How About a Trip Down to 847?

The SPX has a potential head-and-shoulders pattern on its intra-day chart (click to enlarge):

spx-4-30-09

Blue line L1 measures from the head to the neckline, and blue line L2 projects that same length down to the price target at purple point “A” near 847. Following the purple line to the left from “A”, we arrive at purple point “B”, which just so happens to be the panic low from Tuesday morning – the den of fearless dip-buyers.

So, if the market wants to dive tomorrow, I will be looking for 847. Don’t forget that with an H&S pattern, you want to see a surge in volume as the neckline is penetrated. Until that event, it is not an H&S, but just a bunch of squiggles. (You can look at SPY for the volume). Also, with the neckline so close at 868, it is possible for the market to gap right under it at the open.

IWM Ascending Triangle

The IWM has a bullish ascending triangle on its daily chart (click to enlarge):

iwm-triangle

The red lines outline the triangle. The lower red line extends farther back, so it has a good deal of importance beyond the triangle. The blue line marked “L1” gives the height of the triangle, and a breakout would project the same length shown by line “L2”.

From L2, follow the purple line to the left and you will see that a breakout would measure to the January peak marked by the purple arrow. So, if the IWM can break above the 48.25 area, it may have another 8%, or so, to run.

The IWM has outperformed SPY and QQQQ during this rally, and it represents 2,000 small-cap stocks, so it is important to watch. Also, even though many bears are calling this “The Crap Rally”, the fact that small-caps are leading doesn’t really tell us anything.

QQQQ has a similar pattern to the IWM, though it may be degrading. And since the XLF topped back on the 17th, and SPY is still conforming to its bearish rounding-top pattern, I wouldn’t be surprised to see the IWM “round over” also. Nevertheless, if it breaks out, you definitely don’t want to be in the way.

Monday’s Trading – 4/27/09

The Swine Swoon
The futures are down 2% as I’m writing this. I will be watching the volume very closely today to see if this virus is enough to put a dent in the rally. We have still not had a single day of “serious” selling.

From what I’ve read so far, this virus doesn’t seem very serious. Many people have already recovered from it before they even knew what they had. Only Mexicans have died from it, while tourists who caught it in Mexico recovered. Perhaps something about flying on an airplane weakens the virus, and the tourists were cured while they were flying home.

In any case, this should be bad news for companies that make “swine products” such as bacon. If people avoid crowds, retailers should suffer while Amazon benefits, and restaurants might be hard hit, especially rib joints.

Since we don’t yet know how dangerous this virus will really be, I expect traders to sell first and ask questions later. We may have another “trend day” down like last Monday where panicky bulls sell into any little bounce.

Crazy Fed Swings
On Friday, when the Fed released the stress-test report, the market went haywire just like after an FOMC announcement. However, I will have you know that the initial plunge down bottomed at 2:13pm at 856.77, which was only 0.05 points off from the 856.72 Fibonacci level that I calculated over a month ago.

Also, I never posted the chart, but when the FOMC announced its QE policy at the last meeting, the TNX plunged and bottomed at a Fibonacci level that I had on one of my charts. So, if you get good with fibs, they are a fantastic tool for anticipating the extent of the wild swings created by these big government announcements.

Levels

Here is an update of the levels I am using for the SPX. If the market is immune to the Mexican flu, and is able to eventually rally-on later in the week, the January 6th peak is the logical target, and I have calculated the Fibonacci levels that might be resistance on the way up.

943.85 – January 6th peak.
927.40 – Box of Banks Fibonacci projection.
917.18 – Box of Banks Fibonacci projection & Dec peaks.
908.91 – Box of Banks Fibonacci projection.
900.65 – Box of Banks Fibonacci projection.
893.95 – The 127% level of the first chart on this page.
888.89 – Box of Banks Fibonacci projection.
875.63 – Rally peak so far, & February 9th peak.
856.72 – Fib level from Box of Za-Zoom & stress-test low on 4/24.
851.92 – Start of Stress-Test Gap on April 24th.
845.61 – April 2nd peak.
835.48 – Low on April 14 & 23, and gap from April 7.
825.16 – Wells Fargo Gap from April 9th.
811.08 – M2M Gap from April 2nd, and high on March 31st.
804.00 – Important level going back to Nov 19th.
780.00 – Cliff before 666, and low on 3/30.
768.54 – The Geithner Gap from March 23rd.
752.44 – November 20th low close.
741.02 – November intra-day low.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002.

