Exxon Engulfed

Exxon now has a bearish engulfing candle on its daily chart (click to enlarge):

Notice what happened after the last bearish engulfing pattern that it had on January 6th (blue arrows). Also notice the big jump in volume on Friday. That makes it even more bearish.

Exxon announced earnings on Friday morning, and they were received as “good”, yet we got this bearish result. I’m thinking that a large fund(s) was looking to exit Exxon and used the earnings report to engage in a bit of distribution. In fact, it looks like XOM has been under distribution for a while:

The stock was in an uptrend channel (blue lines), but the pattern has recently degraded into a descending triangle (red lines) after struggling to hold the lower blue line over the last two weeks.

The XLE also has a bearish engulfing candle on its daily chart.

Exxon is an important stock since it is so huge, and if it is beginning a sustained downtrend, that will not be good for the indicies.

Note: I don’t have a position in XOM, XLE, or any other oil stocks. But if I did, I would be short.

Friday’s Trading

I took profits on my shorts Thursday and went back to cash. Like George says, get the honey and get away from the bees. But I’ve probably taken profits too early again. As you may recall, when I shorted the January 6th top, I took fat profits as the SPX fell down to 900. And that was about 100 points too early. I might be making the same mistake again, so don’t read too much into my move back to cash. I’m actually just looking for a day off from trading, though I may pop up to short Friday’s close.

If you look back at the chart, you will see that the market made a small bounce on January 8th before resuming its plunge. We could see that type of pattern again.

The futures were testing 840 after hours until Amazon’s earnings were announced. Then the shorts threw in the towel and the futes started moving up.

Don’t forget that next week is the first week of February, and the first week of the month is always treacherous because that’s when the window-dressing ends and the jobs report looms. Even though the jobs report comes out on Friday, Bloomberg will publish their survey of economists on Sunday, and the market will price-in those expectations first thing Monday morning. So, you need to think about the jobs report a week in advance.

The SPX’s false breakout above the resistance around 850 may prove to be a very serious issue because it implies a breakdown out of the range may be in the cards. If you want a short position with an eight handle, you might have to get ’em while their hot. We just saw this phenomena a month ago. The SPX broke above the resistance at 911 on the first day of the year, but fell back below only three days later. That false breakout implied a break below the lower band of the trading range around 865-870, and the market wasted very little time doing so.

Candlestick Pattern
It’s not a perfect fit, but bulls can pin their hopes on SPY’s three-day pattern possibly being a bullish Upside Gap Three Methods. Also, the plunge in breadth Thursday may be some kind of one-day record. It usually takes a two-day panic to move breadth down from such a bullish extreme to such a bearish extreme. While I don’t regard this as bullish, the market just has to bounce after such a breath-taking crash in the internals, right? Right? Enough solace for the bulls…

Links in Comments
I came across the “links in comments” setting in WordPress and raised it from two to five. It’s used to filter out spam, however, I have the “new posters must be approved” setting turned on, so no spam bots are going to get through anyway.

Thursday’s Trading

Tiki Alert
On Wednesday, the TIKI closed at 18. That was the highest print in seven months. The tick count for the Russell 2000, TIKRL, closed at 1,000. That’s a new record high for the data that I have, which goes back to April. For comparison, the TIKRL printed at 776 at the rally peak on January 6th. These two indicators are flashing very overbought signals (short term).

Another Kud-blow-off?
Here is me calling Larry Kudlow a fool:

“Euphoria has officially broken out on CNBC with Kudlow screaming about “panic buying” and talking heads raving about how a giant rally is “in the air.” Fools.”

Was I being unfair? Nope. That quote is from this post on January 5th. The market topped the next morning, and then panic selling ensued. The exact opposite of what Kudlow predicted.

Guess what? Kudlow started shrieking about “panic buying” again on CNBC last night. If the Kud-Blow indicator is consistent, then the market will be peaking soon, if it hasn’t done so already.

No More Cars, Please
In case you missed it last night when I posted it in the comments, here are 13 cool pictures of cars piling up around the world.

Wednesday’s Trading

Another FOMC Rally?
If we have another one-day wonder rally like we did for the last FOMC meeting, a potential target is SPY $87.26. That is the top of the gap that was created at the open on January 14th.

