Sunday, November 6, 2016

Short term trading within IT and LT perspective

During the last three months, if you read this blog, you would know that we had a bearish intermediate term perspective for US equities. From internals to price patterns, everything we looked suggested lower prices for stocks.

The following SPX chart was posted for our members on October 26 , it simply showed our projection for SPX:


This is how it looked at the close of Friday Nov 4 2016:

 As a general xTrends rule, the first test of a projected channel support almost always produces a significant bounce , especially if the subject is a benchmark index.

So we closed our shorts a while ago and were heavily long index futures going into Monday with an expectation for a large gap up 

Our decision was not purely on this price pattern, but based on sentiment, seasonality and certain signals derived from volatility related instruments. This bounce may last for weeks but it is going to be nothing like those we saw during the quantitative easing period. It is going to be corrective, choppy and hard to trade. I will explain why

Purpose of this post is put the current action into the perspective that we have been outlining here for sometime now. As you know we think the bull market ended in late 2014 and we have been in a range bound market since then. We see this range action as a topping process that will be leading to the next bear market. We think the topping process is also ending and we are very close to the beginning of the first leg of the impending bear market.

Today , I will show you a few long term cyclical charts derived from important economical data. Unlike our previous updates which were mostly technical and analytical research on price, internals and sentiment, these charts are purely based on fundamental data:

Difference between "Continued Unemployment Claims" and "Initial Unemployment Claims" already signaled a turn

 Ratio of "Personal Consumption Expenditures" to "Core CPI (Consumer Price Index)" also signaled a turn 

Industrial Production Index made a clear turn too

 Inverse Unemployment Rate is about to make a negative crossover too.

  As you can see, some of the economic data also show signs similar to those we obtained from the analysis of price and internals.

So I would like to reiterate that, despite the FED and zero rates, it is likely that we are entering in a bear market and the market went down for 3 months not because of uncertainties related to the election but because of the fact that underlying conditions were mildly bearish especially for a market that partially made all time highs on the back of very small group of stocks. We could see this reality from the ratio of SPX Equally Weighted Index to SPX which we had shown a while ago.

So I for one wouldn't  hold my breath for new all time highs this time and the evidence suggests that whatever rally we get here will likely be corrective and terminate at a pivot lower than 2016 high. We will not be holding the long positions for a long time, we will likely sell at the first weekly resistance SPX tests.

Thursday, October 27, 2016

Another pivotal ratio chart

I like ratio charts because sometimes they help you to identify important inflection points that you can not see on individual price charts.

About 3 weeks ago, I posted an article on several ratio charts and suggested that small caps should start showing relative weakness and such weakness usually coincides with an overall market sell off.

Divergences and Intermarket Relations are giving the same message

Those charts look like this now:

 Since the article, the market dropped a lot but more importantly small caps dropped significantly. Also the negative divergence between SP500 and SP500 Equal Weight Index got worse.

Today I want to show another ratio chart that works just like RUT/SPX and RUT/DJI ratios. One of the largest sectors weighted in SP500 is banks. When BKX (Bank index) reverses down, it drags the entire market down more or less.

SPX vs BKX/SPX ratio

Monday, October 24, 2016

My read on long term sentiment

We have some interesting AAII numbers. Before you get all bulled up on these numbers, remember that in bear markets, there is a consistent lack of bulls and bearish sentiment is persistent.

50 week SMA of AAII Bulls

50 week SMA of AAII Bulls/Bears ratio 

While bearishness in AAII numbers seems to be elevated, it is nowhere near as extreme as the drop in AAII Bulls. This means there are few bulls (buyers) left but also not many bears (shorts) exist.

In fact when we look into Rydex numbers, we can see that there is an extreme case of lack of bears.

5 SMA of inverse Rydex Cumulative Cash Flow Bear and MM funds

We can also see a similar behavior from insiders. Since late 2014, they are not buying

And 40 week SMA of Wall Street Bulls/Bears is about to drop to the level where large corrections / bear  markets began

40 week SMA of Wall Street Bulls/Bears

So my conclusion is: Bullish sentiment numbers dropped significantly over the last year but there is no proportionally extreme bearishness. When we look into Rydex money flows and allocations, we see a contradicting picture, an extreme case of lack of bearishness in actual investments. Are people not bullish but staying excessively long? This is a recipe for a sudden awakening move.

Unlike many blog and article publishers who post a bearish piece then states they are long stocks, I like to finish by saying that my current read on the market is decisively bearish and I am short index futures.

