Trade review: GTIV, MNI

I think I'm getting a little bit mentally screwed up after the series of losing trades in past two weeks. This week I made two trades and made the same mistake on both, raising my stops too early. I really don't want to see any additional loosers, so I tend to raise my stops way before there is even time to do so, which of course is a sign of bad mental state.

The first stock that I closed this week was GTIV. I bought it from absolutely perfect Squat pattern. For a description of all patterns please see Terminology page. Buy point was 6.35, but I got in a little bit late at 6.64, which was the first big mistake. The second was setting initial stop below buy point, but not below of the day of the breakout. The stock then rallied on low volume and I did not take advantage of that breakout above 7, where I should've take some profits, locking in my stop loss risk. Stock then reversed, fell below 7 and I got scared it could go into negative during this low volume pre holiday trading. So I raised my stop and got stopped out on two occasions with just a minor profit.


Looking at a stock at this time it is still acting very well. It is testing its buy point, which is a normal behavior and it is still poised to go up to 8, where I would look to sell. So the biggest mistake behing the GTIV trade was late entry, consequentially illogical stop and a poor position after the pullback, which, taking my bad series in account, made me to raise stops without any need to do so. I also should've locked in some above 7, taking in at least my stop loss risk out, which would allow me to leave my initial stop where it is without any fear of loosing.

Next is MNI with a Launch pattern. The main problem with all these Launches is that they are very hard to buy at exactly the right time. Buy point usually is not clear, because consolidation often happens way below recent high. So I bought it on a breakout above 2.25, a little late entry again at 2.31, but not that late. It was still a good buy and stokc rallied almost immediately. And then again, the exactly same mistake as with GTIV. Stock rallied a little bit and I started to raise my stop in fear of price turning around into a loosing trade. So I naturally got shaken out on first decent pullback, while the stock is still looking just fine and poised to somewhere between 2.75 and 3, where I would look to take profits.

While making just a couple of these trade reviews my bad habits soon started to strike into my eyes. I always seem to be making the same mistakes, which is buying late as I wait for price and volume confirmation of a breakout, consequentally setting illogical stop and then raising stop without any particular reason to do so as price pulls back. I'll make a short review of all these lessons in a separate post as I think they're worthy of taking a closer look.

Trade Review: DXD, FSLR, DEXO

A bad week for me. I closed three trades, all of them negative.

The first trade was DXD long, which is a double inverse DJIA ETF. After market broke down from bearish flag I anticipated SPX would come down to at least 1175, where I would look to cover. But market reversed the next day, so I had to take a loss on this one. Meanwhile I opened some long trades and I expected shorting a market would be a good hedge if indices go down.


Here is how the actual trade took place:


My next trade was FSLR. This stock made a pattern that I call a "Bounce". A Bounce is basically short term bottoming pattern. After some sort of a shakeout stock bounces off lows, creates a very brief consolidation area and then breaks out, rallying for 1 to 3 days on a short squeeze.
I bought abreakout above 33.30 resistance area and thought FSLR will easily reach previus gap down resistance at 37.


And stock is actually still poised to go there. But as seen from the intraday chart below (for intraday charts I have to use my trading platform) I got shaken out on a wild swing down as I raised my stop. Now, there's not really that much more I could say about this trade as a bad luck. My entry was a little bit late and my stop was probably too tight but the stock simply collapsed after it touched 36 mark. I definitely should've bought earlier, but I would still get shaken out on that ugly drop. So the lessons from this one are don't chase breakouts and have a buffer for stop loss. Which I did have, but not enough.


The last trade is DEXO, which is an intraday copy of FSLR. But DEXO was a really bad trade. I'll explain why.

I have a pattern which I call a "Launch". Every once in a while I find a stock in a solid downtrend, suddenly shooting up from the ground, like a rocket ship from the launch pad. Often Launch pattern develops in several stages. As seen from the daily chart below, DEXO was in its fourth consolidation phase from its absolute low in October and stock was alreaady up 500% since then. I've been watchnig this stock during this last consolidation and firmly believed it can make another move up. But this was flawed thinking. Fourth stage bases are way too obvious to everyone. Also, DEXO experienced a significant climax top on November 29, when price gapped up and was falling all day long on huge volume. The third problem is that this is clearly a pumped up stock. There are many traders shorting it on every rally. So, all in all, I made plenty of mistakes with this one.


An intraday chart revealy pretty much the same picture as FSLR. I bought the breakout above intraday resistance and immediately price crashed, hitting my stop.



