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.