Jun 29, 2011

Looks Like A Bear To Me

In my trading plan for this week I speculated about the bullish and bearish scenario for stock market a little bit. And up to now the market action suggests a bearish scenario is more probable. Eventhough we got a quick rally up to 1300 resistance, which I presumed will happen in any case, the rally was on very poor volume. This indicates there is no real interest from big players to buy the rally and without any significant accumulation in the background a sustained push higher is not likely.

Anyway, I analyze market behavior on a day to day basis and this time will be no different. The following days will reveal the intent of market makers. Now, the biggest question is what was going on throughout Monday's and Tuesday's up move. If big money was slowly accumulating stocks, we should get a real follow through day very soon as many stocks will break out of their bases. On the other hand, if there was no buying by major players, this rally should fizzle out very quick. The first down day that we get should provide at least some resolution. If it is low volume down day, this means there was no selling behind the rally. If it is high volume down day, a distribution day, this means the rally has been sold into and that further decline is most probable.

I was considering buying some minor positions into Tuesday's close just to test the waters, but I'm glad I was able to resist the temptation. It is obviously still too early and this market hasn't proved itself a one bit. Until I see some real momentum in any direction I'm staying on the sidelines.

Jun 26, 2011

Trading Plan For Next Week

Price and volume action hasn't been really favorable for the bulls last week. Volatility actually increased a little bit, which means something is boiling, but a very negative Friday suggests the Thursday's reversal was just many shorts covering into a gap down after they've been caught in a four day rally. So I guess we're pretty much very we've been for more than a month, just waiting for some sort of decision. As I pointed out in my previous plans, I will start watching individual stocks only when I'm satisfied with the market action. This strategy has kept me on the sidelines through this choppy correction, which has turned out to be a right decision. Anyway, my scenarios for next week are following.

Bullish Scenario For Stocks:

  • Basically, I want to see a break of 1300 and I want to see it fast and on strong volume. Any low volume rally into 1300 would probably be just a bear trap and would better be shorted.
  • After a break of 1300 I'd be glad to see some additional follow through. A crawling around resistance lines usually means there is no interest by big players to ride a rally, so such rallies quickly fizzle out.
  • In short, before I become interested on the long side, the market will have to prove me its strength. A shakeout below 1260 or even 1250 is possible, but after that I want to see at least one or two very strong up days on very high volume.

Bearish Scenario For Stocks:

  • In order to even consider shorting any stock I'd still like to see a shortable rally. This means several up days on lower and lower volume indicating that big money is not interested in an up move.
  • I will probably open some minor short positions on a wedging rally into resistance, but a true confirmation would be a low close down bar on volume increase.
  • Any minor rally after such a reversal would represent the highest probability short setup and then I'll become really aggressive on the down side.

As always, the above scenarios are just predictions. Any of them could materialize in many different bar variations. I'll update my trading plan immediatelly when any of above signs start to show up, confirming one or another scenario.

Jun 25, 2011

Still No Resolution From The Stock Market; Gold Breaking Down

During my absence last week nothing really breath-taking happened in the stock market. We got some follow through after the daily swing last week and until Friday everything looked pretty constructive. Wednesday was a low volume test after four day rally and then Thursday's bullish shakeout signaled a possible break above 1300. But all hopes quickly evaporated on Friday as S&P and Nasdaq printed a very high volume distribution day. Definitely not a good sign. Nevertheless, a 1250 – 1260 area should hold for now, as these are the lines the buying came in in the past. I really don't have much more to say about the stock market right now. I'm basically still waiting for some sort of follow through to the upside or a weak rally that would be shortable. I will expose my detailed trading plan for next week tomorrow.

Gold on the other hand finally provided us some clues of where it wants to go. It wants to go down. I think both double top and triangle consolidation I was speculating about last week are now pretty much off the table. Gold instead made a mini double top and broke under the last swing low. This means that gold should now start a downtrend on the daily scale which should bring it down to about 142 on GLD before any reasonable bounce can be expected.

Now the question is, will that be enough or could gold even break that important support? The answer is nobody knows. The action of precious metals is very much dependent on behavior of the dollar. The dollar ETF UUP clearly wants to penetrate the descending trendline that has been valid for more than a year. I suspect it should not be long until UUP attacks the 22 resistance mark. However, the US dollar is still in a long term bear market. I don't believe we already saw the ultimate low as the accumulation in first two weeky of May was simply not enough to start a new bull market. My best guess is that this rally should evaporate pretty soon. 22 mark is very close and could be breached but it looks like dollar will need at least one more leg down before it becomes cheap enough for a major accumulation by big money. In short, I'll be watching both gold and dollar in search for the right time to buy gold, silver and miners. Until dollar tops on intermediate scale, precious metals are just too risky buy.