Banks Saved Again
This is the CNBC story that rallied the futures Tuesday after the close. It appears that the banks will be saved yet again. Our government has been “saving” the banks for almost a year now. I reckon we are nearing the first anniversary of our lost decade. Only nine more years to go!

Goodbye Triangle

Remember the triangle that everybody was talking about back in October? (click to enlarge):

Here is what it looks like now:

Notice that the original geometry established in October is still in force. We are still near the lower line of the triangle, and haven’t been able to push above the downtrend line. We had a false breakdown in November, and a false breakout in January.

Now we are about to exit the apex of the triangle. Here is what the textbook (page 103) says about that:

“the farther out into the apex of the Triangle prices push without bursting its boundaries, the less force or power the pattern seems to have. Instead of building up more pressure, it begins to lose its efficacy after a certain stage. The best moves (up or down) seem to ensue when prices break out decisively at a point somewhere between half and three quarters of the horizontal distance from the base (left-hand end) to the apex. If prices continue to move “sideways” in narrower and narrower fluctuations from day to day after the three quarter mark is passed, they are quite apt to keep right on to the apex and beyond in a dull drift or ripple which leaves the chart analyst completely at sea. The best thing to do in such cases is go away and look for something more promising elsewhere in your chart book.”

So, there you have it. The market has accomplished nothing since October 10th, and is unlikely to accomplish much in the near future.

Vixen Fixin a Surprise for Bulls?

In case you don’t know, the Vixen is the NASDAQ version of the more famous Vix. And it just so happens that the Vixen has formed a bullish falling wedge pattern on its hourly chart since the big gap-up open on January 20th (click to enlarge):

This pattern implies that the market may be intending to take another trip back down to the bottom of the trading range in the near future.

Black Magic

Here is an example of the black magic that you can sometimes achieve with Fibonacci retracements.

Lets go back to June when the Russell 2000 small-cap index looked like it was going to the moon during a bear market rally (click to enlarge):

Now, suppose you wanted to short that crazy chart without having your eyes gouged out with a hot poker. How do you pick an entry point? One way is with a Fibonacci retracement. Using TradeStation’s fib tool, I have drawn a retracement from point A to point B. I chose point A because that was the cliff that prices dove off of. Notice that one of the magic fib levels, 161.8% (blue line) happens to match up with the peak:

And that was the exact point where the rally topped out:

Pretty amazing, right? Of course, prices could have moved up to the next fib level. Nothing is guaranteed in the stock market. But Fibonacci levels give you hints about price levels that may turn out to be important.

Tuesday’s Trading

Candlestick Pattern
The SPX’s two-day candlestick pattern is very close to a bearish shooting star. On the other hand, Tuesday was the only winning day-of-the-week in 2008. According to Scott Rothbort (subscription required), Tuesdays were up 22.79% last year, while the remaining days were responsible for dragging the market down.

The market rallied ahead of the last FOMC meeting on December 15th, so maybe we will see traders anticipating another such rally. Perhaps all the rallying will be done before the announcement on Wednesday. Of course, the market plunged after the December rally.

Because the last meeting was the kitchen-sink meeting, what with the ZIRP and all, I can’t imagine that the FOMC has something to shock and awe the market this time. Perhaps they will announce a new program of firing quarters from howitzers installed on the roofs of every Fed bank branch. The coins raining down on cities across the country will damage cars and boost new-car sales. Picking up all of those quarters will keep the unemployed busy, etc.

Here Come the Giraffes

Here is an hourly chart of new 52-week lows on the NYSE (click to enlarge):

Since this number starts at zero each morning, the bars grow higher as a bad day for the market progresses. The pattern reminds me of a herd of giraffes, and the giraffes grow taller as the market declines. Friday’s giraffe was 133 stocks high; just a baby compared to the giraffes of 2008, so there is room to grow.

Bernanke will be giraffe hunting next week, but does he have any more rounds for his ZIRP gun?

