Forum Crash Earlier

The forums crashed earlier, due to the site exceeding the bandwidth available under my "unlimited bandwidth" web-host contract.  I know, it didn't make any sense to me either.

But this is the price of fame, and we've just become too popular to handle our own traffic.  :)

Anyway, if you got the "forbidden" message, it wasn't because you were banned (although, let's face it: you probably should be.  Troublemaker!), it was due to the server crash.

I had to have an IT guy fix it (everyone say "Thanks, Kyle!"), but it should be back up and running now.  I've been assured that it should work from now on.  At least until it doesn't.  But we think we fixed the problem, so if you were unable to access the forums earlier, you should be able to do so now.  :)

Playing catch-up (ketchup?) now on Friday's update...

No Material Change

I've been trying to stick to finding at least one random day each week where I take the night off -- and this week, that's tonight.  No material change in the outlook from yesterday.

Just so you have something to look at, below is a chart of one of my proprietary signal indicators, with the components removed (I can't give away everything for free!).  This series of indicators issued a confirmed sell signal yesterday.  I have highlighted the past instances where the signal triggered, so you can see how well it's performed over the years

The Fed minutes were released on Wednesday, and there was lots of buzz about QE3.  After reading through the minutes, it's pretty obvious why everyone was so excited.  Buried within the document, I found this very revealing series of "strong statements" from the Fed:

Given the apparent slowing in the economic data, The Fed stands ready and willing to be able to be willing to be at the ready; whichever is greater. The Fed has many tools at its disposal (though, to be honest, Ben is all thumbs!) and is of course able to use these tools to accomplish things such as being ready to be willing.

The Fed is not afraid of an ecomonic slowdown, and is fully able to take whatever action it feels is appropriate, assuming that Ben doesn't show up drunk to the next meeting (again). The Fed wants it noted that it is not currently willing to take inappropriate actions unless it is deemed appropriate to do so -- in which case the Fed stands at the ready.

Also, we're not certain if we mentioned this yet, but the Fed has a lot of tools, some of which are almost certainly appropriate -- though it should be noted that we'd need to examine these tools in more detail first (which we are willing to do) just to be sure the tools are ready, and that we are able to use said tools, Good Lord willing. So say we all!

Trade safe!

Is the Rally Over or Just Due for a Breather?

On Monday, I laid out the intermediate bear case and noted that the wave structure suggested there was likely to be one final wave up over the short-term.  Then, based on Monday's price movement, I adjusted the target for that final wave in the S&P 500 (SPX) to 1425-1430 (contingent on trade above 1419.59); and also published a target of 3100 for the Nasdaq Composite.

In Tuesday's session, the SPX hit 1426.68 and reversed; and the Nasdaq hit 3100.54 and reversed -- and in a market like this, that's not a bad day.

Now the question becomes if the entire intermediate rally is, in fact, complete.  I favor the view that it is, for a number of reasons, but in this article I'll discuss some of the pros and cons for that view.

A series of historical data points which suggest an intermediate turn is underway were laid out in Monday's article, and it's worth visiting if you missed it, since I won't rehash that data here.  These data points are definitely a "pro" to the overall bear case, but are not exact short-term timing measures.  As such, they tell us that a turn is very likely to be in play over the intermediate term, but they don't really help us figure out the short-term: i.e.- if that turn happened yesterday, or if it will happen a couple weeks from now.

The chart below is a point in favor of the intermediate turn having peaked.  The wave structure that shows in the Dow Jones Industrials (INDU) counts very well as a complete wave.

The Nasdaq Composite (COMPQ) is slightly more ambiguous, particularly on the daily level (not shown), and the daily chart of the Nasdaq 100 (NDX) in particular would probably be considered a "con" to the intermediate turn having already occurred (chart follows).

Below is the Nasdaq 100 (NDX) daily.  This chart looks like a con to the idea that the final top is in, though it's also possible that NDX will go on to make a new high, and indices such as INDU will not.

The SPX chart outlines both possibilities, and some key levels to watch.  The weakness of the alternate count's third wave has to be considered a "pro" to the idea that the top is in. 