Jun 18, 2011

Still Waiting For A Bounce, Will Gold Double Top Materialize?

First a little memo. I'm on vacation next week, so there will be no posts. Also, I probably won't be able to do any trading, thus no trading plan this week.

After six weeks of steady falling the stock market was finally able to produce an up week - an incredible 4% gain! However, the action we're seeing is still pretty much neutral. Volume increased as market stopped falling, but a doji candle closing below the middle is not exactly a reversal sign. I don't want to make any long term predictions, but I strongly doubt that we will get a quick reactive rally. At least it doesn't look like we should.

I think two scenarios are most likely. If market starts rallying next week without any real signs of accumulation behind, it could be in for a head and shoulders top. The main property of such rally would be a very slow grind higher on weak volume. It should slowly top in nicely rounded manner without any signs of mass distribution also.

The second scenario is a couple of more weeks of increased volume and no more downside price progress. If market then just shoots up with a solid follow through, it could even go into new highs. Of course, these scenarios are just guessing, I'll touch them again when we get any sort of confirmation. For now, it's way to dangerous to short, especially if SPX undercuts 1250, and I will also not buy anything without seeing a reversal on several indices.

A quick look on gold. As I suspected several weeks ago, a May 20 follow through day was a sign that gold wants to go up. I also predicted that it shouldn't go much higher after a nasty top reversal and a bottom reversal in US dollar. I thought a double top may be a possibility.

Indeed, a GLD produced a wedging rally on lower and lower volume. Meanwhile, dollar successfully tested May lows and should now be ready for a substantial move up. I would officially proclaim that double top on gold is out of question if this week didn't have a look and feel of a shakeout in an uptrend. A long tail hammer candle on a volume increase says that gold may still have a chance of grinding higher along the green trendline for some time.

However, I'd much rather see a triangle consolidation instead of a double top. A double top would probably pull the rug under gold and such a plunge would be very difficult to bottom fish. A triangle consolidation on the other hand would provide a very clean entry point. In any case, my intermediate target on gold is a touch of the blue trendline and until we come any close to it, I'm not even considering to buy and precious metals.


Jun 12, 2011

Trading Plan For Next Week

For next week I think the only realistic scenario is bearish scenario for stocks, so I'm going to mostly focus on this case. Although I don't believe market will give us a clear buy signal any time soon, I'm still going to post a bullish scenario also, just in case something surprises us. I have no intention to trade precious metals in light of strong dollar (and I don't short bull markets), so no plan for PM sector. As usual, I'm going to look at particular stocks when I get some confirmation from the market.

Bullish Scenario For Stocks:

  • A perfect bullish scenario would first print a two day reversal, which can be seen as a hammer candlestick on a two day chart.
  • Following this reversal should be an immediate break above the 1295, which has now become resistance.
  • A test of the same line should be on very low volume to confirm there was no selling into the breakout.
  • Every high quality test should immediately be followed by a follow through day, which is a high percentage gain day on big volume.

As I said, I don't believe a bullish scenario will reveal, but if we get a decent break above 1295, I'll start analyzing potential stocks to buy.

Bearish Scenario For Stocks:

  • First of all, a good looking bearish scenario should not exhibit any kind of bullish reversal. A low volume rally without any kind of background accumulation would denote that.
  • The second step is optional, but in order to complete a bearish reversal in its full power, a marginal break above the 1295 is necessary, as this would trap many bulls as I discussed in my previous post. This break should immediately be followed by a burst of selling, which would push a daily close below the support line. If I see anything similar, I will probably open some short positions at once.
  • The next day all that is needed is some more follow through to the downside on increased volume.


As always, don't expect that any scenario will reveal exactly as displayed on my drawings. They are only a framework of reference of what may happen. If any of the scenarios starts to reveal early next week I will post updates to keep you on the right track. Until then, be patient and wait for the right opportunity.

Good luck!

Jun 11, 2011

On The Verge Of A Bear Market

In last week's trading plan I revealed two scenarios, one bullish and one bearish. None of them happened exactly as I predicted, but overall behavior was much closer to the bearish one.

Instead of giving us a mini rally SPX just sliced through support at 1295. The very next day it tried to regain that level, unsuccessfully. On Thursday we got a rally into resistance levels and another hard drop on Friday, almost exactly as I predicted.