And finally, the biggest mistake I made the last week was trading momentum stocks into the holidays. Experience tells that days before holidays tend to be dull low volume days. Of course, market may day drift higher all the way to the year end, but we cannot expect any serious momentum develop. If I find any good setups to trade I'll probably have to use wider stops than I used to.

Trade Review: NTSP, UUP

I decided I'll start making weekly reviews of my trades. Analyzing market indices is whole lot of fun, but the real-life action is going on in stocks, so I guess these reviews will be a much more interesting read. Also, I believe making detailed reviews of all my trades, winning and losing will help me observe and overcome my weaknesses and become a better trader. So, I'll make an effort to be as critical to my trades possible, even on the risk of making a complete idiot out of myself.

First of all a little introductory word about my trading strategy. I'm basically a momentum-swing trader, meaning that I trade stocks which I expect to move quickly, in a matter of no more than five days, into a wanted direction. Some of my trades are day trades and some last for several weeks, but most of trades will be closed in less then a week. I mostly trade on the long side, but will do occasional shorts if conditions tend to be favourable to bears (as they are now). Stocks are my number one trading instruments, but will do occasional trades in commodities, especially gold and silver, and currencies, such as US dollar.

In general I trade six bullish patterns which I've analyzed and found them to be the most consistent ones for quick swing trades. They are not chart patterns in a sense that most traders understand patterns (i.e. cup with handle, triangle, double bottom, channel, etc.), but are more like contextual patterns. This means that they describe a context, or a cycle/stage/phase, the stock is currently in. A stock can be in solid uptrend, basing, bottoming, etc. I've even made up some stupid names for them. I call basic batterns Bounce, Squat, Resurrection, Launch, Breakthru and Runaway. Some of these patterns can also have continuation patterns, a second stage buy points, which have been named also. I won't bother explaining the mechanics of each pattern in this post, but will rather explain every pattern in a real-life example of a trade, when it occurs. OK, enough talking, let's do some trading!

The first trade I closed this week was NTSP. This was actually a pretty unfortunate one as I got stopped out with a loss, only to see the stock rally from that point on. But, frankly, I made several mistakes in this trade. NTSP was a Resurrection pattern in its basic form. A Resurrection is a bottoming pattern. As the name implies, the stock is somehow being resurrected after being beaten down. After a several mont long downtrend, stock starts to make a bottoming base. When these patterns break out, they can produce some very nice gains in a very short amount of time.

So, after being pushed down for several months, NTSP started to bottom in August 2011 and built a nice ascending triangle in the next four months, with a very, very clear buy point at $6.50. This is a picture perfect resurrection pattern. The basic definition is that stock must consolidate for at least two months, provide a clear buy point, should not rally too much from the lows and, ideally, shouldn't have any upside resistance anywhere near. Everything lined up for NTSP to go up to 8 and probably even higher.

Now, the main problem is that I found stock on December 1, only after it has already broken out od the pattern. It was too extended to buy back then. I also didn't buy pullback to the buy point the next day, since I don't trust stocks that pullback immediatelly after the break out. Stock than built a very tight flag pattern with a clear buy point at 7. It even produced a little shakout right before it broke out. I bought this breakout and got shaken out the very next day as stock gapped down a little bit and fell below muy stop loss at 6.97. What happens next is seen from the chart.


So, what were mistakes I made in trading NTSP. There were many. First of all, buy point from Resurrection pattern was 6.5 dollars. Period. I should've located the stock earlier and buy that breakout. Secondly, my stop was flawed. A safe stop should've been put below the day of the breakout at around 6.75. I bought too late at 7.20 and was forced to put a stop right beneath 7. Which is not bad for a breakout from Resurrection pattern. But what I bought was not this pattern. It was a second stage short term base and these tend to produce a little bit more wiggling as the breakout point is not that well determined. Third, in a hurry to buy I actually miscalculated my position size. According to my money management rules I shouldn't have bought no more than 500 shares, but it looks like I mistyped some number in my money management calculator and got 700 shares. And the fourth mistake. Market was pretty shaky lately. My position in NTSP was way too big for these kind of market environment when indices threatened to produce a sell signal. I don't regret buying the stock at all. I would make the same if I had the same opportunity. But simply, I should've bought less shares earlier with a less stringent stop. That's it. Learn from mistakes.

