Market Insights™

Week Beginning 08/01

Very difficult market to trade this past week because the picture was just way too muddy (at least for me). By the close of trade on Friday, however, I think I got a handle on what's going on here. My favored Elliott wave count says that wave 2 of the new cyclical bear market that began on April 26 should complete right at the next Bradley turn date of August 10 (view chart). I am using the NASDAQ because it eliminates one possible wave count that the S&P 500 does not. What makes me uncomfortable about this one is that although no Elliott rules appear to have been violated, both the blue wave 1 and the pink wave 1 are mightily dwarfed by their respective wave 3s.

An alternative wave count goes back to my July 4 newsletter by suggesting that the cyclical bull market is still in force and the price action since April 26 is putting in the final bear waves. Both approaches fit into the larger scheme -- the first one showing the secular bear market rally off of the March 2009 low tracing out 7 waves, the second one 11 waves. What bothers me about the second one is that the final wave is unlikely to make a new high or even a double top should the August 10 turn hold up.

Referring back to the first chart, notice how the last leg up is tracing out a diagonal which projects to the 1925 area on the Bradley August 10 date. That just happens to be a 62% retrace of the decline from April 26 to July 1 (1922 to be precise). The same holds for the S&P 500 in this final chart for which a 62% retracement is 1140. Bottom line is that I believe prices will be contained by the upper blue channel lines and the lower pink channel lines for approximately the next seven trading days. If either of these fails to hold, then the bulls (blue line) or bears (pink line) will have decisively taken command.

EDIT: I have posted an update of the Composite Cyclical Indicator in the link to the right. It utilizes the latest and greatest versions of my timing models and shows four BUY clusters and one SELL cluster over the past 18 months. A second cluster will form around the Bradley August 10 date with 99% certainty as the daily model has already flashed one SELL signal (June 27) and is currently on sell alert. Then a candlestick reversal on the daily chart will serve as confirmation.

Week Beginning 08/08

The update to the Composite Cyclical Indicator in the link to the right shows that there is a bearish cluster forming around the Bradley March 10-11 turn date. What is needed to form a sell signal with this set up is a bearish reversal on the daily candlestick chart of the S&P 500. In short, what is needed is a close below 1119. On Friday, the S&P dropped to 1107 but a late day stick save closed the index at 1122. I suspect what happens next is a push to a nominal new high vis-a-vis the June 21 peak of 1131. I suspect 1138 is the end game and I would not be the least bit surprised to see it arrive right on the Bradley March 10 date.

An update of the NASDAQ Elliott wave count shows that this index appears to be tracing out a rising fifth wave wedge beginning with the July 26 top. This count for the S&P 500 shows a similar pattern. Aside from the combination of daily model sell signals with a major Bradley turn date, what bolsters my confidence that a slide is about to begin -- perhaps a wave 3 slide at that -- is this chart of the 10 year bond yield.

Notice how bond traders have sniffed out economic conditions well in advance of stock traders over the past nine months (and much longer before). All through April as the stock market advanced bond yields fell as bond traders moved to safer ground well advance of the May collapse in equity prices. Also notice that the bond market never bought into the July-August ramp up in stocks as yields continued to fall. The divergence between yields and share prices over the past four weeks looks uncomfortably similar to the divergence over the first four weeks of April.

Week Beginning 08/22

The small wave 1 of 3 completed on August 16 as anticipated but fell short of the 1061 target on the S&P 500, finding support at 1069. And as anticipated the S&P quickly retraced to the 1100 area (1100.14 to be precise) in a wave 2 of 3 and then sold off. The question is was the decline into Friday the first move down of the a wave 3 of 3?

Possibly but I suspect not. Wave 1 down unfolded in a Fibonacci 55 1/2 hour candles while the initial run to 1100 took only 21 candles whereas normally for a wave 2 I would expect a minimum of .500 x 55 = 27, an average of .618 x 55 = 34, or a maximum 1.000 x 55 = 55 candles and possibly more.

What I think may be unfolding here is a large wave 2 running correction that will take us to the 1092 area by Wednesday (view chart). This would satisfy a retest of the breakout from the bullish channel that has been in play since the July 1 bottom. Here is what the Elliott wave count looks like on the hourly chart. Keep an eye on the 62% retracement level at 1086 just in case wave 3 has already begun.

Week Beginning 08/15

On Wednesday August 11, right at the Bradley turn, the daily chart of the S&P 500 made a bearish reversal thus confirming the sell cluster on the CCI chart in the link above. From there the market treaded water in a sideways pattern that traced out a bearish 4th wave descending triangle pattern on the 60-minute chart (view chart).

