Going Nowhere



If you look at the bigger picture here in the S&P 500, we are essentially just trading sideways in a trading range. You can see the commercials have shifted to the short side of the market on a relative basis. However, if you look at the green line drawn across horizontally, they are still at a high level compared to where they have been over the last several years. Short term, they are at lower levels compared to 6 months ago.



I have researched the number of times that the WillVal indicator with these parameters has gone into an oversold condition as it was recently, with the market moving sideways in an uptrend, and there is not one single instance of a large decline that followed.



I also researched how often the market declined when the commercials were in this type of position in December, and there were no instances of a decline in the last week of the year when this happened. What this means is simply that the seasonal year end bias has been stronger than many of the other fundamentals at this time of the year.



As a result, I am holding my longs into the first week of January, where I will lighten up or completely exit. I do think we will have a January short term top, possibly the first week. I am looking for a March re-entry, for a big rally up from there. Oh wait, I read on another blog the other day that we all should "be very scared." I love that type of thing because that is just another person for us to take money from, the more the merrier especially during the holiday season!

COME TO PAPPA

The year end rally is solidly underway and I would like to point out something here. Notice how the market is pretty short term overbought here. Even the bottom indicator, which is inverse to the others, with low readings being sell signals, is pegged at the sell point.

One of the most painful things to learn about trading is that overbought can get more overbought, with the reverse being true for oversold conditions. I have found that once an indicator gets into these zones, if the reversal does not occur immediately, the move generally continues. As a result, prolonged readings of overbought and oversold need to be ignored.

Eventually a correction will occur once this condition is established, but I have never found anything that is a stalwart indicator to tell me when this will happen. If I ever do I can promise that I will keep it to myself! For now just ride your longs for the year end markup.

MAKE UP YOUR MIND





Cnbc reported as we were approaching $100 per barrel in Oil, that the fundamentals were strong and therefore we should continue upward. Some guests called for $150!

Now this morning they are reporting that the fundamentals are weak therefore prices should continue lower. PLEASE ignore these morons! They have some very qualified traders they interview, and paying attention to them might help you, but the commentators themselves just have no clue. It is shocking to me that these people can be in the pits, and talk to top traders daily, yet have absolutely no idea what is going on. What the hell are they doing down there every day.

My favorite one is the gal in the energy pits, I would wager my Saint Bernards could out trade here! How in the world could the fundamentals change this dramatically in two weeks? The answer is they haven't. They never supported that momentum driven move above $99. You can see the commercials did move up their long positions compared to a few months ago, but did reduce them over the last couple of weeks. They have tailored off somewhat here below a level that justifies long positions. However, if we were to get an increase there during this decline, we would have a very good buy signal.

We can only hope that knucklehead who reports on this market will be bearish at the time a buy signal shows up. That would guarantee a win.

Going back a couple of days you can see where I had stated that I thought there was a high probability of a short term low being formed. Obviously now that we are 600 points higher on the Dow, that call was correct.

I went "ALL IN" at the close of Monday in most of my accounts. One in particular is a retirement account that does not like market timing. I can't wait for the conversation scolding me for this move. It was "lucky" to have bought the low close, but sometimes you get lucky when you know what to look at.

It is too early to tell if this will be a major low, but what appears to be happening is that what began as short covering is picking up some new buying which could propel this sharply upward. That is conjecture, but this is the time of the year in general when you want to be long stocks to take advantage of the seasonal bias to the long side. The bottom line is that lower rates are good for stocks, and that is the environment we have. As a result, when you get dips during low rate periods, you need to be looking at buying stocks.

What is this mess?

I realize that this chart has a ton of clutter on it. Rarely a day goes by that I do not have another idea for finding the Grail for timing short term lows. Alas, none of the ideas ever pan out as anything other than another tool. I have several things displayed here which are all telling us the same thing, there is a good probability that a short term low is being formed here.

Notice the very large difference between new lows and new highs. This is extended to an extreme level, similar to what has often been the case at major lows in the past. The Advances vs Declines is also at a very low level. If we couple this with the seasonal tendency for a low point, we have the makings of a possible starting point for a good move upward. The pundits would have us believe these readings are very bearish and indicate further weakness and perhaps a crash. I like to fade the market at these times. Not every trade will be a win, but the majority of them will be in these instances. We are already long the S&P from Fridays open, so we have already placed our bets on this.

Here is the summary of the Gold trade we just exited in the trading service. The initial entry, and an add on entry above it are marked with horizontal red lines and an S for each of them. Our exit was a bit lucky in that we exited on a limit right before the market zoomed up today. The add on entry was not in the service, that was something I did in my own trading only. Was this luck?



Keep in mind that although the fundamentals the way I look at them are bearish, but we had reached a short term oversold area, in what is still a long term uptrend, so it was prudent to take some profits. It may not look like much due to the scaling of this chart, but this was a profit of $3270/contract on the initial, and $4270 on the add on, so a substantial gain overall.



The big picture plan here is to wait for a pullback and re-enter the short side if the fundamentals are still bearish at the time it occurs, then try and ride down what could be a very big move. It is possible that pullback does not occur, but based on the relative valuation compared to the dollar at the moment, I think it will.

Is this the low?



That is impossible to know. As I had stated previously, I was legging into the stocks I wanted to own on this dip, and bought fully into 2 of the 5 yesterday when they were down on the session. Both exploded upwards, and would have been incredible day trades. However, I plan on holding these longs for awhile.



I had been of the opinion that had we had one more significant down day, this could have been the low, as many of the oversold indicators were about one day away from being in a perfect zone for buying. The market rarely accomodates our plans perfectly, which is both the beauty and the frustration of trading.



As you can see on this chart, the S&P short term timing system has been on a fantastic run, getting us long very early yesterday and enabling us to cash in on the big up day. Since those signals are also now on my trading service, they will not be posted live here.



