Monday’s Trading

More on the Rounding Turn
On Saturday, I discussed the “rounding turn” that the market made last week. According to Edwards & Magee, rounding tops and bottoms are very profound patterns when they appear at the end of a decline, or a rally. In those cases, they constitute powerful reversal patterns.

However, this particular rounding turn came in the middle of a trading range. So perhaps it will not have a long-lasting effect.

On Friday, we discussed how amazingly straight-up the move was. But that’s normal according to Edwards & Magee, page 88:

“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.”

Those words were probably written 65 years ago.

What happens next? Typically, prices will fall back, drift around in lackluster fashion, and eventually resume the trend. A cup-and-handle pattern, if you like.

There are some signs that the market will pull back soon. As I mentioned on Saturday, the IWM’s volume dropped off on Friday, which may indicate that the explosiveness of the move is complete. In addition, the XLF formed a three-day pattern that is very close to a bearish hanging man, and the VIX bounced at the “JungleGirl Gap” from 9/26/08. Furthermore, it would make sense for the move to end here because…

McClellan Oscillator at All-Time High
The McClellan boys say that their indicator is at a record overbought level. If you have TradeStation, you can make your own McClellan Oscillator as long as you make sure to add advancers and decliners first. I did that and have been studying the chart. It’s a very good indicator.

If you wait for the MacOs to hit 150, and then short the close of that day, you almost always have large profits within a few days. Sometimes the market will stay steady and the best you can do is get out even. But the MacOS is more than double that now at 344.57! My chart goes back 35 years, and this is only the third time in history it has been over 300.

The other two times were on November 4, 2008 – an excellent time to be short – and on May 27, 2004. If you sold the close there, you could have taken a small profit a couple of days later, or held on for larger profits as the market dove in July and August.

No matter how good this indicator is, it can fail during times when the public is stampeding into stocks. I doubt that is happening now, but it could be since many people make New Year’s Resolutions about investing that get implemented first thing in January. While SPY’s volume improved over the last three trading days, it was still lackluster. So, volume will be a very important indicator to watch at the beginning of this week.

New Indicator
Only about an hour after I established my short position on December 16th, I discovered a new, super-secret contrary sentiment indicator, the SSCSI. It fired again on Friday, so that’s another bearish signal. I won’t tell you what it is, but I will tell you when it fires. Let’s see if it can predict its second down-leg.

The K-Tangle
Here is the rectangle pattern that K posted on Wednesday. K’s chart turned out to be the correct interpretation. The SPX made its rounding turn at the bottom of the K-Tangle, and broke out above 918. That was the third attempt at the resistance line, which is exactly when the textbook says the breakout should occur.

On Friday, I mentioned that dip-buyers were eagerly stepping in at 857 instead of waiting for prices to hit the lower line at 850. That was bullish. Also, the SPX left behind an opening gap on December 30th, which was also bullish. The entire setup was blatantly bullish, and in retrospect, the breakout was entirely predictable. But will it stick? Here are three criteria for judging breakouts:

1) Are prices 3% or more above the breakout level?
2) Was there an explosion of volume?
3) Have prices held above the breakout level for 3 days?

We don’t know about #3 yet, but #1 and #2 are not satisfied. So, the breakout is questionable, and the MacOs is at an all-time high, along with many other indicators being at overbought extremes. It seems that a pullback is justified, especially since the market might not be quite so cheerful about a second -500k jobs report coming on Friday.

But first, lets see what the K-Tangle breakout projection would be. If the rectangle completes a bullish breakout, it could hit 986 (918+(918-850)). But in light of the overbought condition, if it were to hit that target it would likely be after a good deal of backing-and-filling.

A drop back to test the breakout at 918 is very likely. A 50% retracement of last week’s spike would take us to 896. And of course, since this is one of the fieriest bear markets in history, with the global economy continuing to execute a spectacular, synchronized nose-dive with no end in sight, a pullback could gather steam and just keep on going.

Personally, I am playing for a 100-point SPX, Inauguration Day rally. But since I believe that rally will begin at 700 and race up to 800, I am short. :-)

125 Responses to “Monday’s Trading”

  1. George says:

    Charlie, good call on BBT. I was careful after your observation.

    Thanks

  2. admin says:

    junglegirl,

    Yes, and the two-day candlestick pattern is almost identical to that of December 16-17.

    Matt

  3. Dressguard says:

    Hi Matt,

    good to see you’re still alive. Thanks for updating the withholding taxes web page. :-)

  4. K says:

    i need another 2 monitors. i missed out on TBT

  5. Charlie says:

    I need 4 monitors attached to a super computer located in a bomb shelter to trade in. I also need someone to do my regular full-time job for me as well as another person to take care of my kid so that I can concentrate on the markets… lol

  6. Randall says:

    To be sure, there is currently a healthy debate as to whether the equity market has hit a fundamental bottom. The selling pressure peaked in October-November, but we remain skeptical since our own metrics suggest that we are barely past the 40% mark of this recession, and the equity market typically bottoms 60% of the way through. But even if we are wrong in our bearish assessment of the equity market, we remain convinced that there is at least another 15% downside to nationwide home prices as the problems on the coasts migrate to the financial centers in the Northeast. The latest data were horrific, despite the fact that the builders have taken new construction schedules to all time lows, demand for housing is so moribund that the total inventory overhang has risen above 11 months’ supply in both the market for new and existing homes. This is nearly double a typically well-balanced market and is a sure sign to us that real estate deflation will remain an enduring theme and a constant dragon confidence, credit, net worth, credit and discretionary spending. Source: David Rosenberg, Merrill Lynch, 1/5/2009

  7. Larry says:

    Asia up again. Oil up.