The second trade was UUP, which is a US dollar ETF. Now I don't generally trade currencies, but this time I decided to make an exception. I'll explain why. US dollar bottomed in May 2011 and started a real rally in September. Such long term bottoms don't top just like that. Dollar is still in a long term downtrend, but the action seen in past few months suggests some sort of relief rally is under way. The first rally produced a very deep pullback, scaring most weak holders to sell I guess, and then made an extremely right translated cycle. Right translated simply means the time between the start of the rally is much longer than the time from top to the next bottom. The ratio in this case is 20 to 4. Right translated cycles make higher highs in most cases, so I bought a confirmed swing low.

Dollar is a very slow mover, so my position was almost 3 times my normal position. I sold everything five days later on a gap into new highs. Why? Just because dollar is in a long term downtrend, because gaps to new highs are often signals of double tops, which is still a probability, and because I had a pretty nice profit with a strong three day rally, which I did not want to waste. So, this was a very well timed trade from buying and selling standpoint in my opinion. The only mistake I made is that I traded a currency, which is not my specialty. But, as I said, stock market was getting weak and I wanted to have some sort of a hedge in case I screw up long stock trades. Which paid off perfectly this time as I was still able to close the week positive in spite of a loss on NTSP.


So, that's it for this week. I hope I'll have more trades to report next week, hopefully all of them with a profit:)

Bearish Intermediate Term

Let's start today with the stock market. Well, it has been a chopfest for sure. Trading in these conditions has become extremely difficult. There are still plenty of high quality setups both long and short, only that most of these setups fail soon after the breakout/breakdown. What bothers me the most at the moment is an unusually huge Friday's volume on all indices. Intraday scan reveals that this volume was genererated in the first minute of Friday's trading day. Prices jumped on huge volume, but collapsed soon afterwards. Big volume is almost never a good thing, especially near recent tops. I think there is a pretty high chance that market makes another dip to test the November lows at 1160 on SPX, then rally into the year end and collapse again in January 2012 in earnest. This scenario seems quite logical. Breakdown from this minor bear flag would force many retail traders to sell. Smarts will be able to accumulate at previous support to ignite a strong Christmass rally. This rally would convince retails that new bull is under way, thus smarts will be able to sell accumulated shares, supposedly on breakout above MA200. A once tested support at 1160 will not become tested again, so prices should just slice through these levels like a hot knife through butter. Sure, just a speculation, but a pretty sensible one. I might short something on a break from this bearish flag.

Now to gold. Way back in September 24 I posted some trendlines for gold. I think now is the perfect time to review my long term strategy as very important event happened. Gold violated black ascending trendline that has been valid from the early beginning of this cyclical bull in 2009. So, for almost three years gold price obeyed this trendline on every major dip. This trendline is now broken! I think gold did manage to close marginally above it, but daily action suggests there was no real buying at the line or below it. I think we can reasonably expect another dip down. There are basically two options. Gold may bottom at the green line in January or at the pink line in March. Let me explain why I think gold will bottom at the pink line (or below it).

Let's forget about trendlines for a moment and just observe cycles on gold. On the below chart I have marked all the intermediate weekly cycles since January 2009. Green arrows mark bottoms of each cycle and the number below it denotes the weekly length of each cycle. If we make a quick averaging we can conclude that average cycle should last between 20 and 25 weeks. Now, the last cycle that bottomed in September was extremely short, lasting only 13 weeks. History of cycles says that extremely short cycles are often followed by longer ones. History also teaches us that bear cycles tend to be about 25% shorter than bull cycles on average. So, when we sum up all these numbers we realize that cca 24 week cycle that bottoms in March is more probable than cca 16 week cycle that bottoms in January. A very short 13 week cycle should be followed by a longer one and 24 weeks is appropriate length.

OK, let's wrap this up. The bottom line is that I believe January 2012 will be a massacre month for both stocks and gold. Stock market has been topping since February 2011 and will have to convert this into some sort of a dramatic fall sooner or later. If stocks go down, gold won't be able to keep high grounds as cash will be a safe haven for most investors. The same thing happened in 2008 when gold corrected 30% together with stocks. If a plunge of similar magnitude happens we can also expect that all technical levels will get broken in panic selling. But I'm getting way ahead. We'll talk about this when those times come.

Stocks Also On Sell Mode

I think I've seen enough. Stock market indices printed 3 or 4 distribution days in two weeks, which should be more than enough to turn the trend back down. Today selling continues below MA50, which is my signal that bear market may be back again. Sure, we may and probably will get some sort of a relief rally on low volume into the year and, but I strongly doubt indices will be able to get anywhere near previous highs. Whatever bounce we may get it should probably be the best shorting opportunity of this entire bear market. We'll get back to this when time is right.