I do think it is too early to call this the low and celebrate, but I do have a substantial long side position that I will look to lighten up into years end if we rally, and add it back on during what I think might be a first quarter decline. The cycles still favor a December low point, and the announcements this am that the worst of the subprime fallouts are behind us, seem difficult to believe. All it will take is another scare there, and poof, 500 points can come off the Dow instantly.

When you build the perfect storm, there can be no surprise when it hits, the phrase on the chart is from FIELD OF DREAMS.

I had been telling people a huge drop would come out of the blue in this GOLD market, and it has happened. How did I know this? The commercials have been heavily short, the most in history. This huge run up has been driven by speculators and not insiders. When this happens, often the rug is pulled out of the blue like this. In a situation like this we could see $100 drop or more in a very short period, because of panic selling by the small individuals who now realize they have once again been sold a bill of goods.

I have no idea if we will get a drop of that magnitude, just that it could very easily happen because the fundamentals favor it. You do not have real insiders buying at this point to help prop up a drop. The ideal seasonal high is due in January, but when you get conditions like this, you have to act when they develop. Things do not always line up perfectly with the seasonals.

Is this sideways move a bottom in progress, and time to hop aboard?

I have currently been legging in to partial positions in the stocks I have identified as undervalued/bargain material. I still think we will work along the red line sideways to down for a month or two more, then launch upwards.

However, I did not want to get caught at the station in case the train left early, so I put some money to work. You never can be sure what will happen, so I put about 40% in. Hopefully, I can average down into full positions in the next 30 to 60 days at lower prices.

Of course if I happen to get a sell signal in the mean time, I will exit everything. There does not appear to be a sell in sight at this point with my timing system.

COLD WINTER COMING?

One of the megatrends going on right now is energy costs rising. Here is a daily chart of Heating Oil, with a blue line just stating the obvious up trend. The fundamentals are actually bearish at this moment, and it is a time of the year where the seasonal high is typically made.

I am actively looking for a short entry in this market, although I am in no hurry to stand in front of this freight train. You can see the small speculators are the ones that are pushing this market higher. All else being equal, we want to fade them in a situation like this. However, we need to see a break in the uptrend in price before anything will happen on the downside.

I have learned the hard way over the years not to fight a moonshot like this, so look for sell signals, but only on price action that represents a break down of the trend.

As I sit here hoping the fire doesn't reach me I realized I had not posted yesterday in the midst of all of the turmoil.



As expected, we did not get a crash at the beginning of this week. It amazes me how after a big down day, how many people come out calling for another day just like it. The odds are so heavily against that, you just have to take the emotions out of investment decisions. It is hard to do, but it is what you need to do. If you run the tests on buying a gap down open after a day like Friday, there is a very strong up bias to that, not down.



I still expect us to meander sideways to lower for a bit, and it would be awfully nice to see the WillVal indicator at the bottom here drift into an under 20 reading for a buy spot. I do think this will happen. Next year should have a heavy upward bias, so the question just becomes where to best enter to take advantage of it? The end of this week has been the ideal seasonal low buy point. I am more than likely going to wait to see what the commercials have done in this Fridays report, and then make my decision. I think I will wait for an oversold reading in the WillVal at the very least, before going back in. I am not satisfied with the list of under valued stocks my methods are cranking out because among them are C and HD which are subject to further weakness due to housing. They may just languish, which is not what I am looking for.

I do have an alternate list of undervalued stocks that I got from a friend who uses a different approach than I do, which also has a few selections that I am not too pleased with. Sometimes you just have to go with the numbers, but I am digging deeply to find a numeric way a discrediting a few of these stocks. Until I get that resolved, I am going to stay flat.

The problem with C in particular, is there seems to be some funny accounting going on there, which may in reality make it over valued and not under valued.

CAN I SAY I TOLD YOU SO?

It is worthless in reality to make predictions, all we can do is observe what we see as we go along and try and make prudent bets on what will happen next. I did not outright predict a sharp drop like this, but I did predict a sideways to down move for a month or two. We obviously are getting that now, so what to do next?

The ideal seasonal low would be at the end of next week. Seasonals rarely repeat exactly, they just give us ball park views on what to look for and at what time. The market is getting very short term oversold here, so that does seem to be matching up well with the seasonal low point at the end of next week.

I am currently evaluating which stocks I want to get long when the buy signal pops up. I would suggest waiting for some short term strength just to avoid catching the falling knife. Nobody can consistently predict when these sharp drops will turn on a dime. The subprime effect is seemingly re-asserting itself today with some of the comments being made publicly. This is impossible to quantify, and is not even a consideration in my analysis of when to buy and sell.

The big rally in bonds is good news for stocks over the longer term, and those of you in my trading service got a very nice long side trade there this week, our biggest win in the last 4 years on an individual trade. Lower rates are good for stock prices. Maybe we get lucky and get a huge waterfall here to buy into, but I doubt that. Maybe a little bit more weakness, and then a short term low could be made which would be a buy point.

GOLDEN OPPORTUNITY

My apologies for having missed a few days, blogger was not allowing chart uploads. It is my intent to post something each day, so keep checking in.

Gold has had a very nice upward move that is continuing today as I post this. The trend is your friend, so if you are currently long there is no reason to change anything. However, notice below that the commercials have their largest net short position that I can find in the history of the data that I have. What this means is that if we were to get a break in the trend here, it would be a green light special for a short sale.

This is a trade I am lurking on with my trading service on a daily basis, looking for an entry. You cannot just go out and blindly short a market that is this strong because that just becomes a guessing game against random luck. However, at the very least do not commit to any new longs here, and tighten your stops on any long positions.

The one fly in the ointment is that the ideal seasonal high is in January, so it would be best if a sell set up at that time. With the commercials this short, I will overlook the seasonal if the pattern sets up properly.

FLY IN THE OINTMENT?

