Hitting the wall at 1100

It looks like the confluence of resistance at 1100 for the ES proved to be telling event. The bulls pushed up into this area several times, albeit on light volume, but couldn't break out. After the 2nd or 3rd attempt, the bears smelled blood and took things down harder than we have seen in a while, but on high volume. This light volume rallying intermingled with higher volume selling is commonly recognized as distribution in the overall market whereby the smart money starts getting out while the less savvy blow off top and rally latecomers continue to hope for higher ground. It's interesting as well that this is happening in the face of increasingly positive economic news, or at least increasingly positive economic spin. There are many who continue to disbelieve the underlying strength of the recovery, and the market appears to be agreeing with them at the moment. In the very least, the TA crowd and HAL 9000 traders out there were definitely targeting 1100 as a sell point, if not outright manipulating the convergence and breakdown right there for maximum effect.

Reversals don't happen suddenly. It takes time for the tiny cracks in the foundation to creep and grow into a systemic problem. Sometimes this breakdown of structure is slow enough that it heals itself and things move on, which would essentially lead to a relatively small correction and resumption of trend. But other times, the cracks can't be stopped. They get bigger, and faster, and scarier until the inevitable collapse of the structure under its own weight.

Along with the price volume action of distribution, the de-trended oscillator is showing classic divergence signs as we pushed to higher ground. The oscillator peaks are getting lower and lower, and there is a case to made that the cyclic behavior which has been mostly positive since March 9th this year is ready to dip under the zero line and spend some time south of the border.

This would imply the general market will be going down for some period of time. These technical artifacts coupled with being 60% up from the bottoms, and at record heights above the 200 day moving average all support weakness in the days and weeks to come. Its just really hard to make the case for going up. Going down is the path of least resistance.

Christmas retail season and the next quarter will no doubt be a very key tell for the markets in general. Is the consumer ready to keep this recovery propped up? Or will the Govt step in again, and how much? Will Corporate earnings meet/exceed expectations, or will a veneer of stimulus based recovery be fully worn off by then? Will a whole new sector emerge as a leader? And will it be leading up and out, or at the vanguard of the next major collapse? I think its safe to say no one really knows. There's a lot of optimism out there which could be valid, but if we're not considering the worst as well, especially when it comes to situating investment funds, we could be in for a big and very ugly surprise.

That being said, optimism can easily catch fire even if we see a pretty decent correction here. There is lots of dry powder available to dump on this market and burn the shorts when they least expect it. We just need a good catalyst. Maybe Christmas retailing won't be so bad. Couple that with some job growth and decent GDP, and some of the indices close to their 200 day moving average, and the stage for another launch is set. Interestingly enough, the 200 day MA for the ES is tracking the positive channel bottom in the picture above. The slope of that line seems to be the long term regression trend of the S&P as well. It's all very orderly actually, even more evidenced computers are driving the whole thing from the 10000 ft view.

If you go back decades, the 200 day MA of the S&P has never experienced 2 points of inflection within a short span of a recessionary period (i.e. a local minimum). So there is a strong case to be made for bouncing at or near the 200 day MA line because history tells us that average should continue going up at this point. So that's the better odds bet. However, if it does roll over and turn south again soon, its time to get very short this market. A crash of unprecedented proportions would probably be upon us. And frankly, the global situation of tight credit, potential deflation, very high outstanding leverage on existing debt, as well as potential for continued real estate and bank failure makes me wonder whether this isn't the time we break the pattern. It's worth considering, especially if we start getting early warning signs from the market in the weeks to come.

No really knows what's going to happen, yet there exists a reasonable investment strategy for the choppy action here. The S&P daily chart is trending up and down reasonably well despite all the volatility. We've seen mostly up since March 9, but taking the opposing side as we cross under moving averages probably would have worked out positively at least flat, but not negative, despite being short lived. An investor who is allocating 20% of his money in S&P futures and 80% in cash equivalents will mathematically achieve 2x s&p performance for total portfolio in a bull trending market with virtually no hedging or trading at all. With hedging and compounded gains from dips, this number could be significantly higher.

