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

Monday, April 30, 2012

Apr 30

Recap and Review of the last week:

Tough week that was difficult to interpret. On Wednesday my 60-minute system received a cover short/establish long signal. I was expecting a lower low but instead what we got was a double bottom. On Thursday I was second-guessing that call based on some observations and I was observing an ending diagonal take shape. I was theorizing that a breakdown of the ED might be a strong reversal signal. Instead the 'ED' (which was obviously misidentified) broke *up* and by 2:10 on Thursday the market had negated any kind of reversal setup and closed strongly. My thoughts on a possible reversal obviously did not pan out.

By Friday the 60-min Up Cycle Signal was issued as I discussed earlier in the week which means the sub-cycle buy signal issued on Wednesday is confirmed. Friday and today it continued to gain ground, which means that I am no longer expecting a reversal, and my 60-minute buy signal is firmly intact. As I said tough market to interpret.

For as tough as the 60-min timeframe has been to interpret this year, the Daily System has behaved like a champ. It has been long since Oct 11. It was not faked out by either the November or December or March pullbacks. It is still expecting a higher high above the April high before a sell signal is issued.

Thursday, April 26, 2012

Apr 26

edit 2:10 - So much for the ending diagonal theory


Okay, here are some thoughts that are going to sound like waffling. And to be honest, it really is waffling. Because things are not making sense and it is bugging me. I am getting several conflicting signals and I am trying to find the best story that leads to the least conflicts.

1 - no true divergence at the low). Now, there is no *requirement* for a divergence low after a 60-min Downcycle signal. But there is a *very* strong tendency for there to be one (90%). What we got instead was a double-bottom move. And like I observed yesterday, the Nov 2010 pullback was essentially a double-bottom move. So there is a recent precedent for this. But as ZimZeb pointed out there are some distinct differences that are making me doubt the comparison. (i.e. that we actually have a finished correction)

2 - a potential trend system setup). The reason why I thought the correction was over was the sub-cycle cover/buy signal that got issued with the gap up. As I have explained before, there can be many sub-cycles within a cycle (on average there are two). But the strength of the move up makes it seem like this sub-cycle bottom would lead to an Up Cycle confirmation. I said yesterday that if the price stayed above 138.50 until Friday that we would get one. But I am thinking how sneaky this market is being

We had a failed down cycle in March. And that manifested as a down cycle signal right at the peak of the pullback in March (which was a downsloping ending diagonal). We have nearly the opposite at work here right now. We have a Up cycle signal that will be issued in about a day and the price action looks like an ending diagonal after a large gap up.

So could we have an upside breakout fakeout at play? I certainly think it is possible.

But is it likely?

To answer that I revisited my micro-count, and here is what I see:

We have a move that counts like a large regular flat, and a move up since Monday that counts like an impulse with an ending diagonal right into resistance.

Two options come out of this:

1: This is the end of the up move and we have a lower low ahead.

2: The correction is over, and this is a wave 1 or A up and we have a Wave 2 or B down next

Either way the count seems to be saying that the next move is down. And it is happening at a time where it would be poised to negate a potential Up Cycle confirmation on my trend system.

This being the case, I am not inclined to give the benefit of the doubt to the bulls right here and am going to be looking for a pullback to really develop into something. So right now I will be looking for evidence that this ending diagonal terminates, and likely looking to go short again.

Wednesday, April 25, 2012

Apr 25

Goodbye correction, we hardly knew ya ... ya ... yadda .... yadda, yadda, yadda ....

With today's gap up things point strongly to the correction being done. A troubling sign yesterday was that the market moved back up into the previous bear flag territory (too aggressive for a retest) and refused to break down. Very tough and hard to interpret because it just parked itself for the rest of the afternoon lending to a move up or down.

Like I was saying Monday: "My 60-min Trend System is also expecting a lower low (see: Apr 7 - Daily and 60-min Cycles, Looking for an Edge). But the bear flag has already set the stage for a very large divergence with the next low. So I am expecting a pullback to look something like this: Apr 19".