Tuesday, October 4, 2016

Divergences and Intermarket Relations are giving the same message

These charts are self-explanatory and most of the educated investors know what they mean. I will briefly explain;

In bull markets or healthy up trends, certain leaderships and intermarket relations must be maintained because they are a symptom of economic expansion and positive money flow. When the bull market leadership no longer leads and the intermarket relations between certain asset classes are broken, negative divergences show up. These divergences are a direct product of price therefore trend line analysis works on them as good as any other price based technical analysis does.

The first chart below compares SPX to RUT/SPX ratio and RUT/DJI ratio. As you can see there has been a large negative divergence between Russell 2000 small cap index (RUT) and SP500 (SPX). It also shows a similar divergence between RUT and DJI (Dow Jones Industrial). Furthermore both ratio charts are now backtesting long term trendline which suggest a downside reversal for the ratios is imminent. When RUT/SPX ratio or RUT/DJI ratio goes down, the whole market usually goes down. 

The second chart below compares SPX to SPXEW/SPX ratio  (SPXEW=SP500 equal weight index) as well as to SPX/TLT ratio. As the name implies, SP500 Equal Weighted Index  is an equal weight version of the popular S&P 500 Index and  includes the same constituents as the capitalization weighted S&P 500, but each company in the SPXEW is allocated a fixed weight. Therefore its performance is a measure of broad market participation. When SPXEW negatively diverges from SPX, it indicates that SPXEW underperformed SPX and the extra strength in SPX was created by a few over-weighted components while  the rest of the stocks didnt perform as good as the few large components.

Bottom portion of the chart shows the ratio of SPX/TLT.  TLT is an ETF tracking 20+ year T-Bonds. In a bull market or healthy uptrend, SPX outperforms TLT because money prefers stocks (risk) over bonds (safety).

On the chart below, we can see that both SPXEW/SPX and SPX/TLT ratios formed massive negative divergences. Also note that SPX/TLT ratio is sitting near its long term uptrend line despite SPX rallied more than 300 points since its Feb low. If this ratio breaks below the trend line, it will create a sharp move down in the ratio which will mean SPX will sharply drop while TLT rallies.

These charts support the other long term setups and signals we showed you before. They all imply that the bull market is about to end. But the big question is, what FED and other CBs will do when the bear market become apparent to masses. More importantly, will the next administration let FED to target and manipulate the stock market at the expense of our future.

Monday, September 26, 2016

Welcome to the beginning of the end

We have been talking about several long term setups and high probability signals that can possibly lead to a bear market. Entire Europe as well as several US sectors have been in their individual bear markets for more than a year now but we cant see it on major indices because they are engineered to reflect the performance  of a few selective companies. If you want to see the real picture, you should look at this:

I am not going to talk about old setups and signals I showed you in the recent weeks and months, but I want to show you this long term signal that no body knows about. The signal usually shows up before an important market decline or bear market. The indicator is a correlation between Russell 3000 Growth index and Russell 3000 Value index.

As explained on the chart, when the correlation between growth and value drops significantly, it is a strong indication that growth stocks negatively decoupled from value stocks. In other words, there was a period of time money rotation from growth (risk) to value (safety) was intensified.

Trends don't turn on a dime. Whatever was the reason for this long term rotation, will be there tomorrow. That makes the trend.

Another long term signal that usually shows up before a market plunge is seen on this MOVE index. The MOVE index is the bond market’s equivalent of the VIX. 

I am not going to get into deep explanations but as you can see from the chart below , such values near 50 preceded the 91 recession, the Nasdaq Bubble and the credit crisis.

MOVE Index

We shorted this market several times this year and did great overall, we have shorted recently and doing ok so far. We like to trade it on the short side in certain periods because this is a transition period from bull to bear market and next big surprises will come on the downside.

For example, when SPX tested the neckline after the FED, it was a great opportunity to short it because the transitional condition I pointed out above was as alive as it was before the FED


And leaning towards bearish possibilities during down cycles usually pays off very well. For example last Friday near the close, I saw this possibility based on the chart patterns and sent an update to our members:

As we approach the session end, I started watching this Dow chart which I was posting before FED. The index will breakdown eventually but if the index closes the session near the trend line today (some 100 points away from where it is now), there is a possibility that we may see a nasty bloodbath during the overnight/premarket trading on Sunday.

Dow  120m 

and that is exactly what happened

There is no long term directional trend anymore but a new one is well underway. We are still in a  transition period but we might have seen the high for this bull market already. Shorting the bounces despite FED and other CB actions started paying off quicker than ever because their actions or actionlessness don't help this saturated market anymore.

Friday, September 16, 2016

Incubation, birth and development

In late summer of 2014, weeks before the Ebola plunge, something strange happened. Smart money was rapidly turning bearish, insider buying stopped and  internal weakness elevated.

Ratio of OEX PC to Equity PC is an excellent tool to measure the spread between smart money (OEX PC) and dumb money (Equity PC). This ratio skyrocketed at the time:

At the same time , insider buying stopped suddenly.

