Stock Market Research - What Works, What Doesn't

SPY (131.32; 2/1/12) forming possible flag; February seasonality; 2/2/12 brief update

2012-02-01T23:20:00.000-08:00

SPY (131.32) forming possible flag
Wednesday, February 01, 2012 [see February 2 update]

In my last post ("SPY (@ 131.46) confirms rally to the upside (for now)"), I pointed out that the breakout was confirmed to the upside and should be played cautiously. Since then, the market rallied almost to the 135 area, then pulled back on average volume (although notably (bearishly) higher volume than 9 out of 10 of the last up days) to about where it was then.
As always, markets never give unambiguous signals (and when they do, they are often misleading); instead, we are forced to weigh the bullish factors against the bearish ones:

Bullish:

Possible flag forming at upper end of range near anticipated resistance; there is an adage that "the flag flies at half mast" meaning that on average flags mark a pause rather than an interruption of a trend and more often than not occur about what turns out to be the halfway point of a rally - if so, that would project the rally continuing another 7.5 points (I usually project these things from the bottom of the flag which would put us at about 138.5). This is a very crude measure however and is in no way a prediction. Flags' main utility is in giving us a low risk entry point, since the stop can be placed just below the flag (if it breaks to the downside).

Market closing in the upper end of its daily range. Although the past few sessions have been down, they have managed to claw back from their lows, indicating underlying strength.

Gloomy economic news: worries about the EU and the approaching Greek default (whatever you call it, paying back investors 50% on the dollar is a de facto default), a possible oil shock from Iran, and mixed news on the US economic front (income rose but consumption didn't; housing prices fell 3 straight months in a row, but jobless claims and unemployment surveys are showing strength); gloomy news is actually bullish for markets (markets tend to top when the news is most euphorically upbeat and bottom when everyone seems to have given up hope that things will ever get better).

Bearish:

Rally is overextended: Check out the Williams %R oscillator, which is a measure of how "overbought" or "oversold" a market is. It is a very short-term indicator and should generally be used in a counter-trend way (that is buying an "oversold" market that is rallying or selling an "overbought" one that other indicators show is declining), and will remain needled up during an extended rally, but notice that past periods of several weeks of overbought have been followed by declines. The market spent 6 weeks in an overbought state by this indicator, and has sold off some since then; prior dips below -20 after extended periods above have been indicated by weak or choppy markets for the next several weeks or months.

Volume on down days is greater than volume on up days, with both being below average. A true rally should show accumulation (much stronger volume on up days than on down days indicating more buyers than sellers and the accumulation of large positions by pensions, hedge funds, and market insiders).

Nearby resistance at 135. The market is stalling just below resistance at 135, based on a projection of the height of the base added to the breakout point. This crude measure is surprisingly accurate. Like anything else, it should not be used alone but since the chart itself shows strong resistance just below this area (the July highs before the 20% sell-off to the August and October lows), so it would not be unreasonable to anticipate resistance here.

February tends to be a weak month. The average February percentage change of the S&P 500 since 1950 has been only 0.03% (versus 0.68% for the average monthly change of all months). Since 1980, the average February percentage change has been an anemic 0.02% (versus 0.76% for the average of all months). Note that this works out to only 0.3% annualized! However, these are averages, and hide some remarkable exceptions, such as a 7% February rise in 1998 during the Clinton bull market. February was a winning month for the past two years, rising 2.9% in 2010 and 3.2% in 2011, but it lost a whopping 11% in 2009 (taking the prize for the biggest loser in that terrible year), 3.5% in 2008, and 2.2% in 2007. In 2001, seven months prior to the 9/11 attacks, it lost 9.2%. Bottom line: "you pays your money and you takes your chances."Average monthly changes in the S&P 500 show February is a weak month, vying for August for second worst month (September takes that prize).

[Update: February 2, 2012 (before market open)

This flag was probably too short to really call it one, and the breakout to the upside should be bullish, but the market closed well off its highs which were exactly where it met resistance 4 trading sessions ago. Volume remains unimpressive for a true breakout but at least is higher than 4 of the 5 last down days. Stay tuned; a decisive break above 133 then 135 could lead to a nice rally, but the market seems to be stalling here at least in the short term although the 20-day buy signal remains in place with a stop at 126.43.

SPY (@ 131.46) confirms rally to the upside (for now)

2012-01-19T23:36:00.000-08:00

SPY (@ 131.46) confirms rally to the upside (for now)
20 Jan 2012 2:35 a.m. EST I have been skeptical about this rally ever since the breakdown and attempted recovery from 115 in late November.   In my last entry, I wrote that the resolution of the high, tight flag to the upside or downside would be critical and since then it has rallied to the upside, indicating higher prices in the near to intermediate future:

At a personal level, I must make a mea culpa since I did something I generally advise others (and myself not to do): ignore a simple system which on average beats the most sophisticated-sounding but complicated analysis.
A buy signal was issued in late December on the 4th-to-last trading day of the year. Yes, it was promptly followed by not just no follow-through, but a sell-off, so it seemed at first to fail, but then the market gapped higher, did not fill the gap and formed a high tight flag, then another. These are very bullish. I put less stock in moving averages than I once did (they badly lag market action but are helpful for confirming longer term trends) but the 50 day has crossed the 150 day which is another sign of a bull leg up. The offsetting bearish signals (weak volume, short-term overextension, weak fundamentals, nearby resistance) all scared me away.
So now the market is about 5% higher which may not sound like much but a mutual fund that beats another by 5% in a year is considered to be massively outperforming.
Live and learn. If you want perfection and regret not doing everything right, you simply cannot and should not be trading.   Last year was net profitable despite a very difficult market, so there is yin and yang and I must admit I sleep better in cash and short term bonds!
So what to do now? It's late, but the signal probably should be taken here. I will start moving into the market in pieces myself - a pull-back at some point would be normal, indeed, it's absence would be strange, but I remember the 2003 bottom which I completely wrote off only to see the market march higher.   The market is much smarter than any of us! You don't have to guess its next move, simply follow its last which is on average roughly the same thing because of the wonderful power of momentum (and the fact that the market at some level is reflecting an underlying reality of a recovering economy, and the market tends to rally BEFORE that reality becomes apparent in the news).
Again, a buy stop above the most recent highs will keep you out of the market if it suddenly swoons on bad news from Europe or some nasty international flare-up in the Persian Gulf, but will get you in at a higher price than a market order.
Or just stop trying to be cute, dollar cost average your way in over the next few days or weeks as long as the current buy signal is in place (placing your sell stop at 120.00 moving it up as the 20-day low climbs with a mental sell stop in the middle of the range, at 125.43 or so).
I will look at individual sectors next but for now missing this rally entirely may be the greater risk.

SPY (@ 127.71 6 Jan 12) at a critical point

2012-01-08T05:44:00.001-08:00

This remains a difficult, choppy market, but several bullish factors seem to indicate the next leg will be up:
    - the 20-day buy signal at about where the market closed on Friday (triggered the first trading day of the year when the market gapped higher at the open);
    - the fact that this signal was triggered on a gap;
    - modestly higher volume on up days than on down days;
    - a preponderance of up days to down days (12 of the last 16 trading days closed higher);
    - higher lows after the 105 bear trap in October (when the market gapped down at the open, made a new low below 107.5, then closed sharply higher for the day on strong volume - a key reversal day), then the 115 low around Thanksgiving and the most recent relative low at 120 around Christmas;
    - flags formed high and tight in the upper end of the trading range and now above it;
    - fundamental news is strong; the employment picture really seems to be turning around in the United States, whose economy is heavily dependent upon optimistic, employed workers (also known as customers).

As always some bearish factors give pause:
    - the market stalled exactly where the rally failed in late October, so strong resistance is in place; if this resistance is broken decisively to the upside, the next area of strong resistance is at 135 or so, the highs of July;
    - although up volume is higher than down volume, all volume since November has been below average; this could reflect normally light holiday volume, but it also means that moves made when most traders are away may have less meaning than moves made with solid market participation.

Next week will be a critical week as traders return to work, people have had more time to digest the jobs reports as well as trouble in Europe and tensions with Iran.   There are already signs that a weak Europe is more interested in predictable flow of oil and lower relative oil prices than in punishing Iran for developing its nuclear program.

Bottom line: a cautious buy signal is in place after the 20-day high was hit. Expect sharp pullbacks and equally dramatic rallies as the market equilibrates. If you take the buy signal here and go long, the probability is high that the market will pull back, showing some red ink for a few days or weeks, so if you are highly regret averse, you can either:
    1.) put in a buy stop just above the most recent high (128.38); if the market moves higher, it won't do so without you but of course you will get filled at a higher price than a market order today; if the market sells off, you can move down the buy stop or withdraw it altogether;
    2.) buy at the market but put in a tight sell stop just below the most recent flag (at 125 or so); this will limit your losses if the market sells off (unless it gaps across your stop) but has a much higher probability of locking in this small loss (so only use this option if you are comfortable with the idea of taking many small losses offset by a few large gains).

S&P 500 (SPY @ 126.26) rally looks vulnerable

2011-12-06T23:43:00.001-08:00

S&P 500 (SPY @ 126.26) rally looks vulnerable
Wed 7 Dec 2011 before the market open

If you view a chart from left to right as a sort of motion picture, you can sometimes envision - with a little imagination and squinted eyes - price as a rocket (or a brick) attempting to take off (or starting to plunge).   The analogy breaks down because there is no equivalent of ground, a final resting place, where all the kinetic energy of the object is spent, but at times, you can almost hear the groaning of the imaginary ground control crew as the rocket slows its ascent, stalls, then begins to sink back toward its launching point.
It's possible we are at such a point now. I have annotated in red some of the most salient bearish factors:
- an apparent stalling just where you would expect if a rally were to fail - below intermediate term resistance at around 130, as well as a longer-term (but somewhat more imaginative, hence suspect) trendline connecting all the peaks since July;
In blue, I have annotated the bullish features:
- strong support at 110 (limiting risk somewhat if the rally fails);
- two unfilled gaps up with follow-through;
- most of the price action is in the top half of the trading range.
In black, I have indicated the most troublesome but still neutral indicator:
- volume on up days, although generally higher than on down days in the past several trading sessions is below average and waning; buyers do not appear to be rushing in and accumulating big positions as you would see before or shortly after a true breakout.