Spy Rounding Top

The market has defied my rising-wedge, and my head-and-shoulders, but now it has to deal with “The Gigi Rounding Top.” Here is a 60-minute SPY chart of the rally so far (click to enlarge):

spy-rounding-top-4-24-09

First, look at the blue line. That was the lower edge of the rising-wedge pattern. It provided support three times, and now resistance two times. So, this is an important line to have on your chart.

The red line in the upper panel outlines the rounding pattern. The arc is almost perfect. Such a pattern is created by a slow, steady shift in supply and demand. Demand has declined, and supply has increased.

The purple line in the lower panel is a 32.5 hour moving average of volume, which gives a weekly moving average on the hourly chart since there are 32.5 hours in the trading week. I did that to smooth out the volume bumps better.

In a rounding top, or bottom, volume should generally be the mirror image of price, forming an opposite arc. For a rounding top, volume should decline on the way up, flatten-out at the top, and then increase on the way down. SPY’s volume arc is not so perfect, but it doesn’t have to be. From page 93 of the textbook:

“The volume pattern on Rounding Tops is seldom as clearly defined as at Bottoms. Indeed, it is apt to be rather high and irregular throughout the entire rounding-over movement in prices. …the volume warnings do not become conspicuous in most cases until the downtrend has begun to accelerate toward the vertical.”

The green, dotted, vertical line is drawn through the rally peak so far, and we do have a pick-up in volume since the peak. Also, if you look at the daily chart, you will see that the highest-volume day of the week was on Wednesday, a down day, and then volume tailed off as the market rallied on Thursday and Friday.

Rounding turns can be explosive. From page 88 of the textbook:

“Volume accelerates with the trend until often it reaches a sort of climactic peak in a few days of almost “vertical” price movement on the chart.”

On Friday, the market held its breath until the 2pm “stress test” announcement, and then went berserk – just like it does for an FOMC announcement. So, the market considered the announcement to be a major event. It liked what it heard, rallied up, but then failed to make a new high. The XLF and BKX also failed to make a new highs. Those failures are probably significant events.

So, this rounding-top pattern looks like it has a good chance to survive.

Friday’s Trading – 4/24/09

Can the Bears Win the Week?
The SPX closed last week at 869.60. It seems like the market has been rallying on earnings reports, but what if it has only been consolidating Monday’s plunge?

Cringing Dollar?
Is the dollar cringing ahead of next week’s FOMC meeting, and another QE beating? If so, stocks might be expected to stay strong until then.

Not Impressed
The QQQQ was up 1.10% on Thursday, however NADSAQ breadth was bad: advancers-minus-decliners was -640 for the day. Of course, the Q’s are dominated by large stocks like Apple and Microsoft, which had good days. But the weakness underneath the market could be seen in the IWM, which was down 0.58%. NYSE breadth was better than the ‘daq, but it was weaker than it was on Wednesday and Thursday.

Also, Apple printed a hanging man candle on heavy volume right at its TARP Gap left over from September 26th when it closed at $128.24. That’s a very logical way for it to top-out on this run, and that could cool off the Q’s.

SPX H&S

The rising wedge pattern on the SPX has morphed into a potential head-and-shoulders top (click chart to enlarge):

spx-4-22-09

The red lines outline the wedge. The H&S is marked in blue.

As Yerk mentioned in the comments, the market back-tested the lower wedge line on Wednesday. As it did so, it created the right shoulder.

Make sure to have the neckline drawn on your charts. If the SPX breaks through that line with a surge of volume, then the potential H&S becomes more real.

If that happens, then we use the purple lines to determine a price target. Line L1 is drawn from the head to the neckline. Line L2 is a copy of L1 and moved down so that it begins at the neckline.

Notice how line L2 extends down to the beginning of the lower red wedge line near 780. That’s the projection for both the wedge and the H&S, so everything works out nice and neat.

