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.