Other bullish factors to consider:
- seasonality - December remains the strongest month of the year and end-of-year rallies are common and often surprisingly strong;
- negativity in the news - although a little toned-down in the past few days, does anyone really think the problems in Italy, Spain, and Greece, to name a few, have just gone away?   Add to that continued malaise in the United States job market, and it's only a matter of time before some awful number or piece of bad news makes everyone panic again. As a contrarian, negative economic and financial news is a positive.

So, we have a classic on the one hand, on the other hand situation.   I remain flat and waiting for confirmation or a pullback. The market remains in a sell state until 128.02 (the 20-day high) is hit, and the possibility of a significant pullback before then looks high.   Stay tuned.

S&P 500 (SPY @ 124.99) gaps across short term trend line but volume unimpressive

2011-11-30T23:31:00.001-08:00

S&P 500 (SPY @ 124.99) gaps across short term trend line then to the midpoint of its 20-day trading range on above average but unimpressive volume.

Assessment: sell signal remains in effect, but watch closely. Buy stop at 128.02 ( 20-day high).

S&P 500 (SPY @ 116.56) confirms downturn

2011-11-24T03:35:00.001-08:00

S&P 500 (SPY @ 116.56) confirms downturn

The SPY confirmed 3 days ago that the trend is now down and traders should be short, investors flat. Note that the boring old 20-day high-low system would have had you exit for a small loss this latest buy signal triggered in early October, but kept you from missing the dramatic August decline and sloppy action since then.

However, we can improve quite a bit on this simple system, as I have added little tricks and modifications over the years, a few of which I will discuss below using the chart above to illustrate.

This chart is very busy, but summarizes several key lessons and illustrates how even in a difficult market, it is possible to make money. This is not theoretical - the trades indicated I actually took and discussed in real time in prior blog entries (long trades are indicated by heavy blue lines from entry point to exit, red lines indicate short positions, from entry to exit - rising blue lines and falling red lines are profitable).

Let's start in July with the short, slightly unprofitable trade followed by a watershed decline that was immensely profitable. It is absolutely critical to follow the trend if you want to survive and thrive in a market such as this (or any market really although bull markets will often bail you out of many trading errors, making you look and feel smarter than you are - look out! never confuse brains with a bull market!).

Although our retrospectoscopes are always 20:20, there were some encouraging signs about what I have indicated as a climax low in August:
    - the market had an enormous surge in volume and had fallen 20% in 2 weeks, most of it in 1 week - never buy ONLY because a market has declined precipitously, but add that to the other pieces of evidence…
    - the huge volume indicated that most of those who wanted to sell had, and the even bigger up volume day on what turned out to be the low of the move was bullish;
    - the market failed to violate the low of this day except for a single trading session intraday in October, which turned out to be a failed breakdown, one of the most bullish signals out there, and combined with the strong up volume indicated this was a relatively low risk entry point (one could sell if the market violated either the 110 or 107.5 lows (take your pick)).   The three following strong up days confirmed this rally which took us all the way back to 130 before stalling.   Had you entered at 112.5, you would have enjoyed a 16% surge.

There were several indications however that the market was in trouble following its peak at "1":
    2 days after forming a high, it closed down sharply, then the next trading day, gapped down on heavy volume (A);
    Although this gap was "filled" meaning a close above the upper boundary of the gap, the market rally stalled at B, then at C, each of which were successively lower highs (bearish).
    Finally, at 3, the market confirmed that the trend had changed, at least for now.

Vic Sperandeo, a legendary trader, has a method of simple trendline analysis that would have gotten you out at an even better price.   His definition of a trend change is a 1-2-3 process (which I have labeled on the chart):
    1. A properly-drawn trendline (connecting all the lows for an uptrend or all the highs for a downtrend) is violated. Since this may occur many times without a trend change, in and of itself this is not significant unless:
        - the market gaps across the trendline;
        - the volume of the gap across the trendline is very high; or
        - both. Both conditions were present at point 1 (or A).
    2. The market rallies but fails to make a new high.   (A variation allows the market to make a new high but then quickly reverse.) That situation is found at point 2 (also B).
    3. Confirmation of the change in trend occurs when the market closes below the lowest low made AFTER breaking the trendline but BEFORE the market attempted (and failed) to form a new high.

    The easiest way to envision this is as an upside down W:

If you wait until 3, you may leave a lot of money on the table or ride out a lot more volatility than you would like, so Sperandeo advocates assuming a direction change on what he calls a "2b" meaning as soon as it appears the market has failed to make a new high, or better yet, has exceeded it by a point or two, then reversed below it. This is difficult emotionally to do, since many true breakouts may look like 2b tops but the risk-reward profile is excellent. You could go short and get stopped out (placing you stop just a few ticks above the high) several times and be right only once to make a lot of money. Plus, if you are trading options, volatility for puts is often lower when the market is surging to new highs, or seems to be.

    I got out shortly after A for the reasons listed in 1. A market gapping down on heavy volume across an uptrend line is not a healthy market. Had I had more patience and courage, I might have waited until the rally attempt ensued and failed, exiting closer to B, but there was a chance that the market could have simply fallen off a cliff right then and there.
    Statistically speaking, market tops and bottoms are far more likely to resemble W's (upside down or right-side up) than Vs, meaning you are almost always better off - if you have the stomach (I often don't) - for a market appearing to change trend to approach its recent highs or lows (you can always re-enter if wrong).
    A much more sloppy, but nevertheless similar formation occurred in reverse in early October when the market briefly exceeded but did not follow through on its violation of the climax low. I cannot count the number of times prior lows form support or turn-around points and prior highs form resistance. No matter how much some people dismiss technical analysis as voodoo, this simple observation makes it quite clear that markets do have memory if for no other reason than markets are nothing more than the collective behavior of all of its very human participants.
    Notice also that a similar, less sloppy 1-2-3 pattern occurred in late July when the market broke a shorter trendline (1), failed to make a new high (2) ,then crossed its recent low at 130. After that, it was a toboggan ride down to the climax low.
    Again, the idea is not to be perfect - no one is; I'm certainly not - only to avoid (or short) some of the market's worst declines while participating in the bulk of its biggest advances.   A buy and hold investor in the S&P 500 is down over 7% for the year (SPY closed 2010 at 125.75). At one point, that investor would have been up 7%, at one point down over 20% from the high of the year, so it's been a wild year for those who insist markets cannot be traded.
    Anyone following a trend-following system as simple as the one I present here is in the black for the year.   Not only that, but I slept much better since I spent most of the year in cash and short-term bonds, waiting for the market to tell me what to do next.
    There is a story unfolding written in price and volume plotted on a chart; perhaps this story remains useful because so many are convinced that it is not!
    Happy Thanksgiving - or, as they call it here in Switzerland, Thursday!

2011-11-17T11:23:00.000-08:00

Thursday, November 17, 2011

SPY Rally seems to have failed

If the market closes below the breakout point (just below 122.5), it would confirm failure of the breakout. Note the two recent rally attempts were turned back at successively lower highs, and down volume continues to exceed up volume (distribution).

This is a sloppy, weak market with a lot of fundamental overhang (watch Italy closely). Washington is a dysfunctional mess with the Know Nothings obstructing any meaningful stimulus and the crop of Republican candidates sans Romney looking like some sort of a freak show rather than the best and brightest of what such an innovative country of 300 million people could produce.

Market rally seems to be stalling below the highs set in late October

2011-11-09T10:11:00.000-08:00

Wednesday, November 09, 2011The S&P 500 (SPY 125.00 intraday) is continuing to act top-heavy. Although a buy signal from 122.5 remains in place with a sell stop now at 119.12 (the 20-day low), as I indicated in my last post, I went flat - perhaps prematurely - because the market was not confirming its breakout.
In the latest mini-rally, the market continues to show weak volume, far lower than the volume during its massive gap-down sell-off on news of a Greek referendum which although tabled for now has been eclipsed by the far greater problem of Italy's political and debt crisis.

As always, there are some ambiguous signs, such as the ability of the market to remain (until today) in the upper half of its 20-day range, and what could be hallucinated as a wide and sloppy flag from about 122 to below 130. Seasonality is also on our side, but little else is.
What would change my mind? If the market could decisively clear 130 on heavy volume preferably and remain above it for several days. Yes, by then one would be buying at higher prices, but so what? Had you followed the simple 20-day system, you would have been in cash or short since May (I didn't take the July buy signal which led to a small loss) and the market would have to advance substantially for a buy and hold investor to catch up with a trend-follower.