Gold Breaking To The Downside

This is just a brief update on gold market signal. Yellow metal is now officially in SELL mode as it broke to the downside from a four-month symmetrical triangle. The breakdown was so powerful it violated trendline, MA150 and previous swing low all in one session, albeit not on a closing basis. But I believe yesterday's sell off and today's follow through (not seen on the chart) is enough evidence to confirm my thesis that gold shall see much lower prices in the next couple of months. The currect short term cycle should bottom sometime in the next two weeks and rally out of this bottom will tell, how weak gold actually is. So I'll refrain from drawing support lines until I get a taste of the upcoming bounce. For now, my short term target on gold is around 1620, where this cycle should bottom.

Gold Weakening

How things change. About a week ago I've talking about gold possibly setting up for the breakout to the upside. I know many traders like to buy "in the face of an upcoming breakout", just in case price gaps up at the open, leaving latecomers behind. The problem with this strategy is that one presumes a breakout as inevitable. In other words, you become bullish on stock before you even get a bullish sign, which of course is a breakout itself. My experience shows this is a poor strategy. I made this mistake several times and almost always regretted it. But not this time.

In light of this short aside, gold seems to be negating our bullish outlook from the week ago, as it is now on the verge of breaking down. Now again, I'm not saying it will, but last couple of day's action suggests there is more weakness coming for the precious metals. Several ascending trendlines could be drawn. If our interpretation on the chart below is correct, a break below the triangle bound would be a red flag for gold. The final confirmation of failed short term cycle and thus possible continuation of correction would be a close below the last support (green line). We'll get back to this later.


Stocks are not behaving any better than gold. The two-day coil-consolidation right below MA200 broke to the downside on a sell-off distribution day, which is negative, of course. On the other hand, Friday produced a pretty strong reversal, suggesting Thursday was just some panic selling on bad news. We'll have to wait a little bit more for a consolidation and a breakout or a wedging rally, followed by another sell-off. With a little bit subjective view, I suppose price could easily meander between MA50 and MA200 until the end of the year. Definitely not an environment for a momentum trader. Additionaly, there is still no buy signal more than two weeks into the rally, which is sign of caution by itself. I still believe stock market will continue its bear market trend soon.

Gold Has To Decide

I'll start today with gold. Yesterday it sold off, which almost made to post something about gold probably breaking to the downside. But today it is rallying hard back up. I have absolutely no clue on earth what's the next move for precious metals. Luckily we have a pretty decent pattern to watch. The triangle is getting squeezed to the apex and gold will have to make a choice soon.


Today's news driven market is very unfavourable for anyone trying to grab a share of a trend. Not seen on the daily chart below, but intraday charts are ful of wild swings in both directions, causing breakouts and pullbacks to fail, only to reverse later in the day and fail the very next day again. In such environment it is best to stick to the larger perspective and trade longer term swings. There is nothing on charts that would change my mind about stock market being in a cyclical bear. I still expect the current rally will top some time in December and roll over down to at least October lows. The problem is that now we have resistance at previous top but also support at previous lows and MA50. So this chopfest may continue for quite some time, trigerring several false alarms in both directions. I think we should not a expect a textbook technical top. However, I would love to see a failed breakout above MA200, because this would give us a very reliable stop for short positions. All markets still neutral.

Cards Shuffled Again

I must admit the last week's rally in stocks surprised me. I fully expected any bounce will be just a short term short covering rally, but for now the last five days look more like the beginning of a new short term cycle that should move above October high.

First of all, the swing at the bottom was extremely powerful. Second, after a day of mild consolidation, market just slashed through the MA50 on huge volume, closing at the high of the day. This is the basic definition of a follow through day, that often starts a new uptrend. And third, market was able to keep the high levels for the rest of the week, confirming the follow through day.

However, my scepticism still prevents me from announcing a buy signal. A really huge volume on indices is usually not a good sign. Often such too-good-to-be-true-looking FTDs will fail two to five days later. And we are officially still in a bear market. I just don't think that bullish sentiment has been cleared enough to pave the way for new bull market. So, for now stock market will stay in neutral mode. Things should get clearer by the end of the next week. If MA50 stays and maybe even MA200 gets conquered I will start to believe that the bear is at least temporarily over. And I mean temporarily. The biggest problem right now is the leadership. There are virtually no constructive bases in big cap leaders seen at the moment, which means that chances for a sustainable, many month rally, are low. Indexes are being pushed up by oversold stocks, which is usually not a good sign.


