Market Posture

In my last post on June 3, despite the apparent reasons for caution, I concluded that things were still quite bullish. I am trying to reiterate to myself as well as others that a trend or posture isn't "changed" until it changes. So since the various significant levels and moving averages hadn't yet been broken, a trend trader could only assume that things will continue on as usual. Since then, some of the significant red flags have been raised. The uptrend has not yet been broken in terms of highs and lows, but we have put in an equal high and backed off that level, leaving it as a fortified resistance point and putting the uptrend strongly in question. A lower high and lower low will officially change the trend to downward. Until then, we'll noodle more or less sideways.
As for the moving averages, the 20 MA was broken, reclaimed and again broken. Meanwhile, the 50 MA has provided support on two quick bounces. Friday's close was just below the 50 MA, so I'll call it breached but not definitively broken. Will it hold again or finally crack?
You may also notice on your charts that the SPX is now showing a fresh set of 3 red arrows, the second set that has recently appeared since the big run began with a double bottom reversal in March.
Notice also that the Market Forecast intermediate term line (green) is heading down and has exited the upper reversal zone. Obviously, this is bearish for the intermediate term on this indicator. The Longer term orange line is still above 80 but is rounding over and showing potential for a more meaningful downturn, though 80 remains the official signal line to call it bearish.
Keeping things simple, though, we must remember that price is king and the most obvious signs now will be the strong breaking of the 50 and certainly taking out the recent lows around 1490.
(Click imagine to see it larger)

For the third part of the Investools taught market posture procedure, we look to the VIX. I want to emphasize, particularly to ease Jim's mind, that these other aspects of the Market Posture procedure should be looked at as confirming indicators and in no way should be thought to hold more sway or even equal the power and significance of the index price and posture itself.
With that said, last time I suggested setting an alert to go off if the VIX broke above its resistance at around 14.50. That alarm was sounded and the VIX has since dropped back below and again risen through 14.50. This weekly chart shows it most clearly. The bias looks upward to me.

But even if the market doesn't drop and in turn lift the VIX, I suspect that this slightly higher level will be sustained and perhaps with a wider range from the 17 area down to 12.50 if not 14. Whatever the specific numbers for support and resistance on this volatility index may turn out to be, the message seems clear that rise or fall, the markets will be more volatile for the foreseeable future. For the active trader, this is actually a good thing. For the buy and hold investor, maybe not.
I'm not going to go through the whole Posture thing for the Nasdaq too, but for a bit of comparison, here is a view at some of the major indexes with weekly candles. I always like looking at weekly candles because it simplifies the daily noise into a clearer big picture view.
I've left off the Dow Jones, as it closely resembles the picture of the SPX. I've also used the Nasdaq 100 because the composite shows a discrepancy between the TOS charts and Prophet charts and I think the data is wrong. Besides, the NDX is perhaps a better, more focused look at the powerhouses of tech.
Most noteworthy to me is the succession of weekly bearish engulfing patterns on the SPX after the recent series of bull runs. This speaks strongly for the likelihood of a trend reversal. What these matching bearish engulfing patterns on the weekly chart translate into on the daily is a potential double top pattern.
But the other thing to consider from a bullish perspective in these charts is that the tech indexes have not shown the same strength as the SPX and Dow since the highs in February. The NDX and SOX especially are showing a bit of relative strength compared to the SPX. While the SOX did sell off with the rest of the market on Friday, it broke out to a new 52-week high on Thursday.

Could the semis and tech lead the next leg of the bull market?

Other factors to keep in mind:

Crude oil broke above its recent resistance level. From here, up seems more likely than down. You can check here for a longer term weekly chart. But here's the daily.



I won't pretend to be very knowledgeable about bonds and treasury notes. But at the very least it makes sense to me that if yields go up, the appeal of being in stocks is decreased for long term investors. We've heard a lot about the 10 year yield rising lately. It may find some resistance here in the area below 5.5, but this very long term chart going back to '81 shows what might be a very significant long, LONG term trend break forming.