Market Alert: Cashing Out, Taking Profits, Going Flat - SPY @ 123.22 intraday

2011-11-02T10:27:00.000-07:00

Market Alert: Cashing Out, Taking Profits, Going Flat - SPY @ 123.22 intraday

Wed 11/2/11 6:00 pm Swiss time (GMT+1)

In a market like this, you have to be nimble. I do not understand what is happening, but will not wait around to find out. I can always re-enter later if I am premature, but I just cashed out, locking in profits on all positions (I closed my Euro position the day prior to the Greek referndum announcement).
Normally, I would wait for more confirmation of a change in trend, but the market's action is simply not healthy:

- After a very healthy, robust, good volume advance last week, the S&P 500 not only stalled, but sold off just as sharply on even higher volume. A failed signal (failure to follow through in this case on a breakout) is one of the most reliable fo all signals - although it's a little early to call this breakout a failure, we don't need to wait for the rocket to completely fall back to Earth before ejecting;
- Downside gap was not even close to filled; volume so far today is unimpressive; this is a snapback rally, often the best chance to get out at a good price;
- Never let a profit turn into a loss; green ink was showing on all positions before I pulled the trigger today; I would rather take a short, sweet profit than wait around and wonder what hit me;
- Although I tend to ignore fundamentals as a rule, the Greek action is concerning (from a financial point of view); I actually agree with the protestors filling the streets of most countries that imposing austerity on the many to pay for the transgressions of a privileged, reckless few is immoral and unlikely to change the behavior of those who got us into this financial mess. Nevertheless, it will take the financial markets a bit of time to get used to this new paradigm - expect referenda in other countries facing austerity measures. The IMF model - punishing countries essentially for being poor and in debt by slashing their public services to the poor and retired so that wealth bankers can be made whole again - is deeply flawed but until this point has never been so bluntly challenged. I will wait on the sidelines until this sorts itself out. The United States was hurt not so much by a weak economy as by its complete political paralysis, held hostage by zealots who believe that slashing taxes and imposing austerity in a time of crisis is a great idea. Now the same thing might occur in Europe with fissures between the other EU members, duct-taped over with the latest bailout package to Greece, at high risk of leading to absolutely no net effective action. While the doctors are arguing (and some are arguing for bleeding the bad humors out of the patient and in the United States and the UK have gotten their way), the patient has hardly begun to recover. This is not good.

S&P 500 Breakout Confirmed (SPY @ 128.60)

2011-10-29T04:18:00.000-07:00

29 Oct 2011: There are few things as satisfying as watching patterns worked out over the years play out in real time. After spending the week in Venice, I returned to find that re-entering the market in scale prior to our departure paid for our trip several times over:

SPY (128.60) is following through nicely on its breakout below 122.5 2 weeks ago. Volume is heavier on up days than down days - an encouraging sign - and it is making a pattern of generally higher highs and lower lows.   The lows of the last 6 days are all above the breakout point.
I have reached the point in life where I generally ignore fundamental news, not because it is not important but because it is so unknowable. Markets discount the future, not the present, and most market bottoms occur when the news is bleakest and all hope seems lost. What is commonly misunderstood as callousness on Wall Street (the capital markets rallying while unemployment remains high) is simply the smart money recognizing that the market is improving and taking positions ahead of confirmation through improvement in, among other things, a drop in unemployment.   In fact, the stock market remains one of the best leading economic indicators for that reason.
Focusing on the movement of prices and volume (technical analysis) almost exclusively is simply a recognition of some brutal market realities:
1.) most people, most of the time, are wrong; following the crowd is
2.) financial news, especially of the breathless variety, is beyond useless - it's distracting because its objective is not to inform but to entertain; if anyone really knew what was going on, they would not be standing with a microphone on the floor of the NYSE telling you what happened at 4:00 pm, but would have acted on that information before the market opened, quietly from a yacht in the Mediterranean (and it's unlikely they would be all that interested in sharing that information with you);
3.) when the minority of players who know what is going on act, they leave telltale signs on the markets in the form of volume and price action; these signs are of greatest use when they contradict the prevailing "wisdom" propagated by financial news;
4.) most financial letter writers, active mutual funds, and other so-called experts are better salesmen than investors; they make their money from selling subscriptions or charging fees for management; few outperform a passive index.

That being said, it does not mean all market action is random or that it is impossible to beat the market averages or consistently make money in all market cycles, only that it is emotionally very hard because it requires taking positions that are unpopular, even at times insane. Using a trend-following approach requires buying prices at relative highs after they have usually enjoyed a good rally (but often when they remain far below more distant highs), being wrong about as often as you are right (in terms of percentage of times a trade closes profitable), but making most of your money from a few trades, perhaps as few as 1 in 10.   If your losses are much smaller on your losing trades than your gains on your winning ones, you will make a very comfortable living trading and enjoy the intellectual satisfaction that good fishermen and hunters have always known (which is why I think our brains evolved to be drawn to trading).

Enough philosophy. On to other markets:

Homebuilders also followed through on their rally on very strong up volume with much lower down volume. A very nice chart with a 15-20% pop from the breakout a few weeks ago. If high volatility like this makes you nervous, you can move your stop up to break-even (after commissions) or follow the 3-day low, which is often the first thing to be violated when a move is showing signs of exhaustion. If homebuilders double from here and you are stopped out at 15-20% you may deeply regret it, but that is the tradeoff. I would prefer to let the homebuilders run. My sense is the economy is much, much stronger than anyone anticipates and these things have a way of turning around much quicker than anyone realizes. Homebuilders have sold off so brutally (conventional wisdom says "everyone knows no Americans want to buy new homes and besides there is a huge backlog of foreclosed properties" but conventional wisdom and then some has long been priced into these stocks).

The Euro is another position I took recently I consider a no-brainer. With all the action near the top of the 20-day range and all the news about Greece and Italy so gloomy, something had to give. The markets said buy and I did. In the world of currencies where fortunes can be made with a 2 or 3% move, this 2% gap move up is huge (although I used the far less levered ETF here rather than futures for which I feel I am getting too old).

Switzerland mirrored Wall Street's action, performing a bit better actually over the past couple weeks. As a side note, if you want to take a position in a country, always choose a passively-traded, liquid iShares country web rather than an actively traded closed end fund whose share prices rise and fall not just on the underlying but on anticipations about the future direction of the underlying (as well as the wisdom of the active investors). Contrast the 10-15% pop since breakout here with the sell-off and then recover to breakeven of EWZ, for example.

As with any economic recovery, you would expect industrials to be roaring ahead and they are:

The fact that consumer staples is not doing quite as spectacularly is an indication smart money is shifting away from relatively safe plays into more economically-sensitive ones:

Technology continues to be choppy but moving in the right direction:

There is an old adage that no true bull market can exist unless led by financials. The performance of XLF, as much as I politically detest the behavior of the Marie Antoinettes in charge of these publicly-bailed-out companies, should be encouraging then:

I missed this when on vacation, but Gold has triggered a buy signal at 165 at almost the exact price you would have exited in September to close out a profitable trade from 152:

As always, stay tuned.

Market rally continues: SPY (123.97) gaps up across resistance

2011-10-21T16:25:00.000-07:00

Friday 10/21/11 after market close.

This chart shows SPY breaking above both its 20-day trailing high and clearing the last two relative highs in the 122.5 area. After a choppy week in which most of the action was in the upper quartile of the 20-day range, the market gapped higher and closed at its highs for the day, all bullish. The only caveat was that volume was only average.

I feel particularly proud of this chart. After banging the table a couple days ago about all of the bullish features of the homebuilders (XHB), I took a position and there was very nice follow-through today, again on above-average volume. A 4% surge with no resistance in sight is a very good sign, especially after the failed bear trap in October (a breakdown below the 20-day low without any follow-through and a quick rally off the lows.

The Euro is doing what it is supposed to do - rallying after its breakout then consolidation after falling back into its range. It would be nice to see it close decisively above the breakout point, however.

Switzerland also had a nice day, rising 2.76% in dollar terms (versus a 1.90% for the SPY). Switzerland sold off quite a bit more than the United States from peak to trough (June to September - about a 30% loss), so I would expect a more spirited rise. Switzerland is in much better fiscal shape (the government is running a surplus) and its economy is by many measures much stronger than the United States.

S&P 500 (@ 120.75) Issues Buy Signal - Proceed Cautiously

2011-10-13T00:39:00.000-07:00

Tue 13 Oct 2011 before market open:

The S&P 500 has done something it hasn't since July - triggered a buy signal as measured by an intraday violation of the trailing 20-day high (yesterday at 121.99).
Technically, this is all we should need, mechanically following this signal, buying at a slightly lower price if we simply entered a market order today (assuming it doesn't gap at the open above the buy level, which is unlikely but possible).
As always with the market, however, there is a on-the-one-hand, on-the-other-hand quality to this buy signal.
Positives:
Volume on up days has been improving over the past 8 trading sessions;

Volume on the first trading day of October surged higher, at which time

SPY made a low of 107.5 then closed 5% higher just below 112.5 AND

Gave a failed sell signal, making a

new relative low, then reversing and closing higher;

7 days of higher lows and higher highs in a row;
3 closes above the 50 day moving average;
5 closes in the upper half of the 20-day trading range;
Last trading signal in this direction led to a (small) loss (bullish): although the last trading signal was a profitable short sell from 129 to 122, the last long signal generated a loss (from about 131 to 129). Believe it or not, this is bullish, and one Turtle Trading System insists that signals only be taken if the last signal generated (taken or not) would have led to a loss.

Negatives:
SPY was turned back at almost exactly the point where it met resistance twice before (in late September and mid-October);
Volume, although improving recently, is below average; for a true breakout, you would like to see a strong surge in volume accompanied by at or near the intraday high;
Short-term over-extended: the market has retraced half of the distance from the 110 closing low to the 135 high set in July; markets tend to find resistance after covering 1/3, 1/2, and 2/3 of the prior move (although this is a weak factor and certainly not always true).

