Lowering Expectations

Let's make a brief market analysis. The Nasdaq Composite still looks pretty good, but there are several indictions that a deeper correction is right behind the corner. Distribution days are showing op on daily charts of all indexes. We already have a failed breakout which is a sign of selling into strength. Cyclically speaking stock market's short term cycle is 16 days old and should deep down into low in 2 to 5 days. I expect this low will be quite deep and the next short term cycle will not make a new high, but instead complete a bit shorter intermediate term cycle, before rallying into new highs again.


One very important suggestion comes from small caps. I follow SML index, which tracks 600 small caps. These have clear laggards in last two weeks. While Nasdaq broke to new highs, SML was being caught in a correction already. And when dynamic small caps are left behind, this is usually a very bad sign for general market also. Both my indicators, the stochastics and MFI also suggest a deeper correction is coming in small caps, which are my primary trading vehicle. Not mentioning a plethora of failed breakouts I've seen lately all across the board.


Stock traders should now lower their expectations a little bit. Personally, I'll take the following steps that should keep me out of trouble:

• Trade only the best of the best patterns.
• Keeping tighter stops on open positions.
• Taking less risk on initial positions.
• Selling half at 50% of my usual profit target.
• Trailing the rest of position with a tight stop.
  
• Not holding more than 50% of any position overnight to avoid being hurt by big gaps down in market.

In general I plan to mostly just day trade until conditions improve, taking 7-10% profits when I have them.

Gold is acting exactly as expected after an intermediate term low has been left behind. Yesterday's decisive move out of 33 days long cycle was followed by today's follow through, which of course is a sign of strength. Now, what do I expect of gold in the next couple of weeks? First it will have to face resistance at 175 on GLD. I fully expect it will get broken and then the next resistance is all time highs at 185 on GLD. I don't care whether if it gets broken on the first try or not as I will look to sell my stake around 180. When GLD reaches 180 and possibly 185 the usual 25-week cycle will already be very extended and any tag of new highs will probably be met by a bunch of sellers. For now I'm just holding my positions in DGP and GDX and will look to sell sometimes in the second 8-day cycle if everything goes as planned.

Stocks Down, Gold Up

From my experience cycles can be a pretty useful tool in choppy markets, but during uptrends they can become a little bit difficult to interprete because all correction are so shallow. During last month I pretty much ignored cycle counts, but now it may be time to review them again to gain a better perspective of where we are.

Cycles for stock market are best seen on SPX. I believe the usual 9-week cycle already bottomed, which is denoted with the blue arrow. We should now be on day 14 of a shorter cycle that usually takes about 18 days to bottom. Both indicators that I use, stochastics for momentum and MFI for money flow, show a divergence from price. Distribution days have finally started to show up. Furthermore, in the last few days I saw some strange brief selloffs in highly liquid stocks. And, most importantly, I haven't had a strong breakout in my stocks in the past week. To sum up, I believe a deeper correction now really is coming. I think Thursday's breakout was fake to attract public into buying.


Another bearish signal comes from Nasdaq. This index has become a laggard again. When Dow and SPX outperform Nasdaq, this is a bad sign for momentum traders and general market as well. I expect Nasdaq to correct the most.


So, if money is flowing out of stocks, where can it go? There is only one logical place, which of course is gold. I firmly believe that Thursday marked a bottom of an intermediate cycle that usually takes about 25 days to complete. With 33 days it was a bit extended, but this is normal and actually positive, because it suggests a longer buying period. Besides, dollar tried to rally a little bit, which stopped gold for a few days. But all my signals suggest gold should rally from here. Momentum has not accelerated to the downside, money flow stayed strongly above 20 line and volume nicely subsided. I think gold is ready to launch higher, so I'm giving a buy signal on it.

Climax Top In Apple?

Excuse me for not blogging for almost two weeks, but I've been very busy trading and analysing charts. Besides, nothing really spectacular happened in any market anyway.

Today I'd like to say a word or two about Apple. With a market capitalization of over 460 billion dollars Apple is the biggest stock on the planet right now. It represents a huge portion of both S&P ans Nasdaq index and it is on the eye of every portfolio manager in the world. What I'm trying to say is that as long as Apple is going up, stock market will go up. When Apple tops, market will top together with it.

Now, has Apple already topped indeed? Many traders on their blogs and Twitter are fairly convinced that yesterday's reversal was a climax top. It may be, but I think chances are better that we will see at least one more leg up after brief consolidation. Besides AAPL chart I have two charts to show you to backup my words. First is Google that climax topped in 2007. GOOG made a very similar pattern to AAPL's. A breakout was followed by a straight line up. After couple of days of consolidating price exploded higher once again, before breaking down for good.

The second chart is last year's top in silver as many of us still remember very well. Silver developed a two-stage top. The second stage also made a brief midpoint consolidation before another leg up and final collapse.

And now let's see how AAPL looks like today. A very similar situation indeed. I consider a gap up on earnings as breakout. And yesterday's big volume reversal candle as merely a start of midpoint consolidation that should not take more than just a few days to complete. After that AAPL may see 700 plus in a month or so.

I'm not saying this will happen exactly as drawn on the chart, but historical precedents suggest another leg up is very likely. I would not touch AAPL at this stage, though. Every big portfolio manager in the world owns at least a portion of this stock and will use any strength to unload his stakes at a profit. AAPL is strictly an institutional stock and cannot be traded. It also cannot top in one day, so let's see how it develops.