Overbought, Believe it or Not

As I mentioned in the comments yesterday, the market has had to expend a lot of buying power to overcome the large gaps down in the morning that we saw on Thursday and Friday. And all of that buying has pushed some indicators into overbought territory. One of which is the 3-day moving average of the TRIN. Take a look at this chart (click to enlarge):

The purple line at the top is the 3-day TRIN, and the SPX is below. When the purple line crosses the red line, you get a sell signal. This has been a very reliable indicator during this bear market, and the two black arrows show the last two times it raised the alarm. After each incident, the market pushed a bit higher, and then fell for several days.

If the market is able to make progress next week, it is likely to be short lived.

A/D Drama

Here is a chart of the NYSE Advance/Decline Line (click to enlarge):

The uptrend line (black) for the bear-market rally was snapped on January 14th (black arrow).

The market has found support at the red line, which was resistance earlier in the rally. However, it has been unable to rally off of the red line, and on Friday was only able to manage a tiny, feeble bounce.

If the red line gives way, there should be some support at the green line though it doesn’t look to be very strong. Falling through the green line will be a very strong hint that we are heading to the November low. Or should I say “continuing” to the November low? After all, important elements have already taken out their November lows: XLF, Apple, GE, etc.

The purple line shows that the A/D line was able to match its election-day peak while stock prices were not able to do so. So, while stocks were advancing, they weren’t advancing by as much price-wise.

IWM Falling Wedge

Here is a daily chart of the IWM showing a bullish falling wedge pattern (click to enlarge):

Notice that the lower blue line, which began on October 14th is still a force. The wedge is only a few days old, but I extended the lines backward to illustrate how long they have been in play.

A potential scenario is that prices will pop out of this wedge, squeeze the shorts, and build a bull-trap before rolling over and testing the November low. The rest of the market would likely follow a similar pattern.

Thursday’s Trading

Good Calls
Kudos to both Helene Meisler of RealMoney.com and Jason Goepfert of SentimenTrader.com for giving the heads-up on the big banking bounce. Both made the call during the day on Tuesday and correctly predicted Wednesday’s rally. Meisler used her charting techniques, and Goepfert used his statistical approach, and both came to the same conclusion. I subscribe to both sites, and both Meisler and Goepfert are excellent analysts. I read them before the open every morning.

Candlestick Pattern
SPY’s last two daily candlesticks are pretty close to a bullish harami, however prices may have moved down too far Wednesday morning. If you look at IWM’s candles you will see what I mean. Perhaps SPY will have a bullish follow-through today, though weaker than might be expected from a clean harami.

You have SPY’s gap from Tuesday morning marked on your charts, right? That will likely be an important resistance area. There should also be a good deal of additional resistance coming from the bulls trapped at 850 who will be selling in relief after grimly holding on through the plunge to 800.

The tick count for the S&P 500 hit 212 on Wednesday indicating a good deal of froth. The last two times it spiked to this level were on December 8th and August 8th, neither of which were a good time to be long.

I’m thinking that with the combination of bullish and bearish factors we have, the market might build a short-term top over the next two days or so, and then get back to bear mode.

SPX Broadening Pattern

Here is an hourly chart of the S&P 500. Note the “broadening pattern” that I have outlined in red (click to enlarge):

If this pattern were appearing at the end of a long bull run, then it would certainly spell doom. However, it is appearing sort of in the middle of a trading range, so let’s just call it bearish. Here is a quote from the textbook:

“Hence, after studying the charts for some 20 years and watching what market action has followed the appearance of Broadening Price Patterns, we have come to the conclusion that they are definitely Bearish in purport — that, while further advance in price is not ruled out, the situation is, nevertheless, approaching a dangerous stage. New commitments (purchases) should not be made in a stock which produces a chart of this type, and any previous commitments should be switched at once, or cashed in at the first good opportunity.”

This doesn’t mean that the market will flop right over, but it’s probably not a good idea to get married to long positions. Speaking of flopping over, the SPX is making a symmetrical triangle on its monthly chart:

Maybe we could squeeze February in there, but it would have to be a very narrow-ranged month. The textbook says that this is a continuation pattern 75% of the time. And in this case “continuing” means “down”, as you may have guessed.

Wednesday’s Trading

The Coronation Crash
Thanks everybody for the compliments. I hope that you had time to read my crash call before the market opened yesterday. I didn’t have any time to chitchat on my blog, but I did slip in a few trades and had another good day. In addition to going short in the futures on the weekend, I made nice profits on IWM and QQQQ puts. IWMNR was up 89% and QAVNB was up 63%. I caught a nice slice of those giant gains.