Another "pro" not shown was discussed yesterday: the NYSE Composite (NYA) reaching, and so far failing to overcome, intermediate resistance.  On Tuesday, NYA was rejected directly at the intermediate trendline discussed yesterday.

In conclusion, the rally turned perfectly from within Tuesday's final adjusted target zone, and I feel reasonably confident that an intermediate trend change is now underway.  Obviously, trade back above the 1426 pivot high would suggest the alternate count is in play -- however, even if that were to be the case, at the bare minimum, I expect this high will hold for several sessions and lead to a decent correction.  As the assumed decline unfolds, I'll watch the structure and the key levels, and that will help me either add confidence to, or subtract confidence from, my view that Tuesday's swing high was all she wrote for this rally.  Trade safe.   

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX, Nasdaq, and NYA Updates: NYA Faces Intermediate Test

There's really not much to add to the outlook since yesterday, so this update is going to be on the short side (no pun intended).  Unfortunately, I just can't invest 20 hours into writing and charting every single day -- if for no other reason than the fact that, after a mega-weekend-update like yesterday's, I simply run out of new and interesting stuff to talk about.  This update builds upon that, so for more perspective on the intermediate term, please refer to yesterday's article.

One chart I'd like to revisit briefly is NYSE Composite (NYA) daily chart.  This is a very broad-based index which is almost never mentioned by the mainstream media -- NYA covers all the common stock in the NYSE, and I like to track it because it's a much better representation of the total market than, say, the Dow Jones Industrial Average (INDU) which consists of only 30 large-cap stocks.  NYA consists of thousands -- and it has yet to best the highs of 2011. 

I called attention to this chart on August 13, and suggested at that time that higher prices would fit the pattern over the short term -- and that's what's happened. 

This pattern has a very triangular appearance, which sometimes suggests the first breakout will be a fake-out move that reverses.  In any case, that's a bit ahead of the game -- currently NYA is approaching the blue intermediate down-sloping trendline, and thus is now facing a test of intermediate resistance.

Nasdaq has reached the targets I mentioned at the beginning of August, but still looks like it has some more upside left.  The final sentence ("the next target is from here to 3100") was added today.

A very short-term chart of the S&P 500 (SPX) also suggests the index will probably take a stab at least somewhat higher, and I have drawn-in a speculative short-term ending diagonal pattern (it's speculative because there's yet not enough price info since the 1412 swing low to make a more definite call). 

My second preferred option, only barely shown on this chart (in black), is the potential that this is a bullish nest of 1's and 2's, which would lead the rally into the 1425-1430 zone.  Unfortunately, there's really no way to tell the two patterns apart until the market starts moving again, so I've outlined some levels to watch.  Both potentials suggest higher prices immediately over the short-term, but the larger wave count suggests this should be the final upthrust.  It goes without saying that bulls do need to clear the 1418.71 level first.

In conclusion, the market has reached all the targets discussed earlier this month, but the short-term direction still appears to be "up."  The intermediate interpretation I'm currently favoring has the patterns quite close to reaching culmination, but please remain cognizant that I'm going out on an analytical limb here and trying to nail down an intermediate turn before even the slightest sign of a turn actually hits the tape.  This is pretty much the toughest job in market analysis, so I could well be wrong (or at least off by a few points).  Obviously, if the bulls instead stampede right over all the sell signals which have triggered recently, then all we can do is try to adjust accordingly.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.



Current VIX Trend Line Has Marked 5 Consecutive Intermediate Tops

The bottom line with this market right now: there are plenty of sell signals, but price is not yet showing any weakness.  I can't overstate how challenging this is making the work of projecting the market's next move right now. 

I've been wrestling for the words to express what I'm seeing, and the best I can come up with is as follows: 

Since the number of sell signals is actually increasing as price strengthens, somebody's lying.  Either the signals are lying, or the rally is.  These signals began firing off after the S&P 500 (SPX) reached 1407, so for the moment, I'm continuing to run with the outlook that the rally is not going too much higher.   

