Category Archives: Strategy

Treasury bonds make waves – Tactical Update 05-13-2011

Posted on May 14, 2013 | Leave a comment

Treasuries Elliott Wave Count

Over the past weeks I have followed the development in US treasuries closely. It was a nice trade, that seems to have gone sour now. However, upon close examination we can notice 5 waves up and 3 waves down. The third wave is still in progress, but nearing its ideal target (61.8% retracement = 143’30 and A=C is at 143’24).

If you are not familiar with treasury bond futures, please note that it trades in ticks of 1/32. So 30 ticks = 30/32 = 0.9375).

The bottom line, we are coming into a very strong support from a technical standpoint and from a structural standpoint (Elliott Wave). The implications on the market is quite bearish and the implication on Bonds is quite bullish, which seems to be contrary to widespread belief (Marketwatch ran several bearish Bond stories today).

Watch your backs, stay nimble and keep an eye on Treasuries. If it confirmst the pattern, we should put in a bottom very soon.

Coincidentally, the wave volume on the daily chart shows that this panic sell-off contained less selling than we had buying on the move up (bottom indicator on chart below).

Wave Volume

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Posted in Bonds, Elliott Wave, Finance, Strategy, Tactical Portfolio

Tagged Bonds, Investing, Stocks, Treasuries

Gartley or not – Tactical View 2013-04-27

Posted on April 27, 2013 | Leave a comment

Emini Gartley pattern?

The S&P 500 futures appear to be carving out a bearish pattern!

I will keep today’s post relatively short, since many of my previous words are still valid. The current pattern on the E-mini futures contract appears to take the shape of a bearish Gartley pattern. Making new highs will invalidate this pattern, so it represents a relatively low risk / reward entry point for adventurous shorts or hedgers. A break below 1570 would confirm the bearish nature, whereas a break of the 1588 high would most likely invalidate the pattern (although it still has a lower probability of playing out until we exceed 1593). So as far as entry points goes, this is pretty decent.

Please read the disclaimer on this website!

SPY volume watch – dying on the vine

The SPY S&P 500 ETF shows a rare bearish Tri Star pattern, accompanied by a severe decline in volume. The muted response in the options volume could be seen as complacency, or as a non-event met-up in progress. Again, it is best to wait for confirmation, even if that means giving up a few points.

SPY vs TLT in downtrend

The bond market is amazingly strong, causing the SPY/TLT indicator to show a bearish divergence to the overal market performance. You know what they say, about the Bond market usually beeing right. I guess the bubble is still not quite ready to deflate and could in fact inflate even further (e.g. Japan).

In any case, the flight to safety (Bond, Defensive sectors) is picking up steam.

Energy unconfirmed double bottom

Did the energy sector just make a double bottom? The bounce doesn’t look very convincing yet, but a further sell-off would indicate even higher level of dis-inflation.

Healthcare strong

Defensive healthcare is showing a lot of strength. We could pull back on a short term basis.

Darling Utilities

Utilities are without a doubt the current darling of the investment universe.

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Posted in Bonds, Commodities, Finance, Strategy, Tactical Portfolio, Technical Analysis

Tagged Finance, Futures, Investing, Stocks

Chop Chop making a Top – Tactical View 2013-04-20

Posted on April 21, 2013 | Leave a comment

E-mini support and resistance zones

The day after I called for a top, we had a steep 3 wave sell-off, that hid the trend channel that went back to November last year. We also just re-tested a prior low and just had completed and A-B-C structure with A=C. This made a perfect trifecta of confluence for a nice bounce. What surprised me was the strength of the bounce, which took us to a new high.

Obviously this was short lived, and we started a new downtrend. How are we going to proceed from here?

In my picture above I outlined two cases. One bearish (green) one bullish (dotted green), based on the form of the correction. Assuming that the surprisingly large run-up was some sort of B-wave (in Elliott Wave terms), then we are most likely looking at an expanded flat. Usually those unfold in 3-3-5 structures with a deep C wave.

However, the correction doesn’t look much like a C wave at all. Currently it looks more like a double ZigZag off the top. If we still respect the falling down-trend line (thick yellow), and if we get another push to lower lows, we could still consider this a C-wave with a 5th wave as an ED (endig diagonal). In which case we can expect a target near the thin red trendline (it can overshoot). This would then end the correction and the market could take off to new highs.

The ultimate test would be to take out the 61.8 fibonacci retracement level near 1569 on the E-mini contract.

The second (at this point more probable scenario) has us chop around a bit more, run up a bit more and then have an even larger correction to lower levels. This results in further distribution and thus calls for a deeper correction eventually.

SPY volume indicators

The volume indicators show why I prefer the bearish case. We have diminishing volume on the up moves and increasing volume on the down-moves, which seems to be clear preference for further downside.

Small caps came down (still looks like 5 waves up and 3 down)

Small caps are leading the way down. However, one warning sign to the bears is the 5 wave run up, and the 3 wave correction down. So far this does not spell disaster, unless we consider the 5 up a C wave (A=Oct’11 to Feb’12). At this point I would just keep an eye on this ratio chart, with the ascending blue trendline in mind.

Telecom double bottom blastoff ?

The relative performance of the telecom sector blasted off a potential double bottom. Those are dividend paying defensive stocks, which seem to do well when investors are uncertain.

Utilities testing resistance soon

The same can be said for utilities, whose relative performance will soon challenge the long term downtrend.