Unfortunately only half of the prediction came to pass. We had massive divergence on Monday, but no lower low. Instead we got a quasi-double bottom. So that means that instead of getting a true divergence bottom, we got this double bottom that is very reminiscent of Nov 2010.

And if the market stays above 138.50 until Friday, then we will likely get a new 60-min Long Cycle Confirmation, which will just confirm that the down-cycle really is done (the signal that was sent out today: https://twitter.com/#!/binve01/status/195143049330950146 was a sub-cycle cover/buy signal). And from a time perspective, this 60-min down cycle will be pretty close to average. So I just have to respect the fact that the lower low does not look likely and that a double-bottom was all we were going to be offered. Oh well.

Bull's are ready to charge again. So heed the tape and move on.

Monday, April 23, 2012

Apr 23

Current micro-count, which I seldom show or count anymore. But many are counting this as part of a larger impulse down (and thus setting up a series of 1-2, 1-2's). I don't think that is a correct call, even though I do agree that we have another low coming.

My 60-min Trend System is also expecting a lower low (see: Apr 7 - Daily and 60-min Cycles, Looking for an Edge). But the bear flag has already set the stage for a very large divergence with the next low. So I am expecting a pullback to look something like this: Apr 19

Thursday, April 19, 2012

Apr 19

Current best guess as to what's happening:

Friday, April 13, 2012

Apr 13

We have a more significant weekly close in play now (largest weekly loss for the year). Per my Trend System, we still have a 60-min Down Cycle and Sub-Cycle sell signal (see: Apr 7 - Daily and 60-min Cycles, Looking for an Edge). The low on Tuesday was a spike bottom on my 60-min system (no divergence) and like I stated in the study from Apr 7 above 90% (61 out of 68) sub-cycle bottoms after a down cycle signal occur on divergence. This means that my system is telling me that the odds are very favorable/compelling to wait for another price low before the next sub-cycle bottom signal gets issued.

With the close this week, it looks like we are going to get one in the next week or so.

Looking ahead, there are two spots that look compelling from a pullback and support standpoint.

Both of these zones would make for a very nice looking Cup and Handle on the Daily chart.

And like I said before (Apr 7 - Daily and 60-min Cycles, Looking for an Edge) even though I am still looking for lower low on my 60-min system, my Daily System has not issued a sell-signal. And even more, my main indicator on my Daily System increased alongside price all the way up to early April peak. And as I said in the study, 90% of all Daily Cycles with the same characteristics (18 of 20) made higher price peaks after my main indicator rolls over (i.e. 90% chance that I will see a divergence before I get a Daily System sell signal).

For this reason (among many others) I am not looking for a 'major' top here. Rather I think this is a tradeable pullback from a swing trading perspective which will lead to a very buy-able dip from a longer term position trading perspective.

Wednesday, April 11, 2012

Long Term Projection, Macro, and an Analysis Retrospective

Since late 2010 I have put together a lot of work that I have shared with the community that I think has been of high quality. It has remained objective and has run counter to mainstream macro, fundamental and technical analysis at the correct times (I was calling a significant top and going short in May 2011 when most of the participants in these communities were looking for moves higher and I was calling a significant bottom and going long in Oct 2011 when most of the participants in these communities were looking for moves lower, and I was calling for new recovery highs in early 2012 when most of communities were looking for lower highs). My analysis has been very timely and actionable, and in January 2011 I started posting the signals from my Trend Systems publicly.

I wanted to review/update my long term projection as I tend to do every few months. But more that that, I wanted to take the opportunity to discuss my previous studies that were very in-depth and has been calling (at lest thus far) the larger trends correctly from fundamental, macro and technical standpoints.

Macroeconomic Developments

My Macro Page has a number of good notable posts that are worth reading. But I would like to highlight three posts in particular related to market developments:

In July 2011 I wrote this post dispelling the myths that Quantitative Easing was 'money printing' and showing what some of the drivers of the rally really were. And it was an extremely timely post warning about a market panic in the near term based on decreasing margin being used, but being very clear at the end of the post that the market was not on the verge of a 'collapse' and that the cyclical bull was not over.