The most likely scenario at this point is a pullback either to the 50-day (117.5) or the middle of the range (115) if not a test of the recent lows, but markets exist (or so it seems) to confound the most people most of the time, so a slog upwards from here with the market finding itself 20, 30, or 40% higher a few months from now is certainly possible. When markets bottom, it is not pretty, and the fundamental news usually remains awful (the reasons for the buying only become evident long afterwards which is why following the money by studying the charts works so much better than following the talking heads on CNBC).
At this point, an investor or trader true to the 20-day signal would go long at the market. A less aggressive trader would place a high above the high of this move (122.14) which would only be triggered if the market confirmed its buy signal and moved higher. Another way to enter the market would be to place a buy stop at the trailing 1- or 3-day high (take your pick), adjusting it every day as necessary. That way, if the market pulls back then turns around, you will likely get in at a lower price and not have to waste time (and lose sleep) fearing that you bought at the very top of a move (a risk with any trend-following system).   Speaking of risk, there's quite a bit, over 12% if you use the 20-day low as your sell stop, 10% if you use the 20-day 110 closing low as your sell signal.

Other charts:
The dollar is pulling back with 2 unfilled down gaps after an initially impressive rally; this tends to be bearish for the stock market in the short-intermediate term:

Of course, part of this is simply a mirror index of the Euro, which is rallying apparently in relief to the Greece bailout plan:

Anything that helps Europe will ultimately be bullish for the United States also, since the Eurozone taken as a whole is about the same size as the United States economy and one of our greatest trading partners.

Gold has been hammered recently, gapping across its 20-day sell signal line at 165 in late September, and unable to rally up even to the bottom of the gap, much less filling it. That buy signal, however, gave a nice run from 151 in July to 165 in September or 9% in a little over 2.5 months.

Germany is breaking out nicely with follow-through:

You would like to see better volume, however, but you had some very strong up days in September and the first trading day of October, indicating net accumulation.

If you missed the Germany Web buy signal, you could always trade the Germany Fund (more of an active ETF rather than an attempt to mirror an index) which gave a buy signal on heavy volume:

Contrarians might keep an eye on solar energy (TAN @ 3.42) since the news out of this sector has been unrelentingly negative, distorted by a toxic political atmosphere (an attempt to highlight a failed $500 million investment in a much larger sector, an exception that does not prove the rule).   Because this ETF is so low-priced, it is not marginable and many pension and mutual funds maybe prohibited from buying it (meaning that the usual drivers of an explosive upside rally may have to stay on the sidelines), but for the individual retail investor or trader, this ETF maybe starting to get ready to rally.   I wouldn't bite here, but the fact it found support at 3 after such a brutal sell-off from 9, and on heavy volume no less, warrants close watching:

Of the sectors making up the S&P 500, only a few have triggered buy signals, notably excluding financials and energy.
Technology is a stand-out but up volume remains anemic and following the breakout yesterday, it closed at the lows of the day:

One bullish thing about technology is that it gave a recent false buy signal leading to about a 10% loss, which again is bullish, but the trading range is wide and sloppy.

The Swiss Franc, after getting hammered, gapping down a staggering (in currency terms) 10 points from 125 to 115 in early September, has not even been able to approach the lower part of this gap and volume on down days remains much higher than on up days:

The Swiss stock market has issued a buy signal, however:

Not for the faint of hart, the ETF that attempts to mirror the VIX (volatility index) looks as though it is approaching a sell signal after a fantastic trade was triggered at 25; if it does not gap below 41.35, then this would be a 65% profit in a little over 2 months.   The fact that volatility is settling down is settling down, or at least approaching lower end of its elevated trading range, maybe a sign that things are returning to normal, or at least that the panic levels of volatility recently seen are backing off.

2011-09-23T02:06:00.000-07:00

Chart Review 9/23/11 (SPY @ 112.86 before market open) - the ugliness continues.

Selected Chart Analysis:

Market Indexes (with yesterday's change and % change):

SPY 112.86 -3.77 -3.34% (short since 129, 14% open profit)

DJI 10,733.83 -391.01 -3.64%

ETFs with the lowest % risk (closest to stop loss point):

ishares 1-3 short at 84.59. BS @ 84.74. 0.2% risk.

SPDR consumer staples long at 29.44. SS @ 29.14. 1% risk.

UltraShort Health Care short at 26.99. BS @ 27.4. 1.5% risk.

SPDR Consumer Discretionary long at 35.2. SS @ 34.63. 1.6% risk.

Gold Shares Trust long at 169.05. SS @ 165.88. 1.9% risk.

Dollar ETF long at 22.26. SS @ 21.5. 3.5% risk.

SPDR technology long at 23.73. SS @ 22.91. 3.6% risk.

SPDR utility long at 33.08. SS @ 31.91. 3.7% risk.

ishares 7-10+ Treas Bond Fund long at 106.41. SS @ 102.38. 3.9% risk.

Euro ETF short at 134.24. BS @ 141. 5% risk.

Japan

iShares short at 9.31. BS @ 9.91. 6.4% risk.

UltraShort Consumer Services short at 20.71. BS @ 22.1. 6.7% risk.

iShares Canada short at 25.64. BS @ 27.5. 7.3% risk.

Swiss Helvetica short at 11.01. BS @ 11.93. 8.4% risk.

Proshares Short Dow 30 long at 45.36. SS @ 41.81. 8.5% risk.

Templeton Global Income Fund short at 9.92. BS @ 10.82. 9.1% risk.

SPY short at 112.86. BS @ 123.51. 9.4% risk.

iShares China short at 31.53. BS @ 35. 11% risk.

UltraShort Technology short at 62.33. BS @ 69.36. 11.3% risk.

iShares Germany short at 17.52. BS @ 19.5. 11.3% risk.

iShares Hong Kong short at 14.95. BS @ 16.7. 11.7% risk.

BP short at 35.73. BS @ 39.95. 11.8% risk.

ishares 20+ Treas Bond Fund long at 123.12. SS @ 110. 11.9% risk.

Swiss Franc ETF short at 108.9. BS @ 122. 12% risk.

Greatest % Declining ETFs:

Russia

ETF RSX 25.99 -2.99 -11.50%

Templeton Dragon Fund TDF 23.25 -1.97 -8.47%

iShares Latin America ILF 38.71 -2.74 -7.08%

iShares China FXI 31.53 -2.14 -6.79%

Templeton Emerging Markets EMF 17.01 -1.12 -6.58%

Solar Energy ETF TAN 3.56 -0.23 -6.46%

Oil OIL 20.24 -1.27 -6.27%

SPDR energy XLE 59.34 -3.55 -5.98%

SPDR materials select XLB 30.29 -1.80 -5.94%

iShares Canada EWC 25.64 -1.44 -5.62%

Thai Fund TTF 12.32 -0.54 -4.38%

iShares Germany EWG 17.52 -0.75 -4.28%

SPDR homebuilders XHB 13.26 -0.55 -4.15%

iShares Hong Kong EWH 14.95 -0.62 -4.15%

iShares Malaysia EWM 12.10 -0.48 -3.97%

SPDR industrial select XLI 29.01 -1.13 -3.90%

iShares Singapore EWS 11.07 -0.37 -3.34%

SPY SPY 112.86 -3.77 -3.34%

Greatest % Increasing ETFs:

UltraShort Basic Materials SMN 26.39 2.95 11.18%

Proshares Ultrashort China FXP 44.20 4.61 10.43%

UltraShort Oil & Gas DUG 39.23 3.85 9.81%

VXX VXX 49.84 4.63 9.29%

UltraShort Health Care RXD 26.99 2.18 8.08%

UltraShort Industrials SIJ 62.91 4.46 7.09%

UltraShort Consumer Services SCC 20.71 1.26 6.08%

UltraShort Technology REW 62.33 3.71 5.95%

Proshares Ultrashort S&P 500 SDS 25.73 1.47 5.71%

UltraShort Financials SKF 88.06 4.80 5.45%

UltraShort Semiconductors SSG 57.81 3.15 5.45%

UltraShort Consumer Goods SZK 26.20 1.30 4.96%

UltraShort Real Estate SRS 17.25 0.79 4.58%

ishares 20+ Treas Bond Fund TLT 123.12 4.46 3.62%

Proshares Short Dow 30 DOG 45.36 1.52 3.35%

Dollar ETF UUP 22.26 0.23 1.03%

ishares 7-10+ Treas Bond Fund IEF 106.41 0.98 0.92%

ishares 1-3 SHY 84.59 0.01 0.01%

SPY Update: Sell, baby, sell!

2011-09-22T09:43:00.000-07:00

22 Sep 2011 @ 1240 EST

After 8 years of "the MBA president" we now have had a year of the Tea Party Congress. Just as word comes out that yet another government shutdown threat is on the horizon, the market is plunging. Those of us who are adequately hedged or in cash can smile, but the real economy is tanking. We just can't wait until 2012 to vote the Tea Party out of office (and if they are voted back in, then we are truly lost).

S&P 500 Update (SPY @ 120.19 10:25 am): Trading Rally Possible From Here...

2011-08-29T07:59:00.000-07:00

Very interesting chart. Markets tend not to form V bottoms, but at least W bottoms. As I wrote a few days, ago it looked as the S&P 500 (as represented by the SPY) was forming a left-leaning W with a slighter higher second low, and over the next few days, it formed a triangle with lows and highs bouncing around within a declining range. As of this morning, it broke out to the upside (bullish) on a gap (bullish) and rallied to middle of its 20-day range (bullish). End of month seasonality helps also. Relief that the Hurricane Irene damage was not as great as initially feared may help, but more likely is the much-needed distraction over the debt hysteria. Any hurricane-related rebuilding will probably stimulate the economy net-net, putting some Americans at the margin back to work and allowing the government to provide de facto stimulus spending (something the Tea Party has made taboo for some reason).
Bottom line: although it's not an official buy signal, for traders willing to take a quick, short loss if wrong, it might be a good time to go long, keeping stops tight.

Is the S&P 500 (@ 112.58) trying to form a bottom?

