I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Friday, December 30, 2011

Dec 30

My 60-min Trend System issued a sell signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

This was not a clean-cut call, and at best it could be called an 'early' sell signal. We had none of the markers that I look for at sub-cycle tops, especially given the setup that I discussed here. So honestly I still think this wave could continue up in early January.

But what happened today:
1) 15-minute sell signal (again, like the one on Wednesday)
2) 60-minute main indicator rolled over. It is unconfirmed by other indicators on my system, but I am going to listen to it right now.
3) Last trading day of the year and the long weekend before the next trading day.

So I am just choosing to heed my system 'warnings' (not official sells) and walk away until next week. I am fully prepared to buy again if my main indicator turns back around. And if Tuesday ends up being a large gap up, then so be it. I would have liked this week to end on strength in order to hold over the long weekend, but that doesn't look like its going to happen. So it is wait and see mode for me.

Happy New Year Everyone!

Wednesday, December 28, 2011

Dec 28

Not a fun day to be long in the market (which I was and still am).

My 60-min system did not officially give a sell signal. The top occurred with no divergence. The setup that I mentioned on Friday is still valid. So I am staying long (perhaps foolishly, we will see). A few reasons for staying long despite the mini-bloodbath today:

1) Top occurred with no divergence on my 60-min system. There was divergence at the top on my 15-minute system. There was also divergence with the low today. We will see how that manifests tomorrow morning.

2) This was a very interesting statistic from 'Trading the Odds': http://www.tradingtheodds.com/2011/12/high-number-of-52-week-highs-in-december/. We also needed a correction for the rally (likely brought on by end of the year tax selling into this rally), but I am still looking for more upside based on my own system and statistics as well.

3) In a very un-quantifiable / un-analytic fashion today didn't feel like the start of a major correction, more like a reaction. Now, the market could spit in my fact tomorrow and say 'I tried to warn you'. And if that happens then so be it. But my gut says to stay long, so I am going to see where this goes.

Tuesday, December 27, 2011

Dec 27

There continues to be a lot of comparison between now and early/mid 2008, and I continue to say that the comparison is not appropriate. There are some similarities, but there are quite a large number of differences. One of those differences are sector behaviors.

In 2008 nearly everything (with the exception of Staples and Utilities) was showing weakness all together. But right now the market is much more mixed compositionally. Both Technology and Consumer Discretionary are still holding up fairly well, pretty much two of the last sectors that should if we are entering into a crash phase.

My $0.02 at any rate.

Friday, December 23, 2011

Dec 23 - Happy Holidays!

First: Happy Holidays! I hope everybody reading this has a wonderful Holiday season.

Second: Some analysis.

I continue to see this move as bullish for several reasons.

1) The daily chart setup continues to be valid

I am referring to this study: Dec 8 - Daily Cycles, Looking for an Edge. This setup continues to be valid and the last 3 days has made the setup appear to be more likely on my daily indicators

2) 60-min statistics are very compelling

As I said on Tuesday a 60-min buy was issued. Today I got a confirming signal from one of my secondary indicators. And this has happened in a very specific way. I ran a study on my cycle system and since 2001 there have been 67 similar setups and 93% of them led to higher highs (typically several percent higher). Again, these are stats not predictions, but it is a very compelling stat.

3) Very bullish seasonality for not only the week before Christmas but especially the week after

See: http://www.bespokeinvest.com/thinkbig/2011/12/23/market-performance-during-the-last-week-of-the-year.html

4) Closed above the 200 day MA

This is a nice confirmation for point 1 above and a bullish way to end the day before the Christmas stock market break.

5) Closed above the downtrend line

The downtrend line that the market has been unable to breach for the last 5 months was finally surmounted today. And that's not bearish.

Third: Some eggnog ... with a very healthy shot of whisky. Time to start drinking :) Happy Holidays!

Wednesday, December 21, 2011

Dec 21

Just another one of binv's crazy ideas. Don't pay it any attention.

Tuesday, December 20, 2011

Dec 20

I haven't said much the last few days because:

1) When there is no reason to say anything, then don't say anything
2) I have been very busy, which reinforces point 1

My 60-min Trend System issued a buy signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

Bottom yesterday was on highly negative divergence. But divergences have to be confirmed before they are tradeable. The move up today confirmed the divergence and a buy signal was issued.

Wednesday, December 14, 2011

Dec 14

Today did not look good at all for any kind of bullish case. Today needed to be a dramatic reversal day, and instead it was just a big red candle. Divergence from yesterday is gone and everything looks like it is rolling over on my 60-min chart. Unless tomorrow brings some kind of bullish miracle, the tone for the end of the year is looking not-so-Santa-Rally-ish.