If my count is right, we should see a gap down opening on Monday that will complete the 5th wave of small wave 1 (8/9-8/16?) of a larger wave 3 (8/9 - 9/30?). If I have this analyzed correctly, the low should be in by 2-3 pm Eastern time (my target is 1061) at which time a small wave 2 of larger wave 3 should make for a sharp end of day rally toward the 1100 area. From there a wave 3 of 3 selloff should begin -- normally the most powerful within any five wave impulse move.

To play it safe, I will be watching this chart as well to see if the bear channel is violated to the upside -- a signal that a tradeable short-term bottom is likely in place.

Week Beginning 08/29

The S&P 500 only made it to 1082 before selling off to a double bottom at 1040. If my Elliott wave count is correct then Monday will conclude the formation of a countertrend wave 4 and the beginning of a wave 5 (view chart) . My target for this final leg down before a rally of some significance is 1005. The NASDAQ, however, appears to be in the middle of a zig-zag wave 4 that likely will not complete before Tuesday (view NASDAQ chart). My target low based on this count is back down to 1700.

Week Beginning 07/04

A fairly eventful week last week. First, what appear to be large head & shoulders topping formations in the S&P 500 and Dow Industrials broke down through their respective necklines at 1047 & 9800 (view S&P here). Unfortunately, this appears to be a widely observed pattern by market traders and analysts. In the past when a formation has received a lot of press it typically fails to unfold as expected so anyone who is short here (including yours truly) needs to be keep their finger on the trigger.

My favored Elliott wave count shows that the market is close to a short-term bottom. This projects to 990, 33 points lower than Friday's close. If that count is correct, we should see a bounce back up to the neckline to test the breakdown. At that point, we will learn if the head & shoulders pattern is going to hold. If it does, a resumption of the decline will follow; if not, a short covering rally will ensue that could invalidate my wave count and burn a lot of bears. Either way, the Bradley turn scheduled for week's end is likely to be a short-term bottom.

While I remain long-term bullish on gold, I lightened up my position this week based on a bearish short term breakdown through the recent bullish channel.

Week Beginning 07/11

Last week I was of the opinion that stocks had begun an Elliott wave 3 decline on June 21, but warned that the large head & shoulders formation could fail and spark a short covering rally. Well that appears to have occurred. I use a set of moving average channels on the 60 minute chart to gauge market momentum. Notice on this first chart of the March 2009 bottom that coming into the major low the S&P was trading mostly between the solid line on the bottom of the channel and the dashed line on the top. On March 9 the S&P bounced from the solid line on the bottom all the way to the solid line on the top and from then on rallied mostly between the dashed line on the bottom to the solid line on the top. The same general pattern can be observed this past week.

A Bradley turn window extends from about July 2 to July 15 and the Dow Industrials made a low on July 2. Although there is plenty of time for the market to top out and still fall inside the window, sentiment suddenly got quite bearish this week with the number of bulls in the AAII survey falling to 21% -- the lowest since March 2009 when it dropped to 19% -- and the Rydex bull/bear ratio approaching March 2009 levels. This generally indicates an oversold market that wants to rally.

From an Elliott perspective assuming July 2 was the Bradley turn, it appears that the decline from April 26 was an A-B-C correction (view chart). This implies that the cyclical bull market that began March 2009 is still in force and will likely carry stocks into a double top by the next Bradley turn date of August 10-11. This final chart shows my wave count from the beginning of the secular bear market that began in 2000. It shows two complex corrections (bear market rallies in the form of cyclical bull markets) from October 2002 to October 2007 and from March 2009 to (likely) August 2010. As the chart demonstrates, complex corrections come in two varieties -- seven waves and eleven waves.

Week Beginning 07/25

On Thursday the S&P 500 broke up through the bearish trend channel I displayed last week. That was supposed to spur me into going "long with both feet" yet as you can see above I am flat in the trading account. What gives? Well in spite of the bullish sentiment readings that abound (see the 07/11 letter) my proprietary overbought/oversold indicator is precisely where it was January 11 and April 15 earlier this year (view chart).

In both instances the market treaded water for about a week before making a nominal new high (less than 0.5 percent higher), then trended lower for 3-4 weeks, losing 8 percent on a daily close basis, before putting together a decent rally. In the first case the rally moved to new highs, in the second the market collapsed a total of 17 percent into the July 1 low. Will history repeat? Your guess is as good as mine. The way I intend to play this is to move back long with an hourly close above 1109.25 (0.5% above the Friday high). If it fails to do so, I will be looking to go short by week's end.