I know I've said this before, but I hope to get a new and improved watchlist up soon.
For now keep eyes tuned to VSEA. After a wild up and down day on Friday, it closed near the top of the range, breaking the recent downtredning resistance and peaked back above the 50 MA.

LRCX also looks interesting, though not as high scoring.
Tech monster Google(with an impressive F/E score of 3.88!) is out at a new high after testing old resistance as new support. If you're interested in getting in this stock and not missing the boat again, this seems like as good a time as any. Remember, there's not that big a difference between buying 10 shares of a $50 stock and 1 share of a $500 stock.


On the downside, REITS are looking weaker and weaker. Some have clearly begun breaking down, others are just beginning to crack now. I'd like to see some of the first to break down come up to test resistance for a better entry.
Homebuilders have seen renewed selling. Banks look pretty weak too.

Have a great week!

VPRT review and setup

Hello all,

Sorry to leave so much time between posts lately. Rehearsals have got the best of me right now and I'm just not finding enough time to look at the market intelligently, much less make worthwhile blog posts. The BHI credit spread post will have to wait too since it will take more brain power for me to put together.

Boy, whoever wrote the last post on this blog sure had it wrong about the channel being broken. Amazing strength the past few days. But let's not forget that the Nasdaq is still not quite above resistance. And while the SPX is somewhat out in the clear, the OEX hasn't quite gotten there. The Russell 2000 looks like it's not quite ready to make the charge.
The NDX looks like it could even be working on the right shoulder of a head and shoulders pattern. A move down to and through the 1760 area would be the confirmation of that pattern. It may well be shattered soon, though, to the upside.


Don't get me wrong. The market is clearly bullish right now and it will be so until it turns around, which it hasn't yet done. I just want to point out some of the things that aren't quite as rosy looking as the Dow Industrials. Going into the three day weekend, I would expect to see some profit taking, unloading a bit of risk going into the three day weekend.

I wanted to share this chart of VPRT that I just mocked up for a friend. I mentioned this stock some months ago at a meeting or two and mentioned before that I have a paper position on it. I've gotten the impression that Jim has mentioned the idea of buying on a "close above the high of the low day." This is a good way of buying pullbacks, particularly in conjunction with a stock that is coming into likely support.

I really like the looks of this stock. The fundamental scores are really nice. It seems that the P/E could be a touch high and some cause for concern, but if they're really growing at a rate of 34% annually, then people are apparently willing to pay up for it.

There is a good looking Cup and Handle pattern here. I bought on a pullback to old resistance/new support in anticipation of a forming handle for the cup already in place. Indeed, the stock did move up and through the buy point(.10 above the high of the right side of the cup) and with a big volume spike. On a pullback to new support, I added 1/2 again the size of the first position. Normally, I wouldn't want to buy right before earnings, but with a buffer zone of profits already and some degree of confidence in the consistency of earnings reports, I was comfortable taking the chance.
(click it to see it bigger)

Notice that the stock has consolidated and pullback a bit to what was old resistance. This could be a very nice "close above the high of the low day" buy on a bounce off new horizontal support as well as the MA.

I'm sure it doesn't quite work out like this every time, but assuming that this stock does do very well from here on out, I've built a position in an ideal way. I may add one more time, but we'll see. Now it's just a matter of sitting back and letting the trend do its thing. I will give it some room to breathe along the way in the interest of making this an intermediate to longer term play. Might even do some covered calls on it if it looks like it's not ready to move higher just yet.

I should note that the big chart ranking on this one is not good. But the group's chart itself looks quite strong. One real bit of concern is the fair amount of recent insider selling. But with a stock that has been so strong, perhaps it's natural for them to want to take a little bit off the table. I'm sure they have kids in college or whatever else that the rest of the world has to worry about too.

I hope you're all taking your share out of this market. Enjoy it while it lasts. Check out this IBD article, Distribution Days Can Signal Market Top.


Have a great weekend.