With the markets sailing along wonderfully, how could anything be wrong? For the most part we have the perfect storm going, lower rates and insiders bullish, right at the seasonal rally point. There are a couple of things that are a bit troubling. First, the A/D line has not made new highs yet while the DOW has. This divergence is pretty small, so not a huge worry yet, but it is something to keep an eye on.

Second, notice the large negative divergence in the Pro Go indicator at the bottom. I have explained what this is in the past, so scan the archives if you do not know. This quite frankly, is very troubling. I am looking very closely for a spot to buy back in, but this makes me think we may have a bit of a rough patch of a month or two. Rarely does the market continue upward, when this diverges by this amount.

One thing to keep in mind about divergences in indicators, they often occur against the trend and are not anything but profit taking indications. This is not ever a green light on it's own to short a market. However, this is occuring right at a point where we have a broadening formation at all times highs, so this is not a point to initiate new longs.

My guess is that we will go sideways to lower for a month or two, then launch a pretty good upward move again. I will be looking during this period for the stocks I want to buy, and when to enter. It is frustrating to have been out the last couple of weeks, I have missed a nice move, and my timing model still indicates a long position is appropriate. This tells me that just a blip for a short period, then off to the races again.

COTTON

This is another market that is setup for a decline. The short entry was at the red line with a stop above the highest high point by 1 tick. Again notice the heavy short position by the commercials and heavy long by the small specs. This by itself is not a lead pipe cinch, but it is a good starting point for an entry.

Some of the internals have not diverged yet which would make this a better setup, but it is good enough without them to take a shot. This is not a mechanical approach like many that I use, but the reality is that some discretion or judgement has to be used to trade profitably. If you can establish a basic structure that is somewhat mechanical, you can then use your experience to fine tune how you get in and out.

I do want to stress though, that it is imperative to establish how you will exit a trade before you enter it. This will help eliminate the emotional tugs on you that will develop as the trade progresses.

Heating Oil





For subscribers, here is a visual of the Heating Oil trade we currently have on, with the red line indicating our short entry at 2.2205. I have to delay posting this by a couple of days to be fair to clients. It would not be right to put it out in the public for everyone to see right at the time paying subscribers are getting into it. As a result posts like this about actual trades are going to be a few days after the fact. I will also put up some trades that lose to be fair and not paint an unbalanced picture of my trading. I have always done this in the past as readers know.

This market has been in a substantial uptrend along with the entire oil complex. Why in the world would you want to short something like this?



First, this market has weaker fundamentals than the other markets in the complex. Second, the commercials not pictured, are heavily short. Third, we have had some divergences in some underlying indicators telling us the time may be now. Also, we had a very low volatility reading, indicating a breakout one way or the other.



We have already taken profits on half our position with $1839/contract and are trailing down a stop to see if we can catch a larger move on the balance. Often you get picked off on the second half for a scratch on that portion. That is ok, because occasionally we will get a windfall on it, and we are risking nothing. We have already rung the register for some $$, so anything more is gravy. It is still possible that this is only a retracement in the uptrend, so it is prudent to keep the trailing stop at break even on the rest just in case we get going again on the upside.

Up Up and Away?

If you look at the sharp upward shift in long side positions by the commercials, and my Magic Potion indicator solidly in the green, things look very bullish. At this point the seasonal seems to have been met by the sharp decline at the end of July.

I am in a flat position due to the horrible mistake I made of exiting due to someone else's model that I respect. As a result, I now need to look for a way back in, or wait for the short signal. The problem is, we are nowhere near a short signal now. Also notice the very bearish positions by both the Small Specs and Large Specs, this is very bullish. At this point I will wait for the typical seasonal low point in October, and just buy strength if we have not had any meaningful decline into that time period.

It is important when you make a big mistake like I just did, to not get emotional and chase a market. If I miss out on an opprotunity, so be it, but chasing what could very easily be a runaway move here upcoming, is not something I am going to do. If you are long, definitely stay long, it could not be much more bullish than it is right here.

Do Not Fight The Fed

Quite frankly I could not have been more wrong when I exited my stocks on Monday. This is where discretionary decisions can come back to haunt you. When trading with systems, which I do, there are still times when some judgements have to be made. This year I have been off by just 10 days in one spot, and here probably about a week, and the result has been a horribly managed trade.

With the bond market breaking down sharply, and the commercials starting to go to the short side, my model will probably give the sell signal next week. However, it would not be surprising to see new highs by then. I do have to confess that in my research I looked at a new timing model developed by someone else, that indicated an exit early this week. This did influence my thinking because he is one of my mentors. I will not make a mistake like this again, it is clear that my system is far superior to his.

When we make new highs, we will once again have one of those broadening patterns I have posted previously. If this occurs while a heavy commercial short position is on, it will be an excellent shorting opportunity. I apologize for steering people wrong on this recent movement, it is one of the biggest blunders I have ever made.

WHAT TO DO?

I have been debating this for the last month or so, after we had the severe decline in stock prices. My plan as I had posted earlier, was to sell on a rally off that low point. It is always easy to say that, but defining the exact point is never an easy task. The COT report is released after the close today, so I do not know what that will show. I had planned to wait for the commercials to get heavily short before exiting, however on this screen, there are a few reasons why I am front running that plan.

First, I have a proprietary indicator which I just call the Long and Short indicator ( L&S). As you can see, it does a pretty good job of calling short term highs and lows, and it is in the sell zone here. Also, the commercials started moving off their heavy long positions two weeks ago. The other thing that I have displayed here which concerns me is the Small Specs increasing Long position. It is back up to a level similar to where it was in July. This is an indicator that I want to fade.

The last, and most important reason why I have exited today is that the value stocks I had purchased, which led the market rise significantly, have lagged it considerably, on the bounce off the lows. I view this as a sign of underlying weakness of the overall market. Last, the heavy seasonal down bias is here. It is possible that the big decline we have already seen is all that there will be, and the seasonal would still be accurate if that were to be the case. However, the seasonal calls for fall buys, so that is where I am focused.

