Big picture posture

I don't normally look at the Dow too heavily, but with all of the talk about global expansion and the industrials outperforming due to their exposure to overseas growth, it's interesting to consider the Dow in addition to our normal go-to indexes.
Though the breakout to recent highs did breakdown and ultimately "fake out" fairly quickly, there is still a strong and in tact long term uptrend with a trend support line just below us. If that doesn't hold, the next likely area of support would be 12,750. After the recent craziness and fear as high as I can remember in recent years, is the Dow really likely to fall another 500 points in the coming weeks? Remember, the crowd usually gets it wrong, or so they say. I suppose it's possible this level will break and the quick drop to 12,750 could happen. After all, it's really only 4% and would actually finally achieve the 10% correction that so many have longed for. But again that is a strong and healthy long term uptrend in 30 mammoth stocks that don't just get going or turn on a dime. Even if we are destined to test that area for an "official" correction of 10%, the past two weekly candles are pretty major inverted hammers, showing an inclination to bounce. We shall see.


SPX is also still in good looking long term uptrend, though the breakdown after the fake out of the trading range at the top does seem a bit more severe. The trend line from the mid '06 lows is pretty much broken. But there is almost surprising support from the old channel resistance line in blue. Also the weekly candle shows an inverted hammer like the Dow. If this area doesn't hold, the next likely area of major support is 1,380. After that, all the way down to 1,325. The first level would be roughly an 11% correction from the top, the second would be almost 15%.


For a closer look at the SPX, I'm going to be a bit obnoxious and put up a chart with way too many indicators and lines. Basically, I just don't want to do a third SPX chart. One thing that I think is quite interesting, though I'm no Fibonacci pro, is that the low from last week that provided intraday support again this week is right on the 38.2% Fib retracement line, the first of the most significant retracement levels. The 200 MA is also providing support in addition to the diagonal and horizontal support lines present on the weekly chart. In total, there are 5 support lines of one kind or another, including the fib line, around the current price.
The Market Forecast indicator is actually quite bullish, save for the longer term sentiment indicator, which is heading down with plenty of room to go. But after last week's cluster, the intermediate term green line has exited the lower reversal zone for the official green light on playing the cluster. To strengthen the bullish argument being given there, the momentum and near term lines are lining up for a nice "Intermediate term confirmation" signal, another of the signals Investools teaches on these indicators. In short, the two shorter term indicators line up to be the wind at the back of the intermediate term line.
In short, I'm expecting a bounce here. But the real test will be when the index tests the bottom side of the old support and recent resistance line at the 1490/1500 area. If that holds as resistance, we'll likely see some serious sideways choppy action for a while or possibly another leg down and potential beginning of an intermediate term downtrend.


I think I showed VIX with a weekly chart last time, so I'll just stick to the daily. It's rocketed only higher and seems very likely to come in some. Even if it is destined to go higher, there needs to be some kind of retest of the new range support. I just can't imagine the VIX going parabolic without a true market crash happening. Regardless, it is clearly telling us that fear is high right now. It's also telling us to be on our toes for a peak, as once it is high and then turns, THAT is the time to buy. So my take is that this is very close to being a bullish indicator right now. One point of interest from this past week is Wednesday's action. Though the SPX had a big strong up day, the VIX did not have an impressive down day and actually couldn't break below the recent support/old resistance level at the 20 area. I took this at the time to mean that the up day in the SPX was not to be trusted because people were still buying puts heavily. But really, just look at that Doji star hanging up there. Can it really go higher in the next few days? Of course it can. But is it likely? I doubt it.


The Russell 2000 small caps index has shown much relative weakness in recent weeks, but this week was quit strong. With what we could call a bullish engulfing weekly candle, it seems to not want to give up these support lines, both diagonal and horizontal.
With all the talk about how strong the Big Caps are, could this be the time to get into small caps? The long term view seems to indicate so.


Again, I'll leave the Nasdaq up to you. But here's my thinking. The Dow still shows the most relative strength. The SPX, with many more components to it, is still strong in a long term sense, but the short term is looking a lot more shaky. If the Russell and the small caps bounce from here, the small caps may finally wake up and actually provide a bit of support to this market. I would think that would only help the SPX regain its composure next to the Dow.
Take a look at the Nasdaq versus the Nasdaq 100(NDX). The NDX looks stronger than the composite as a whole, which makes sense considering the NDX is the 100 big boys. If the smaller guys, many of which are surely in the Russell 2000 can get it together, perhaps the Nasdaq composite can work its way through the congestion of "overhead supply" it has to deal with.

Any comments? I dare you.

Bueller?