Some Trades

I know I said I'd do a look at some of the sector indexes, but with an erratic and short first week of 2007 behind us, I'd rather wait until we have another full week under our belt to get a more settled look at what's doing in the market. In the meantime, the first three days of trading in 2007 were quite jumpy and on considerably higher volume than the holiday period. We talked about the relative weakness in the Nasdaq and particularly the Nasdaq 100. Yet those indexes actually gained on the week, the NDX(Nasdaq 100) getting back above the broken support line....

...while the SPX and Dow both were down. What is most striking to me is that the SPX closed right at the horizontal and diagonal support lines that I've had drawn on my chart since the prior week. It's just weird when that happens. If this 1410 area is broken, this will be bad news for the short term. We already have lower highs and lower lows on an intraday basis, but on a closing basis, this would be a clear lower low. After 1410, I would see the 1380 area as very important support for the intermediate time frame.
(click for bigger picture)

All this is to say that the markets are still giving us pretty mixed signals and though we may be on the verge of something significant, we haven't broken yet. A crucial thing to watch will be the VIX index. "When the Vix is low and starts to turn up, it's time to go." The weekly action on the VIX shows a doji star with a fairly wide range but small body. It closed up somewhat for the week, but still hasn't broken above the very significant level just under 13. If that is broken while the SPX breaks 1410, I would see this as a blatant signal to turn bearish, at least in the short term.


This article is an interesting look at the sell-off in commodities as a signal for economic slow down. The basics of it make sense and its nice when big talk on the economy makes sense to the average civilian like me. Also, it's worth mentioning that the Wall Street Journal pointed out this morning that we haven't seen healthy correction (10% pull back in a bull market to keep it from overheating) in the Dow or SPX in several years.

One member mentioned at the meeting that we spent a little too much time on the market posture rather than looking at individual stocks. It's a reasonable comment. Of course, what matters most is what is going on with the individual stocks that we have our money in or want to put our money in. But it is crucial to always stay in tune with the broad market indexes because when they are at potential turning points, if they do turn, each individual stock will drastically change its tune even if it has been performing very well. Strong stocks on the verge of breakouts and further advance will, at the very least, wait longer to make their move. At worst, they'll see profit taking as people want to reduce their risk. I try to think of the market as a bunch of people standing in a room watching what each other is doing. When the selling gets going, most people will join in and follow the crowd. Look at the run up and sell off in GROW. I think it's fair to say that this was all the momentum of people piling on to the buy side of a super hot stock and then all bailing out as the momentum swung back to correct the move.



Here are a few trades I've done recently on our list.

COH December bull call spread. Purchased on October 30 for 3.80 with the stock at 40.08.
This chart from that day shows my analysis and entrance was made on the most current daily candle of this chart. The mention of short sellers is because I'd seen that short interest had decreased over those months.
(Click image to see it bigger)

I rarely do a debit spread but am realizing their appeal more and more. Credit spreads, of course, have great appeal, but they serve different situations. I did this one because a credit spread only makes sense to me if there is a support level between the short strike and the price at the time. In this case, I did the bull call spread because I saw a potential pull back to one of two support levels between 35 and 40. If it would pull back enough to make it worthwhile, I planned on buying back the 40 call for a profit and then hold the 35 call for the expected bounce back up. That's also why I bought the December spread, to give myself a bit more time in the long call if I went that route. It ended up not pulling back very much and I never bought back the 40. Of course, when the stock started moving, I wished I wasn't in a capped profit position, but I was happy to just let time decay for the position as long as it stayed above 40.

On 12/4, I sold the position for 4.85 because I realized that even the max profit on the 1 contract spread would not justify the commissions for exercising the options. It was more profitable to take slightly less than the max potential profit and pay only the small commission for closing the position. I could have waited a couple weeks longer and maybe gotten .05 more, but I was happy to just close it and move on. (Think about it. What market maker is going to by a $5 spread from me for $4.95 for a profit potential of .05?) In the end, I made $.99 or a 26% return on $3.80 investment including commissions on a stock that didn't have to do anything but go sideways or up from where I initiated the position.