I still have a profitable trade, so it is time to take the profits and wait for a better entry point.

What in the world is this?

I have diagrammed out a broadening formation which is taught by a famous trader by the name of Kevin Haggerty. The rules as to how these points are derived is proprietary to him, but not necessary for this discussion. The basic concept is that once these form at key points, often large market moves happen.

There was also one at the high, just for the record, which did predict this downward move. This one happens to be occuring in the zone of the 200 day moving average, which is a widely watched level by institutions. I for one have not found it significant in my studies, but many other very good traders swear by it. Please also notice that the commercials have increased their long positions over the prior week. When you combine these two things, this is a pretty good buy signal. I realize I will get booed out of town for saying anything other than the world is ending, but this is how I see it.

Whether or not we have another huge downdraft or not nobody can know, but the fundamentals are in place for a bounce from here. If you combine this with what was in my last post with the Vix, there is a reasonable basis for an upward move. If it happens, I will be watching my model closely to see if the commercials jump off the ship. If they do, I will jump with them.

NOW WHAT?



It is impossible not to concede that the trend has now turned down. Oddly, the commercials are still heavily long, if we go into a full crash, it would be the first time in history that it has happened when the commercials were positioned like they are. Below, I have a custom indicator based on the VIX index. As you can see, whenever it has hit 100, a major low has been made.



Although this chart only goes back to 2006, all the prior major lows have had this reading. It is at 100 now. As a result, the likelihood of at the very least a good bounce is very high right here. I am waiting for that bounce to then see how things look. If they still look the same with the other things, I will stay long, if they do not, I will sell all my stocks on the bounce. The VIX measures fear, which is why it has historically been a good predictor of lows. The fear is clearly everywhere right now, and rightfully so. It is possible that we have an unprecedented economic event that will spill over into everything.



I do not get involved in investing based on guesses about such things. The above types of things are how I make my decisions. This tells me not to short the market here or sell out here, so I will not. Could we just continue to waterfall, absolutely. Do I think we will, no and the above is why.

No Change

In spite of all of the emotion surrounding the volatile gyrations in stock prices, fundamentally nothing has changed. As you can see, the commercials continue to be heavily on the long side of this market, which is preventing any sell signal in my world from developing.

Keep in mind that this is news driven trading, and we could easily see a 500 pt up day if there were one good news item that came out. Historically, there has not been one single market crash, with the commercials this heavily long. That does not mean that it cannot happen, but it does mean that the odds are against it. As much as I do not like watching my stocks get hit any more than the next person does, I will not get tied up in an emotional exit. On a short term basis, this is a buying opportunity for a bounce out of this decline. I do think there are big picture issues that may take stocks down more. However, I would expect to see a move to the short side by the commercials before it happens.

I have short term buy signals for Friday depending on the opening, which as I type this appears to be setting up to be a weak one. Bonds did not decline much today, which shows a lack of belief on the part of institutions in todays selloff. A flight to quality would normally occur on a day like this in bonds if insiders were really scared. It is curious that it did not to me.

I do not profess to have all the answers, all I am doing is spelling this out as I see it and as I am trading it.

NOW WHAT?

Here we are in the midst of a pretty sharp decline in stock prices. Alot of gloom and doom is out there. I have to admit that the price action does in fact look like a top.. However..... my timing model is not telling me that yet. The commercials are still heavily long, which is significant. If the real insiders are not selling this decline, why should I?



It does need to be stated that I do have a long term upward bias for stocks, and there is a reason for this. No matter how I research timing models over mid term time horizons, all the short signals are very inconsistent. The reason for that is obvious, the long term huge stock uptrend that exists.



As a result, I look more to dodge big declines and buy dips, than I do to short big rallies. That is a suckers game, and I have learned that lesson the hard way over the years. What I have displayed here is what my guess is as to what will happen in the near term. If my system is to generate an exit, it would most likely be with a rally up from here that probably fails to make new highs. If the commercials were to move over to the short side during such an attempt, the system will most likely give the exit signal. Most of the exits ( sell signals ) with my system, have occurred that way in the past, so that is why that is what I expect now. I was on the record as many know that a sharp decline should occur this year beginning in about the beginning of August, I was off by one week unfortunately. I do wish I was out of my trade at this point just off the cuff, but I always follow my systems, unless I find something that is so important that it cannot be ignored. I have not found anything like that at this point.



Just for the record, that buy trade in the last post was stopped out for a loss. I did it with small size due to the volatility expansion. I always trade small when that type of thing happens, so it was a 1% loss, who cares about that.

Is it time to panic?

We are in freefall at the moment, so what to do next? As indicated on the chart, I just went long the S&P futures, am I nuts? Maybe, it is never easy to buy into declines like this, and also not always the correct thing to do. Why am I doing it?

First, my long term model is still in the long side only mode, so I am looking to buy short term weakness within that. If you look at the red line on the chart, specifically in the first sub-section, we are at a very low level. This is a proprietary indicator that measures advancing issues on the NYSE in a unique way. It has rarely been this low in recent years. Second, I mostly follow my systems with small amounts of discretion thrown in along the way. I have no way of knowing when an individual trade will win or lose, and when I thought I have known this in the past, I have usually been wrong. As a result, I rarely pass a trade due to my opinion about the outcome. It is true, that if this is in fact a trend change, this trade will lose.

From a short term basis, there is no reason to buy into days like this because it is clearly a news driven down trend day and these types of days can really get away quickly. The system that generated this trade is about a 10 day hold on average, and often the first few days go against the position. As hard as it is to watch this adverse move, it is typical of these types of trades.

I am constantly trying to find ways of filtering out bad trades like this one "might" be, and have never been able to find a conceptually correct way of doing so. As a result, I just take them as they come up and hope for the best over time. Ten of the last 11 in this system leading up to this trade have profited, so there is a good track record with it.