Making a list

We spoke about making a group list together at the next meeting. We're still working on the group rules, but perhaps we can squeeze a bit of list talk in there too. As IBD always points out, corrections or bear markets are a great time to build new lists for the new bull market or next rally. It sure was a good time to do so in March.

As a bit of reference I wanted to point you toward the last bit of posting I did on making a list. We don't HAVE to do it like that. It's just the way I did at the time and shows a bit of my thinking on the subject.

Back in march I made list and did a post explaining a bit about my thinking for the list at the time. It focused much less on the strong group of the time and more on strong stocks in various groups. Here's the post on the Watchlist Criteria. It was posted on March 31 just before the SPX was successfully tested as new support the old resistance from the middle point of a very clear double bottom reversal. Very nice rally happened from there.


A proposed list was put up on April 4. I made a portfolio out of it with 1 share of each stock at a purchase price of that day's close for each. It doesn't say anything about trading them, but the success of the basket as a whole since that day speaks volumes to the merits of strong fundamental scores and some of the considerations I explained in the post about criteria. It also speaks to the value of relative strength, be it versus an industry group or the market as a whole. This should also be a consideration for our new list.
Here is the latest status of that list from April. After being at around 30% profit in recent weeks, it's now showing 19.6% profit. Not bad for just over 4 months.


As for the WFR trade I setup in that post, it got stopped out on 4/13 for 13.60 per contract and a total loss of $720. Perhaps the stop was a bit tight and I wasn't happy to miss the quick rally to follow. But I certainly was not upset to be out of it when it gapped down big on earnings.

The CMG triangle in that post didn't quite pan out as a stellar ascending triangle liftoff, but a kick ass earnings call sent the stock off strong.

I like Ben Stein's articles. Always a very level headed take on things. How Speculators Exploit Market Fears.

Market Posture, again. :)

My Gosh! Is it really over a month since I posted a blog? Interesting, though, to read the last one. Not a bad read on things, I think. And VSEA has done well since then. Today was a seeming breakout that I almost bought. But because it was a resistance breakout with less than 150% average volume, I decided to pass, particularly considering the shaky nature of the markets at the moment. There was a lot of buying going into close, but in after hours it sold off a good amount of the day's gains, even if on low volume. It remains one to watch.

In any case, here's the rundown on what we came up with for the Market Posture. I want to remind that the intention is to come up with a posture for the intermediate term, meaning not what's going to happen tomorrow, but what we might expect in the coming months. And also, because this was a tough one to call, I want to emphasize that technical analysis is as much or more art than it is science. Therefore, we will all see things a bit differently. Because I was leading the exercise, it is of course skewed toward my take on things. Others had at times slightly different views. Whoever is doing today's Market Wrap on the Investools site might have a totally different view. There is no "right" answer. We're each entitled to our own interpretation of things and should become well practiced in making such interpretations. That's the whole point of the Investools education.
Without further ado:


SPX:


On the shorter term, while the recent downdraft feels awfully bearish, there are quite a number potential support lines just below us now. Furthermore, though the shorter term and even intermediate uptrend clearly broke, there is still no official downtrend when considering a trend as a series of highs and lows. As a result, the SPX chart was considered Neutral.


Market Forecast, is bearish because the green intermediate line is the lower reversal zone. Market sentiment line also bearish with tons of room to go yet.


Finally, the VIX. The Volatility index, or as some people call it, the Fear Index. Without even looking at it, would you guess from the market lately that fear is high? The Vix surely supports the thought.
"When the VIX is Low (and turns up) it's time to go (sell)." "When the VIX is High ( and turns back down) it's time to buy."
It is high now and possibly turning back down. But it really hasn't yet. But it does seem like a pullback or breather would be necessary for it to surge yet higher right now. Therefore, we called it Neutral.


What is really interesting is to look at the very long term chart of the VIX. This is as far back as the data goes. I remember thinking and hearing in the past year that perhaps the days of high volatility were over. Better technology, more sophisticated markets, better risk control. Perhaps not.
It has moved back above what was for years the floor. As Jim pointed out last night, if the market does bounce from support at the current level and approach the high again, but the VIX fails to get and stay back below the 20 or even the 18 area, than the VIX will probably be telling us that the move is not trustworthy. This would confirm the same message Jim has been hammering away at on the $NYAD, which remains completely broken down from the top despite the DOW still holding up.



I hope this makes sense to you, whether you agree with the interpretation or not. Whatever the case, the most important thing is that you question and interpret it for yourself and don't just accept whatever I or whoever else has to say.
I'll let you go through the process and do the NDX yourself.

Until next time!

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!