I mentioned in this post a BHI bull put spread I placed. I'll follow up on this one in coming days, since I reversed it and went through the whole dicey process of trying save a bad trade. This will take a whole post in itself, so I'll leave it out for now.

On the second post of this blog, I did a detailed analysis of ZMH and proposed a trade on it. Two days later, I opened a paper trade.
On 12/7 in the 11 o'clock hour at 75.03, I bought a Jan 70/75 bull call spread with a fill at $3.58. Again, I did a bull call instead of a bull put credit spread because I saw the possibility of a slight pullback and prefer credit spreads when there is clear support between the price and the short strike. But with my analysis of the stock and the healthy trend, I was comfortable to get in, let time(theta) decay, and trust that it would close above 75 at Jan expiration. A break of the uptrend support line would have been a good place to exit for a minimal loss. I say minimal because as the 70 call would lose value, so would the 75 call, offsetting each other to a good degree. But let's say the trend line was broken and we got out of the position with the stock at 73. The position as a whole would still have had $3 intrinsic value and time value on top of that. So I think it would be a minimal loss, definitely no more than .58.


I sold the spread on January 3 when the market was selling like crazy and this stock showed a severe looking bearish engulfing pattern. Even at the time, I realized that it had not yet broken the uptrend support line, but I didn't like the smell of the market and didn't want to risk giving up any more profits than I had to. I was happy to close it for a decent gain. 23% return on investment not including commissions.

Last month I mentioned a potential bull put spread on ISE in this post with accompanying chart on a bounce off the trend support line. I paper traded this Jan 45/50 bull put spread entering the next day, 12/18 at noon for a credit of $1.65 with the stock at 49.78. This is a bit unusual for me, since the short strike was in the money, but with the trend line so close I knew it'd be either up above 50 or would break the support line in a very short order. Therefore this issue should be resolved fairly quickly. I failed to see the high volume selloff before the bounce as a warning signal. Or maybe I did and that's why I only paper traded it. I'm generally less on top of my paper trades than real trades and didn't close this for a couple days after the support was broken. In any case, with a debit of 2.85 to close, the loss was $1.20. The positions was sized for the max loss potential of $3.35, so this was well below my maximum acceptable loss.


One of the difficult realities of spread trading is that they have a much higher probability of success, but a much lower profit potential. So one must understand and strike a balance between these two aspects in order to be profitable in the end of a number of spread trades.

For those of you still new to the market and trading, I strongly recommend sticking to getting a strong grasp of basic fundamental and technical analysis of stocks and learning how to plan and manage simple directional stock trades first. If you don't know what you're doing with basic stock analysis, you definitely won't have a clue how to deal with the stock's movement affecting a more complicated spread trade.

Another paper trade still in progress is a regular stock purchase on VPRT, a stock I've mentioned at a meeting or two. Bought on 12/11 a 32.52, I was anticipating the formation of a handle to complete a cup and handle pattern before the stock powers through the official buy point above the highest point on the right side of the up. That is where there would be no more "overhead supply" or sellers. So let me be clear that this was not yet an official buy according to the O'neil teaching on cup and handles. But if it does clear the buy point, the target would be roughly 47.50, using the depth of the cup as a target distance from the buy point.

But aside from the potential cup and handle pattern, it was in an intermediate term uptrend and bounced off of old resistance, confirming new support. My stop was set just below the round number of 30 at 29.95 and the position was sized for that distance. The support was breached, but not in a convincing way to me with volume decreasing on the selloff and I thought the intermediate trend line, the potential pattern, and the well received earnings report in October deserved the benefit of the doubt. Notice the big volume selling day on the 15th has a good sized lower shadow indicating buying pressure as a significant part of that volume.

As of right now, the intermediate trend is still in tact and I will get out on a convincing break of the uptrending support line, particularly if the broader market continues to look weaker. It is worth noting that it is perhaps expensive here with a PEG of around 2.