With higher allocation into futures, the gains can be leveraged up at will. Each 10% of portfolio committed to S&P futures is more or less another 100% increment in portfolio performance relative to the S&P (from the point of entry), but that means the dips get bigger too, so hedging skill is even more important to even out the bumpy ride. The tradeoff of allocation vs. gain is one each investor has to make for himself according to his tolerance for risk and account value fluctuations. And of course, with futures, you have to be extra sure your position is not so large that a single unforeseen event won't wipe you out because P/L in the futures market is settled each and every day. A 10% market move against an initial S&P futures position wipes it out altogether, and if not sold at that point, threatens to cost more than the original position. Such is leverage, so there is definitely some risk. However, this is risk managed by countless traders and portfolio managers every day.

One can do the same in a bear trending market too, and potentially make 2x the absolute value of the movement of the S&P down. Recognizing when to switch from bear or bull is considered an art unto itself, but intelligent hedging money management should provide the opportunity to ride through the reversals and always be more or less with the long term trend.

The tale of two channels...

Which way? Which way?

On one hand, we have a very nice upward channel with the March 9th marking a true panic low, which by my reading, is a feature which extends well below established channel range trading. We have risen some 60% or so from that bottom and made many wonder what is driving it all. Its a very good question. My take is that the Govt has simply replaced the consumer which used to drive the Market until Oct 2007. It may not be over, but it can't last forever.

Now on the other hand, there is still a very major downward channel which frames the is entire bear market. The bear has been very beaten up recently, but it may not be completely dead.

The S&P is quickly approaching the upper trend line for the down channel, and the detrended price oscillator is definitely showing divergent tendencies indicating good grounds for weakness. On top of this, the dollar weakness, which few would argue has some significant role to play in the rally so far, is potentially at a turning point. We saw a bogus devaluation story this week, followed by supportive statements from the FED more or less confirming the dollar will be supported, and QE will be reduced when the economy improves. Since the FED has also been talking about how much the economy is improving recently, it seems logical to think they might be ready to support it soon.

And then there is earnings. INTC and GOOG on deck, and its going to be a big part of what happens in the next couple weeks. Good earnings could very well break the back of this downward channel and leave no where to go but up. The upward channel will prevail, and we'll know which lines to follow. But earnings could be also be not so great, or just not good enough.
There are hidden forces at work in the collective mind of traders at large, and a small crack in the dam can lead to a whole lot of damage. So we are far from out of the woods.

Collision with the upper line of the big down channel is a major crossroads for this rally. It's going to get interesting.

Big view S&P monthly log chart

Lower trend line support connects 1932 bottom, WWII bottom, 1974 bottom, and 1982 market bottom (and beginning of super bull market). So considering currency shifts & gold standard, inflation/deflation, political unrest and war, major booms and busts, and decades of plowing steadily along, this line has set the low bar.

Prior to the March rally, we were spitting distance away from this line. If we fall back to the low 700’s again this summer, the mid 500’s will definitely be my target. It will either be a once in a generation bottoming opportunity, or the sign of a major breakdown of US economic might.

I think its also safe to say the mid line is a pretty good place to expect some significant weakness if we do continue to rally up from here this year. It could take a year or 2 to get there.

Also notice how the 666 low is almost precisely a 61.8 % retrace from the 1982 low (100) to the Oct 2007 (or Sept 2000) highs. Pretty interesting.

ES channel

Here's the S&P e-mini futures (symbol: ES) channel in play since with th erecent rally. We hit support today after yesterdays big selloff and bounced yet again.

Can it last? Lots of people talking on both sides of this rally now. I think breaking out of this channel will be a big deal when it happens.

Oh...by the way.

The catalyst for the selloff. Chris says Hedge fund redemptions are cutoff this friday. So if you have deep pockets, but you are sick of your hedge fund manager partying in the hamptons while your pockets are getting progressively and significantly less deep, you may want to go to cash. These redemptions beget selling and margin calls which beget more selling and more margin calls and more index dropping and more panic and more redemptions until the market loses more in 2 days than any other 2 days since 1987 (happened last week).

Well all that will come to an end for the year this friday if our information is right. So significant selling pressure should subside.

It would be perfectly natural for saavy pro traders to participate in a final plunging of the market to celebrate and profit from this important deadline. If it weren't a historically awful bear market, it probably wouldn't make much difference. But in this environment, another 10-15% drop would be no problem.

Get ready for the bounce.

2 Pictures of interest:

The first is the big picture of s&p falling since mid may. This one lines up fibbonacci retrace levels with big movements in the s&p. The end point support prediction is the mid to upper 700's. I honestly think this is where we're headed soon.