But for some reason, not a lot of traders joined me. Looking at the put/call ratio, you might think that Tuesday was just a ho-hum day in the market. This nonchalant attitude toward a 332-point plunge is an indication of complacency, and is bearish.

On the other hand, many of my indicators are flashing oversold readings. For example, the TICK closed at a barfy -1058, so it looks like a mixed picture to me. Maybe the market can resolve this buy diving, scaring people sufficiently, and then bouncing back up to work off the oversold condition.

In any case, I probably won’t make any trades since I like to have the odds stacked in my favor. I took profits on my futures and puts and am back in cash now. Gun to head, I would be short and steeled to ride out a relief rally.

Rally On?
Probably not, what with all banks going to zero and whatnot, but it’s important to keep in mind that the QQQQ and IWM closed Tuesday right at the 61.8% Fibonacci retracement of the November 20th to January 6th rally (using daily closing prices). The bull has a chance to survive that kind of retracement.

Also, QQQQ and IWM are well above their November 24th gaps, while SPY filled some of its gap on Tuesday. So, you have two ways to look at this setup: QQQQ and IWM are holding up the market, or they have a lot of air underneath them. I reckon that there is no need to comment upon the XLF, right?

Coronation Trading

Coronation Crash?
The S&P 500 peaked on election day at 1007. The SPX then “celebrated” Obama’s victory by plunging over 250 points to a new bear-market low only twelve days later.

Can Obama do it again? Sure, but maybe not so much this time. The crowd is not leaning excessively bullish now as it was on election day. However, from my reading in the blog-o-sphere, I got the impression that many traders have been anticipating a coronation rally.

Let’s assume that many shorts bought-to-cover ahead of the coronation, and many bulls got long. So, where is the rally that all of this buying should have triggered?

It’s nowhere to be found. Even worse, Friday’s close at 850 looks to have been “arranged” by the options market judging by how the futures have flopped over since.

“Everybody” seemed to be buying ahead of the anticipated rally, but the market has done badly. And that means that somebody was selling. Probably several somebodies. Several large somebodies.

On Friday, SPY and QQQQ broke above their downtrend lines extending down from January 6th (using daily closing prices). But IWM and XLF did not, and those are important non-confirmations.

So, will small caps and financials drag the market down? Or will tech, energy, etc. push it up? The futures say down, so who am I to argue?

As far as I can tell, the economy has actually taken a turn for the worse, believe it or not, over the past few weeks, so the news-flow should continue to be horrible. As I have been saying, earnings season should give us the next leg down of this bear. The SPX’s next visit to the 817 area will end in tears.

H&S Bottom?
Dick Arms (subscription required), who invented the TRIN, thinks that the market may be making an inverse head-and-shoulders bottom with the left shoulder being October 10th and the head being November 20th. But Arms needs to enroll in remedial courses in chart school because the volume pattern for an H&S reversal here is all wrong. For example, the CMF on SPY’s daily chart has been trending down since December 8th and is now deep under zero. There is no accumulation going on here.

Toughing it Out

Here’s a picture of South Beach as seen from my balcony (click to enlarge):

While UAW workers in Michigan clear the snow off of the driveway of their ritzy country club using diamond-encrusted snow blowers purchased with TARP funds, I am toughing out the arduous Miami Beach winter. Sure, it’s partly cloudy and 75 degrees, but there is no breeze. It will be a very difficult day.

The building on the upper left by the ocean is the Setai. All the way at the right is Il Villagio, at the northern tip of Ocean Drive. My building is on Biscayne Bay, away from all the turistas.

There are no tall buildings anywhere near me, so I have an unobstructed view all the way south, east, and north. One day I will post the entire panorama.

Mauldin on Tech Ticker

John Mauldin is on Tech Ticker here and here. I agree with his forecast that the November lows will be taken out, as well as his other predictions. The only one that I question is his idea that all the money that investors pulled out of hedge funds in 2008 is going to come flooding back into the market in February and March. I’m not holding my breath waiting for that one.