2011-08-24T05:00:00.000-07:00

Wednesday, August 24, 2011: It's way too early to tell, but there are a few encouraging signs:

First, the market, as anticipated, tested the low set in the 110-112 area. It's too early to say it has passed, but the fact that for 3 days in a row it found support above 112 is bullish.
Second, the overall pattern of the market the past few weeks is in a W - tipping a bit to the left, yes, but a W nevertheless, which is a much more common bottoming pattern than a V.
Many bearish factors remain however indicating the decline is not over:
Down volume (volume on down days) is much stronger than volume on up days; over the past 6 trading days, for example, every one of the 3 down days saw higher volume than the 3 up days (yesterday's was a bit of a tie, but in a true turnaround, you expect to see the market rallying on enormous surges in volume).
None of the long down days (showing up as tall red bars) were negated by a close above the highs of those days.
The bottom line is that picking a bottom is a dangerous and expensive sport, but there are some signs showing up that we maybe getting there. A rally to at least the mid-point of the 20-day range which would also take out the intermediate relative high (the middle hump of the W) would make me start to change my mind, but until then, the downtrend remains in force.
Seasonality is not much of a help: August has become the worst month of the 12, with September either second or third depending on which time frame you use. The market tends to rally a bit going into and after Labor Day so expect a short, sweet rally at the end of next week unless it's swamped by negative economic news or renewed fears of the End of the World.
Stay posted.

SPY Update: Sell-off continues....

2011-08-18T21:31:00.001-07:00

S&P 500 Update: The selling continues….
Friday, August 19, 2011: If I was not so busy during the day, I doubt I would have passed up the juiciest shorting opportunity to present itself for quite some time:

After the sell signal issued just below 130 in late July, the market gave a beautiful (from the short side) highly profitable plunge all the way down to 110. One way to play these waterfall declines is to place a trailing stop at yesterday's high - such a stop would not have been hit until just above 116 for a 14 point profit in 10 days.
But if you missed this signal, you should have been setting up for the next. Markets rarely form Vs and almost always rally off a bottom, sometimes sharply, then take back a third or a half of the declines. Then this rally stalls and the market tends to resume the downtrend, testing or breaking the prior lows. Most successful tests lead to what looks like a W formation on a chart.
So as the market rallied off the 110 low, several things should have alerted you to the rallies imminent failure, allowing you to re-enter on the short side for the next leg down.
Volume was the first clue: it was much lower (and ebbing) on up days than it had been on the most recent down days.
Price was the next clue: the market rocket higher only to stall out about where you would expect it to, about a third of the distance from the high of 135 to the low of 110, or 1/3 of 25 points or about 8 points, added to the 110 low = 118. The market punched above this a bit then stalled. Finally, today, it sold off on very heavy volume. Expect a test of 110 with the weight of evidence on the bulls to explain why the market should not fail this test.
August has been a horrible month, taking the place of September, as seasonality has started to shift.
Stay tuned.

2011-08-08T23:30:00.000-07:00

What Does History Have to Tell Us About The Stock Market?

Today the market dropped over 600 points on the Dow. The broader S&P 500 which I will refer to as the market for simplicity's sake dropped 6.66% to close at 1119.46. With all the breathless commentary about the market's latest swoon, it's useful to put it in historical perspective. What follows are some observations based on every trading day in the S&P 500 since 1980, in Question and Answer format.

Question: Was today's drop a record?

Answer: No, it wasn't in the top 10, but it was the 11th greatest percentage drop in the S&P 500 since 1980.

The market fell over 3 times as much during the market crash of October 19, 1987. Here are the top 12 percentage declines since 1980 with today's decline highlighted in purple:

Rank:	Date	S&P 500	1 day % change:
1	19-Oct-87	224.84	-20.47%
2	15-Oct-08	907.84	-9.03%
3	1-Dec-08	816.21	-8.93%
4	29-Sep-08	1,106.42	-8.81%
5	26-Oct-87	227.67	-8.28%
6	9-Oct-08	909.92	-7.62%
7	27-Oct-97	876.99	-6.87%
8	31-Aug-98	957.28	-6.80%
9	8-Jan-88	243.40	-6.77%
10	20-Nov-08	752.44	-6.71%
11	8-Aug-11	1,119.46	-6.66%
12	13-Oct-89	333.65	-6.12%

Two things about this table:

- Despite the decline, the S&P 500 is still higher than at any time following a similar magnitude decline; it's almost 5 times as high as it closed on October 26, 1987. Since the index does not reflect reinvested dividends, this understates how much an invested dollar would have grown since then.

- The single program-trade-driven decline of the Crash of 1987 really stands out. The second greatest decline was not half this 20% plunge. In fact no other plunge was in double digits, percentage-wise. Note to journalists covering the market: please do not ever compare point declines, only percentage declines. Thank you.

Question: But the market fell sharply last week; is the total decline over the past 3 trading days (Thursday, Friday, and Monday) not one of the greatest in stock market history?

Answer: Yes, the past 3-trading-day decline of 11.18% came it at #7 since 1980:

Rank:	Date	S&P 500	3 days:
1	19-Oct-87	224.84	-26.34%
2	20-Oct-87	236.83	-20.55%
3	9-Oct-08	909.92	-13.91%
4	26-Oct-87	227.67	-11.89%
5	31-Aug-98	957.28	-11.71%
6	20-Nov-08	752.44	-11.56%
7	8-Aug-11	1,119.46	-11.18%
8	7-Oct-08	996.23	-10.59%
9	8-Oct-08	984.94	-10.40%
10	16-Oct-87	282.70	-10.12%

Notice how October (7 out of 10) dominates this table, especially October '87 (4) and '08 (3).

Excluding non-overlapping 2-day periods, the rank of this 2-day decline rises to #6.

Question: Well, what about a full week of trading (5 trading days)? Wasn't this one of the worst week in stock market history?

Answer: It was bad, but didn't quite make the top 10:

Rank:	Date	S&P 500	5 days:
1	19-Oct-87	224.84	-27.33%
2	20-Oct-87	236.83	-24.70%
3	9-Oct-08	909.92	-18.34%
4	10-Oct-08	899.22	-18.20%
5	20-Nov-08	752.44	-17.43%
6	22-Oct-87	248.25	-16.72%
7	21-Oct-87	258.38	-15.35%
8	8-Oct-08	984.94	-15.17%
9	7-Oct-08	996.23	-14.59%
10	27-Oct-08	848.92	-13.85%
11	8-Aug-11	1,119.46	-13.01%
12	23-Oct-87	248.22	-12.20%

Question: What about 2-week (10-trading-day) periods? Surely, this has been one of the worst declines ever, correct?

Answer: It was up there, but didn't make the top 10. It came it at #15. Over the past 10 trading days, the market declined 16.30%.

Rank:	Date	S&P 500	10 days:
1	19-Oct-87	224.84	-31.47%
2	26-Oct-87	227.67	-26.41%
3	10-Oct-08	899.22	-25.88%
4	27-Oct-87	233.19	-25.86%
5	20-Oct-87	236.83	-25.81%
6	9-Oct-08	909.92	-24.75%
7	28-Oct-87	233.28	-23.57%
8	15-Oct-08	907.84	-21.81%
9	22-Oct-87	248.25	-20.98%
10	23-Oct-87	248.22	-20.20%
11	21-Oct-87	258.38	-18.89%
12	29-Oct-87	244.77	-17.88%
13	8-Oct-08	984.94	-16.94%
14	20-Nov-08	752.44	-16.85%
15	8-Aug-11	1,119.46	-16.30%

However, it was only about half of the 31.47% 10-day decline ending on October 19, 1987.

Question: Do major 2-week sell-offs indicate buying opportunities or sell signals? In other words, how did the market perform in the past AFTER it sold off this much?

Answer: There are countless ways of trying to answer this question - perhaps the easiest is simply to look at the 14 cases in which the market's 10-day decline was greater than the 16.30% of the past 10 days and measure how it rose or fell over the next 10 days, 20 days, and 250 days (remember, these are trading days, so represent 2 weeks, a month, and a year, roughly):

		Average:	2.94%	2.03%	18.54%

Date	S&P 500	10 days:	Next 10d:	Next 20d:	Next 250d:
19-Oct-87	224.84	-31.47%	13.75%	9.75%	22.41%
26-Oct-87	227.67	-26.41%	6.81%	6.73%	24.25%
10-Oct-08	899.22	-25.88%	-2.50%	3.53%	18.49%
27-Oct-87	233.19	-25.86%	2.49%	5.66%	21.64%
20-Oct-87	236.83	-25.81%	5.91%	2.62%	16.33%
9-Oct-08	909.92	-24.75%	-0.20%	-0.55%	16.23%
28-Oct-87	233.28	-23.57%	3.70%	4.64%	21.00%
15-Oct-08	907.84	-21.81%	2.45%	-6.12%	18.21%
22-Oct-87	248.25	-20.98%	2.51%	-3.30%	12.54%
23-Oct-87	248.22	-20.20%	0.88%	-2.51%	11.58%
21-Oct-87	258.38	-18.89%	-3.65%	-4.97%	6.98%
29-Oct-87	244.77	-17.88%	1.53%	-1.81%	15.37%
8-Oct-08	984.94	-16.94%	-8.95%	-3.27%	7.08%
20-Nov-08	752.44	-16.85%	16.43%	18.00%	47.49%
8-Aug-11	1,119.46	-16.30%

This is a busy table but it shows the market rebounded on average 2.94% over the 2 weeks following a decline of the past 10 days or greater, a snap-back that was greater and more consistent (only 4 down periods) for the subsequent month (or 20 trading days) which averaged 2.03% and was down roughly half the time. Notice, however, that the market rose every year (250 trading days) following 10-day declines of the last 10 days or greater with 5 years climbing over 20% and only 2 rising less than 10%.