Also take notice in the above plot of the steeply sloped lines on the right. That's a channel which setup Monday morning to guide a steep fall this week, and possibly longer.

I'd expect S&P movement to be repelled at edges and to be attracted up or down to the center, but generally in a twitchy manner with detail not unlike what we see here.

The edges are what counts. They setup reversals with elevated probability of success.

At some point, I'd expect a pretty substantial selloff. The descent of the s&p will be parabolic on a 5 minute candlestick chart, and the bounce from whatever bottom takes hold will likely be dramatic as well. I'd also expect the VIX to get close to its highs near 90, which seems to be the new panic level these days.

Some good options for bounce buys: I like 2x index etf's SSO, DDM, QLD, UWM, and also the 2x bank etf UYG. Also, oil is heavily beaten down. It has to recover at some point. Oversold is oversold. DIG is 2x oil etf.

There are inverses of all these to profit from the fall if you are so bold. SDS, DXD, QID, TWM, SKF, and DUG, respeectively. But you are absolutely playing with fire if you short without watching for the squeeze in this environment.

Have fun, and good luck!

S&P bottom?

Long term S&P: 50% retrace line is 1175

1 year s&p action. 1170 is channel bottom, and fib bottom too based on some previous reversals.

Still headed up!

Since the last S&P shot, we're still heading up off the channel low.
I want to emphasize that the upper and lower lines are not completely arbitrary. They are equidistant from a linear regression fit to the S&P index data since July 9th or so. And the market has set the slope of the trend line, and the early peaks have set the width of this bigger channel.

The fact that we can find support along the invisible line in the sand weeks later tells me I'm not the only one looking at this. The line can be violated, sure, and if it is, we know we have an event which is beyond the extremes of the last few weeks, which is a big deal to be concerned about for any long postions, and possibly a signal to go short.

But if the lines hold, well, that tells you something different about sentiment and the value of this channel as a predictor as well.

As for the middle zone, one can use shorter steeper channels to define movements across several days, and also 5,8,21, 34, 55, 89, 144, 233, 377, and 610 period moving averages on 5min , 15min, 30min, 60min , and daily charts to look for support/resistance. When one of these lines line up with fibonacci support/resistance across some similar time frame, the setup for a reversal is in place. Its like looking for a needle in a haystack sometimes, but I can't say how many times recently I've analyzed a bad entry/exit and found a good reason in these simple support/resistance lines to come up with a better decision. It just takes patience, practice, and discipline, but the roadmap is waiting there ready to reveal itself.


Here's a near end of day update...things are looking good so far for bulls, and my insanely overleveraged long SPY call position which is coming back on me...hooray!

S&P TA turmoil

Its been a while, but I'm back with new S&P channel shots. We had some amazing volatility since later last week and then after the weekend break. A lot driven by Gustav, RNC VP selection, and just low volume and uncertainty in the market. And you zoom in close enough, you can even see how the intraday bottoms today even follow that uptrending slope to some extent. This gives me some confidence that this picture is still on other peoples radar too.

So which way? Hard to say...I'd like to think up...there are good reasons to buy in here. But people are spooked too, so its pretty hard to really gauge sentiment. The recent history of the past week or so says we are completely range bound from 1260 to 1300 or so. However, impending breakouts always start before you really expect them, so I think its safe to say we are getting ready to jump now.

Breaking outside this channel towards lower values is definitely bearish movement we haven't seen in weeks. So be wary of that. Also be wary of simply hugging that lower trend line...that shows short term bullish behavior that could easily be smacked by a relatively light bad news event, and leave lots of room to fall without a lot of support lines to break the fall. But if we have nice push back into the middle zone, the bulls will have spoken again that they are not ready to lie down quite yet. If we take off, expect resistance again near the middle and the top of the channel. And anything goes in between, but in the channel is still technically "up".

Be careful out there!

SP riding new channel low line

I bought a straddle on SPY at ~1266, and it is losing money slowly. :-(

I was expecting a relatively large jump from this level within a day or 2 given the past history. The S&P hasn't wanted to stay anywhere for too long, and it was poised on channel line.

There are lots of little channels drawn on the chart above, but the longest one is the one I'm concerned with. The peaks and valleys were following a steeper channel until about a week ago when we dropped back hard from > 1300. I identified the shallower channel from the lower group of highs happening since july which also seemed to be in line with linear movement in lte june.

It looks like we resumed another linear movement right along the bottom line of my new shallower channel.

