NASDAQ-100 Megaphone Pattern

Below is a daily chart of the NDX showing a megaphone pattern (click to enlarge):

NDX-Megaphone-Feb-2014

This pattern is sometimes called a “reverse symmetrical triangle” or a “broadening top” and is usually bearish. Here is a megaphone chart that I posted back in 2009:

ES Broadening Pattern

Two days later, the S&P 500 rolled over and dropped 63 points. But the correction only lasted six days, and the bull market resumed. So in that case, the megaphone was a signal to go to cash and get ready to buy the dip.

No pattern is perfectly reliable, and it’s not impossible for the market to shake off a megaphone. Perhaps Janet Yellen’s melodic voice has soothed the market beast. We will know very soon.

Long Line at the Car Wash

After the recession began in 2008, I no longer had to wait in line at the car wash. That was odd because I live in an upscale neighborhood, and the most-expensive service at my car wash is $10. I couldn’t believe that my neighbors couldn’t afford to wash their cars anymore. Maybe they could afford it, but could not afford to come down to their condos here in Miami Beach. Maybe the “snow bird” population had been thinned. Maybe they had to stay up north with their noses to the grindstone year-round.

Whatever the reason, the car wash is busy again. On Thursday, I had to wait in line for over an hour. Maybe the economy is reaching escape velocity – at least among the population that can afford cars.

Dow Rectangle Pattern Targets 12735

During the past few weeks, the Dow has been trading in a rectangular range about 300 points high. On the hourly chart below, I have outlined the range with red lines. (Click chart to enlarge):

The futures have already broken out of that range, and stocks will certainly follow on Monday. To find the downside target, we subtract the height of the rectangle from the lower bound of the range. And that brings us to the March 6th low of 12735.

The last time that the market plunged after “not creating enough jobs” was on September 2, 2011. The next day, I criticized the panicky selling in “Companies Add Jobs for 18th Straight Month – Investors Jump Out Windows“. And while I was right that the expansion/bull market wasn’t over, the market did languish for a few weeks. On this chart, the red arrows point to that seemingly “bad” jobs report:

Of course, there’s no guarantee that the bulls will get off easy again this time, with only one month of chastisement. However, another important event occurred last September: Mitt Romney said that, if elected, he would not re-appoint Ben Bernanke. And so, while Doug Kass says “the liquidity rally is over”, a certain Mr. Bernanke may have other ideas on the subject.

AAPL Down = IWM Up?

On Wednesday, I joked that AAPL was sucking the life out of the small caps. Well, maybe it’s not a joke after all. On Friday, the Russell 2000 staged a dramatic come-back rally, and broke out of the downtrend channel that I drew in the previous post.

While the R2K was up 1.05% on Friday, AAPL was down 0.58%. Did money rotate out of AAPL into IWM? If it did, and AAPL continues to pull back, then maybe the small caps are the sweet spot in the market now.

That’s the bullish perspective. Now let’s look at the bearish side.

The IWM has been range-bound since February 3rd. Friday’s rally brought it up to the top of the range, and the IWM is now overbought on some indicators.

Thursday, the IWM fell on strong volume, and it rallied on Friday on lighter volume.

The false breakout from March 19th still stands with four consecutive closes below the breakout level.

So, the IWM still has work to do.

Momentum traders have made huge profits during this year’s rally. Maybe it’s time they hand those profits back to the mean-reversion traders, if not the perma-bears.

In any case, the small caps need to scrub that false breakout off the chart.

IWM Downtrend Channel

The IWM came within an eyelash of my downside target #1 from Tuesday’s chart. Take a look at the green box (click chart to enlarge):

Here is what the chart looks like now. Notice how IWM dropped into my green box:

Not bad, huh?

The fact that IWM bounced without filling the gap completely is a sign of eager dip-buyers, so maybe you bulls will survive after all. However, the bears scored some points too. On Tuesday, I said that the bears “would want to see this pattern evolve into a downtrend channel.” And that’s exactly what has happened. Look at the red downtrend line that I drew on the chart on Wednesday:

To see if we have a downtrend channel, we duplicate the red line to get a parallel, and drag it down to see if it connects the dots. And so it does:

IWM made a nice double bottom around 81.65 Thursday afternoon, and rallied sharply into the bell. In order to stay alive, it must keep that momentum going long enough to at least run up and tag the upper line of the downtrend channel. If it falls short, the next swing down might pierce the lower trendline.

If you are bearish, your dream entry for a short trade is at the upper channel line. If you are looking to buy a dip, your dream entry is at the lower channel line – but only if prices can tag the upper line first.

If the market is weak on Friday, then I draw what I call a “turbo line”. If the market drops at the open, it would look like this pink line:

If IWM rallies up a bit, but fails to tag the upper channel line, then I draw the pink line through its high for the day. The turbo line is a signal that the slope of the downtrend may intensify. So, just like the head-and-shoulders pattern has morphed into a downtrend channel, the red downtrend channel may morph into a more intense pink downtrend channel.

Film at 4pm.

IWM H&S Still in Play

When I drew the red line on the second chart in the previous post, I thought “too steep”. I was also thinking that the right shoulder wasn’t wide enough to balance the left shoulder. So, what the small caps did on Wednesday, moving sideways, made sense. On the chart below, I have re-drawn the red line, and it now has a more reasonable slope for a downtrend if the market drops. The blue boxes show how the shoulders looked after the close on Tuesday, and as you can see, the shoulders look more balanced now (click chart to enlarge):

Bulls can be glad that the right shoulder is now wider than the left shoulder since that’s a sign that the IWM may be able to shake off this bearish pattern. Bulls can also point to the pink line which has held an uptrend for over a week.