Satellite Internet Sucks

I simply have had such trouble getting consistent Internet connections, that it has made it very difficult to post regularly here. I will do my best to do a better job of it going forward. It has been all I could manage to place my trades much less do much else when the Internet cuts in and out randomly at the most inopportune times.

To the left is the weekly S&P Chart, and as you can see the world has not ended since my last commentary. I had stated that if that last small pullback was all we got, a good sized up move could be coming. We have seen that, and there really are no exit sirens blaring right now.

We are nearing the time of year when we can usually expect a decline to occur, so I am watching closely right here. However, as long as the commercials stay this heavily long, we should be ok. Today we got a big down intraday move, but they rallied it back most of the way by days end. We opened about 50 down in the Dow, and that is where we closed. Most of the reasons cited by the bears here for a down move are actually bullish indications, and they just do not understand them well enough to see it. High short interest is bullish, not bearish to name one of them.

I will keep close tabs on things, and may in fact bail out when the seasonal tendency kicks in just because of the large gains I have in the stocks I hold, over 20% as a whole just since April. However, you always want to let your profits run, so never take a full position off just for a dollar amount reason. Taking partial profits, if it is part of the plan is prudent. It is not prudent if you think "well I have made alot so I should get out" ... etc..

What next for the S&P?

Here is the weekly chart, and you can see that the commercials have jumped back heavily to the long side of the market. This is bullish when we are already in such a strong uptrend, just the smallest dip and they bought back in heavily.

The bond market decline is reflected in my Magic Potion indicator at the bottom, but it has abated somewhat in the last week. There are certainly alot of news items that are making intraday swings interesting lately, but overall as you can see, we really have not had much of a retracement.

It would be nice if for a change, positive news got some media coverage. Why is it always the negative stories that get the most attention? Should anyone really be shocked that a few mortgage related funds have some trouble? You would have to be sleeping in a cave not to be aware of the issues in Real Estate right now! This is why that story only hurt the market for about 2 hours, but it still killed the party.

I expect us to move sideways with an upward bias for the next month or two at which point I will be looking for any signals that the party is over. If all the pullback we get is what we have had so far, another good sized up leg could be coming. As always, I will follow my rules as far as when to exit my longs, these are just opinions based on what I am observing.

Nothing Really New

There is not anything of note that has changed with the stock market. You can see my Magic Potion indicator is in the red, which is not good, but it is only one of the components of my system. The rest are still firing away in Green Mode.

The commercials have dropped down to 69, so they have backed off some. If they were to drop significantly, and everything else stayed the same, my system could trigger a sell signal. If I had to guess, I would say that they will gradually taper off on thier longs over the next 4 to 6 weeks. This would coincide with the July/August typical seasonal high, and indicate an exit then.

Only time will tell if that will take place. Until that happens, it is stay long and ride the trend. Do not be a hero trying to fight this trend. Unfortunately many of our great heros died earning their reputation, you will also if you fight trends. You may get lucky once in a while, but over time, you will get run over.

A Picture Paints A Thousand Words

Off to the left is the 30 Yr Bond Implosion. I have displayed standard deviation bands just to give a visual of how extreme this move has been, relative to recent action.

We are below the 3.0 band right at the moment, and as I type this, have a very weak overnight session going once again. Rarely does this market get extended to this degree in either direction. There is a gap down from 3 days ago that is unfilled so far.

There is alot of logic and math that will tell you that a reversion to the mean is imminent when these types of extensions occur. While this is true, they generally occur when a very strong trend is underway, and hence, you are fighting the trend playing for that reversion. My Short term bond trading system did generate a buy today, but has struggled recently during this down move. Most of my patterning is based on "normal" market action, and alot of the general rules go out the window when you get a move like this. You cannot pattern your trading activities for the once every 5 year occurence, or you will struggle most of the time. All that can be done is install strong money management techniques, so that you do not get wiped out when you get a move like this.

I do expect some type of reversion to occur, but it will setup a short entry if it does. This trend is very strong, and will not be easily reversed.

SEE I TOLD YOU SO
This is inevitably what the chicken littles are going to say after today. I did not imply from the last post that I was predicting this, only that this was a potential sign of trouble. Had I been trading from a short term perspective I would have been out before today, but I am not with stocks.

A sharp correction like this is scary and brings out the doom and gloomers. Maybe they will be right this time, we do not know at the moment. The precipitous drop in the bond market today once again shows its merit in directing stock prices. Notice how we have already hit the 2 standard deviations down level on this retracement, generally a good place to buy in an uptrend.

I am waiting for the COT report tommorrow to see how the real insiders have handled this. If they have scurried for the sidelines which I doubt, my model may generate a sell signal. Most of the stocks that I own have not fallen much during this drop, which is a positive, one has risen.

For now I say to stay the course on the long side, and if that has changed I will post something here.

S&P 500

I apologize for having been so negligent in keeping up here. I have been juggling alot of different things, and have had tremendous internet problems at my home. Satellite internet sucks for the record!

As you can see, the Jaws of Death have shown up for the stock market. This is a pattern that has led to many severe declines in the past, so why am I still bullish and heavily long stocks?

Notice at the bottom, the heavy long position the commercials have established. What I think will happen is that the rally will continue for awhile, the commercials will gradually shift away from the long side, and if this happens, yours truly will exit his longs.

The trick with this formation is that is sometimes can persist for a few months to 6 months before anything happens. As a result, for the time being, it is just watch this closely for signs that it is leading to trouble. Sorry for the poor spacing, Blogger is not in the mood apparently tonight to allow me to put spaces between the paragraphs.

Here is the close out of the short trade from the other day, exited on yesterdays opening for a nice profit. This shows that there is value in shorting at times against strong trends in short term trading.