Since the SPX reached the 1325 swing low in early July, my preferred short-term outlooks have, for the most part, managed to anticipate higher prices when appropriate, and thus have captured the majority of this rally to date.  Right now, I'm working overtime trying to decipher this market, because I don't want readers to miss out if the sell signals are actually the liars and the rally ends up growing legs from here. 

All investing is simply speculation -- and as always with the game of speculation, we are dealing only with odds and potentials. The signals suggest the odds are above average for a top to occur soon (in terms of price), and my research suggests that the current price zone would make an excellent potential turning point -- so, from an intermediate standpoint, I remain cautiously bearish at the moment.  Let's discuss why. 

The Signals

There are two new charts to add to those published previously.  Since I don't want to take up too much space publishing repeats of the same signal charts, I'm going to update two of them in written form, with links to the most recent articles in which those charts were published (below): 

1.  The Nasdaq total volume ratio to NYSE total volume has finally backed down from it recent all-time high reading of 3.24, registered on August 16.  On August 17, it dropped to 2.4, leaving a nice spike high in its wake -- which is often a good sell signal in and of itself.

2.  The VIX:VXN ratio has now reached a new low of .73, the second lowest reading of all time.  I mentioned this indicator on August 14, when it was at .76.  The all-time low of .71 was recorded in March 2012, slightly ahead of the SPX print high which rolled into a 10% decline this past spring.

Additionally, there are some new signals to examine.  The first is a 5-year chart of the Volatility Index (VIX), which has reached an important support line.  This current support level in VIX has marked five consecutive intermediate tops in SPX, going back to 2007 -- though it has sometimes led the turn by a few weeks (which would seem like an eternity in this market).

 

The next chart examines some signals in the put/call ratio (CPC), which also works as a sentiment indicator.  For new traders, the concept of tracking (and betting against) sentiment is called "contrarian investing."  The basic idea is that stocks are driven by the simple concept of supply and demand, and the more investors are bullish, the less buyers are left in the market.  Conversely, the more investors who are bearish, the less sellers remain.  No buyers = falling market; no sellers = rising market.

This chart below is based on my own buy/sell signal indicators, which I've structured around the weekly put/call ratio.  This chart reveals a decade of prior history for this indicator, and one can examine the chart and see that a cross of the sell signal line (represented by the dashed red vertical lines) almost always triggers an equities correction at the minimum.  Note that, unlike the VIX chart shown above, this is not necessarily an intermediate sell signal.  However I felt it was worth sharing, because the current put/call readings, just like the VIX readings, indicate there are high levels of bullish sentiment present in the market. 

Past performance is never a guarantee of future results, and bulls will feel brilliant if all the sell signals fail -- but I am currently unable to bring myself to become "brilliant" enough to ignore market precedent.  Combined with the potential of a double top near 1422, which I'll discuss in more detail shortly, I think one has to heed these warnings.


The Price Charts

Last week, the Russell 2000 (RUT) crossed my bullish buy trigger at 808.53 (this has been a standing buy trigger for several weeks), and on Friday it easily captured the trigger's 818-820 target.  The larger pattern here is still a mess, and almost impossible to decipher at the moment.  Now that the short-term target has been captured, I simply have to take a "wait and see" approach to this chart; two trendlines are noted which may help with short-term direction.

The S&P 500 (SPX) has also rallied into the short-term target zone, and is another messy chart.  Both SPX and RUT continue to look like corrective rallies since June, which suggests that lower prices will be the ultimate outcome -- but as mentioned, price has been reaching upside targets, and has not shown any weakness so far. 

A short-term chart of the SPX reveals that this rally leg has good odds of wrapping up soon.  The appearance of a triangle in the fourth wave position helps confirm that the up-thrust is nearing completion.

A weekly chart of SPX reveals the potential for a double-top.  On July 3, I asked whether the market needed to retest the 1422 zone, and the market has since answered.  Now the question of course becomes how the market will respond to this retest of the prior highs.

Since I'm discussing the double top pattern, it's relevant to outline exactly what that pattern is.  It's also important to understand the difference between a double top, and a pattern that has the potential to become a double top.  I've been attempting to remain cognizant of the fact that the experience level of my readers varies significantly, so I hope the veterans will forgive me for stating the obvious here:  Right now, this pattern is a potential. 