Week Beginning 07/18

My apologies for not posting on Sunday but I had Internet issues. I'm in the process of moving my residence and requested that Internet service be available in both premises for one week. When the installer added service to the new address on Saturday, the system automatically dropped service at the old address -- where all the computers and our bed, clothing, food, dishes, etc. were. So on Sunday we hustled to move as much as we could to the new address (in our cars), only to discover that the modem logged the IP address from my wife's laptop and I could not get mine connected, where all the software is loaded that allows me to upload to the web site. Anyway, I am unable to write the letter tonight because I need to prepare for a busy day tomorrow. Will post Tuesday night.

I'm back and the stock market looks ripe for a decent upside rally. All the major averages posted bullish outside reversals today after retracing the rally from July 1 roughly 50% and my short-term indicators are nearly unanimously flashing green. The next overhead resistance is the bearish channel that goes back to the April 26 top ( view chart). If that falls, I will be long with both feet. Meanwhile, gold appears to be in a 50% retrace of its own (view gold chart).

Week Beginning 06/06

If my Elliott Wave count is correct, June is going to be a brutal month for the bulls (view chart). This take shows an extremely weak wave 2 (it retraced just 38% of wave 1) and the beginning of wave 3 as of last Friday. That wave 3, if it has truly begun, should carry the S&P 500 down to the 875 area over the next four weeks. What to watch for: if S&P trades above 1088 on Monday then wave 2 is not complete (assuming it is a wave 2) and will carry prices to between 1131 and 1152.

The early June Bradley dates are June 3 and June 9. Thursday June 3 was at least a short-term top so it's possible that June 9 could be a short-term bottom. It is quite common, however, that when two Bradley dates fall within two weeks of each other they combine at the mid point into a single turn event. The mid point for these two is Monday June 7 (+/- 4 trading days). Using that date would mean that the turn window is June 1 to June 11 which includes last Thursday's top.

Week Beginning 06/13

I'm expecting a top to form between this coming Tuesday (initial top) and Friday (potential double top). Price target is between 1110 and 1130 on the S&P 500. If that unfolds or anything remotely similar, prepare for a very nasty decline into early July.

Week Beginning 06/27

On June 21, Elliott wave 2 ended and Elliott wave 3 began to unfold. By week's end the first wave down within that 3rd wave completed and a corrective wave 2 is now underway (view chart). If what I just stated is correct, a wave 3 of 3 -- the most powerful of all impulsive waves -- is ready to unfold by EOD Tuesday. This means that you should be exiting all longs and initiating short positions in the next couple of days. The most likely ending of wave 2 of 3 is around the 1100 area on the S&P 500. A close on the 30 minute chart above 1081 (pink line) will confirm that this target is in play. But I don't want to miss out on a 3 of 3 so if for whatever reason the blue line at 1068 is violated to the downside, I will go heavily short.

Week Beginning 06/20

The June 3 and June 9 Bradley turn dates can be interpreted two ways. They can be used conventionally because June 3 was a short-term top and June 8 was a bottom. I prefer to take the mid point between the two dates as a more significant turn date since they are separated by a mere four trading days. That means that June 7 is the date of interest and as this chart indicates both the closing low of June 7 and the intraday low of June 8 fell neatly inside the window formed by the two Bradley dates.

The next Bradley turn of interest comes June 26 +/- 4 trading days which means the new window opens on Tuesday. Because stocks are rallying into this window, we should expect a top to form between June 22 and July 1. The decline from April 26 to May 25 took a Fibonacci 21 days to unfold. The correction since then is now 17 days old so the most likely count for a top to occur that falls in the Bradley window is 21 days or Thursday June 24.

Week Beginning 05/02

The market does not want to correct but neither does it want to rally. The S&P 500 closed on Friday precisely where it had on April 5, four weeks ago. The reason for this from a fundamental viewpoint is that the smart money is beginning to sniff big troubles ahead for Europe -- trouble that could spread globally. "The contagion is definitely spreading and spreading quite rapidly to Portugal, Spain, Ireland and Italy," Mehernosh Engineer, a credit strategist at BNP Paribas SA in London, wrote in a report this week past.

From a technical standpoint, this sideways consolidation in stocks is tracing out a head-and-shoulders pattern as can be seen in this chart. Annotated on that chart are the recent sell signals that were registered by my short-term timing models. I went to all cash after the weekly model went negative but got sucked back in by the closing new high on Friday April 23 and did not update my daily model until this weekend -- missing the sell signal at the 1220 top on Monday (damn). The way I intend to play this is to cash out on any decent bounce from here and contemplate going short. The first downside target is in the low 1140s.