As I write this, the futures have taken out the 836 support level. I was surprised to see that drop considering how well the market responded to Ebay’s and Apple’s earnings reports after the bell.

But the SPX futures look very weak, being red while the NDX futures are green. That’s an unusual state of affairs.

Wednesday’s Trading – 4/22/09

Banks Seized
All the banks, that is. Here is what Geithner told the TARP oversight committee on Monday when they asked him about banks returning TARP funds:

“My basic obligation is to make sure the system as a whole…has the ability to provide the credit that recovery requires…”

So, we now have a precedent: in addition to traditional policies used to fight recessions, the government now claims the right to direct the lending policies of banks.

Is this a hint that Geithner will soon be taking a more active role in commanding banks to “provide credit”? Can that be a good thing for banks in the long run? The camel’s nose is under the tent, and…

The postofficeification of America marches on.

German Investors Turn Rabidly Bullish
According to Zew. Jason published a similar study on US investors a week ago here.

Downside Targets

Today, the market re-gained about 50% of Monday’s drop. As I write this Tuesday night, the futures are sagging, so let’s see if we can find some targets if Tuesday’s bounce turns out to be merely a routine retracement. Here is a 60-minute chart of the SPX (click to enlarge):

spx-4-21-09

The red lines are a Fibonacci price extension.

A 100% extension of the bear flag would take us to 801 (green line), which was support on April 1st (green arrow).

Before that, the market would almost certainly bounce in the 811 area, the Mark-to-Market Gap (blue rectangle), which would be a 78.6% extension.

And a 50% extension would take us back to Tuesday morning’s low, the Wells Fargo Gap (purple line.)

Take a look at the purple arrow. Notice how the SPX didn’t quite fill the gap. When you see that, it means that dip-buyers were very eager to buy at that level; so eager that they were all trying to get the jump on each other and never allowed the gap to be completely filled. This happens in reverse also, when sellers are eager to short the market as it moves up to fill a gap. This is an important signal to watch for. This morning, there were many eager dip-buyers, and that was a bullish tell.

Wednesday is an important day. If the market is able to continue rallying, especially above 857 (the 61.8% fib retracement) on strong volume, then you have very bullish action. Recovering that quickly from a “wedge snap” isn’t easy, and would demonstrate a very large horde of dip-buyers.

So, is Goldman Sachs done squeezing the hapless quants yet?

XLF
The double-top on the XLF that I mentioned in the comments on Monday may have been triggered by the stress-test rumor. The XLF rallied back on Tuesday morning when Geithner told Congress that the banks were fine. So, it is possible that Monday’s plunge was a “mistake.” Nevertheless, I agree with Meredith Whitney that the XLF will be back to its lows by the summer.

Tuesday’s Trading – 4/21/09

Wedge Snap
What happens when a rising wedge pattern snaps like we saw on Monday? For the answer, turn to page 165 of the textbook:

“Once prices break out of the Wedge downside, they usually waste little time before declining in earnest. The ensuing drop ordinarily retraces all of the ground gained within the Wedge itself, and sometimes more.”

So, where does did the wedge begin? I like 780, the low on March 30th, as the beginning of the lower wedge line. So, that’s my target for where this pattern should complete over the next few days. On the way there, there should be support at 825.16, the Wells Fargo Gap from April 9th, and then at 814.53 and 811.08, the top and bottom of the Mark-to-Market Gap from April 2nd.

Wedge targets are not always hit, but this market is so overbought that a correction down to 780, or so, seems very doable.

MacOS Breakdown

The McClellan Oscillator has broken its uptrend line (click to enlarge):

macos-4-20-09

The MacOS is the purple line in the upper panel. The SPX is the green bars in the lower panel. The black lines highlight the triangle that the MacOS had made, and the black arrow points to the breakdown that occurred today. The last time this happened on February 13th (red line, and red arrows) was a very bad omen for the market.

The MacOS is just above it’s longer-term uptrend line (blue), and that may provide support. If not, then the rally may be fatally wounded.