In August 2011, in the middle of the panic, I wrote this post which discussed the reasons why the wave developing down was not the precursor to a bear market with an associated recession. The deficit spending position of the US Government was (and still is) at a high enough level to support aggregate demand and well as allowing the private sector to pay down its debts (it is making progress but the private domestic sector as a whole is still in a balance sheet recession). I was stating that calls for a recession were misguided (keeping in mind this is when the ECRI recession call was gaining substantial popularity).

In January 2012 I wrote this post which discussed both near term and longer term macro realities and risks. I thought that the calls for a recession in the near term were still incorrect and those looking for a 'major top' based on near-term recessionary risks were misguided in January (and still misguided today). However, things are not 'fine' with the US economy and I believe that we are still in a secular bear market because of the associated economic and demographic issues at work (and I think most macro commentary on these matters is incorrect). I simply believe that this secular bear is progressing more slowly (but still in-family with previous secular bear timelines) than most analysts think.

Fundamentals and the Current Cyclical Bull Market

I have been maintaining since Nov 2010 that we are still in a cyclical bull market. And even further, that we are still in the middle of this cyclical bull. And that attempts by those to keep calling 'the' top of it would be met with money-wasting frustration.

I have written many posts regarding the fundamental drivers behind this rally (Corporate profit margins, corporate earnings, etc.) and that none of these items are close to suggesting we are at the end of this cyclical bull:

-- Corporate Profit Margins, the Stock Market and Recessions, Mar 2012
-- Long Term Technicals and Macro, Jan 2012
-- Yet another reason why I don't think we saw 'the' top (3), Nov 2011
-- Yet another reason why I don't think we saw 'the' top, Sept 2011
-- Yet another reason why I don't think this cyclical bull is over, Aug 2011

These are all good reads and I highly suggest taking a look

In-Depth (and Unorthodox) Technical Studies

My 'Moving Average Price-Stretching' study came about by looking at the structure of this secular bear market (since 2000) and thinking about its characteristics and what other periods it was similar to. The original post (Jan 2011: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching') describes the genesis for this study. I provided an update in Nov 2011: Moving Average 'Price Stretching' Update. I will also include an update here, so far it is still right on track:

The next study that I would like to highlight was my BPSPX study (BPSPX = Bullish Percentage of SPX stocks, a market-based pseudo-sentiment technical indicator). Contrary to the analyst community which largely saw the spike in the BPSPX (to an all-time high) in May 2011 as well as a huge spike in bullish sentiment on a number of surveys as signs of 'the top', my studies have shown that bullish sentiment extremes tend to happen in the *middle* of moves, not at the end of them. There is bullish sentiment spikes at the end too, but they are less pronounced then the move in the middle. The original study is from Feb 2011: The BPSPX and the Secular Bear Count and I did an update in Nov 2011: BPSPX Update. Here is the updated chart:

Next up is my VIX/CPCE chart. My original study from Nov 2011: Yet another reason why I don't think we saw 'the' top (3) made the observation that there was no VIX divergence at the May 2011 peak. And this was another reason (among so many others listed above) that the May peak did not market a 'major top'. That call has since been confirmed with the new recovery highs. Here is an update to the study:

Notable major real-time calls that ran counter to what the larger technical/EW analyst community was saying

There were three calls in particular that I believe has distinguished my track record as a technical analyst because they were timely, actionable and ran counter to what the larger community was saying (rather loudly). This combined with other characteristics (On Mea Culpas, Admitting to Being Wrong, Objectivity, and Changing Stances in the Face of New Evidence) should reinforce the strength of my objectivity in readers minds.

1) The 'Top' Call of May 2011. - I think this particular call distinguishes me in two ways: i) That I was making a call for a significant correction where the rest of the community was looking for a higher high, and ii) the fact that I specifically was not calling *the* top, that this was a 'top' / mid-range correction in a cyclical bull market that was not complete. I made two posts in near real time (within a couple of days of the top) calling this top: (May 2 and May 5 (and a Long Term View Update)). And I performed an in-depth review of this call (both my actions and the actions of the larger EW community) here: Regarding Tops and Sloppy / Misleading EW Practices

2) The bottom Call of Oct 2011 - Another contrarian call where many analysts were still warning of lower lows being imminent. I made a real time call on Oct 5 and I performed an in-depth confirmation a few days later: Revisiting the Large Count.