Someone reading this table closely might notice that it may overstate the returns an investor would receive since one could only really invest once at some point in October, 1987, and hold for the next year, and 9 of the greatest 10-day declines occurred in this month, so since we now know that the world didn't end following the Crash of '87 and the market was sharply higher a year later, this may skew the average. Nevertheless, look at the stunning 47.49% advance that followed a year after the 10-day decline ending November 20, 2008.

So to be rigorous, let's broaden our net and look at all declines that were roughly equal to the past 10 days' decline of 16.30%, say declines greater than 14%:

		Average:	3.01%	3.93%	21.02%

Date	S&P 500	10 days:	Next 10d:	Next 20d:	Next 250d:
19-Oct-87	224.84	-31.47%	13.75%	9.75%	22.41%
26-Oct-87	227.67	-26.41%	6.81%	6.73%	24.25%
10-Oct-08	899.22	-25.88%	-2.50%	3.53%	18.49%
27-Oct-87	233.19	-25.86%	2.49%	5.66%	21.64%
20-Oct-87	236.83	-25.81%	5.91%	2.62%	16.33%
9-Oct-08	909.92	-24.75%	-0.20%	-0.55%	16.23%
28-Oct-87	233.28	-23.57%	3.70%	4.64%	21.00%
15-Oct-08	907.84	-21.81%	2.45%	-6.12%	18.21%
22-Oct-87	248.25	-20.98%	2.51%	-3.30%	12.54%
23-Oct-87	248.22	-20.20%	0.88%	-2.51%	11.58%
21-Oct-87	258.38	-18.89%	-3.65%	-4.97%	6.98%
29-Oct-87	244.77	-17.88%	1.53%	-1.81%	15.37%
8-Oct-08	984.94	-16.94%	-8.95%	-3.27%	7.08%
20-Nov-08	752.44	-16.85%	16.43%	18.00%	47.49%
8-Aug-11	1,119.46	-16.30%
23-Jul-02	797.70	-16.28%	7.76%	17.52%	22.70%
7-Oct-08	996.23	-16.16%	-4.13%	0.96%	4.44%
22-Jul-02	819.85	-16.08%	1.80%	15.96%	21.16%
27-Oct-08	848.92	-15.39%	8.28%	0.34%	27.17%
19-Nov-08	806.58	-15.34%	4.79%	9.76%	37.66%
2-Mar-09	700.82	-15.24%	7.57%	12.37%	57.60%
16-Oct-08	946.43	-15.06%	0.81%	-3.71%	15.38%
21-Sep-01	965.80	-14.80%	10.93%	11.15%	-12.68%
18-Nov-08	859.12	-14.58%	1.35%	5.27%	29.12%
17-Oct-08	940.55	-14.44%	3.00%	-7.15%	16.59%
14-Oct-08	998.01	-14.43%	-5.76%	-9.93%	7.83%
23-Feb-09	743.33	-14.42%	-8.99%	10.71%	49.22%
19-Jul-02	847.75	-14.28%	1.95%	9.56%	15.80%
21-Nov-08	800.03	-14.07%	13.71%	8.95%	36.86%

Notice the market did even better here, rising 21.02% on average the next 250 trading days, and falling only once (2001).

Question: Are these numbers that big of a deal? Doesn't the market usually rise on average over any given year?

Answer: Yes, they are a big deal because although the market does have a tendency to rise, it's nothing close to 20%+ a year. Here are the averages for all rolling (overlapping) 10, 20, and 250-day periods for comparison:

	Next 10 days	Next 20 days:	Next 250 days:
Average, 1980-8/8/11:	0.36%	0.73%	9.48%
Average following 10-day declines of 14% or more:	3.01%	3.93%	21.02%
Average following 10-day declines greater than the last 10-day decline:	2.94%	2.03%	18.54%

So if the past is any indication, and it's the only one we have, sharp declines are followed by above average returns in subsequent 10, 20, and 250-day time periods. Remember these are averages, and the market can do whatever it wants. Caveat emptor. Also, just because the market was higher a year later does not mean it didn't decline further along the way (I did not look at that here, only the next 10, 20, and 250 days of trading). It may in some cases have made a new low 60 or 80 or 120 days later, but that would not show up in these numbers.

Question: Does this mean that one should buy a sharply declining market?

Answer: Not necessarily (I certainly don't, waiting instead for indications the market has bottomed and is trying to rally). But the historical data seem to indicate that by the time a market has sold off dramatically to be newsworthy, much of the damage has already been done and the market tends to rise subsequently. Of course, there are exceptions, such as the 73-74 bear market (not in this time span of course), in which the market inexorably ground down for the better part of 2 solid years (followed a third very strong year, then more backing and filling).

Question: But how can the historical record help if the global economy is so much different today? The United States is holding high levels of debt, leadership in Washington does not seem to be able to do anything about it except blame the other side, and the economy is very weak with relatively high unemployment. China wasn't even a global player much less the second largest economy and the Euro with all its troubles didn't exist until a few years ago. Maybe we're going into a double dip recession or something worse.

Answer: Whenever the market has sold off in the past, the news about the economy or whatever triggered the sell-off was scary and unique. We had never had a program-trading driven crash until we did. We never had an Asian contagion or a mortgage-backed security implosion until we did. It's always different but some things remain constant: markets tend to sell off, panic, and rally to markedly different news in markedly similar ways.

That being said, those predicting the end of the United States, Western Civilization, and a crash of the United States economy, blah, blah, blah, have been doing this every time the market sold off. The fact that one day they might be right is not helpful (since in that case it doesn't matter how you invest), but the odds are we will muddle through this the same way we have through past crises. The United States economy has been moribund and written off many times before but we remain the world's largest economy with advantages that the EU - which has a single currency but no single, harmonious monetary policy as we do - especially its northern members - can only dream of right now. There are many advantages of being a declining power, the most notable of which is that the United States may wind down its massive military expenditures, more than the rest of the world combined, which would mean all that money would be freed up to invest in schools, roads, and infrastructure. The losers of World War II, especially Germany and Japan, grew far more rapidly and had higher stock market returns than the winners.

Question: But isn't the United States debt burden strangling any economic growth?

Answer: There is no evidence that running a surplus is correlated with economic growth or that running deficits is correlated with economic contraction (except for a lagging relationship, that is, a growing economy, all things being equal, tends to increase government revenues (taxes), thereby lowering deficits, whereas a contracting economy contracts revenue collected at the same time demand for federal government services for everything from unemployment insurance to bailing out of state and municipal governments - surges. The Tea Party repeats this idea so often you would think they would have data to back it up but they don't.

This economic contraction is unique in that after an initial bailout of Wall Street under Bush to the tune of $700 billion and a subsequent $700 billion of stimulus money disbursed under the Obama administration, the government is slashing rather than expanding assistance to the economy. This almost always is disastrous economically but it has not been done since Herbert Hoover in this country (and arguably in Japan after they prematurely stopped stimulus spending the in the early 1990s, leading to another decade of economic stagnation).

There are two separate dramas unfolding in the markets. The first is the dramatic slowdown in the rate of growth including revisions of past growth announcements. That has been the main cause of the sell-off in the stock market, the best leading economic indicator of future economic growth.

The other drama involves debt, but that is a political drama that will probably have a side effect of prolonging the Great Recession or turning it into another depression as Washington cuts off the spigots. (Private industry is actually creating jobs, although at an anemic pace; it is the dramatic, accelerating shedding of state and federal government jobs that is leading to stubbornly high unemployment.) As long as people are piling into US Treasury bonds, willing to lend our government money for 10 years at less than 3%, the idea of a debt crisis is ludicrous.

Greece, Spain, Portugal, and Italy are suffering debt crises and their cost of borrowing reflects that. The United States may face a limit to how much it can borrow but it most decidedly has not reached that limit if our cost of borrowing is any indication. The Chinese can lecture us about spending less on social security programs but they are still first in line to gobble up a billion dollars of US debt every day at ridiculously low interest rates.

As Warren Buffet recently pointed out, the United States has always and will always repay its debt. The imbalance between taxes and government expenditures is almost entirely accounted for by 3 reversible factors, 2 of them immediately amenable to change: the Bush tax cuts which have driven federal revenue as a percent of GDP to record lows, the Bush wars in Afghanistan and Iraq, and the aftermath of the 2008 financial collapse triggered by Bush era deregulation of, among other things, mortgage-backed securities.

Question: But didn't Standard & Poors downgrade our debt? Doesn't that mean the United States does have a debt problem?

Answer: No, it means it has a political paralysis problem. The behavior of Congress, particularly the Tea Party freshmen who refused to negotiate in good faith and created a down-to-the-wire drama by doing something no one had ever done before - threatening to renege on government programs and services already promised if they didn't get their way - was cited by Standard & Poors, not necessarily the level or manageability of the debt, which could disappear in a few years if the United States government agreed on a combination of tax increases and decreases in massive military spending. Entitlement reform is a longer term issue but even small tweaks would change projections from red to black. Only a minority of federal spending is discretionary, but that is where all the effort of both President Obama and the Tea Party has been focused to date. All other options were ruled out a priori by the Tea Party and the GOP. One could drive discretionary spending to zero and not balance the budget. One could roll back tax rates to the level of Clinton and end one of the two ongoing wars and not touch discretionary spending and go into surplus. The self-imposed ideological straitjackets are going to make it virtually impossible for the government to take decisive, concerted, sustained action to stimulate the economy and fill in the slack until private industry can get on its feet again and start hiring. The Tea Party has made stimulus a dirty word, so until those who got us into this mess are voted out or impeached, it's unlikely Congress will allow the government to function in any meaningful way.