Not all trades work out like this, but if you pick your spots carefully, you can succeed. As you can see from the chart there have been very few short trades my system has generated in the last 30 days, which is good. When markets run like this they are difficult to trade, because most of the time they trade a bit more two sided.

For the average investor, I suggest staying on the long side here, and buying pullbacks. Fighting a trend like this is a losers game over time. In my early days I used to fight trends like this all of the time, and learned from the school of hard knocks not to do it. I did do it here and profited, but I have 20 years of experience trading, which gives me a small advantage in picking my spots carefully.

If you choose to do it honor your stops and keep your egos at the door. When a market is running like this there is no telling how far it will go. It could stop tomorrow, or go for quite a while.

S&P 500

Here is the trade I currently have on for the S&P 500. As you can see it is a short position. I am bigger picture bullish, but that does not mean that short term sell signals cannot be taken. The recent COT report did show heavy long positions on this recent rally, which is very bullish larger picture for the market.

I do view any pullbacks as buying opportunities and I think those that are waiting for the big selloff are going to have to wait until the end of the summer. Predicting is a difficult undertaking for anyone, but that is how I see it at the moment.

This trade will be exited shortly as it is a short term trade and appears to be headed for a profit.

S&P 500

I posted a couple of weeks ago there was possible trouble due to weak bonds. As we can see, there has been some short term strength that has entered that market. This was the lone remaining shortcoming of the rally off the lows, that has now been resolved. I am aggressively long stocks from a couple of weeks back, when the short term trend down trend of bonds broke. I was waiting for a pullback, but decided based on the strong seasonal pattern, to pull the trigger and just add to my positions on any pullbacks.

I was concerned that the breakout that was brewing due to the small ranges I mentioned, would happen upward, and I did not want to miss it. We also have the commercials on the long side as well. We are hugging the 2.0 standard deviation band on the high side, which tends to happen during strong trend moves. This does tell us that we are short term overbought, but I would view dips as a buying opportunity for now.

We do have to keep a close eye on the bond market, which is showing some weakness as I type this. If we were to get a big drop there, it will undermine this rally at some point.

CRUDE OIL

For those of you that get my newsletter, the Crude Oil trade is summarized to the left. I had said to short it on 4/2/07 and exit when the percent R closed under 25. The entry was 65.10 and the exit was 62.01, a profit of $3.09/barrel. This yielded $3,090 per contract so I hope some of you did this trade. Things rarely line up as perfectly as that one did, so the trades have to be taken when they do.

STOCKS

Here is how we look on 4/11/07. Once again the resiliency of this election rally has asserted itself. My long term indicators have never gone away from the long side, so they indicate to still be long. We do have some possible trouble brewing with the Bond Market.

The Blue Line marks 30 yr Bonds, and as you can see, this market has had a sharp move down in the last 30 days. This happened while stocks rose nicely during this same period. These types of divergences often spell trouble for stocks. We are in the early stages of this divergence, but it is probably not a time for an aggressive long position without a pullback in price first.

Also note how the average daily range is getting quite small, indicating very little volatility. Generally, these conditions lead to breakouts in price, one way or the other. The commercials are still heavily long this market, so that is a positive. I am looking to enter this market on the long side aggressively, but not without some type of a pullback first.

S&P 500 The Latest

Here is the latest picture of the S&P 500. This weekly chart is nice to look at because it keeps things in perspective. You can see that prices have not really dipped much in spite of what some of the people calling for a crash have said.

The commercials have bought this little dip, which is bullish. However, you can see that my Magic Potion indicator has turned negative. This just stand alone is not enough to short the market on a larger scale, but it is reason to expect a sideways to down move here for a period of time.
Overall though, I do not expect to see a large break in the market until the end of the summer, but I am hoping for a dip in the next few weeks to load up on the long side.

I will need to see that bottom indicator turn green to confirm the upmove, which it has not done yet. My overall timing system does still say to be long this market, so dips are buys assuming that indicator goes green on them.

S&P 500 The Latest

Let's take a look at where we sit now with the S&P 500. If you remove the emotion out of the moment, you can see this decline has not been that significant. We have broken the uptrend, but we do not have a crash on our hands. You can see I had a short term buy yesterday that profited, being exited this morning.

I have drawn a red line down indicating the short term downtrend that we have established. Underneath this, under the blue line which is bonds, I have a red line indicating the nice uptrend we have there. At the very bottom, I have drawn a line that indicates we have had some commercial buying during this drop, this is what we want to see. Strong bonds and commercial buying, are both supportive of stock pricing.

The commercial buying is not at the level "yet" where it is strong enough to act upon. However, if this index gets over 80, that will change things a bit. As long as the bond market stays strong, and the commercials continue to increase their long side exposure, I am looking for a buy setup for a several month hold coming up soon. My large picture timing indicator has not flashed a sell yet, so buying dips is the call until that happens.

It would be nice to get one more sharp dip that has heavy commercial buying to set this up perfectly, but things rarely setup up in the optimal fashion. We may move sideways to lower for the next few weeks instead. Either way, I am looking for a buy spot.

Banking Stocks

Someone asked me to take a look at the Countrywide situation. I believe the thinking was that with the subprime mortgage overnight implosion, there might be a spillover effect.

First, for those of you who are reading my blog for the first time and or, are not current clients, I need to briefly explain how I trade so that you can view my comments in the right context.

My orientation to trading which has evolved over the last 24 years, is that I only take loaded or very high percentage trades. This is how I achieve an accuracy of 80% wins to losses. As a result, I establish criteria, and only go in when those criteria are met. This is not to say that there are not other ways to trade profitably, there are. However, to trade and get the results that I require, I need to have this level of discipline.