Monday’s Trading – 4/20/09

FXE Frowns Upon Rally
The euro is down again as I’m writing this Sunday night, and the FXE may fall below the last Fibonacci level on the chart that I posted back here. Normally, stocks would be moving down with the euro, but they are not, probably because of the short squeeze that is killing off the quant funds that Zero Hedge has been writing about.

But once the squeeze is over, SPY may play catch-up with FXE black-swan style.

Kill the Dollar
When Ben Bernanke dreams at night, he dreams of chopping the dollar into little pieces. That’s how “growth” is accomplished here in our post-capitalist economy.

If you don’t want to allow the “creative destruction” phase of capitalism to function, then you have abandoned capitalism. In a real capitalist economy, Citi would go belly-up and BB&T would take over a chunk of their assets. Bad managements would be punished and good ones would be rewarded, right?

But we can’t have any of that here, now can we? Citi must be saved at all costs. And that makes growth sub-par because resources are held hostage by bad managements propped up by the government.

And so we try to grow by inflation: print a lot of dollars, get some inflation going, and just watch your stocks and real estate shoot up.

It’s a very dumb economic strategy, but this is the USA’s policy. So, if the dollar refuses to die, it will be very difficult to pump up the stock market. That’s why this divergence between SPY and FXE is so alarming.

The Wedge
Everybody is aware of the rising-wedge pattern on the SPX. And with the market making this bearish pattern right at strong resistance (875), I wouldn’t be surprised to see the rally die here. “Wedge snaps” can be sudden and powerful. Of course, there is no way to know how far down dip-buyers may lurk. But what if the dip buyers have been quant funds getting blown out of their short positions?

Death Stars Align
Strong dollar, SPX wedge, dying quant funds, ridiculous overbought levels, giddy CNBC talking heads, “sell in May”, and the super volcano that we call Yellowstone National Park about to explode, well, you can color me bearish.

If the Zero Hedge “black swan of black swan events” comes true, an early warning might be spreads widening. So, keep on eye on whatever you are trading, and if you see the spread acting funny, it might be a good idea to start running.

On a Bullish Note…
It seems to me that the QQQQ and SMH would not come this far without at least tagging their November highs. So, maybe there is another stab higher before the lava starts flowing.

Friday’s Trading – 4/17/09

Copper Coming Back?

A while ago, I commented that if I were China, I would be stockpiling metals too – in order to diversify out of my dollar holdings now that the Fed is “monetizing” the federal debt – printing money that is. Now, here is somebody who agrees with me:

“They are definitely buying metals to diversify out of US Treasuries and dollar holdings.”

Copper’s rise (chart here) may be the first manifestation of the inflation that many believe is in our future. Don’t forget, “expectations” are important to inflation. The Chinese expect problems with the dollar and have inflated the price of copper.

American pennies used to be made from copper, not zinc like they are today. So, copper used to be money in the USA, and it might be money again one day – in China.

Nothing Screams “Recovery!” Like…
…Google’s “first sequential drop in quarterly sales since the company went public in 2004.” But on the other hand…

Knowledge of Fundamentals Can Hurt Your Trading

“Avoid fundamental analysis of short-term trading vehicles. Mental bias from knowledge of a company’s inner workings can distort the message of the price chart just when opportunity knocks.”

That’s from Alan Farley’s book “The Master Swing Trader” (page 23).

875
If the rally continues today, 875 is the next major resistance level.

Thursday’s Trading

Max Pain is still at 80 for SPY, and we have seen the market do wild things to try and hit that number at the end of opex week. But the market is ignoring a lot of bad data again this morning.

Perhaps the hedge funds that sold all of those SPY 80 calls are out of firepower to drive the market down.

The January Line

You should have the January Line on your charts. Here it is on the XLF chart (click to enlarge):

the-january-line

In January and early February, it served as support until the XLF gapped under it. In March and early April, it served as resistance until the XLF gapped above it.

If the support doesn’t hold, don’t be surprised if the XLF gaps back under the line.

Also, note on the chart Tuesday’s volume (black arrow). That’s the second tallest red volume bar since the rally began, and is something to keep an eye on. If the XLF falls on heavy volume Wednesday, especially with a gap under the January Line, then we might have a significant crack in the rally.