That's all for now. I'll try to get that BHI trade a maybe a few others up in the near future. I the meantime, please leave any questions or thoughts about what I've written here in the comments section just below. Hope you're enjoying the beautiful day today.

Looking back, planning ahead

HAPPY NEW YEAR!!! I'll start this one off by sincerely wishing you and yours a very healthy and happy year ahead.

It seems a good time to take a good hard look at where the markets have been, where they are, and where the charts seem to indicate they might be going. As I am not formally educated about the economy or really anything business or money related, I will attempt to stick to objective technical analysis of what has happened and what is happening. I will not get any closer than the weekly charts as they tend to factor out the "noise" of day to day movement and give a clearer view of the big picture. For the sake of simplicity, I will use either a plain chart with naked price action or the Investools study set with MACD and Stochastic because most of us are comfortable with them and I think they are as good as any. It's really not about which indicators you use. It's how you use them.
There are seemingly thousands of year end reviews with recaps of what made what happen and what might happen in the coming year. I enjoyed this quite level headed take on things from Investor's Business Daily, After Smart '06 Bets, Fed May Enjoy Rest. For a less market-centric forecast of things to come, Yahoo columnist Jeremy Siegel gives a straightforward and digestible Outlook for 2007.
As I think has become the norm, I'll focus on the SPX (S&P 500) as "The Market" and generally disregard the Dow Jones Industrial Average. The reason for this is that the DJIA is an index of only 30 Large Cap stocks, therefore showing far less representation. But more importantly, the biggest beef with this index is that it is price weighted rather than value weighted. This means that a $1 move in a $20 stock affects the index exactly the same as the same move in an $85 stock despite a drastically different percentage move for each stock. Somewhat problematic, no? That said, it is worth noting that the DJIA with its 30 mega-cap stocks beat both the NASDAQ Composite and the SPX in 2006. Noteworthy also is that the Russell 2000 small cap index nudged ahead slightly as the the winner. I'm far from truly knowledgeable on the distinctions and performance of different capitalizations and classifications(growth/value), but it seems reasonable to me to guess that with the ever more rapid development of technology and the growing use of the Internet, the playing field may be leveling ever so gradually, offering small cap companies more feasibility to compete with the big boys.
(Click image to make it grow)


If this were the year chart for any stock, what would your first impression be?

Mine would be: Long term uptrend. Very strong rally mid year followed by a somewhat dramatic correction. 4th quarter rally recovers nicely and is surging into the old resistance level. Looks ready for a rest for consolidation before going higher if not a bounce down off old resistance.

Well, perhaps it's a bit silly to make such a flippant reading on it, but this is a 20 year look at the SPX(S&P 500).


I prefer to look at the monthly chart without indicators, as it seems that beyond a certain time frame(I don't know what, exactly), it seems ridiculous to use them.
Looking at the 10 year, monthly candlestick chart for the SPX, we see something along the lines of a double bottom reversal to begin the recovery from sell off in the wake of the tech bubble bursting and the tragedy on 9/11/01. 2003 shows a fairly remarkable comeback with the market easing back in early '04 to establish a more sustainable trend for the coming years. From 2004 to late 2006, the market was in an quite orderly channel, though the lines are not exactly parallel. Considering that rising channels are more inclined to break to the down side, the final months of 2006 bursting through the resistance line is an impressive show of strength. In the absence of oscillating indicators, I'll reference the ShadowTrader, Peter Reznicek, in saying that a movement above channel resistance can be considered moving into overbought territory. This confirms what we would see if we did look at the Stochastic indicator. It is also worth mentioning that though it is not drastic, the resistance line of that period was ever so slightly less inclined than the support line, creating what might be looked at as a Rising Wedge, a bearish reversal pattern. But it didn't break to the downside.