For stock trading, what I want to see is improving earnings for buys, declining for shorts. I also want low debt, or itleast a declining trend in debt for buys, the reverse for sells. I also want the seasonal tendency to be at the very least nuetral, not against the way I am looking. Then I want a pullback against the trend for entry. I do not care about what I call the "story." The story is the subjective situation surrounding the company that I may have an opinion on. Opinions are to suject to emotional influence, so I stay clear of them when trading.

Countrywide, if we use my criteria, would be a counter trend entry to the seasonal if it were shorted here, so that is not good. Debt is flat, but technically slightly rising, a negative. We are awaiting the recent earnings statement to see where that currently stands, that mark that as an unknown. Also, we are in a current retracement in a flat market, which is a better buy than sell in general.

In summary, this is not set up the way I require for a short entry. This does not mean that this stock will not go down, it is just not a short entry that I would take. If you are playing the story, you need to step in front while it is at a high level, here we are just in the middle of a trading range, so this entry has "poor location."

S&P Update

Here is how we look as of the close of Monday. We have continued downward even though we have had a couple of intraday snap back rallies that good day traders could have capitalized on. Most day traders lose money, so do not be tempted by that endeavor.

Notice the carrots on the chart which indicated potential signals. All of these signals (the last 3) were filtered by my secondary trading filters. We have been trading the bonds here the past week, but nothing has triggerred in the S&P.

I have been through too many of these to try and be a hero, I will take the signals when they come regardless of the market environment. If I do get any here, I will take them with half the normal size due to the increased volatility. I do hope for this decline to setup a rally in 30 - 45 days more or less.

I have highlighted the gap on the chart, because that is an ominous pattern. For this market to have gapped down, and not tested it, or even close in the ensuing days, does not speak well for the immediate future of this market. However, we are extremely oversold, so the odds to not favor shorting at these levels. Wait for a bounce to enter new short positions. We are likely to have volatile action in both directions, so honor your stops.

I do expect some further downside action, but I do not believe we are going to get a runaway bear market out of this due to the strength in bonds.

Where do we go from here?

I had mentioned that I would have buy signals for Wednesday, but none of them were triggerred, so I am flat(no positions). Today we come in with a gap down open following an inside bar with an up close.

Historically this has been a good buy pattern and poor sell pattern in general. However, none of my systems generated any buy signals, and in fact one generated a sell signal that was filtered due to the bullishness of the pattern. I want all the stars aligned, so nada for me today.

I do urge caution for those of you not to react too emotionally during these types of periods. Do not chase the market, and please trade smaller positions than your normal size. It is tempting to want to make a killing during a period like this, but more people blow up than make killings during market crashes. The worst thing that can happen is to bet the farm on one short position, have it pay off, and have a bad habit reinforced. Market conditions like this come around once a year for a week or two, so you can not pattern all of your methods on the rare occurences. Do not pyramid and press your bets. There are likely to be sharp moves up and down over the next week, and you can really get whipsawed.

The trend has changed here, but we are really overextended down right now, so the odds of a sharp bounce are high. You do not want to be short the farm when a 20 point bounce in the S&P happens.

What Now?

The big one that alot of people have been looking for finally happened today. You can see by the chart that alot of damage was done today. I would love to tell everyone I called this in advance, like last May.

However, that would be false. I had been warning that we were setting up a sell signal, but my large picture sell has not triggerred yet. After today, it will not ,simply because one of the components requires an overbought condition, which is now weeks away.

Days like today take on a life of their own, once the selling begins with this type of power all that you can do is honor whatever stops you have in, and let the action take place. Many reversals do happen after heavily negative overseas action like we had last night, so we cannot always know that this type of blowout will follow that.

If I had to guess what will happen next, I would guess the following. A little more weakness over the next few weeks. Then a bounce up that fails to make a new high, setting up a larger picture sell signal that syncs up with my timing indicator. There have been a few instances like this for those who get my newsletter, that were pointed out last month. This is only a guess, with no real basis other than just my years of experience, it may or may not have any value.

For those trying to trade in here, what I would suggest is to cut back your size to take into account the increased volatility that is likely to be here for a bit. Next, honor your stops and do not get emotional. We do not have many days like this historically, so the sample size is too small to have a reliable read on what will happen tommorrow. We are already very extended down, and historically 5 consecutive down closes in the S&P which we have had, have been good short term buys. I will more than likely be buying the S&P on Wednesday depending on what my systems tell me.

It is possible that this is an isolated event, but there are not many historical days like this that just result in things returning to normal right away. The strong bond market should provide some strength underneath this soon.

Still no Sell Signal

The end of last week refused to give the sell signal, so it is still a long side market. I am relieved simply because it would have had to have been ignored due to the seasonal up bias still in place. If we get one in March it will be past the filters for time of the year.

We may not get a sell signal, so there is no reason to be short until one develops. We have had a tremendous run, and the trend is up, so ignore the gloom and doom of the doubting Thomas types and stay with longs until we get something that says not to. There are some internal aspects that have weakened slightly, as you can see the commercials are mostly on the short side. As a result the base underneath is not as strong as it has been for the last several months.

All this really means to me is to not add too agressively to existing longs at this juncture. It does not mean run out of the market and hide.

Stocks Peaked?

Here is an updated view of my "Magic Potion" indicator. There is no magic to it actually, but just a goofy name a gave it to make fun of myself. As you can see it has returned to the green, indicating a buy. However, based on the computation of it, if prices stay where they are the rest of the week, it will go back into the red.

There was never an official sell signal generated during those 3 red bars because the other components of the timing system did not confirm it. They are all presently confirming any sell signal in the underlying, if the week closes with all of the components where they are as of this posting. It is February, so a sell signal now should just be used to get flat. In general we do not want to be aggressively short during the first two months of the year due to seasonal effects.

If march rolls around and the indicator is indicating a sell at that time, we will have something to act on. Until then, the trend is still up so no need to do any shorting.