So what are we looking for to help confirm or rule out a double top?

First off, a "double top" does not need to be to-the-point on price; so (similar to the term "retest") it's more of a zone that ranges slightly above and beneath the previous high.  The majority of technical analysts consider this zone to be plus or minus 3% of the previous high; note on the chart below that the 2000 peak was a lower high, but 2007 was a higher high.  

Another confirming factor for the double-top pattern is volume:  volume should generally be higher on the first leg up than on the second leg, and so far that's been the case here.

The corrective appearance of the rally suggests that odds are above average for a double top, but as always, we'll need to see how the market responds to determine if the pattern has validity.  The first step would be a solid reversal coming from within 3% of the 1422 print high.  In classic technical analysis, the pattern is not considered to be "confirmed" until 1266 is broken (and ideally, retested from below); which illustrates one reason I don't rely solely on classic TA.

Looking down the road, if bulls can break out of the possible intermediate double top, the next challenge they'll run into is the potential for an ominous long-term triple top in the 1500's.

Next is a chart of Amazon (AMZN), and I'm calling attention to it because the present appearance of the price structure on this chart makes Amazon an excellent candidate for a potential double top.  The rally since December appears very corrective.

Bonus Chart

Finally, I want to share a proprietary chart courtesy of my friend Lee Adler at the Wall Street Examiner.  The chart is pretty self-explanatory, and I find it intriguing.  Fed cash to Primary Dealers has basically tripled since 2007, and this herculean effort has almost bought the market back up to the 2007 highs.  The chart seems to illustrate the diminishing returns of each successive QE program, and the question this chart begs is: where would the market be today if left to its own devices?



In conclusion, prices are still in the projected turn zone, and the number of sell signals is increasing as prices seem to strengthen.   

As I stated several weeks ago, this type of top is a process, not an event.  If the overall outlook is correct, then that process should be approaching completion in terms of price, if not time -- and, assuming the sell signals aren't lying, then we should see some price confirmation relatively soon.  The bottom line is: if this turn is going to happen, then we should be pretty much "there."  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX Update: Bulls Feeling Invincible

In yesterday's analysis, I suggested that the market was finally ready to move out of the two-week trading range.  The market obliged; and in the process reached the next short-term preferred target of 1415-1421, which was published on Tuesday. 

The market is now in the zone for a potential double-top with 1415-1422 -- and many metrics are indicating that sentiment is more than a bit frothy, which usually suggests that some type of correction lower is due.  In fact, the Nasdaq total volume to NYSE total volume ratio reached a second consecutive all-time high on Thursday. 

Again, the reason this indicator generally works is because it indicates that investors are pouring relatively high amounts of money into the high-beta Nasdaq vs. the "safer" NYSE.  This suggests that traders are feeling rather invincible on the bullish side of the trade, and are essentially throwing caution to the wind.

We're getting into the territory where one has to ask themselves how long these types of readings can continue, but the challenge I'm seeing is that there aren't currently any real signs of weakness in the actual price action.

Next is one of my proprietary sell indicators (though I've shared it previously, so it may have made its way into the public world by now).  This is a ratio of the Nasdaq 100 (NDX) to the Dow Jones Utility Average (UTIL).  It operates in a fashion similar to the chart shown above, though its signals are much less frequent.  Over the prior decade, it's been 80% accurate at finding short-to-intermediate-term tops, with the only signal failure coming in late 2003. 

Note the last time this indicator issued a sell signal was at the end of February, which hit the short-term top well, but led the intermediate-term top by a month.

The Preferred Outlook

Based on numerous signals such as the ratios just discussed, I remain in favor of the view that an intermediate top is under construction.  It's not always possible to call intermediate turns within a few points; so I obviously can't be certain if the assumed turn will come from within my 1415-1421 target zone -- but that would be the perfect world scenario.  In a moment I'll discuss the "but what if no turn comes" outlook.