So what are we to expect now? Well, we have about 100 pts. above us before we reach old resistance. So there is plenty of upside potential for the near future. We should also remember that overbought is what leads to more overbought. With the strength in the last 6 months, it's hard to imagine that momentum just dying overnight. But with 6 straight bullish months, it would be reasonable to expect a bit of a rest somewhere soon. Whether it be profit taking after the run up and quarter/year end, redistributing positions or whatever, it would not surprise me to see a pause in this run to begin the year. Coming in to retest that old resistance as new support would probably be a very healthy occurrence. In any case, I read the monthly chart as bullish with a bit of caution, particularly for the start of the year. But if that old resistance line is tested and doesn't hold as new support, I'd read that as a bad sign.

Looking a touch closer at the weekly chart, we can see the impressive bull run since July with a very orderly ascent. Though that trend support line was breached 5 weeks ago, it was only broken on a weekly closing basis two weeks ago. Interesting to note that this past week shows the upper shadow for the week as having kissed the underside of that line and backing away from it. Looking at it from another perspective, however, there is a more gradual channel that has appeared since November which includes almost all of the daily action intraweek. Even with the slight retreat at last week's close, the index is comfortably in the middle of that channel.

While we do have 3 green arrows still in tact on the Investools study set, the MACD is about to cross over, giving a red arrow and showing an easing off of momentum. Stochastic is very high in the upper reversal zone and seemingly rounding downward, if only slightly.
Looking strictly at trend, the SPX has not yet broken its uptrend with a slightly lower high being made last week, but not yet a lower low. A close below the prior week's low would begin a near term downtrend. At that point I'd look to the round number of 1400 and the long term channel resistance at just under 1390 for potential support. I read this chart as cautiously bullish.

Okay, so I lied. I am going to use the daily chart to read the Market Forecaster study. Simply put, with the green Intermediate line having passed out of the upper reversal zone (below 80), this should be read as bearish for the intermediate term. In fairness, the it appears to be lurking sideways at the moment, but it has not turned back up. The two shorter term lines are also heading down, though the short term momentum line(red) is very low and likely to bounce upward. The much longer term "Sentiment" indicator has very gradually turned over in the upper reversal zone and is headed toward crossing below 80.
The chart shows the 20 MA, which has acted as relatively good support over the last 6 months continuing to hold and the 50 MA. It is worth noting that the 200 MA is 100 points below the current price. I am cautiously bearish on the Market Forecaster for the SPX.


For the final piece of the puzzle, we look at the VIX volatility index. The 5 year chart is decidedly downtrending. As a contrary indicator, this is bullish. While the actual numbers are not too important, the relative price action is what counts here. If it is low, there is complacency and comfort in the market. If it is high, there is fear. We watch it to see it turn up and down from these relative lows and highs for signals that sentiment is changing.


Looking at the latter half of 06, as the SPX rallied strongly the VIX settled into all time lows. But at the end of November, the VIX jumped to break the downtrending resistance. The next couple weeks were somewhat benign and then it fell sharply to test the old line only to bounce up off it forming a piercing pattern, which argues for a bullish reversal. Since that's bullish for the VIX, it's bearish for the market. But as of yet, it hasn't followed through. I am neutral on this index but watching it for a move upward for signs of market bearishness. Until this index breaks above the 12.5 and 13 level, it will be hard to be bearish on the market.


In summary, I am reading the SPX as pretty bullish for the market in the intermediate to long term, though it seems like there is a bit of consolidation or healthy pullback necessary before another leg upward is made. How long that might take is anybody's guess. With the very low volume activity for over the holidays in December, it will take a bit of time for the market to find its feet again.

Now for a look on the other side of the tracks, let's consider the tech. heavy and more volatile Nasdaq Composite. It is said to lead the other indexes, which it certainly did in turning downward in 2000 first and again in selling off this year in April about 3 weeks before the SPX began its slide. However, it has lagged the other indexes in the late 2006 rally.