Week Beginning 05/09

I hope that, unlike myself, you were clever enough to avoid the melt-down this past week. As I said in last week's newsletter, it was time to exit the market on any decent bounce. We got a bounce but I only sold off a portion, hoping for a higher price the next day. Too greedy. For the last year plus it has been better to err on the bullish side than the bearish side but that came to a screeching halt this week. The technical damage from Thursday's 10% mini-crash has changed the picture.

The only question left to answer is was this the beginning of a new bear market or the last gasp of a topping bull market? I lean toward the latter and hope for the sake of my portfolio that I am right. If this is part of a topping process than more than likely we will see a retest of the highs over the next couple of months that will form into a double top. If not, a 62% retracement is all that the market will be able to muster. The good news is that this week's collapse gave us a lot of insight into where the money will move once the impending bear market commences.

On Thursday the flight to safety drove the US dollar, the yen, the long bond and gold higher while the Euro got crushed. So we know where to park funds as the stock market sell-off begins. Stay on your toes, however, as the contagion from Europe spreads to the rest of the globe including the US. Once it arrives here, there will be a panic from the US dollar and long bond which will leave gold as the only safe place to be. Hard gold will be preferred over gold stocks and the GLD exchange traded fund.

Next week the newsletter will not be posted until Tuesday due to travel.

Week Beginning 05/23

It is clear to me now that the bull market ended in the last week of April. That was confirmed when the channel I showed in last week's newsletter was violated to the down side on Wednesday. The markets are very oversold here so a sharp bounce is possible but it is likely to last only a couple of days. As the bear market unfolds, money will move to gold and the long U.S. bond.

I refined my monthly stock market timing model so that it triggers a buy signal at the March 2009 bottom. In doing so, this model is very close to registering a sell signal for the month of May as can be seen in the Composite Cyclical Indicator chart above. We'll have to wait until May M2 money supply numbers are released in mid-June.

Week Beginning 05/16

Looks to me like we're going to witness a pretty good bounce in stocks over the next few days. It's possible that a retest of the April 26 highs are in the cards but I will begin scaling out of my remaining longs when the S&P 500 moves back to the 1174 area. If, on the other hand, the S&P violates the lower boundary of this rising channel, I will close all long positions immediately (view chart).

Week Beginning 05/30

The message is simple this week. The S&P kisses the dashed line, sell/short (view chart). It closes above the dashed line, sell/short at the upper channel line.

Week Beginning 04/04

The market refuses to offer a pullback and a chance to go long. While the S&P 500 remains in this bullish channel, we should be looking to chase this market (view chart) . Day 34 of the rally touched 1181 followed by a retest on Friday with a higher close. If the S&P takes out 1181 I will be in with both feet.

Week Beginning 04/11

The S&P 500 index remains in this update of the bullish channel I presented last week (view chart) . Next upside target looks to be 1240. Gold has broken out of its consolidation Bull flag and is trending higher (view chart).

Week Beginning 04/25

Well, what can I say. My short-term models are flashing red but the market refuses to fall back. This is beginning to smell like a short-covering blow-off top in the making. Stocks moved sideways all week but then closed on a new cycle high on Friday. This forced me to redraw the bullish rally channel I introduced two weeks ago (view chart).

My monthly model is not close to a sell signal and there is no near term Bradley turn window so I will fall back on a leading intermediate-term indicator I came across a month or so ago. The Fidelity Capital and Income Fund (ticker FAGIX) is basically a bond fund and measures whether the market for fixed income investments is confident or nervous. Notice how it tends to fall early at stock market tops and rise early at stock market bottoms (view the weekly FAGIX chart). Once a divergence with stocks is established, confirmation comes with a cross of the 30-week MA. Clearly, there is nothing in the FAGIX chart that hints at a stock market top presently.

If a correction comes it will be short and sweet and present an opportunity to increase long positions. But all of the so-called corrections over the last year have not been tradeable for short sellers with two exceptions. Don't look for the market to make it easy to ride a final burst upward.

Week Beginning 04/18

Both my daily and weekly models went to sell this week. Typically when this occurs the correction in the stock market is greater than my intuition is telling me to expect at this particular time. Let's see how this sell-off plays out but a close below 1170 by the S&P 500 means something bigger is brewing. Next week I will take a look at the monthly model to see where it stands.

Week Beginning 03/07

Stocks and gold charged higher this week, although my SPY position easily outperformed my GLD. Stocks are getting overbought here, and after 19 days of uptrend (21 is a Fibonacci number) as the major averages approach their January highs, I am looking for a roughly 50% pullback beginning on Tuesday +/- one trading day (view chart). It is now clear to me that the February 25 low at 1086 was the Bradley turn for March 1 +/- 4 trading days. Therefore, after the pullback I see a continuation of the rally with upside target of 1215.