3) The Call for new Recovery Highs - After the Oct low was established, the EW community was counting the move as a wave 1 impulse down and was contending that were in a wave 2 retrace back up. I had vehemently rejected that count since August 10 showing why it was completely incorrect to count the move as an impulse down. And after the 'five-wave structure' had developed after the Oct low was established, I was the minority voice (if not the lone voice) discussing why that impulse count was still invalid (chart from November, note the observation at the top regarding the Nasdaq). But while many were expecting the move to stop going up because they were mistakenly calling it a Wave 2 (because of the mistaken/biased call that the preceding move down was a Wave 1 impulse), I was looking for new recovery highs: EW Shenanigans.

Long Term Projection History and the Current Projection

I have a long track record of being consistent with my projection. It has obviously adjusted based on how events actually unfolded (absolutely *nobody* can predict the future), but this long term projection which serves as my preferred count has been quite good in general directionality and intermediate timing.

-- Nov 2010: Abandoned the Primary 2 count and adapted my leading alternate count which was a Cycle X count - The Large Count

-- Jan 2011: Rethought the size of Cycle X with some historical analysis and comparisons. I lay out my thoughts for March 2009 - June 2011 (projection at the time) being only Primary W of Cycle X - The Large Count with Historical Perspective

-- Jan 2011: Macro thoughts that accompany my projection - Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?

-- Feb 2011: Long term context - Secular Bear Market Projection in Historical Context

-- Mar 2011: An in depth study and a comprehensive list of references and analysis of previous work. I highly recommend reading this post and following the references - First Derivative of the S&P 500, Long Term Study

-- May 2011: Count of the large structure (the top of this wave) being completed in real time - May 5 (and a Long Term View Update)

-- Aug 2011: Macro thoughts in the middle of the August crash putting this wave in context (specifically refuting that this was the start of 'P3') - Update on Long Term Projection

-- Oct 2011: Real time count that pointed to the October low as being a significant low based on how the waves and indicators unfolded - Revisiting the Large Count

-- Jan 2012: Confirmation of the October low being a significant bottom - Update on Long Term Projection

Primary Wave Projection

Secular Bear Market Projection / Long Term Count

4-year Cycle Chart

This chart comes from this study (A Look at 4-year Cycles) and fits pretty nicely with my long term projection.

Tuesday, April 10, 2012

Apr 10

Current EW count for anybody that cares.

First up is a 2-year chart. As I have said on many occasions, tops are processes and bottoms are events. The PPO(14,13,10) in the upper pane is good at finding bottoms, which was another reason why I called the October low in near real-time (see Revisiting the Large Count). But this indicator is too fast to capture the rolling-over 'process' that is associated with tops, and the PPO(34,89,21) in the lower pane is much better suited to that task.

Drilling down to a 1-year chart to see the Minute degree waves at work.

Count since the October low where the waves down to the ~Subminuette/Micro degrees are identified.

Now, I am sure I will get comments about my counts. That these W-X-Y's don't follow the EW orthodoxy (to which I say the orthodoxy is completely incorrect: http://marketthoughtsandanalysis.blogspot.com/2011/08/regarding-tops-and-sloppy-misleading-ew.html#comment-276329829). Or that all these W-X-Y's are 'unhelpful' and complicating what could be counted as simpler wave forms.

I disagree on both counts. The fact is that the structure of this wave at nearly all degrees of trend has been distinctly three-ish ever since the March 2009 low. And for anyone who is looking at the waves objectively, we can see threes even in the move since the October 2011 low. You really don't get impulsive waves until you drill down to the micro/submicro degree. It is all right there, plain as day:

The fact that I don't suffer from the affliction where I try to shove every sharp wave into an 'impulse box' means that I am seeing the waveforms more objectively than the greater EW community. It is precisely this view that allowed me to call the top last May when the rest of the EW community was looking for another wave up to finish the 'impulse': Regarding Tops and Sloppy / Misleading EW Practices.