Its not what I would have liked having bet on big move instead of a slow upward crawl, however it is interesting that it is following the trendline so closely. I still think a breakout is imminent, especially if oil makes another big move, up or down. Falling into this narrow range action is rare enough, but much rarer is for it to continue for more than a couple days. So I'm still in my straddle. Just gonna take a little more work to clean up the losing side once it breaks.

Oil still in a channel?

Not much time to comment. A picture is worth a thousand words. Middle line is the regressed linear fit for the Oil down turn. Outer lines are at 1.82 sigma about the mean. A much smaller sigma channel defined the USO action for the past 6 weeks until yesterday. But just pushing the channel edges to 1.82 sigma captures todays peak, and shows it is in line with the mid july peaks using the same channel top line. So we may just be looking at an extreme channel excursion, and not necessarily a resumed oil rally.

If we bust further up, I will have that much more confidence the oils bulls are back. But if we stay within this 1.82 sigma line and start dropping, we're still obeying the channel, which means some more tradable pivots along the sigma values which have shown support/resistance in the past my come into play.

Tht all being said, oil will not be going to zero. Real bottom support and decent upward growth from there are due, if not overdue. But right now, technically, its battle of conflict support and resistance, and war in Georgia isn't helping those who would have it drop more.

Oil ready to bounce up?

Here we see a fairly long term chart for USO, the ETF which tracks crude oil prices. These days, the spot price of barrel of oil = 1.236 * (Price of USO).

Oil took off like a rocket this year, and built upon last years big gains too. But it hit its peak around $145 in July, nd strted falling as the general market recovered. The reason for the big dip and big fall is the subject of much debate. Some say real world demnd from developing countries. Other's say pure speculative bubble. Either way, one only really needs to consider price to understand what's going on.

Consider the big rise since Jan 2006. If we set a fibonacci range from this low to the July 2008 highs, we see some intermediate corrections landing in or around the key 38, 50, and 62% support levels. But perhaps most interesting is the situation right now. Based on this range of movement, we have retraced 38%, and from the looks of it, found some soft support and flattening right at this line. But we re also looking at intersection with the uptrending 200 day moving average around USO=88. This is strong combination of medium to long term technical support levels. We could very well find some support here, and any strength in USO which appears to break out of the channel it has declined within for the past 6 weeks could be considered a bullish oil opportunity.

On the other hand, continuing through this big retrace level and the 200 day moving average says there aren't enough bulls to keep it floating, and more precipitous decline is likely. But you can bet that $100/barrel isn't going to be an easy line for it to break if it keeps dropping. This is more or less at the 50% retrace level, and then $89/barrel is roughly the 62% retrace line. These would be good price targets to keep in mind if playing the downside.

AAPL channel adjustment

I've adjusted my channel slightly...the slope is steeper, and is better matched so some other features in the AAPL 15min price history. There's no science to choosing channels...its pretty arbitrary, but what I have noticed is that certain choices of slope match existing details better.

When AAPL prints the next local bottom, we'll have an even better idea of what the channel looks like.

In this case, the new slope matches the slope of some tight channeling around the middle line, and also connects the wider transition points above and below. The top and bottom lines are centered some proportion of the standard deviation of all the data in the regression, so it makes sense to me that a well fit channel should capture big peaks above and below the center line nd connect some smaller channels with the same slope of line. You cn imagin sliding the upper and lower lines vertically (up or down) to test fit conditions. Tweaking the slope is effectively done by changing one of the end points to include/remove some data from the regression fit. The choice of endpoints is tough in the beginning of new trend, but gets easier as the path unfolds.

And notice the channel also sets the avg expected gain and price movement. So if you have weigh price movement vs. premium loss, this helps provide some direction in an average sense.

Its all empirical, but there's little arguing boundaries can be set, and that there is a linear trend supporting the price movement for some time until some big event changes the dynmics.

Price movement to the boundaries sets up higher reward/risk opportunities for quick trades on the reversal. Good luck!

AAPL redux

I guess I implied it, but its worth emphasizing that with the Nasdaq perched near a high point, and AAPL too, a strong down day is probably an excellent AAPL put option opportunity.
But it is expiration week, which means premiums are low nd delta is high making for really nice potential gains on modest stock movement, but also a lot of risk if the market turns and runs you over when your not looking. There's little time to make up a bad trade, but you can always try putting on a spread to hedge and even make back money lost on the original directional trade, if the counter trend is strong.

