, rose 3.79% on above-average volume, breaking out through resistance in the 163 zone.  FCG, the natural gas trust ETF, gained 3.10% after dropping sharply yesterday.  Volatility declined as the market rose and XIV, the inverse VIX short-term ETN, jumped up 6.48%.  URTY, the leveraged Russell 200 ETF, climbed 5.33%.  Please click on the symbols for details.

The SPY ran back up to its intermediate-term resistance line, trading through it intraday but closing back at the trend line.  “Former support once broken frequently acts as resistance when tested” and that axiom is really showing itself to be the case.  For the first time, DIA, the Dow 30 ETF, ran up to its former support now resistance line.  You can make the two charts below full-size by clicking on them:

SPY weekly1a

DIA weekly

While I had been concentrating on SPY, tomorrow I’m going to concentrate on DIA.  The 60-minute chart clearly shows where the resistance is; note carefully where the low was on the final 60-minute bar: 166.20. Yesterday’s high was 166.23.  Today’s close was 166.71.

DIA 60-minutes

Should DIA trade below yesterday’s high it’s likely it will make a run lower to try and close today’s gap open higher.  That may be an opportunity to trade the short side using inverse ETFs like DOG or DXD, provided it doesn’t gap open lower tomorrow and completely wipe out the gap.

That wraps it up for me this week as I’ll be unavailable tomorrow afternoon.  Subscribers Only! tomorrow will be updated over the weekend rather than after the close.

Enjoy your weekend.

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10.22.14 – Way To Call It, Bob

Well, it looks like my ol’ buddy Bob was spot on; the Dow Industrials pulled back 153 points to close at 16,461.32.  The S&P 500 Index fell .73% while the Nasdaq Composite slipped .83%.  Surprisingly, Treasury yields were relatively unchanged.

Volatility shot up again as the market declined.  VIXY, the short-term VIX futures ETF, jumped up 7.84%.  JDST, the 3x leveraged junior gold miners Bear ETF, rocketed 15.87% on below average volume.  SCO, the leveraged short crude oil ETF, gained 4.77%.  TWM, the leveraged short Russell 2000 ETF, rose 2.81%.  Please click on the symbols for details.

If you compare yesterday’s weekly SPY to today’s, you can see how my friend Bob was correct yesterday about the market running into trouble getting through the former support (now resistance) line.  The red line is the intermediate-term trend line.

Yesterday, right up against the trend line:

SPY weekly1

Today, pulled back from the trend line:

SPY weekly1

Today’s daily volume was slightly lower than yesterday.

The fact that bonds were relatively unchanged leads me to wonder whether or not today’s pullback was a one-day event.  There has been a strong negative correlation between SPY and TLT, the 20+ year Treasury Bond ETF.  A positive correlation indicates that two assets tend to move in the same direction. A negative correlation indicates a strong tendency for two assets to move in opposite directions. A correlation value of near zero indicates there is very little correlation between the two assets.  The highest positive correlation is 1.0 and the lowest negative (inverse) correlation is -1.0.  The pattern has been when TLT goes up, SPY goes down, and vice versa:


The negative correlation has weakened the past few weeks (currently at -.14) but with such a strong stock market pullback today, I expected TLT to be higher.  Perhaps this is telling us something?  The answer to that question is something we will know, in the fullness of time.

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10.21.14 – Good Eye, Bob

No one is going to complain about a 200+ point up day except short players, but….how long will it last?  Right now no one seems to care.  The S&P 500 Index had its biggest day in a year as the Street speculated the European Central Bank will boost economic stimulus.  The Dow Industrials gained 215 points to close at 16,614.81 while the S&P 500 Index climbed 1.96%.  Thanks to Apple forecasting record sales the Nasdaq-100 Index rose 2.40%.  Treasury yields closed higher while both gold and silver posted gains.

GREK, the Greece 20 ETF, shot up 5.20%.  Sounds good but it’s still well below its 50- and 200-day SMAs.  FCG, the natural gas ETF, floated higher by 4.19%.  OIH, the oil services ETF, rose 3.69% and BIB, the leveraged Nasdaq Biotech ETF, gapped open higher again and closed with a 6.40% gain.  If you bought BIB two weeks ago and never checked the price, you never would have known how much it had fallen because, as they say in the horror movies….”it’s baaaaack.”