 

Daily chart of the Dow Jones Industrials (INDU):

A brief discussion of the short-term SPX on the chart below:

An Alternate Outlook:

The outlook shown above hinges on what happens over the near term.  If the 1422 resistance level is claimed, then that will eliminate certain potentials, and when trying to anticipate the pattern in advance, one has to recognize when the market dictates that it's time to evolve.  The outlook shown below only becomes a consideration if the more bearish pattern shown above is invalidated. 

If the 1422 level is solidly claimed in the near term, then that suggests a different pattern (than the one shown above) is unfolding, and the outlook below attempts to anticipate what that pattern might be.  This path still suggests an intermediate top is close in terms of price, but the pattern below would be more near-term bullish and would allow the time component to stretch out for several weeks (or longer).

Again, this pattern is being shown in advance, but it is not a consideration unless 1422 is solidly claimed by the bulls.

In conclusion, a high number of sell signals have triggered recently, and these are causing me to continue favoring a bearish intermediate-term hypothesis, which further suggests that price is now in the turn window.  Sometime in the reasonably near future, we need to see some price confirmation to add confidence to that hypothesis.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX Update: Beta Chasing Reaches Historic Highs

This remains one of the more challenging patterns I've seen in a long time.  Every type of trading system runs into challenges at times, and all the technician can do at such times is make a hypothesis, then back off a bit and see how the market responds.  Based on numerous indicators which have issued sell signals recently, I've made the hypothesis that the market is forming an intermediate top.  Now it's up to the market to either prove or disprove this hypothesis.

The first indicator I'd like to share is one that I've shared fairly recently: the Nasdaq total volume to NYSE total volume ratio.  This ratio has now reached an all-time record high, and this suggests that investors are chasing beta -- which indicates that sentiment is very bullish.  Extreme bullishness is often seen at the end of rallies:  when everyone's bullish, who's left to buy?

The next chart is one I studied for a few hours last night: it's the ratio of the S&P 500 (SPX) to the iShares Barclays 20-year treasury fund (TLT).  What I found is that divergences in this ratio often coincide with meaningful turns in equities -- and over-bought readings in RSI here seem to lead, or coincide with, market tops. 

There isn't enough history behind this indicator for me to be certain what the huge year-over-year divergence that formed between the 2011 highs and the 2012 highs means (TLT hasn't been in existence long enough), but it seems to suggest that a more meaningful turn could be underway.  There is also a divergence forming with the present market and the 1415 print high.  In any case, I felt the chart was worth sharing -- feel free to draw your own conclusions. 

Note the potential head and shoulders forming since the 2011 low.

 

The next chart is the SPX 30-minute, and the outlook here has remained essentially unchanged for several weeks.  In the last update, I suggested that higher prices were probable over the short term, and this occurred on Tuesday -- however the market fell short of the target of 1415-1421.  The short-term wave structure is entirely unclear, and I simply don't know if that target will be reached or not.

In either case, I do strongly suspect that the chop of the past couple weeks is nearing an end, and that the market is finally ready to break away from this narrow trading range.  I expect the market to begin a direction move within the next couple sessions.

Next is a 5-minute BEST GUESS.  A number of readers have asked me to provide these, and I'm applying a slightly different wave count to this structure vs. the last 3-minute chart I published, because, quite frankly, the short-term is a complete toss-up.  This count considers that this whole sideway/up wave is a small ending diagonal.  In a perfect world, I'd prefer to see the (ii)-(iv) trendline unbroken -- but hey, it's not a perfect world.

The question is still whether (5) is complete or not.  Keep in mind that if the overall outlook is correct, then an intermediate top is forming, and we simply may not be able to figure out the to-the-penny high at this stage.

Next is the same chart without the speculative count.  Many short-term traders will be watching only the lower red trendline, but the blue channel has been established with four alternating touches, so the first step toward short-term control will come with a breakout or breakdown of that channel.

In conclusion, I continue to feel that the number of meaningful top signals here must be taken seriously.  The funny thing is, though these indicators have worked well historically, I've been conditioned over the past couple years in this QE Wonderland market to doubt these readings.  Be that as it may, I feel the historic odds require that I continue giving preference to the idea that an intermediate top is under construction.  And if my hypothesis is correct, the move should finally be nearing completion.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.