Moving forward to gold. I guess we now have a confirmation that many investors see the same picture as we do. Yesterday gold tagged the descending trendline perfectly, sold off a little bit, but stayed mostly neutral for the rest of the day. I suppose this is a bullish sign. A partial retrace-consolidation just below the trendline would set gold, silver and mining stocks for a powerful breakout. I'm starting to lean to the bullish side. The fact that gold is probing resistance levels and not selling off probably means the sellers have been exhausted. If price breaks above yesterday's high, I will definitely buy a stake in precious metals and proclaim a buy signal.

A Reflex Rally

A brief update on the recent action in stocks and gold.

Yesterday stock market indices completed a strong swing low, which is a clear indication that a new short term uptrend has started. I want to stress SHORT TERM as I fully expect the current cycle will top sometime in December. I'm not sure whether we may start making lower lows this year, but January 2012 should be a strong down month. Anyway, stock market is now on neutral signal and I doubt we will get a decent buy signal before spring 2012.


Hard to say what gold is up to. It completed a swing low yesterday also, but today's lack of follow through suggests the current cycle should top below the recent, which means that lower prices may be ahead. We're still waiting for the break of the descending trendline or MA150. A break that should determine gold's trajectory for another quarter or so.

On Time For A Bounce

This week made nothing more than confirm my views from the week ago. Stocks dropped from the bearish topping pattern and should now face some sort of a bounce from oversold levels. The 2600 area on Nasdaq looks like a good spot to look for shorting opportunities. The MA200 now finally and completely turned down. Past analysis that I've made some time ago revealed that when MA200 changes its course, this usually means a long term trend reversal. From my point of view, we are now in a confirmed bear market. What does this mean? It means that every rally should be very choppy and short lived. The tendence to go is now on the downside and so should be our trading strategies. It is still pretty early in an intermediate cycle. Current cycle bottomed seven weeks ago. Cycles in bear market tend to be of a bit shorter duration, but we should see at least ten more weeks of generally lower prices. Only when this cycle bottoms, I will start looking for possible longs.


Gold action is still a bit unclear. On first glance the triangle consolidation looks bullish, but frankly, I don't think gold is going to break out. If stocks are in a bear market and dollar in an intermediate cycle rally, it simply doesn't make any sense for gold to breakout and rally above 2000. But markets often don't make sense, so I'll refrain from any speculation about the direction of the breakout until it really happens.


Even if gold breaks to the downside I have no intention whatsoever to short and precious metals index or stock. If I learned anything in the past two years is to buy bull markets only and short bear markets only. So, my strategy for the next couple of weeks is to try to catch a short term top in stocks and IF gold triangle breaks to the the upside, buy a position in precious metals. Just in case this turns out to be the last obvious consolidation area before the final climax run.

A Test Of October Lows?

Finally, a "bullish triangle" pattern forming on SPX broke to the downside. First, I'd like to say a word about patterns on stock market indices. The simple fact is that in most cases they are completely irrelevant. SPX index is a weighted sum of 500 stocks and any triangle, cup with handle, double bottom or any other pattern formed on such an index is more of a coincidence. It's usually much better to follow the accumulation-distribution pattern which has been strongly in favor of bears recently.

Anyway, I'm almost certain that the first intermediate bear market rally has topped and we should be facing gradually lower prices for at least another 3 months. The first downside target is around 1125 on SPX, where buyers came in during the first decline. In anticipation of these levels I opened an SDS long position (2x inverse SPX). Although I don't believe the October lows will hold for long also, I don't want to make any bold predictions until my first target is met. Any minor rally from current levels early next week should provide an excellent opportunity to open some additional short positions in my opinion.

As seen from the SPX chart above my market direction system has been pretty solid in the past few months. Although it produced several consecutive signals in a very short period of time, which is not desired, it has generally kept me on the right side of the market. I'm especially confident of the last sell signal as these kind of "sell-off - wedging rally" topping patterns have proved as extremely reliable in the past. Also, a triangle on SPX turns out to look like a head and shoulders topping pattern on COMP, which is another strong distribution sign.

I've been talking about the possible triangle formation forming on gold for quite some time. If this turns to be the case I think precious metals are in for a monster rally in 2012. If, on the other hand, gold breaks below MA150, which was a strong support for 2 years, I believe we'll have to draw another support below the September low. Which is quite possible as it better coincides with the anticipated stock market low in early spring 2012. It is still too early to say anything in particular, though. Right now, gold is on a sell signal and should be headed for a corretion.