So who is Bob and why did I give him props for having a good eye?  Bob has been a very good friend of mine for many years and he works as a stockbroker.  He called me today around lunchtime to discuss the market action and he commented that the SPY was about two points away from bumping up against a long-term resistance line, which could mean trouble ahead.  After lunch I looked at my charts and by cracky, Bob was spot on.

There’s a well known axiom in technical analysis that a support line once broken frequently acts as resistance when tested.  Yesterday I posted a weekly chart showing how last week SPY had pulled back to the support line of a long-term rising trend channel.  Here’s the chart again:

SPY weekly

Within any long-term trend you can always draw trend lines of shorter trends.  That’s what Bob was looking at and here it is:

SPY weekly

Look at the red rising trend line.  Let’s zoom in and take a closer look:

SPY weekly1

You can see how the SPY has risen right back to the former support line, broken two weeks ago.  Will it act as resistance this time?  Further resistance is seen in the SPY retracing 61.8% of its decline since making a new high last month:

SPY weekly2

Let’s not forget about volume, which has been declining although today’s volume was higher than yesterdays.  The next few days will be crucial in determining whether or not this V-bottom is The Bottom or a setup for another leg lower.  The indexes are setting up Dave Landry’s Gatekeeper pattern, a reversal pattern that looks to identify when a market, stock, or ETF has completed a “last gasp” higher or lower, a.k.a., a top or a bottom.  I prefer to use it for the sell side, buying inverse ETF’s.  It is most effective when the ETF retraces 61.8% or even better, 78.6% of a recent decline.

The Dow 30 ETF DIA hasn’t quite reached back to its shorter-term rising trend line and QQQ already rose through its trend line so the ETF I’m watching for now is SPY.  Keep your powder dry and let the market action tell you what to do, don’t you tell it what it’s going to do.

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10.20.14 – What A Long, Strange Trip It’s Been

The last three weeks have been quite a ride, haven’t they?  And today the market probably would have done much better had it not been for IBM falling off a roof.  The Dow Industrials gained 19 points to close at 16,399.67.  The S&P 500 Index and Nasdaq Composite performed much better, up .91% and 1.35%, respectively.  Treasury yield, which had fallen to the floor the past three weeks, have risen somewhat the past few days but are still much lower than where they were at the beginning of the month.

SVXY, the short VIX short-term futures ETF, jumped 7.76% as volatility retreated.  TQQQ, the leveraged QQQ ETF, gained 4.45%.  TAN, the solar ETF that was last year’s darling, rose 3.48% but is still below its 50- and 200-day SMAs.  BIB, the leveraged Nasdaq Biotech ETF, was up 3.28% and has recovered a little more than 61.8% of its decline since topping last month.  Please click on the symbols for details.

This decline has felt brutal but how bad has it been compared to others?  The website Advisor Perspectives had a chart that I found very helpful for putting this recent decline in perspective:


The recent decline of 7.40% was greater than the January 2014 and June 2013 declines, but less than earlier declines.  Does this mean the current decline is over?  I’m not quite prepared to say yes but I’m feeling better about it than I was last week.

The Dow Industrials substantially pulled back from resistance around 17,100…which happens to be a Fibbonacci extension level:

DIA monthly

The monthly chart above is of DIA, the Dow 30 ETF.  It takes the level of the Dow and divides by 100.  It pulled back earlier this month to the rising support line but didn’t close below it.  That’s a positive but I won’t breathe easier until this resistance is taken out.

The weekly chart below is of the SPY.    It pulled back last week to a rising support line and bounced sharply.  That’s also a positive:

SPY weekly

But volume today on the Nasdaq was below average even though the index managed to close back above its 200-day SMA.

My big concern is that the market rises on steadily decreasing volume, which is an invitation for a resumption of the sell-off.  Earning reports are coming out and it won’t take much for a big name to miss and upset the apple cart.  Whether or not that happens in the next few weeks is something we will know, in the fullness of time.

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