S&P 500

Here we have an updated S&P chart. You can see where I exited my short trade from a few days ago on Mondays opening. This is exactly why I exit short term trades against the trend very quickly, had I held that position, I would be sitting on a big loss. The way I exited brought in a very nice profit of 13 S&P points.

I have written in my newsletter about my larger picture timing system that I have developed for the S&P. Although very close to triggerring a short sale indication, it has not done so yet. It will most likely be held off for itleast another week due to the rally in the bond market (red line).

I do expect this bond rally to slow down here and perhaps move back down in the next week or so, which might setup the S&P sell signal at that time. There are several components to that system, and most are lined up on the short side, but not all of them. Until it signals a sell, it is still green light to the upside, and exit counter trend trades quickly.

Shorting the Lenders

There has been alot of talk about shorting the lenders lately, so I thought I would devote a day to discussing this. Accredited Home Lenders is displayed over on the left. As you can see it has dropped from a high of 60.13 to a last trade of 24.50. It is clearly in a downtrend, yet if we look at the last 12 months earnings, we see a nice uptrend. Also, another filter I like to look at is debt. Their debt ratios are actually dropping.

Many people are expecting both the EPS to deteriorate, as well as the debt to increase, due to the difficult period that lenders in general are in.

However, as I have told people over the last 6 months to a year with the homebuilders, the balance sheets of most of these companies have very attractive ratios still. This does not make them prime candidates for shorting. I want deteriorating debt ratios, and declining earnings for stocks I am shorting, and the reverse for stock buy candidates. Further, this is a stock that has already dropped 60%, so although there may be more downside, the fat of the move is already over.

For those that cannot help themselves, and are dead convinced that the worst is just beginning, I suggest just waiting for 3 to 7 day reactions upward against the downtrends to taks short positions, or buy puts. Then hope the downtrend resumes. These little retracements visually look like flags, so we call them bear flags. I would start this process by looking at stocks that have increasing debt and declining 12 month earnings ( not just one quarter ). This will itleast line up the fundamentals with the "story."

For Sam, NFI has fallen way more than these others from 70.32 to a last of 15.96, too late there. NEW is the same story. AHM looks better as the 12 month EPS has declined and debt ratios have risen, and the stock has only dropped about 25% off the high. However, it is not in a downtrend yet. I would wait for a break, and short the first retracement of that one.

S&P 500

Here is an update of the daily S&P 500 chart. You can see my system has me short as of Friday's opening. This is a short term trade that will be exited on Monday's opening. My big picture timing system is ever so close to giving a sell signal now, it just missed on Friday's close.

Not to worry because most significant highs are not made in February, so we will probably go up itleast one more time. My short term signal was based on entirely different parameters than the big picture system.

Notice large divergence that continues to be in place with the Bond market below. This at some point is going to spell trouble for stocks, and it may already have triggerred something. The small graph at the bottom is just a moving average of the tick index. This is something I am playing around with, but have not really found any use yet for. It can be ignored.

The commercials have also gotten heavily short as of this last weeks report, so it is only a matter of time before a decline hits.

S&P 500

Displayed to the left is the weekly S&P chart. It may be tough to see, but the large picture swing system I have is applied to that chart. As you can see it had a long entry back in late August of last year, and is still long.

It is getting very close to generating a sell signal, but it has not done so yet. Very few market peaks are made in January or February, so there is no need to get excited and step in front of this trend. However, as you can see, the sharp downmove that the bond market (purple) has made recently, has set up a large divergence with stock prices. It is possible for these divergences to persist for a few months before stocks are effected. If this relationship stays like this, it is only a matter of time before we see a big stock market decline.

BOND UPDATE

We have had a substantial move down in the bond market this week. As you can see, we have broken through the 2.0 standard deviation bands (the blue lines). There is really no magic to these lines, other than they tell us when a short term move has traveled more than a normal amount. I have covered this in past newsletters.

However, it is still a nice visual aid to help with a larger picture perspective on things. I suppose the more positive than expected economic news is the explanation for this move, but I could care less. You could also argue that the rise in gold, was the primary cause.

With the primary seasonal tendency for a decline at this time of the year, combined with the well defined downtrend in prices, we should be looking to sell rallies against the trend. Buying oversold conditions for reversions is another strategy that can be employed, but it is not for the faint of heart. My short term system will do that in the trading service, but I do not suggest that the average person do this. Staying in sync with the primary trend of the markets, is where most of the money is made.

BONDS

Here is a weekly chart of Treasury Bonds. As you can see we have had a decent sized decline recently, right after the PIMCO bullish comments were made. At this point we are still technically in an uptrend, but a very choppy one that is difficult to trade. Trading retracements this deep with trend trading techniques, makes for sleepless nights.

We are still holding above support (marked by the red horizontal line). The RSI is reading 49.90 with is neutral. Due to the seasonal down tendency during the first half of the year, I expect this market to head lower overall by mid year, breaking this support level. If this happens, that would mean higher interest rates. It does seem at the moment that the Fed is determined to not lower rates, so this kind of makes sense. However, be clear, that I do not get tied up in "THE STORY." Those are just observations only.

I look at fundamental conditions and mechanical measurements of things to tell me where we are. I only mentioned that because it ties in what appears to be a broader economic situation, with the mechanical conclusion I spelled out initially.

STOCKS

We are getting close to a bigger picture sell signal in the stock market. I have a proprietary indicator that is fundamenally based, that has been declining, and is close to going negative. The commercials are also heavily in the sell territory as you can see.

When these two things combine at the same time, moves lasting longer durations, and also of larger magnitudes begin. You can see that it triggerred the sell signal in May that I pointed out the day before it happened. It also indicated the buy in July/August.

The way that it triggers makes it likely that the end of next week would be the soonest it could give the final confirmation of a sell. It may not, but it is certainly something to be on the lookout for. We also have to watch the commercials to be sure they are still short if the Magic Potion indicator crosses into the red. If the commercial buying picks up it would nullify the short signal.