But even despite these observations, I am sure I will get more comments telling me that I am wrong / don't know what I am doing than those that actually agree. And you know what, I am fine with that. In fact, I am better than fine, I am ecstatic. I love being the minority opinion. I love suggesting things and making observations that the crowd is missing. So I am extremely comfortable and happy in my 'wrongness'.

Saturday, April 7, 2012

Apr 7 - Daily and 60-min Cycles, Looking for an Edge

If you recall this setup last month (Mar 6 - Daily and 60-min Cycles, Looking for an Edge) failed. We did not get a divergence bottom on the 60-min pullback before the next 60-min cycle, nor did the Daily Cycle main indicator peak. This bull move since December continued up with no meaningful correction.

The reason I am bringing this up again is because the same setup is just about to occur again. My 60-min system is one candle away from issuing both a sub-cycle and cycle top signal. Assuming that Monday opens the way the Friday futures suggested, then we will have those signals confirmed.

I want to give the (updated) stats associated with this setup because they are compelling. BUT as the failed setup of last month showed, even a compelling statistic is just a statistic, it is not a prognostication. There are always exceptions / failures which is why no stat is 100%. But with the extreme overbought / divergence conditions at play here, I really doubt that this setup will fail twice in a row.

I have explained previously that the trading signals that I post are sub-cycle top and bottom signals. However, I also occasionally relay what is happening with my cycle signals. I don't trade them, but there is a wealth of statistical information that I get out of running studies, several of which have paid off tremendously over the last 6 months.

Today will be another similar study.

Because the Monday open will likely result in both a combined sub-cycle top (tradeable) and cycle top signal on my 60-min system. Now, does that mean that I think we will have a 'major top' here? Nope. I think for a number of reasons that is not the case, not the least of which the statistics from my trend system say to not expect such an outcome.

Recall several weeks ago this post, Why I am not looking for 'the top' with the next pullback, whenever it happens. Here is the summary position from the post (but you should really read it):

The Daily Trend System long signal is still on a buy. The last four weeks the 60-min System was also on the upcycle half of the new cycle (see this post from March 16). However, because the main indicator on my Daily System was still increasing right alongside price since October, what were the odds that this peak will be a 'major top'? And my study results showed that there was a 90% chance (18 out of 20 Daily Cycles) that this price peak would not be the top of this Daily Cycle (i.e. 90% of the time the price goes higher after my main Daily Indicator peaks, which it has not yet done).

So the point of this post is two-fold:
1) Reiterate that point. Statistically speaking, there is little evidence that the price peak that we just saw is a 'major top', and instead the next pullback will be a dip you want to buy
2) Show some relevant stats regarding the 60-minute cycles to help navigate this pullback.

The 60-min cycle signal will occur Monday morning with a gap down (assuming we get one) which will likely put us in some sort of decent correction. The indicator that I have developed to track pullbacks on the 60-min system has not bottomed yet. And in fact, 61 out of 68 60-min cycles (90%) did not bottom at the peak of my 60-min indicator. This means that statistically speaking there is a 90% chance of lower lows before the real dip-buying opportunity presents itself (i.e. that the first large spike down is almost never the bottom of the correction after a 60-min cycle top signal is issued, the early March pullback being a rare exception).

So, in summary:
-- 60-min System says there is a 90% chance of lower lows before the bottom is seen in the downcycle half of the next 60-min cycle assuming Monday opens as expected (and the *average* downcycle half duration is ~20 days)
-- The Daily System says there is a 90% chance that the price peak that we saw was not a 'major' top and that we should expect higher highs before the current Daily cycle is over (i.e. that the bottom of current 60-min cycle is a dip that you want to buy from a Daily Trading Standpoint).

The reason I think this post is useful is that the Daily Cycles (which average 445 days in duration) represents a nice intermediate balance between the timeframes that position traders and investors look at.

Again these are statistics, not prognostications .... past performance is no indication of future results ... yadda, yadda, yadda. Read the binve standard disclaimer... yadda, yadda, yadda...

So in short, I think the next pullback (which we are now in the middle of) is not a 'short it and forget it' type event. I think it will be a dip that will be worth buying.

Thursday, April 5, 2012

April 5

3+ weeks of nowhere