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.