    This market might want to repeat the 1929-1931 crash. The suicides came in the 2nd, 3rd and 4th crashes, not the 1 st.

    Fully hedged and watching in amazement. Reported earnings S&P500 will probably be below $30 in 2009. The lastest analyst estimate have come down all the way to $42 (Source: Mauldin). You decide the multiple you want to slap on it. The market wants to slap a 40 multiple on it first.

    Happy new year Meb. Enjoy the upcoming depression.

  8. David says:

    Rosenberg is living in a dream world. it is going to get alot worse than that

  9. George says:

    I’m serious, multiple monitors really make a difference.

  10. newbie says:

    @ JG,
    “SPX daily bearish harami” – I am weak at TA, but the lack of engulfing and decent volume doesn’t seem to match the description in -http://hotcandlestick.com/directory/Bearish%20Harami.htm

    @ Matt,
    You are a machine, NICE catch! — “Yes, and the two-day candlestick pattern is almost identical to that of December 16-17. “

  11. newbie says:

    George, does your broker allow you to set alerts to flag setups?

  12. David says:

    I have today’s candle on my SPX daily chart as a doji following a long white candle. usually not a good thing when so overbought and neg divs all over the place on the intraday charts.

  13. newbie says:

    @ David
    I presume that improving real estate will be leading indicator of a valid bullish stock market. In one of the worst bubble markets (Phoenix) bids are beginning to surface. A long way from good news for sure, but the downward momentum is loosing steam. Stable inventories in the bubble markets may indeed show up in late 2009!

  14. George says:

    newbie;

    Unfortunately, no, my broker has nothing except a price alert. I’m looking at other alternatives.

  15. junglegirl says:

    newbie,

    Bearish harami is Japanese for pregnant woman imagery. The small body of today’s candle is completely engulfed in the body of the larger white candle yesterday. Thus, by definition, it is a 2 day pattern. The tails of today’s candle needn’t be completely engulfed (tho’ often they are, or at least close), just the real body of the candle. IMHO, today’s pattern is more formidable than the one from December 16-17 because of the candles before the 2 day pattern (larger up-trend this time) and also because of VIX action, CPC, MACD signals, divergences, EWT and all the other technical signs that this market is going to break. Hard.

    Funny thing in Randall’s post where “drag on” is inadvertently written “dragon.” Like David, I anticipate this will get much worse. Erosion in confidence, credit, net worth, etc. won’t just drag on, they’ll all get DRAGONED–extra crispy. A new word coined for this market???

  16. newbie says:

    I have to wonder how they average the SPX earnings to come up with their estimates. Random # example:
    $24, $16, $8, $0, -$8. can be 48/3 = $16 if you ignore the non positive earnings. Or $40/5 = $8. I think we can all name a few big CAP names that will loose serious money, all year long.

  17. David says:

    Sorry Matt for cutting and pasting, but there seems to be a disagreement here and this book is wide open all over the internet on those download sites.

    A harami pattern is a small real body which is contained
    within a prior relatively long real body.

    While a Western inside session requires the high and low be within the prior session’s range, the harami requires a narrow opening and closing range (that is, a small real body) to be within the prior wide opening and
    closing range (that is, a tall real body).

    For the harami, a small real body follows an unusually long real body. [this is the only problem here for a harami and comparing it to Dec. 17th]

    The harami pattern is usually not as much of a significant reversal signal as are, say, the hammer, hanging man, or engulfing patterns. With the harami a brake has been applied to the market; the immediate preceding trend should end and the market will often come to a lull. At
    times, the harami can warn of a significant trend change—especially at market tops.

    The harami cross has a doji [the perfect doji has the open and close the same, but we are very close to this and the context is correct] for the second day of the harami pattern instead of a small real body. The harami cross, because it contains a potent doji is viewed as a major reversal
    signal. The harami cross is sometimes referred to as the petrifying pattern.

  18. David says:

    Junlge, I would have to agree with you on how significant today’s action may be, now if we can get this stinking market to roll over…

  19. David says:

    Newbie, that could be a temporary reaction to more favorable market conditions. that money may dry up too.

  20. newbie says:

    JG,
    Thanks for the detailed explanation. I see that the VIX has not closed below 40 consecutively since the OCT crash. I guess I may not get filled at SPY $95 or $99. We’ll see what happens.

  21. newbie says:

    David, there is not much favorable here. JUMBO rates have not improved nearly as much as conforming loans. In many markets $417K won’t buy much in a safe area. That may change if the FEDs take some action on that front.
    Of course only time will tell and the early bubble markets will likely stabilize first since they STILL have the growth to help mop up supply, not a nation wide phenomena…

  22. newbie says:

    I like the way the SKF (XLF) are behaving relative to the SPX. Does that add to the bearish case?

  23. junglegirl says:

    newbie,

    IMHO, yes. Financials have lead the way down since 2007. Weakness now cannot be good for the market.

  24. admin says:

    Funny you should mention financials… I’m going to post an XLF chart soon.

  25. newbie says:

    No teacher’s pet comments!