Edit: the "50% pullback" means 50% of the advance from the February lows, i.e., a selloff from 1150 down to around 1100.

Week Beginning 03/14

The S&P 500 is struggling at the January top of 1150 and looks like it wants to put in a double top. Prices continued to rise after the 21 day Fibonacci advance was reached as the S&P marched up to the new high on Thursday and Friday. Friday was day 24 of the rally which while not a fundamental Fib number is, nevertheless, an intermediate Fib number (fundamentals follow the .618 ratio whereas intermediates can be ratios of .887, .786, or .700; to get to 24, one has to multiply the fundamental Fib number of 34 by .700).

This chart of the VIX is warning of an imminent sell-off (view chart), while my weekly market model posted a sell warning (not quite a full blown sell signal) and my daily model is on sell and simply needs confirmation with a chart reversal which would come with a close below 1140 on the S&P. Should that occur, I expect the ensuing sell-off to be sharp but shallow, presenting us with another buying opportunity.

Week Beginning 03/28

The S&P 500 pushed above resistance at 1166 and after trading as high as 1181 dropped back to close at 1166 on what has now become support. Monday is day 34 off the bottom and with 34 being an important Fibonacci number I anticipate a retest of the 1181 high, followed by a reversal that will leave a double top. No serious shorting should be attempted as long as the S&P remains above 1166. No serious sell-off is in the cards as long as this channel remains intact (view chart)

Week Beginning 03/21

The top in the S&P 500 pushed nominally higher this past week from the 1150 to the 1170 area without posting a daily chart reversal. As I stated last week, the top would not be compete without a close below 1140. What we got instead was a pullback to 1140 that finished the day near the high, thus leaving a long tail from which the rally resumed.

Now the completion of a top will require a close below 1160 which we technically got on Friday at 1159.9. That marginal reversal will require a more definitive statement by the bears before any significant funds can be committed to the short side. Once that is secured, the ensuing sell-off will likely present a buying opportunity in stocks. The first support to watch is 1135 (3.0% correction) followed by 1120 (4.3% correction) which is very near the 50-day MA (currently at 1116). I am not looking for a deeper correction than the 50-day MA at this juncture.

Week Beginning 02/07

Last week I was looking for a first leg sell-off to the 1060 area. On Thursday the S&P 500 closed at 1063 followed by a close on Friday of 1066. During the day on Friday the market sold off to 1045, so my upside correction target of 1115 revises down to 1110. Otherwise, the picture remains largely intact with a downside target of 975 in the first week of March.

Week Beginning 02/14

I am currently positioned net long in anticipation of a retracement by the S&P 500 up to the 1105-1110 area but the market is taking its sweet time getting there. I would keep an eye on the triangle formation in the hourly chart (view chart) for either a breakout above the 1080 resistance or a breakdown below trendline support to gauge the direction of the market in the near-term.

EDIT: I have updated the Composite Cyclical Indicator to show the latest SELL signal. It includes revisions to the monthly model that has it showing just a single BUY signal all the way back to November 2008. I have also reinstated the RPCM2 chart with a new way to interpret the data.

Week Beginning 02/28

The Bradley turn window opened last Tuesday and will close this coming Friday. My read is that the Thursday low was the turn and stocks should rise from here. If that is the case, the S&P 500 will break out of the pink channel as the green channel holds as support in the coming week (view chart). Gold retested its break-out trendline from last week's chart and held support (view gold chart) . It looks now like Thursday presented an excellent opportunity to go long the yellow metal. If stocks move up to retest the recent highs, then I am forced to reevaluate the sell signal for the Composite Cyclical Indicator in the above link. This would be the new interpretation.

Week Beginning 02/21

As I watch this market rally, I am becoming more bullish. From the January 19 top in the S&P 500 at 1150 to the February 5 low 1045, the market sold off approximately 9 percent. Back in June the S&P also sold off 9 percent and than rallied to new highs. Since the March 2009 bottom, nine percent appears to be the most this bull market can correct.

Looking at this channel chart of the S&P 500, I would not be at all surprised to see stocks test the red channel line on Monday and then pull back to the green line. If that occurs, a touch of the green line would likely occur during the March 1 (+/- 4 trading days) Bradley turn window and would present an excellent buying opportunity. On the other hand, if the S&P breaks through the red line and kisses the pink line within the Bradley window, I suspect an important top will be in place. Either way, net long seems to be the right place to be for now.

Gold broke up out of a bull flag consolidation pattern last Tuesday and looks bullish here. A retest of the breakout trend line would make GLD a screaming buy, IMO.