S&P 500 Continues to sell off

2011-06-15T12:47:00.000-07:00

Wednesday June 15, 2011
I wish there were something kind or redeeming I could say about this chart but the market is ugly, ugly, ugly:

Although the 4-week low should have gotten you out at 132 in late May (I exited a little earlier and little higher and regretted it for a bit, but I would rather be rich than right). Normally, I try to be agnostic when it comes to market direction - much money can be made much quicker by shorting a collapsing market than going long a bull market - but of course we all have skin in this game and the things that are showing up on the market charts as squiggles and wiggles represent the discounting of real economic forces. Somewhere out there is someone looking for a job, or (whether she realizes it not) facing life 10% poorer (versus the Swiss Franc) than she was a year ago. Meanwhile, the crazies have taken over in Washington and people who are ideologically opposed to any tax cuts any time are about as far from honestly balancing our books and - more importantly - paying for the infrastructure that is the fabric of our society and our economy - than at any point in history. At least when Reagan talked about trickle-down economics, he was thinking a bit of most Americans (who were downstream of that trickle from the few elites). Now the average person is not even part of the equation and the workers who make stuff, the teachers who teach the next generation of workers, and the people who put out our fires and inspect our food and medicine and highway overpasses have all been discounted while CEOs have been lionized as though Enron, Worldcom, Healthsouth, AIG, Lehman, and the whole mortgage-backed securities thing never really happened or was never really their idea no matter how much they shilled for deregulation at the time.

With the Euro under fierce pressure and the whole idea of a borderless single European market coming into open question, with money fleeing the Euro and the dollar for the safety of the Swiss Franc (who had a $3 billion surplus last year), and a lot of head-scratching going on about what makes an economy grow and what, if anything, the government can do about it, it's a dangerous time economically to be an American, a bit less so to be a non-Swiss European. My concern is that it's hard enough to know how to fly a plane if you accept aerodynamic realities; if you have disdain for them or have been taught in some rightwing think tank that "lift doesn't matter" or that reducing drag is all a pilot needs to worry about to fly a plane, then we really are in trouble. We're in trouble.

Many of the jobs lost in the latest weak jobs report were those vilified state and local government employees whose services the boneheads in Washington feel we should no longer have to pay. Whether we need those services in the first place, whether private industry can pick up the slack, or what this means for our most vulnerable citizens or the next generation of Americans is anyone's guess.

I do not like making predictions, but there are some eerie parallels with 1987. It, too, was a pre-election year that experienced a nice bull leg up that stalled (although a bit later, in August) then began to decline. Dollar weakness and a perceived unwillingness by Washington to support a strong dollar was probably the coup de grace. The Reagan administration was running massive deficits and despite the evidence that the tax cuts then were not paying for themselves (Reagan at least had the decency to reverse himself and raise taxes for 6 of his 8 years in office, although he lowered taxes enough to make the deficit and debt a crushing issue for Bush's father). Military spending was massive by any rational measure and remains even more so today with the wear and tear of 3 wars straining our military and the taxpayers who support them. Yet no politician can say out loud what any economist or economic historian knows: without lowering military expenditures, raising taxes, and reforming entitlements, the hope of balancing the budget is about zero.

Sorry to sound so gloomy, but something very ugly is unfolding... stay tuned. And stay flat or short.

Markets Have Memory: Why the Gambler's Fallacy Applies to Coins, but Not Necessarily the Market

2011-05-25T08:36:00.000-07:00

The gambler's fallacy is the name behavioral economists give to the widely held but erroneous belief that a fair coin flipped heads 2 or 3 times is more likely to come up tails on the next flip (it isn't, since each flip is statistically independent of the one prior and is always 50%). However, markets, unlike coins, have memory because the market participants have memory.

They know the prices they bought and the prices they would like to sell (or if short, the prices at which they would like to cover). Plus, there are literally millions of participants all of whom have different, sometimes complimentary sometimes contradictory, objectives and time frames. The smart money, usually large hedge funds or investors, are trying to establish or exit positions without showing their cards all at once. But inevitably, although certainly not obviously, the charts tell a story. What usually happens it that when a trend first changes, for whatever reason, most people refuse to admit or recognize it has actually changed. But when certain trend lines get broken, some traders jump in and try to call a bottom (in the case of a downtrend changing). The early ones are almost always disappointed, or perhaps exit quickly for a short, quick profit, and the market falls back to its old lows right before the breakout. Some early investors who thought they were lucky or smart now regret their decision, promising to sell if its clear that the downtrend is resuming, which is usually at or around (or usually slightly below) the last prior low. As all those who want to sell do, whatever main trend was causing the turnaround (usually some fundamental news or trend) becomes more obvious, and people who noticed that the market is holding at its prior lows jump in and start to buy. This causes others who are more skeptical but missed the last rally to jump in and so on. At each higher price level, it becomes clear that something has changed and since the market is nothing but the collective perception of all of its participant observers, something does indeed change and the market starts moving smartly higher. This time, it may pause at the high of the last rally, but tends to hold there. More aggressive traders add to their positions, especially as the highs are held or broken and finally as it becomes obvious to everyone that the trend has changed, many pile on, driving the market up to often twice as high as the prior rally before something - who knows what? - causes the rally to stall and often pull back. But here's the thing: it often pulls back to the prior HIGH not the prior LOW, and that high is often now support. What usually follows is a zig zag pattern with the market rallying above its last relative high then selling off to form a low just above that high, until something happens that causes the rally to stall for good, forming a high that matches or slightly exceeds the last relative high, then a sell-off, then an abortive attempt to regain the old high, then the process reverses.

Of course, no market follows this script exactly, but it's astonishing how often it does, and why awareness of this tendency does not make it disappear (as people try to game what seems an established pattern, thereby destroying it).

The reason I believe that this pattern will continue is because the things that drive buying and selling behavior - fear and greed - have not changed and never will. As long as human beings make markets, markets will reflect mass psychology. This is something very few economists and precious few market commentators want to admit. That something as important as how trillions of dollars are invested at any point in time could come down to squiggles on a chart or a gut feeling held by millions of people as their regret at having sold too early or bought too late becomes overwhelming is something that we have a lot of trouble accepting. But if I ever hear that a market declined on fears of inflation or rose on an improved outlook from Apple, I always wonder why we accept this nonsense, as though

a.) there is a single reason why markets made of so many participants trading different time horizons for different objectives do anything; and

b.) this information so confidently reported after the closing bell was not reported (and acted upon) at the open.

The market, we are told by talking heads, will often panic today at information it shrugged off yesterday, the day prior, and the day before that. Why? If the efficient market hypothesis were true and markets reacted instantaneously and more or less perfectly to knew information, what you would see is a straight line between news or data releases, then immediate jumps to new price levels as information is released, then more boring flat line. People don't trade news, they trade how others trade the news, which is a constantly rippling feedback loop as participants become observers then participants again, changing the thing they are studying as the thing they are studying elicits certain emotions and behaviors in them.

All of this sounds very deep and theoretical perhaps, but for me it comes down to price and volume. The chart tells a story of buyers and sellers in a constant tug of war, each jockeying for position. Rallies, trading ranges, and sell-offs are caused by the same human quirks that cause traffic jams and the accordion-like effect we have all been subject to as we are forced to accelerate then brake, accelerate then brake, with no "fundamental" (externally valid) reason such as an accident or construction that can come close to explaining these wild oscillations. The only explanation can be found in our brains, in the tension between wanting to get somewhere soon (greed) versus the desire not to get into an accident (fear). But we are not alone, and must contend with how not just the driver in front of us, whom we have never met and don't need to to be part of an intricate, elaborate feedback loop, is also reacting. From these very simple inputs some surprisingly complex patterns, indeed all traffic and market patterns, emerge.

S&P 500 Triggers Sell Signal

2011-05-25T08:22:00.000-07:00

25 May 2011 (prior to market open): The S&P 500 (SPY @ 131.95) triggered a sell signal on Monday, closing below its 20 day trailing low. Down volume has been heavier than up volume and the longer term trend is down:

Technology (XLK @ 25.72) has also broken down, triggering a sell signal.

Homebuilders (XHB @ 18.12): ditto.

The dollar is rallying and although the intermediate trend remains down, there are several bullish things to note:

- all the price action since mid-May has been in the upper part of its 20-day range after two thrust days up;

- buy signal May 15 after 20 day high penetrated to the upside;

- 3 recent closes above the 50 day moving average.

Please note: if you are US investor, you already by definition have all the exposure to the dollar you could ever want; I track the UUP for illustrative purposes only.

With so many sectors turning south, it should be no surprise that some short funds and ETFs have triggered buy signals. Ultrashort Semiconductors (SSG @ 48.12) looks very bullish here for a few reasons:

- following a protracted down trend (meaning an uptrend in semiconductor stocks), a buy signal was given that led to a small loss - this is normal following a protracted move, and taking the second trade against the prior trend is often far more profitable than the first;

- excellent support at 42.95, the 20-day low;

- Vic Sperandeo 2b bottom with broken downtrend line.

Fundamentals are favorable (meaning they are bearish for semis) with disruption of production in Japan and some signs of a slowdown in economic activity (semis go into everything from cars to computers, which are all highly cyclical).

Real estate looks interesting after a long bull leg up, it appears poised to at least give a good trading rally down (meaning that going short real estate through SRS @ 14.63 could be a good play).

Another beautiful chart.

If you want to short the S&P 500, this is as good a vehicle as any.

Russia is getting clobbered.

Gold is a more ambiguous chart; usually it is inversely related to the dollar but with money fleeing the Euro and all sovereign currencies (except perhaps the Swiss franc) looking shaky, gold may continue its up leg. However, the spike high in April and very heavy volume sell-off in May will probably present resistance as sellers who did not get out then will look for opportunities to get out at better prices. Technically, however GLD is still in a buy state without having its 20-day low violated.