In addition to the head-and-shoulders pattern, bears can cite the fact that the IWM has closed below its breakout level for two days in a row now.

So, Thursday is an important day. A third close under the breakout level is one of the criteria of identifying a false breakout. So, its “swim or die” time for the small caps.

Why is the Russell 2000 struggling here? Suppose that a consumer has $2000 in spending money for the rest of the year. First, she buys yet another iPad for $600. Then she buys a share of AAPL for another $600. Then she has to set aside the remaining $800 for $4 per-gallon gasoline so that she can get to work.

Now she’s tapped out and all the rest of the retailers will go bankrupt.

And the Zero Hedge Times will be upon us.

May god have mercy on your soul.

IWM False Breakout?

Has the Russell 2000 small-cap index made a false breakout? Take a look at this 15-minute IWM chart covering that past few days (click chart to enlarge):

Not only has the IWM dropped back under its breakout level of 83.31 (blue line), but it has etched out a nicely formed head-and-shoulders reversal pattern in the process. I have my neckline drawn at 82.65 (red). The upper pink line goes from that level to the top of the pattern. The lower pink line is the same length and gives us our potential target just below 81.05 (black “x”). That’s near a former swing-low (purple arrow), and is a likely level where dip-buyers may come in.

Also, the green box marks a gap left over from March 13th. So, this head-and-shoulders pattern may be the market’s way of telling us that it intends to fill that gap.

Of course, since we are still in a bull market (probably), bearish patterns such as this will have a higher failure rate. If you insist on bucking the primary trend of the market, putting your short trades on at the red line of this chart might not be suicidal:

Right? So, you would want to see this pattern evolve into a downtrend channel. And in order to have a downtrend-channel, prices will need to tag the blue line I have drawn in. Anything short of that would indicate that dip-buyers are eager to come in.

If prices charge right up to the red line on strong volume, that’s a sign that they might break through. If prices hit the red line by going sideways, or drift up on light volume, then you can entertain the idea of a short trade – with a stop of course. If prices gap over the red line in Wednesday morning, then odds of pattern-failure increase.

IWM Leads, but Can’t Break Out – Sort of…

Yesterday, I mentioned that the market breakout was suspect until the small caps joined the party. Today, the IWM out-performed SPY and QQQ, but fell short of its rally peak of $83.31. That intra-day peak came on February 17th, marked by the red arrow on the chart below.

However, the second panel on the chart is of closing prices. IWM’s high close was $82.95 on February 3rd, marked by the black arrow. And as you can see, IWM closed above that level by an eyelash today, and also on Tuesday.

So, what’s more significant? The intra-day high, or the closing high? Answer: the closing high, because fund managers look at daily charts of closing prices and don’t care about intra-day extremes.

Right now, fund managers are seeing a breakout on the IWM chart, and are thinking about coming in. If IWM can follow through in the next day or two, bears should probably throw in the towel.

Also, this morning, the IWM was lagging until the “oil to be released from SPR” rumor hit the news. Oil whooshed down initially, and the IWM rallied along with the transports. If small caps are sensitive to gasoline prices, it’s news to me, but that’s what it looks like. Has the Russell 2000 been sulking, along with the transports, because of gasoline prices?

The Dow Jones Transportation Average finished up 3.27% today. So, even though the White House denied the SPR rumor, the markets suspect that Obama sent a message to oil speculators. And that might mean that he is serous about not letting gasoline prices cost him the election.

In other words, there is a potential catalyst there that might cause the small caps and transports to join the breakout. The IYT came up short of its rally peak, so it’s in the same boat as the IWM: it also needs to deliver some follow-through on today’s action.

March 15th is a Major Bradley Turn Date

March 15th is the first major Bradley Turn Date of the year. And since the market has been shooting straight up, the only possible “turns” would be down or sideways.

And there are indeed flies in the ointment. The small caps have been lagging badly. The Russell 2000 is not validating the SPX and NDX breakouts. Not only has the R2K failed to take out its 2011 peak, but it hasn’t been able to break out of its recent trading range.

In a rip-roaring rally like this, you would think that the McClellan Oscillator would be crazy overbought. But it stands at -36.74! And that shows that there is no breadth to this breakout.

Where have the small-cap gamblers gone? I don’t know, but until they come back, this breakout should be viewed with skepticism.

Typically, what would happen in a bull market is that money would now rotate into the small caps. And you would have a day where the IWM is up 2% and SPY and QQQ are up only 0.5%.

The moral of the story is: all eyes on the small caps as they will likely call the tune from here one way or the other.

Note: The last major Bradley Turn Date was on December 28th. And that turned out quite well as the market turned from flat to up rather decisively.

The Cramer Missile Crisis – Day 8

Since Jim Cramer declared a “missile crisis” and did his damnedest to turn you bearish a week ago, SPY has rallied 3.5%. The only missile in sight is SPY rocketing higher (click chart to enlarge):

By having Cramer on practically all day now, CNBC is making itself into one giant clown show.

And the crime is that CNBC has real talent on the roster. Look at the amazing call that Simon Hobbs made back in 2010.

Note to CNBC: WTF?