On The Verge Of Next Leg Down In Bear Market

I think the past two weeks now clearly resolved the issue whether stock market wants to reach new highs or resume its bear market trend. The good-looking rally above MA200 was nothing more than a fake breakout, a classic for bear market tops. As I always say, any positive sign that is reversed, should be treated as double-bearish. Breakout failed, sported a distribution day, then market rallied for a week, before another big sell-off day kicked in. It now looks like indices are drawing some sort of triangle pattern, which in my opinion will break to the downside. Actually, any rally into MA200 or upper triangle line should be an excelent shorting opportunity. We'll look at a bigger picture of when and where this intermediate cycle should bottom when we get a confirmation that the next leg down is underway.


The main reason for weakness in stocks is the dollar, which rallied viciously above MA200. Actually, I believe that dollar should now enter a steep uptrend that should last at least three months and push stocks into new low ground.


Regarding gold, I don't believe that any commodity market will be able to rally in face of a strong dollar. I'm not sure whether gold will go below September's low or not, but I'm almost certain that the current rally is now over and that precious metals in general should be headed for another correction.


I think the following months will rip the stock market apart. I wouldn't be surprised if indices traded 30-40% lower two or three months from now. For quite some time I wasn't sure if the dollar is going to break down and push stocks and gold higher, or it will reverse and lead the next leg down in bear market in stocks. I'm quite glad that things finally crystalized as I expected from the beginning. From now on stocks and gold are on a SELL signal and any rally in stocks should be an opportunity to open some short positions.

How To Spot A Bear Market Bottom, Part 4: Look At Stocks For Clues

This is the last part of a series of posts on how to spot a bear market bottom. If there is one thing clear from the first three parts it should be that spotting an exact bottom of a bear market is at least very, very difficult if not impossible. The 2000-03 bear market provides plenty of examples of how a good-looking rally can quickly fail and drive the next leg down. But, the fact is that indices show only a part of the story. It is a market of stocks after all and general market conditions could as well be judged by the state of individual stocks.

Amazon (AMZN) was one of those stocks that were big leaders after the market bottom in 2003. In fact, Amazon bottomed almost 10 months before the general market and during the last few weeks of final sell-off in general indices, AMZN formed a very constructive pennant pattern, which was perfectly buyable. As the market tested the lows again in March 2003, AMZN was holding up well, building another base that showed its superior strength during that time.

E-Bay (EBAY) is another good example of a high relative strength stock, which turned out to be a bull market leader. It bottomed seven months before a general market and completed a constructive double bottom base and exploded higher together with the market. EBAY's leadership quality became even more apparent in weeks ahead as it formed two tight channel bases that are almost always a sign of extreme strength.


Yahoo (YHOO) was a bit different story. It bottomed together with the market in a selling climax, but the doubled in less than two months, kept the high relative strength during correction and broke out to new highs again when the pressure from the market was released.

Taser (TASR) is an example of a pennystock that literally exploded when the market started rising. From the breakout point to the climax top TASR made almost 10000% to those who were patient and brave enough to hold such a volatile stock.

There are plenty of examples of how stocks build buyable bases during last stages of a bear market also from the 2007-09 bear. Leaders of past bull cycles usually don't lead the next, but Amazon was an exception. Again, it bottomed way ahead of the market and built a constructive tight channel during the last selling climax.


Baidu (BIDU) is an example of a stock that doesn't fall with the last stages of a bear, nor does it make any significant progress, but simply builds a base while everything is going down. BIDU was a difficult buy as it did not breakout on any significant volume and price increase, but nevertheless it was one of top stocks of the 2009-2010.


Chipotle Mexican Grill (CMG), a fast-food franchise, surprised just about everyone during the past bull cycle. However, if we look at CMG during 2009 bottom, it is clear that something was brewing under the surface of a just-another-fast-food-franchise at that time. CMG's base is not the best looking in the world but the fact that it was 25% above lows while everything else was making new lows, is a sign of superb relative strength, which took stock up to the 350's area in the following two years.


The last stock we are going to look at is Netflix (NFLX), a superstar of the past bull. NFLX was one of those stocks that are almost impossible to grab a share of as they start their magnificent run way before the market turn. As the bear market bottomed NFLX was already 100% profitable to those that bought at exact lows. Of course, no sane person would buy such an extended stock, but NFLX finally tagged the $300 mark.


The point of this post was simply to show on some charts how bear market bottoms are actually made. It is not a one-day event when big institutional investors simply decide that they will buy every stock available, but a process, brewing under the surface several months before a final bottom. The most promising stocks will bottom ahead of the market and build constructive bases during the last shakeout. And when the number of such high-quality bases starts to increase week after week, this is by far the most reliable sign that bear market bottom may be just around the corner. Don't miss it.

