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

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

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.  

S&P 500 Triggers Sell Signal

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.

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.

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

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.

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.