In comparison to the SPX, the run up to the peak and the fall from grace in 2000 is far more dramatic. The recovery, however, is quite similar to that of the SPX and relatively orderly. That it has yet to recover even half of that fall is interesting. For you Fibonacci followers, there is still over 200pts. up to the 38.2% retracement of the fall from the peak in 2000. Either things in techdom were just off the charts of overvaluation in 2000, or there's still plenty of room to go higher at this point. Here is a Yahoo finance article that is bullish on tech.



The monthly chart shows a surprisingly orderly uptrending channel for the past few years. While the SPX finished 06 with a bullish December, the COMPQ closed lower with an almost obedient respect for long term trend resistance. It is also worth noting the slight resistance back in '99 at the 2,500 level. As a significant round number, it seems a reasonable level to expect some resistance. Nevertheless, the trend is still clearly up, so I read this is long term bullish with an expectation of short term weakness.


The weekly chart makes a slightly more bearish argument, though it hasn't cracked yet. Three green arrows in the air, though the MACD and Stochastic have red arrows likely coming soon. The index has failed to make a higher high in the last month and has a big bearish engulfing candle pattern two weeks ago. Since July, it went straight up and now it's going sideways. Healthy consolidation perhaps. But if it breaks below the current short term support at 2,400 and just below, this won't be a very good sign for the short term. There's not a lot of obvious support on the way down. I read this chart as neutral. Not bullish, not yet bearish.



What worries me more, though, at least in the short term, is the NDX (NASDAQ 100). These are the big dogs of the NASDAQ and looked at as its leaders. They have already buckled beneath short term support by closing below it after a bearish engulfing pattern and shown the first major bit of weakness among the major indexes. Last week, though on light volume, was a failed attempt at getting back above that support line. The MACD has already crossed the center line and the Stochastic is very close to giving a sell signal. Again, there's not a lot of obvious support on the way down. I read this chart as bearish.


The Market forecaster doesn't speak any better for the COMPQ. The longer term Sentiment line in orange has crossed out of the upper reversal zone, arguing for a longer term bearish bias. As it moves further, the stronger it will get. The Intermediate term line in green is well on its way downward and with a reading of about 40 still has room to go. The red momentum line is very low and ready to bounce higher. If it were high with room to fall with the blue near term line as it is, this would be an intermediate term confirmation signal, one of the stronger signals to look for on the Market Forecaster. Though it is not fully there, it is worth paying attention to.
The daily candles have now tested the underside of the 20 MA twice and bounced down from it. Will the 50 hold for a second time? I read the market forecast for the NASDAQ Composite as bearish.


Finally, the VXN is very similar to the VIX in having broken the downtrending resistance line, but it shows more conviction in moving upward in last week's candle. It needs more confirmation, but for now, I'll read the VXN as a bearish as long as it stays above 18.


In summary, the Nasdaq Composite is showing much more imminent signs of weakness. The long term trend is still bullish, but the intermediate trend may well be on the brink of bearish. I will look for this index to show weakness and fight it out in the beginning of 2006, but closer higher by the end.

To wrap it up, the two major indexes tell more or less the same story in the long run, but in short term, the NASDAQ looks much weaker. Their support/resistance layouts are also quite different. While the SPX has a good 100 pts. overhead until resistance, the NASDAQ seems to be currently bouncing down from resistance. The SPX has likely support not far below us. The NASDAQ is on the verge of breaking support obvious levels close below. Considering the Indexes' push/pull relationship to one another, I expect the beginning of 2007 to be somewhat more volatile than we've seen in the past 6 months with a likely pullback of some degree before regrouping and trying to go higher. Barring major tragedy or economic shocks, I would think we'll see another bullish year in the end.

Perhaps it is overly simplistic to make predictions like this solely on the analysis of the indexes. There are obviously concerns of a slowing economy, Fed surprises, oil possibly moving higher again, the housing market not recovering nicely, etc. But at the very least, this gives me something to work with. As technical traders, we do not need to pretend to know it all. Regardless of what we think will happen, we can manage our risk and spot the rising tide by watching the charts. To quote Thinkorswim trader/instructor Joe Kinahan, "When you realize you're a dummy, life gets really easy." Makes sense to me.