Markets Taking A Breather

Yesterday's powerful rally in the dollar suggests at least a short term low has been printed, which means stocks could take a couple of days to consolidate huge gains made in October. Actually, dollar and stocks have been in perfect inverse correlation for the last two months and if trend is to be continued, the fate of the stock market fully depends on the dollar. As the buck is now severely oversold I expect it will break the descending resistance trendline and rally for at least a week. It might even go to new highs, which should drive the next leg down in bear market for stocks. However, if it turns out that the dollar truly is as weak as ti looks, it would turn around quickly, which should push the stock market even higher. Anyway, two consecutive down days that were not bought and a possible trend reversal on USD suggest a stock market may see some weakness ahead. It is on neutral signal from now on.


What does this mean for precious metals? Not much, I think. Gold has been pretty resiliant to the yesterday's huge rally in the dollar and it looks like it wants to beat its own drum. The cycle is still young, the volume on this correction has been low and I expect gold will at least fill the gap at about 174 on GLD. Yesterday's narrow range trading even convinced me to buy some shares of DGP (double gold ETF) as addition to SIVR (silver ETF). However, when and if the gap gets filled, I'll probably just take the profits without hesitation as there is just too much overhead resistance in the 175-180 range on GLD.

Is Dollar Toast?

For weeks I've been touting that stocks are in a cyclical bear market and that current rally should be short lived, meant just to revert bearish sentiment. My arguments for this case have been a cyclical nature of the stock market, a very obvious five month topping process, lack of real leadership and the fact that bear markets usually don't bottom in just one phase.

But the current four week rally actually gives the appearance of a solid new uptrend. First of all, it has simply gone way too far. Not so much in percentage as in retracement terms. Bear market rally simply should not retrace 70% of the previous drop. Mind that NASDAQ is actually only a couple of percents below the bull market highs. Secondly, with the exception of the lack of a valid follow through day near the bottom, it has been a high quality rally. From the beginning of this uptrend, we have witnessed only one distribution and both two day correction were heavily bought as hammer candles followed by instant breakouts indicate. This Thursday's heavy volume breakout above MA200, the final technical resistance level, siggests something significant may be hapenning under the surface.

Mind that such strong late breakout often lead to reversals as big money sells into buying frenzy. So we still have to be cautious. But Friday's action looks more like consolidation than exhaustion, so I suspect new highs will be reached soon. Of course, sooner or later market will have to go into a more significant correction and the rally out of that correction will give us clues whether this bear actually has bottomed on October 1st or not.


The next very important evidence for the bullish stock market case is the dollar. After rallying sharply out of its three year lows, the buck could not find support during correction and is now on the verge of touching the final support line again. If there is any chance that the dollar continues the uptrend, it should reverse and rally violently above MA200. If that doesn't happen in the next week, chances are high that dollar three year cycle topped in only two months, which means that stock bear market is definitely over and that we won't see a decent correction in gold for the rest of its bull market.


Speaking of gold I think the yellow metal will soon give a stab at the ascending resistance line, which we already draw several times, before going into a brief correction (coinciding with the dollar briefly rallying from oversold conditions). It should then consolidate somewhere above MA50 before resuming the uptrend. If (and only if) the dollar is finally toast, I believe we won't get a decent correction and a buying opportunity in precious metals until the next short term spike which could be several months from now. Not to mention that an extreme parabola could also mean that gold bull is over. But it's way too soon to discuss this.


So, the past week completely reversed my expectations for gold and stocks, but that is the nature of all markets as they always fool the majority. That being said I must also point out that almost ALL bear market corrections look like that! Everytime the market falls far off its highs, a rally which will give the appearance of a high-quality uptrend will be produced. When the last bearish analyst throws in the towel, when bullish sentiment reaches extremes and when "everything is fine again", then is the time when the most dramatic plunges happen. So, let's just stay cautions. Day-to-day based analysis is still the best tool.

Gold Headed For higher Prices

Well, how things change in the stock market. A couple of days ago I issued a sell signal in gold, anticipating another leg down. But once again gold tagged the 150 MA, rallied weakly for two days up to resistance and instead of turning back down, flashed a very strong accumulation day that sliced through resistance like a hot knife through butter. From my experience, when negative signs give positive results, this is extremely positive (and vice versa). As this is only the beginning of a new daily cycle, which should last for at least a month or so, I believe gold will soon attack the all time highs. I bought a share of silver ETF SIVR to participate in this rally.