Now, as I said many times, shorting into deeply oversold levels can be suicidal. That's one reason why I did not take advantage of that one day rally into 1295. The second reason is that Wednesday's relatively narrow candle on high volume suggested that there may be a short term reversal coming. And the third reason is that none of my short candidates signaled any high quality sell short alert.

I'll post my trading plan for the next week tomorrow, but what can we expect according to this week's action? It seems that the market will have to go down further until big money decides that's cheap enough. There obviously was some buying taking place on Wednesday and Monday will show, what was going on into Friday's close. I do believe that a quick three or four day bounce above 1300 will have to happen before a plunge down to 1250 is possible and I'll explain why.

A drop below 1250 would be a signal for thousands of cyclists and technical analysits around the world that a new bear market has started indeed. This should produce massive short selling right under that levels. On the other hand a rally above resistance level would be a signal that the correction is over. This, obviously, means new buying. Now, a failed rally above 1300 would trap many buyers, which should freak out when the market slices through support at 1250. This means another selling climax, which big money should take advantage of. Shorters then covering their losing positions as the market rallies back above 1250 should provide just enough fuel to start another leg up.


Of course, this is just my best guess of what could happen. My approach to trading is day by day analysis of indices and individual stocks. I'm still waiting for my wedging rally and only if I get it, I will start aggressively shorting. More in my trading plan for next week tomorrow.

Have a good weekend!

Jun 7, 2011

Gold Diverging From Silver And Miners

Today I'd like to touch a little bit on my intermediate term view on bull in precious metals, especially gold and silver. Gold, silver and gold miners are three industries that are moving in parallel almost all of the time. Of course, mostly up. Usually a strong negative divergence in any of the three can provide a clue that something may not be right and that we should reconsider our views.

What's happening now is that we have negative divergence in silver and miners, while gold is still moving steadily up. This by itself doesn't mean much. It has happened in the past that miners and silver have been lagging, but then broke out higher with gold. So to get an additional clue of what may happen in the near future we must closely observe each three by their price and volume behavior.

Let's see the gold miners first. First thing to notice is that GDX is now in an intermediate term downtrend as the pattern of lower highs and lower lows has evolved. Second, the volume pattern does not favor a push higher. The last two weeks' bounce resulted in wedging rally without a test and has a look of a snapback rally from highly oversold levels. A quick drop on strong volume confirms this view. It all looks like a January low around 52 should be taken out pretty soon.

Next, silver. It's a little bit difficult to say what's going on with the white metal. After a spectacular drop SLV experienced some very high volume bars and rebound, which was soon tested. Price then went slowly higher. This could mean a reversal. However, the rally that followed has been very week up to this point. Moreover, more distribution days and another mini wedging rally is clearly seen. I cannot clearly say what direction silver is aiming from here as it is caught in a non-trending mode. With all that overhead resistance it is hard to believe it will be able to enter a new uptrend without first shaking off all those weak holders.

Finally, let's see how gold is doing. It is by far the best looking chart of the three. After climax top in silver gold followed down but without any real distribution at the top. Volume increased on a way down, resulting in a short term selling climax which stopped a drop. That big red ugly candle was successfully tested and a follow through day commenced a two week rally that is still looking not so bad at all. There has been some distribution (a reverse hammer bar) followed for the next day, but it was quickly reversed and nov GLD is aiming at new all time highs.

I think silver will be a driver of the next leg down in a complete precious metals sector as it has obviously been most widely publicly accepted darling of the last bull run. And as long as there are any weak hands on silver, neither gold nor miners will be able to produce any convincing run. Gold may breakout into new highs, but I think this will be a nasty fakeout if it really happens. Not until silver becomes strong again will big money risk buying any large positions in gold or silver. I suspect gold will fall the least and when sector bottoms it could be the best buying opportunity of the trinity.

The final nail in the precous metals coffin may be the dollar. PM sector has never been able to rally into the strong dollar and it looks like dollar may be forming a double bottom reversal pattern. If the dollar ETF UUP successfully tests May lows and rallies on good volume, this would be a lot of oil to PM bear fire.

As you might have guesed I have no intention to trade precious metals in the near future. Buying into a breakout into new highs would probably suicidal and I usually don't like to short bull markets. So for the next couple of weeks I'll probably be more focused on shorting stocks as our bearish scenario seems to reveal.

I suggest you be extremely careful in the following weeks. Shorting is tough even in confirmed bear markets as counter trend rallies are always violent. The best protection is just to not overexpose. Good luck!

