Saturday, November 20, 2010


As we ended the week for another intraday rally to save a down close, this is how things look overall. First we have the big picture 3 point divergence labeled above. In general this picks much larger moves than what we have gotten so far, but there have been occurrences when this is all we have gotten. It certainly should not be a shock to anyone if we just rocket back up again here. There is a strong tendency for a rally going into Thanksgiving in both bonds and stocks. Unfortunately, both of those trades indicated being long at the beginning of the week, so if taken would both have been stopped out for losses, before the rebound here. This is the scenario #2 I discussed the other day, one big day blowing out of the low point.

We are now at a critical spot for this to turn back to the down side if it is going to. If by Tuesdays close we have not rolled back over, I think we will take off again upward. I have indicated on the far right part of the screen, where the momentum oscillator is still under it's trend line, but it is curling up sharply here and in a couple of day might be back above it. Ironically if it gets there and then makes a lower peak than point #3 and turns back down, we would have a very powerful sell signal. At this point we have no idea whether or not that will happen, it is just thinking out loud about possibilities.

We have by price action intraday the most powerful rally I have ever seen in my 20+ years of trading. You can find other spots on charts where the market has gone up more, late 90's certainly to name one. However, there has never been anything that I have seen with so very few even intraday corrections. The government has such a tight handle on this that they get futures buy programs going so quickly even on the slightest declines, it really makes even trading on the short side on a 5 minute chart almost impossible. In the late 90's this was not the case, there were plenty of pullbacks to play for day traders. We are in uncharted waters. I would not be surprised to see a push to outlaw shorting, Buffett has been running his mouth a little about that. What a jerk he is. The more he talks the more sick to my stomach I get. He is brilliant, but one of the great hypocrites of all time.

I still maintain that the longer this artificial manipulation of prices goes on, the more likely another terrible wipe out is to happen. Timing that wipe out is likely to be impossible because it is going to come out of the blue. Looking at a few other things to confirm or not confirm what the SP 500 above is telling us makes things a bit more clear to me.

Generally speaking Gold the chart above is the same trade as stocks, and as you can see it looks about the same. The oscillator is a little weaker here than in the SP 500 so I would argue that this is a tad weaker overall. This market does appear from a short term basis to be a sell the rally here. However, if the blue line rallies enough to get back above the trend line, long is the side to be on. Silver is much stronger, so longs should be done there not in Gold in the metals. This is the weakest of the metals markets at the moment.

The next chart is Crude Oil which again is similar to stocks in general they trade very closely in sync nowadays. Look at how comparatively weak this has become.

I would say between Gold and Crude we have a nod to the short side in general. The next chart is that of the Dollar Index, this muddies things up considerably.

You can see this is clearly a buy the dip, and the dollar stock relationship is an almost inverse tick by tick situation at this point. So if I look at that I have to feel that it forces me to lean to the short side also. However as with stocks, the momentum in the last couple of days is going toward the trend line. If it just keeps going that would negate a buy setup. This among many other reasons, is why I always want price to trade back in my direction to get into a trade. If I were just to blindly buy a dip here at the market, who is to say it won't just go straight down? I want at least a burst of short term movement in my desired direction to pull me into trades.

The last chart to look at is the VIX. We have broken back down in this index, and other than a possible 4 point divergence that could develop on new lows, there are no buy signals here ( sell for stocks ) that I can see. This would support the long side of stocks case. The next couple days are again going to be the key in this index also. I have drawn in a textbook megaphone pattern here. I have talked about this before in here, if you study charts you will often see this megaphone pattern at major high and low points in the past. It is not a very accurate pattern percentage wise, I would say less than half of them work. However, the ones that do are dynamite. I have inserted a chart of the NAZ in 2000 to show one example of one of these that worked pretty well. When they appear at market extremes they are better, and this is certainly that.

This has very good symmetry and it is at a multi-month low. The trades with this pattern are generally much better in a situation like this than just in the middle of other price action. The last chart is the Nazdaq at the all time high. Notice the nice 5 point megaphone pattern that formed, pretty much the inverse of what we have here.

Here you clearly had a trap pattern where new highs were made, then price quickly reversed. It is not always that easy unfortunately. However, I am just pointing these things out for your own decision making. It seems no two tops or two bottoms are ever exactly the same. For all I know I am forcing this here because I am leaning to the short side.

In summary, here is what my take on all of this is collectively.

First, and foremost, we have the government completely controlling the markets, which can trump almost any technical development unless heavy volume comes in. As a result, any shorting needs to be on smaller size risk wise until a new downtrend is clearly defined. They want prices to rise not fall, so the house is on the side of the longs. I am a bit surprised they allowed this recent decline to happen.

Second, we do still have a strong trend, and not much technical damage has been done yet. If we just move up out of here in the next two days everything is fine and look for new highs going into the end of the year.

Third, we do have a few things now from the dollar index, to weakening Gold and Crude Oil markets, that might be telling us to be a little careful here.

Fourth, the dollar index is potentially reversing it's downtrend, which would be very bearish for stocks if that were to happen.

The Vix is potentially giving us a major buy signal, but it has not yet setup correctly, and may not if we just keep falling there.

All in all I would say to watch the markets the next 2 days, if we stay stable then break out upward, we are off and running. If this is going to reverse down it will happen in the next couple of days. Many of these potential flies in the ointment would be negated with a few strong up days at the beginning of next week.

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