Stock Market Is A "Buy"

I am a bit reluctant to say this, but stock market flashed a buy signal. From the beginning of this rally I've been warning that this is just a normal bear market rally. These often come on surprise, driven by short covering. They usually extend very quickly to an unbuyable overbought areas and they often start on low volume without any strong accumulation on the way up. These are all characteristics of the current rally.


However, even in bear markets, intermediate cycles usually don't top in just three weeks. Most often it will take 6-8 weeks to reverse the bullish sentiment, created by a false rally. At least that is the case in the early stages of a bear, when many people are still optimistic. Anyway, Thursday's dip was obviously bought and now we should get in the stage of "buy the dip, sell the rip" type of action as smart money starts to swing trade, distributing their shares into every break to new highs and not leting prices fall too much. Most breakouts will fail in such market and the best strategy is to buy high quality names as they pullback into support areas and sell them into 10% plus profits. Eventually, as enough weak hands buy these fake breakouts, smart money will stop buying dips, which should pull the rug below market's legs.

Gold Heading Lower

I think the triangle consolidation in gold I speculated about last week is now finally off the table. Gold is breaking down of feeble three week consolidation and now it should only be a matter of time before the black support line gets broken.

With some benefit of hindsight I can say that the rally has been doomed from the beginning, which I pointed out several times. 13 weeks is way out of normal timing band for intermediate lows and a plunge of that magnitude could not recover that easy. However, I still expected that gold will pullback up to arround 1800, which teased me to buy some SLV. Needles to say I got stopped out. The weakness of this rally indicates that the black support line should finally get violated, which means that gold will have to find new support lower.

If we get back to the September 24 post, when we draw some support lines, we can see that gold should now look for major support on green line at about 1500 and then lower on pink line at 1400. It's impossible to say which one of these lines will hold. My plan is to wait for a tag of 1500 and if price rebound, buy some. If I get stopped out, another buy point is 1400.

All in all, gold is still in a downtrend and in a sell mode as of today.

Historical Precedents For Current Rally

Yesterday Dan Zanger, one of the best traders of all times, posted a tweet on Twitter, where he compared October 1998 bottom, which lead to a huge rally, with today's market conditions. Actually, double bottom as we saw a couple of weeks ago, is a quite usual intermediate bottoming pattern. In 1998 Nasdaq bottomed three times this way, as denoted on the chart below. However, I argue that there can be no comparison between 1998 and 2011. In 1998 Nasdaq was in a secular bull market and October bottom was a normal cyclical correction within a larger uptrend, although very deep due to extreme volatility of those times.


Today, stocks are in a secular bear market and 2009-11 rally was a cyclical correction within a larger downtrend. If we were in search for precedents of current conditions, we would have to look inside primary cyclical bear markets. I scanned the last two major bear markets and found three intermediate bottoms that could be compared to today's.

The first rally after Nasdaq climax top in 2000 is probably as close as we can get in search of our precedent. Double bottom after initial drop looks remarkably similar to current. After that Nasdaq rose 25% in just 8 days, but soon finished this run. What followed was 5 weeks of meandering in horizontal channel. Finally, a failed breakout signalled the next leg down in a bear market.


April 2011 bottom could provide another example. After a bottom Nasdaq again shoot out, made everything in 11 days and then stalled for 6 weeks. The bottoming formation is not just quite today's, but the initial rally was similarly powerful.


And a third preccedent is October 2002 low. Bottoming pattern is a nice rounding head and shoulders top with a double bottom again. The rally following it then made 35% in 7 weeks, before rolling over again.


When in search for historical example, we should mainly be concerned with the shape aind not so much with the percentage gains or losses as they vary with general volatility. Also, we should consider the context of the current conditions. The 2002 intermediate low was already deep into the bear market. Also, the rally started with a perfect follow through day, which was not the case in any of other examples, nor is the case in current rally. But both the 2000 and 2001 bottoms could be accounted as valid precedents in my opinion. The bottoming formation in 2001 was a bit different, but the most important is the look-and-feel of the rally out of lows.

If the old proverb, "Markets seldom repeat, but they often rhyme", turns out to have any validity, we should now face around 4-6 weeks of sideways action. A late break out of consolidation is possible, but if it happens, it should be a fakeout. There was never any follow through day, volume was weak from the beginning, most leading stocks have built faulty V-shaped bases and my early buys are acting poorly. Those to me are the main signals that this rally is baloney, meant to fool 90% of traders that bear market is over. I don't buy it.