This has taken much longer than I expected. I hope it was worth the read. I will try to complement this post with a look at some of the sectors in the coming week. As always, thanks for peeking your head in to see what I have to say about things.
Here's to a profitable 2007!

Double Tops

As we approach the year end and indexes are beginning to show signs of weakness, I though it would be good to look at the double top, a bearish reversal pattern.
Simply put, a double top reversal pattern is at the end of an uptrend where an M-like pattern forms. A new high for the uptrend is followed by selling off around 10-20% or more and a climb back to the high which then acts as resistance. If the stock or index then sells down from that resistance level and then breaks the low of the trough between the two peaks, it is a double top pattern.
Ideally, we want to see volume increasing into the selling off of the peaks and more modest in the buying up into the second peak. The pattern can take anywhere from a couple weeks to many months.
The pattern is confirmed on a break below the support from the trough between the peaks and, as always, a spike in volume makes the pattern all the more significant. Also, as with all support/resistance breaks, a retracement to test the line from the other side can be a great entry point.
To find the projected target from the pattern, measure the distance from the peaks to the low of the trough between them and then find your target at that same distance below the support from the trough low.
For a more official description, here is a good run down on the Double Top Reversal pattern from Stockcharts.com.
We've been pretty bullish in the short and long term lately, so finding lots of double top examples is not very easy. Here are a few, old and new:

The bursting of tech bubble shows us doubles tops on the NDX and the $NWX, the AMEX Networking index. The NDX(Nasdaq 100) firs put in its top in March 2000 with a shooting star and then a second effort at a new high, which failed. This formed a double top pattern when it broke below the lows between the two peaks. After that ran its course and reached the target fairly quickly, the market struggled back to about half its recent slide only to put in another double top pattern. The second peak of that pattern on 9/1/2000 was confirmed the next day as an evening star reversal candlestick pattern, giving further strength to the potential double top. It then moved down, broke support and completed the pattern by hitting its target fairly quickly.



While the NDX peaked in March, the NWX Networking index was still going strong until July of that year. Picture perfect shooting star candle with confirmation on 7/17/2000. (This pattern could be called an Evening Star Pattern, though the second day of the three day pattern is really supposed to have a gap up.) The second peak is completed with a bearish engulfing pattern on 9/5/2000, the same day the NDX put in it's final peak of the second Double Top pattern. All thoughts of bullishness in the tech world were gone from that day forward until years later.



There is no volume to support these patterns, but such is the reality with indexes. One could argue that the nature of an index being a group of stocks makes the factor of volume not as essential to the chart.

HP made a nice one early this year and shows subdued volume on the climb to test the first high and then ramping up volume in the sell-off at resistance. Picture perfect retracement to retest the broken support line for a bearish entry. Though it still hasn't reached the official target of $10 lower than the break, it made half of that projected move in the month of July alone.



It may be a stretch to call it a double top, but the NDX today broke what might be called a double top. The distance between the highs and the low in between them is only about 3% and this is a shorter time frame. But it would probably be a good thing if we were all on the right side of a 3% pullback in the market. The NDX 100 is referred to (so I hear) as "The Generals" since it is the big cap of the tech stocks. They are seen as leaders of the Nasdaq. If these guys are breaking down....Uh oh.
Here's a bearish article, Tough Times Ahead for Big Cap Tech.



To make it more fun and personal, we can look at ISE from our own little stable.
The formation is certainly there, but I'm not going to get too excited about this one just yet. Until it breaks the support, it's still just a potential pattern. Furthermore, the volume on the rise into the second peak was quite substantial and the sell-off volume hasn't been very dramatic. On the bearish side, though, we did break the uptrend and the stock with a P/E of 36.7 is trading at quite a premium to its group(P/E of 21.5). It has PEG of 1.65.



As these charts and others start to give us some potential bearish signs, now would be a good time to start looking for potential bearish charts for when the market does confirm a turn around.

Have a great weekend!