Is AAPL getting a little frothy?

Ah...everybody's little darling AAPL. At the money options purchased off the 50% retrace bounce from the mid-May highs eventually reached a 10x gain over the course of the past week.

And the really smart folks who also bought in on the dip to the mid 140's for the quick pump did even better. That's right...a 10% or so portfolio bet on AAPL ATM's could have doubled your total holdings if you played them right. Amazing!

But that was then, and now we're at another spot. The recent trajectory of AAPL has been very steep, but it basically peaked coincident with the Nasdaq hitting and stopping cold at its 50 day moving average. That was yesterday, and the market has been testy since. While AAPL showed a little more strength pressing the edges of the wide channel shown above, it really didn't have the buying umph of late, and definitely showed some signs of cracking the rally late in the day.

We've got some tough economic news expected tomorrow, and we're coming on the heels of some weakness in the DOW and S&P, as well as a very toppy looking Nasdaq (relative to its wide channel since the july bottom). My bet is we see more weakness to push the indices towards a short term oversold condition, and set up the next leg of the rally.

AAPL is looking much like the Nasdaq at the top of a wide channel after a long and nearly monotonic and linear climb. A push higher seems unlikely until it drops lower into its channel, or at least just goes flat for some time, giving the channel upside little time to open up again.

Good luck!

Naz too hot?

Nasdaq approaching 200 day ma, and bear channel resistance simultaneously. A breakout is a big bullish event for this nearly yer old bear market, but be prepared for downside too.

Recent AAPL channels

Speaking of channels, check out AAPL in the past 20 days. I really like the 15 min period  for looking for daytrading trends, and you can see here how AAPL has hot support at some key points and set up nice quick profit opportunities. The most obvious is the big drop into the mid 145's which was well below trend. This was basically an opportunity for people big on value. If you believed AAPL is a good solid company, this an amazing gift. The gift was gone by the end of the next day. ATM AAPL options picked up at the lows were good for 500-600% gains before it peaked.  

Good opportunities don't last long.  But even if you missed it, its exciting to know stuff like that happens. So keep your eyes and ears open.

As of late, AAPL has finally kicked into the nasdaq Rally which started  few weeks back. Just after the quick low mentioned above, AAPL retested the low 150's a couple times (more excellent opportunities) and eventually bounced for good. AAPL went from 115 in mid march to 190 in mid-May, and trailed off from there. So let's see, 190-115 = 75, and 50% of 75 = 37.5, and 190-37.5 = 152.5...aha...a nice 50% retrace bounce. And lo and behold, look at the renewed interest since. Big retrace's in strong stocks are powerful opportunities laying in waiting as well. 

Sorry...forgot the channel lines. Here they are. 

Also, note the support lines in the bull run in April-May, and the very channel bound drop since June 6th. The in between channel areas are subject to random news shocks, but the trader sentiment to stay within channel boundaries seems to dominate when we get close. The bounce at 1200 could easily be rationalized by hitting the much longer term channel designated by all the high VIX lows since last August, as seen here. 

A parallel channel placed at the top seems to model the peak action well too, though I'm pretty certain proximity to the 200 day MA had quite a bit to do with the mid-May reversal as well. 

Here's the S&P 500 as of friday. The bounce from 1200 has been very volatile to say the least, but we do see consistent uptrending support following a straight line from 1200. Until this support line is violated, there may be more low risk/high reward opportunities for options traders anytime the index is approaching this line, or has recently bounced off it. And s we hve seen this week, we can go between heavy support and heavy resistance in the course of a single trading day. But even for swing traders and short term investors, buying in at the support line will be the best opportunity until this bear market rally fails. 

Speaking of rally failure, its reasonable to project we'll see topsy turvy action up until the s&p hits the high 1300's again. This would more or less put the peak in line with the big bear market channel we've been watching for the better part of a year, and certainly since last November. But the market is full of suprises...it will be significant if we hit that expected resistance zone in the high 1300's and don't slow down or turn around. Then its time to consider the possibility of the birth of a new bull market. 

 

Hi Folks, 

This is the first entry into my new blog to capture some interesting and hopefully profitable market insight. I'm not a pro, and I'm not offering anything remotely resembling professional financial advice. But you may see some interesting analysis and viewpoints and use it for 

your own investment decision making. Good luck, and stay sharp! There's a lot of people out there who want to take your money. 

Cheers, 

Ben