What's not to like about the Swiss Franc? As fears of another EU bailout of Greece and probable restructuring of Greek debt rattles that currency, driving it down to the 1.23 area from above 1.5 recently versus the CHF (something I know viscerally, having just visited Paris and benefiting from my stronger "home" currency), with the United States a fiscal mess following disastrous tax cuts and ideological opposition to reversing them, as well as massive military and now stimulus spending, Switzerland, with a humming economy (with a growing trade surplus) running a very disciplined $3 billion government surplus seems the only game in town if you are looking for a rock solid place to park your money. Some exporters and many trade unions are nervous about the high CHF which may hurt exports and therefore the Swiss economy, but so far this has not been the case, with so many Swiss products value-added ones that have very little sensitivity to currency fluctuations (as may be the case with commodities, let's say). If you want a Swatch or a precision piece of machinery or specialty chemical, you just can't get it anywhere else.

The Euro has been hit hard by Greek debt problems as well as rumors that additional rounds of aid or even debt restructuring will be needed in Ireland, Portugal, or Spain.

Japan (EWJ @ 9.98) illustrates a few things. First: never try to catch a falling knife (guess a bottom). When a market panics following a catastrophe, as it did following the earthquake and tsunami and nuclear disaster in March, buyers appeared as the market approached 9.40, 20% below the pre-earthquake peak above 11.60. But the down gap was not filled (and the top of the gap formed resistance for the rally) and sellers drove the market down to the 9.70 area.
Another rally in late April looked promising and even triggered a buy signal, violating the 20 day trailing high, but it was turned back at 10.64, the same price level the abortive late March rally had failed. The market is now in a sell state but this could change - expect lots of back-and-forth sloppy trading as people jostle to figure out how to discount Japan going forward but the fundamental news is not good and does not appear to be getting better anytime soon, and evidence that if anything the damage to the nuclear reactors was initially understated (so whatever reports are issued now should be treated with skepticism).
Usually when markets fall off a cliff like this, the technical damage takes much longer than a couple months to repair.

Another interesting short idea with terrific looking chart is the Proshares Ultrashort Oil & Gas (one of the most creatively-tickered ETFs, DUG, @ 29.52). You have a long, broken downtrend line, all of the recent action concentrated above the broken downtrend line and the 50-day moving average and up volume heavier than down volume. The April buy signal was false, leading to a short, small loss, which means the next buy signal, triggered in early May, is more likely statistically to be profitable.*

Stay tuned!

* Note that this is NOT a restatement of the gambler's fallacy, the belief that a fair coin flipped heads 2 or 3 times is more likely to come up tails on the next flip (it isn't, since each flip is statistically independent of the one prior and is always 50%). However, markets, unlike coins, have memory because the market participants have memory. Click here for more.

S&P 500 (SPY @ 134.44) rally looks to be topping; Gold and Euro selling off.

2011-05-12T00:14:00.000-07:00

S&P 500 Update Wednesday May 11, 2011

After exiting prematurely in mid-March, thinking I was quite smart when the market subsequently dipped to the 125 area (on the SPY), the market then rebounded up to the 134 area, where it met resistance at its late February high then sold off, only to gap up in late April, take out the high, and march to within spitting distance of 138.
As I mentioned before the market - and any system based on following the trend of the market - tends to be smarter than I am, so overriding a system (I did not take the signal to re-buy the market in late March when it penetrated its 20-day high) is usually a bad idea. What makes it particularly hard is watching from the sidelines as the market moves higher without you in it.   At some point, you would be tempted to jump back in at a higher price - often just in time for the market to move down and stop you out.
This time I waited and although there are signs that the market has some underlying strength, there are also many caution signals:

    - Volume on down days has been heavier than volume on up days, although not as dramatically so as in the March distribution period and the most recent down volume was less than the up volume day of 4 trading days ago;
    - Trend Line A from the November lows was broken and the market has been trading below an extension of this trend line;
    - the market had a nice, solid, profitable advance from its breakout in late 2010; profitable signals tend statistically to be followed by unprofitable ones;
    - seasonality - we are now entering a relatively weak May-October period but it is a presidential pre-election year, the most bullish of the 4-year cycle;
    - failure to challenge or even match the recent high of 137.18.

Some bullish signs (nothing is ever 100%):

    - Most of the market action is above the breakout point of 134, the prior resistance, possible support now;
    - The gap up around April 18 has not yet been filled;
    - the market trades above its 50 day and 150 day moving averages, and the former is above the latter.

So it's an ambiguous market looking vulnerable to the downside. The system says buy though, so we should be long with a sell stop at 129.51, to be moved up soon to the 133 area…

Gold (GLD @ 146.54) looks very weak here. Long down bars on heavy volume breaking an intermediate uptrend line, weak rally to below the halfway mark of the selloff, then apparent resumption of the downtrend. I sold yesterday at the open. Will probably have a better re-entry point later.   No reason to be greedy.

The Euro (FXE @ 141.49) is also under heavy pressure.   Sold yesterday at open to take advantage of 1-day counter-rally. Same comments for gold apply to the Euro with the addition that FXE is much closer to its 20 day low which would give a non-negotiable sell signal (at 140.98), and not only were there two thrust days down but the first was on a gap with both on heavy volume.

2011-04-05T12:49:00.000-07:00

Tuesday, April 05, 2011: SPY @ 133.34 (intraday). Technically, the market has just issued a buy signal, but I am going to go out on a limb and do something I almost never do, and recommend no one else do (much) either: ignore it.

When the market broke its 20-day low and issued a sell signal in mid-March, it looked as though a significant decline punctuated by a failed rally or two was in the works. As it turns out, the market climbed a wall of worry, paused at its midrange point, then kept climbing. 2 trading days later, it poked above its trailing 20-day high, which should signal a buy signal and resumption of the uptrend.

Although I will likely regret it, there are several reasons why I am overriding this buy signal at least for now:

- The market has gotten ahead of itself, at least in the short term; I do not believe in the terms overbought or oversold - a market can always go higher or lower than anyone can imagine and the worst reason to avoid buying a market is because it is higher than it was a week or two ago (in fact, that is usually the best time to buy a market); but 8 points in a little over 2 weeks is a bit much with no low lower than the prior 3-day low;

- Volume, although a bit higher on some of the up days than most of the down days during this rally is still way below the overwhelming down volume of the last leg down; in other words, distribution (net selling of shares) is still going on - the market is moving higher but on below average volume whereas the decline was on above average volume;

- Major resistance at around 134 where the market peaked in late February before sharply selling off; if this resistance is decisively cleared, then my mind could change but until then, I believe the next leg will be down rather than up;

- A broken uptrend line connecting the lows of September and November remains in effect; in fact, this could be what Vic Sperandeo calls a "2b top" where you have breaking of an uptrend line, then failure to take out, or brief penetration of the high prior to the breaking of this uptrend line, followed by confirmation of the change in trend as prices fall below the low between the two highs;

- Intramonth seasonality: the market tends to get a nice pop around the end of the month, typically the last couple trading days of one month and the first couple of the next (entire trading systems have been built around this remarkably consistent tendency); this is the weakest of all reasons to sell, but it would not have been surprising to have the market rally into the end of March and first few days of April, only to give back those gains as the month wears on.

I still like the Euro (FXE @ 141.69):

… and Gold (GLD @ 141.88) which had a very strong day today, clearing its 20-day high on decent volume:

Gold has a very bullish chart with long-term resistance cleared (the peaks of November, December, and January) with lower lows and higher highs. Volume on up days has been generally higher than on down days, indicating accumulation. The fundamentals for gold look good also, with a weak dollar, pick up in economic activity, and major inflation in food and crude which has not yet shown up in the headline CPI numbers.

Stay tuned!

S&P 500 Rallying to the Midpoint of its Range But on Weak Volume

2011-03-24T14:45:00.000-07:00

Thursday, March 24, 2011 The S&P 500 (SPY @ 130.90) has rallied for 6 trading days off its recent low around 125 after breaking through its 20-day trailing low at around 129 2 weeks ago.
Although the rally has been impressive in terms of % and points up on a per day basis, volume has been weak, with none of the up days approaching the volume of the 2 most powerful down days.
Nevertheless, SPY has rallied to above its midpoint, and has closed above the 50-day moving average for the first time since it triggered its sell signal.
This bears watching. Remember the key is not to predict but to respond. Buy stop would be at 133.11 but this rally looks tired. I could be wrong; I have been before and will be again!

GLD @ 139.22 had a key reversal day - making a higher high then closing lower on a wide-ranging day. Volume was not impressive but it's been higher on down days than up days, although not dramatically so:

The Euro looks strong, rising today on strong up volume:

The Japanese rally (EWJ @ 10.59) is stalling - it seems to be forming a flag in the middle of its wide range from peak to trough, but has not been able to close the dramatic down gaps, a bearish sign.

S&P 500 Follow-up: rally attempt seems to be stalling; Euro (FXE) and Gold (GLD) look bullish.

2011-03-21T05:05:00.000-07:00

Monday, March 21, 2011 (SPY @ 127.76 as of Friday's close): The sell signal continues to be confirmed in the S&P 500 as evidenced by:

- failure to rally up to the break-down point, then closing on the lows of the day when this area was approached;
- much lower volume on the two past up-days than during the prior 2 down days; this trend of higher volume on down days than up days (indicating distribution or selling) has been occurring since late February;
- failure to rally to the mid-point of the 4-week trading range (dotted green line below);
- failure to approach the 50-day moving average, and 6 closes below over the past 7 trading sessions.

Where in the world looks interesting right now? The Euro (FXE) has been breaking out after consolidating in the upper part of its trading range following a breakout at 134 in mid-January. The gap up is very bullish, although volume is not overly impressive. A key test will come in the 142 area, the site of a spike high and stalled rally in November (a bull trap):

FXE's sell stop should be placed at 135.20.
Gold also looks interesting, as though setting itself up to move higher:

Gold's sell-stop should be placed at 134.47.

Note that the last two are essentially bearish plays on the US Dollar.