Tuesday, December 13, 2011

Dec 13

Move down today is happening on some very serious negative divergence on my 60-min chart. I am going to wait for an upturn / buy-signal to confirm. But it wouldn't surprise me at all if tomorrow confirms this correction is over.

Friday, December 9, 2011

Dec 9

Current count:

Thursday, December 8, 2011

Dec 8 - Daily Cycles, Looking for an Edge

Okay, enough things have happened that I can now start thinking about this scenario more concretely.

1. The overbought condition on the 60-min Trend System has been relieved. And the fact that it is done so in a relatively sideways manner is pretty bullish
2. A couple of days ago a Daily Cycle Long Signal occurred on my Daily Trend System.

I talked about a potential setup last month here (Daily Cycles - Looking for an Edge), that did not end up materializing. The triangle did not break up, it broke down pretty hard and the Daily signal cross never happened. But the rally this past 2 weeks reversed that trend and we now have a positive signal. I will rehash much of what I said last month (because the stats are still valid) and what I will be looking for in the current environment.

There has been a big (and good/useful) discussion of cycles in my blog comments recently. What I want to do in this post is to take a step back and offer a statistical look at the cycle signals from my Daily Trend System

Note: I am referring to my Daily System, not my 60-minute System. I have backtested my Daily System to 1982. And like with my 60-minute system, I trade the signals based on the sub-cycles. The last Daily System trading signal was a Cover Short/Establish Long signal at 1181 on 10/10/11 on the SPX (see here and see here)

There are multiple sub-cycles within a cycle in my system. And while I don't show the cycle signals (because I don't trade off of them, I use them to 'reset the boundaries' of my system, and they are used as confirming indicators), they do have some analytical usefulness and might give some insight here.

The reason being that we did get a Long Daily Cycle Signal earlier this week and now have a short term pullback to relieve overbought conditions, which I tend to view as a buying opportunity.

My cycles are not defined on some strict time relationship, in fact there is no time requirement at all. It is based completely on indicator moves (mostly MA based). Since 1982 there have been 24 cycles (with a long/up half and a down/short half). Minimum Duration: 154 days, Maximum Duration: 951 days, Median Duration: 390 days, Average Duration: 444 days.

So let me pose this hypothetical: We close above the 200 day MA sometime in the next week.

Like I said above, we got a long cycle signal earlier this week. I measure a cycle from long cycle signal to the next long cycle signal. This made the last cycle 440 days, which is right around the average and median cycle durations. That is good and makes sense.

So what would be the odds that a close above the 200 day MA would be a 'fakeout' (i.e. that it close slightly above the 200 day MA in mid/late Dec and then crash, in a Wave 3 down or something similar)?

Even though I don't trade the cycle signals, I ran a study that was formulated like this: From the price the long cycle signal was issued, what is the highest sub-cycle signal price before the next cycle short signal was issued? This gives a way to quantify how many cycles did not 'fail'. The stats are pretty compelling:

Study Results
24 Long cycle signals
21 cycles made higher high sub-cycle signals before next cycle sell (88%)
Max Gain: 68.0% (Max sub-cycle peak, not necessarily the next sub-cycle peak)
Avg Gain: 19.7% (Avg sub-cycle peak, not necessarily the next sub-cycle peak)
Avg Loss: -2.2% (Max value of failure)
Max Loss: -2.8% (Max value of failure)

Here is what I see, and here is the edge that I think the stats are giving me:

If we close above the 200 day MA (in essence making a higher high), there is an 88% chance that we made a legitimate bottom in October, that the last higher low confirmed that bottom, and that we should be looking for more upside (and on average a large amount of upside, 20% gains).

Again, these are statistics, not prognostications.

But given the way this bottom has developed on my Daily System, and the bullish seasonality, the fact that we made a higher low above the October low which confirmed the divergence seen at the October bottom, the fact that the overbought conditions have been relieved on my 60-min trend system, etc. etc. I think if there is any edge to be gained from this analysis, it is to go long after this current pullback ends [aggressive] or to go long after a higher high / close above the 200 day MA [conservative] and not to expect a fakeout and crash (end of Minor 2 and looking for a Minor 3 down, or something equivalent).

Monday, December 5, 2011

Dec 5

My 60-min Trend System went short today (as did I). Yet despite that, I think December will end up being a very bullish month.

BUT! The SPX failed at the 200 day MA ... again!

Yeah, so?

It made a clear higher low since the last test confirming the divergence seen in October. I think the current pullback is just a move to relieve the short term overbought conditions (at a level that will invite over-bearish prognostications, i.e. the 200 DMA). I actually see some very bullish developments happening with my Daily Trend System. But there needs to be some more confirmation first, more on those as they develop.

This is what I would expect to see if the more bullish scenario is going to play out.

In the meantime, just trading the signals from my 60-min system.