 For years, I have been using Catalyst Insider Buying Fund (INSAX) to observe insider buying activity. Once I started tweeting the ratio of INSAX/SPX in 2015, it became popular among traders and analysts. The ratio never recovered since the summer of 2014. Insiders showed reluctance to buy based on the fact that earnings were going to nosedive in coming months and years. This was the time incubation period for what seems to be a possible bear market began.

From this point, it took nearly 1 year for the market to form a long term top. In Aug 2015, the bull market was officially ended on the charts as the main trend which was holding the bull market was broken. As I showed in my earlier posts, it was not only on NYSE chart but many other US and world indices had the similar breakdown.

NYSE weekly

As you can see on the chart above, post-brexit rally was nothing but a test of the breakdown level coming from Aug 2015. And the most recent plunge that started last week was the confirmation that the test failed and we will eventually make new lows below NYSE 9000 level.

One way to project the next low is to interpolate the past intermediate term lows. In 2007 and 2008, it worked fine.

NYSE weekly, 2007-2008 top

 NYSE weekly now

So, together with the other data and long term chart setups I have, I want to repeat that;
Aside from short term corrective rallies that are necessary to reset the sentiment from time to time, I think we are in an intermediate term downtrend that will last months and extend beyond your wildest imagination.

Tuesday, September 13, 2016

Doing the most obvious in the most unobvious way

When they ramp the market to test the freshly broken channels yesterday, it would be a shame not to short the close despite how strong it looked at the closing bell. We opened new shorts there but this is going to be a roller coaster ride , not a straight plunge.

Excerpt from yesterdays comments:


As I tweeted late in the session, Russell 2K gave us a perfect chart setup to short

RUT hourly
RUT hourly

The setup is also obvious on SP500 charts

SPY hourly

SPX hourly

We are in the very beginning of a large decline that may last for months. This could be the biggest sell off since March 2009 because we had a perfect long term setup for a bear market , the setup was there, ripening  for nearly 2 years, and now the conditions are suitable.

But it will also be very challenging to play on the short side because of the large irregular and deceptive corrections like yesterday's. Because of the increasing public awareness , the system can get clogged quickly until irregular and bizarre rallies reset the system.

Look at this;

UVXY volume vs SPX

Each time UVXY prints an up day on huge volume, SPX bounces next day. This is because when these inverse leveraged ETFs are in high demand , it is an indication of extreme bearishness which naturally clogs the system and causes a counter-trend move.

Tuesday, August 30, 2016

'Ooh F' pattern

There is this pattern on Russell 2K weekly that beautifully fits in the big picture. I call it "Ohh F' pattern which completes at the point 'F'

We saw it in 2007 before the great recession but it was relatively small in size. Now, considering the CB interventions, understandably it got bigger, and its product will probably be big too if it works.

But the strange thing is, if the current pattern mimics the one from 2007 time-wise, we should see the final high right before the elections in early October or September. In other words we may have one more month of this sleazy choppiness before the fun begins but I doubt if the big money risks it that long

Russell 2K weekly

Wednesday, August 3, 2016

Long Term Megaphone

It's been a while since my last update. With Brexit and other CB related BS behind us, let me give you our perspective as to where we are now.

We have been in an intermediate term uptrend since Feb 2016 low, this uptrend was briefly interrupted by Brexit event which we used to cover all our short positions that we had opened at much higher prices. Our exit was ES 1983 which turned out to be the absolute bottom.

 Since then we have been trading short term moves but we think this whole intermediate term move is coming to an end.
 Since early 2014, major US indices have been forming long term tops. Their long term momentum already turned , price will follow like night follows day.  There are many sectors and sub-sectors that are already in bear market. It is only a few large cap names camouflaging the underlying broad weakness.

Dow Jones Ind. Monthly backtesting the megaphone top

Transportation Index Monthly broke inside the long term channel

 Transportation Index weekly

Investment Banks, Brokers and Dealers weekly, backtesting the broken bull market channel

Russell 2K small cap Index weekly backtesting the broken bull market channel

 Financials weekly backtesting the midline, headed to the channel support

 JPM weekly

Value Line Geo monthly sowing the real picture

 Value Line Geo weekly

And many European and Asian markets are already in bear market

Germany weekly 

China ETF

Europe 600 weekly

France weekly 

It is still early to call for a large intermediate term sell off but we are in a swing down move that may last for a few days. After this short term move, we may see marginal new highs on SPX but that's the best case scenario. The next intermediate term sell off will be worse than anything you have seen since March 2009 because weekly and monthly charts suggest that the next down cycle will be enormous and very powerful especially for those markets and indices  that are broken (C wave).