Jun 5, 2011

Trading Plan For Next Week

As I said in my previous market update post I don't believe I'll do any trading next week. Indices are just acting too choppy and until a new trend establishes it is better to stay on the sidelines. However, a new trend WILL establish sooner or later. As a trend follower I simply have to believe that. So, although I don't expect to do any trading next soon, I still have a trading plan, which is as follows.

First of all, I'm not going to even look at particular stocks until I see any resolution on indices.

Bullish scenario:

  • First I'd like to see some sort of a reversal forming. It could be in the form of a hammer, a two-day reversal or any other pattern, this is not so important.
  • More important is what follows next. We should see at least a two day rally on strong volume.
  • The best next thing would be a low volume down day – a test. Sometimes tests occur, sometimes not. If we get a solid rally I may do some buying without waiting for a test.
  • The final component of this »perfect« scenario is a follow through day – a breakout into new short term highs on massive volume. Again, follow through days sometimes happen and sometimes they don't. In any case there should be at least one very high volume up day supported by plenty of high quality names breaking out of solid base patterns.

Let's see how a perfect bearish scenario would look like.

Bearish scenario:

  • As I said before I don't believe market will just drop as it is already being oversold. In the first days of next week there should be a weak rally on lower and lower volume – a wedging rally.
  • A high volume plunge through the support area could follow. Now, if I see a wedging rally and a swing high on volume increase, I might start opening a few short positions in case if market just cuts through support and never looks up again.
  • Anyway, the best shorting opportunities should appear on a weak rally into resistance. Keep in mind that market may »crawl« above or below the green horizontal line for several days before rolling over. Picture below is just an example of a perfect scenario. In any case weak rallies into resistance areas should provide the highest probability short setups.
Don't expect that any scenario will reveal itself exactly as I draw on pictures. It won't. This is only a model of expected steps that would confirm bullish or bearish scenario. I may do mid week updates on which scenario may be realizing. I will touch particular stocks when I get a confirmation of bullish or bearish case. There are plenty of candidates for both.

Good luck and be careful with your stocks!

Jun 4, 2011

How Deep Can Market Go?

Stock market has become a total mess. Tuesday's follow through day turned out to be a bear trap and has undoubtedly got many technicians who traded a break above the red resistance line into poor positions as we got some more follow through to the downside. On Friday we got a broken descending support line and we shouldn't be surprised if market rebounds on Monday.

Now, the next very important line in the sand is support at around 1295 drawn as a horizontal red line. It has been a pretty obvious support or resistance many times in the past. If market just slices throught or crawls along it next week there is a very high chance that we may be on the verge of the bear market indeed. An inability to rally from such oversold levels would confirm the view that there is no more support in the market. A March low at 1250 is then only a matter of time.

The best thing to do now is to do absolutely nothing. Stock market is in a downtrend and I don't buy in a downtrend. At this moment it is also very risky to start shorting as market is now very oversold after a three day plunge and should experience some bounce soon. As we get the bounce I will be monitoring it very closely for signs of strength or weakness. Another wedging rally on lower and lower volume and a swing high on volume increase would probably mean that 1295 will be broken sooner or later. I will look for shorts then. On the other hand, a strong rally would mean there is still strength in the market. If that happens any down day on low volume would be a confirmation that a temporary low might be printed. If I see such a pattern I might do some buying.

A day to day approach is the best in a choppy market. The next week might be boring as hell but sooner or later a day will come when market direction will become clear again. Until then, don't overexpose yourself in any direction.

Good luck

Jun 2, 2011

Market Poised To Go Lower

Stock market is in serious trouble. What looked like a follow through day turned out to be a bear trap. Yesterday I though my patience will be rewarded after all. For more than a month I've been patiently sitting on cash, waiting for opportunity. Yesterday I thought I finally got it, but I got a hunch that I should not do any buying anyway. Let me explain why.

First, despite a n
ice up day, on intraday basis market actually made a double top. Price fell immediately after gap up on open. It recovered until the end of the day, but the fact that people were selling into the gap is a clear message what's on their mind.

Second, a real follow through day should be accompanied by a number of high quality names
breaking out into new highs on volume. My scan yesterday found only four names I was willing to put on my watch list - not a number I would expect on a follow through day. Most of the names in my scanner were laggard stocks rallying into resistance.


Anyway, I think the market will have to go much lower before big money is willing to step in again. From now o
n, until conditions change, I'll be focusing on shorts. Another wedging rally into resistance could be an opportunity to make some quick bucks. It is also an opportunity to unload any remaining longs, if anyone still has them. If we don't get a wedging rally, positions could be held, but I suggest tightening up stops. And I would certainly not do any buying until a real follow through day is printed.

Good luck