Semiconductors still in downtrend

Semiconductors (growth sector) are still caught in a down-trend. Problematic is the clear ZigZag of the 2009 lows, and the potential to make a 5th wave down, if we break the 2012 lows.

Materials at 2009 lows

Materials are still weak, now testing their 2009 lows (in relative terms to S&P 500).

Technology at critical juncture

Technology is challenging its bottom channel line.

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Posted in Elliott Wave, Finance, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged e-mini, Futures, Investing, Semiconductors, Stocks

Dangerous Lullaby – Tactical View 2013-02-17

Posted on February 18, 2013 | Leave a comment

SPY daily volumes

The stock market has entered the lullaby phase. Grinding higher every day, lulls even the last cautious investor into a false sense of security. Last week I speculated that we would still see a climax top and that may yet come to pass, in order to draw even more retail money in, before we see a good sized correction.

Last week was uneventful, so this will be another post short of words, but with more charts this time.

On the weekly charts, we can see the range of the bars narrowing, right near the upper trendline of a long term rising wedge. Although there is no hard rule that this market must fall now, the risk to downside now seems to outweigh the reward to the upside, so at the very least we should stay cautious and mindful of a short term correction.

The large bullish wave (green triangle above) indicates that this will most likely not end the bull market and that we should see another push after a correction is over. Last friday we saw a lot of volume (supply) come in, but a large percentage of that volume can also be attributed to hedging options positions on options expiration week (vertical red lines). We got high volume during the previous 3 months on op-ex day as well.

Emini Futures

As you can see from the chart of the E-mini futures above, the lower blue channel line of this melt-up wave has once more stopped the decline and pushed prices back up. This line will have to break before we can start a down-trend. Oversold momentum indicators are useless for predicting a reversal in this kind of market environment. The light blue line is the McClellan Summation index, which has made its high and is now showing a divergence. Although this is a good warning sign, we had a similar situation in early 2012 that lasted several months.

Momentum is certainly slowing, since we haven’t been able to touch the upper trend-line in a while.

SPY vs. TLT

SPY vs TLT still is in risk-on mode.

US vs. World

The US market found some strength compared to the rest of the world.

Top in Bonds

Bonds have corrected down. We are straddling the red trend-line and could get a bounce. If we decline further, we should bounce at the blue channel support. Wave volume is very bearish, indicating that the sell-off in bonds is quite serious. I do not believe that this market will just head straight down and we should get a decent bounce soon.

Gold in corrective pullback phase

Gold did surprise me by taking out the high volume low of 1/4. We created a similar high volume low and were pushed off the blue channel. Let’s see if we can break to the upside this time. The news on gold is certainly bad enough to mark a significant low.

Small Caps still looking strong

Small caps are still leading up.

Materials may backtest breakout

Materials may backtest their breakout level and/or trendline.

Healthcare strong

Healthcare is still looking strong.

Financials still supportive

Financial sector still supports the rally.

Energy Breakout

Energy finally broke out. I expect it to continue to outperform the broad market in the intermediate term. Short term, we are a bit overbought.

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Posted in Commodities, Finance, Oil, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged Finance, Investing, Stocks

Climax Top still missing – Tactical View 2013-02-09

Posted on February 9, 2013 | Leave a comment

Climax Top still missing – click to enlarge

After reviewing the charts, I have come to the conclusion, that the ultimate climactic top in the market is still missing, despite the strong warning signs everywhere.

Since this also means that very little has changed since last weeks post, I will keep this update shorter and refer you back to last week for more charts.

The numbers on the chart above are powerful DeMark Sequential counts, indication exhaustion in a move. They are thus broadcasting when a trend becomes mature. Currently we have had a 9-13-9 sequence, which is already a powerful bearish indicator. Notice however, that the past bull run ended with yet another 13 (9-13-9-13). We are still missting that signal.

We also cannot see a climactic volume pop, that often indicates the fireworks at the top of a strong trend. Rather than the climax volume, we see a similar volume profile to the time we hit a 9 on the DeMark charts in 2012. I have marked these with blue arrows.

A warning sign of a possible near term trend-change is the strong under-performance of Junk Bonds. Financial websites are awash with warnings of an impeding “Bond Bubble”. They were not warning of a top when it happened. On 08-04-2012 I wrote: “The treasury bond market seems to have topped already at the buying climax. Then we got a false break two weeks ago. False breaks often precede a reversel in the opposite direction.” In hindsight, we can see that the ultimate top had happened on that false break, just as I had suspected.

So what does the sell-off in Junk mean now? This beast is more difficult to predict. Junk normally moves with the market, but in February 2012 it started under-performing, foreshadowing the April top. Keep an eye on that!

German Stock Index futures – DAX (= Deutscher Aktien Index)

Similar to Bond investors, Investors in the German Stock Index seem to be more prudent. The strong outperformance led me to write “Either the DAX will come down hard or the US market will have to catch up. I am going to suggest the latter in this posting.“ on 2012-12-02.

Ultimately this suspicion was proven correct, and the US market made a new bull market high eventually.

Now the DAX is under-performing, as the European Crisis re-asserts itself. Is this a warning sign of an impending top? I think so!

Spy vs. TLT indicator

SPY vs. TLT isn’t broadcasting any warnings just yet.

US vs. World performance

The US market is catching up.

Energy breaking out

Energy still breaking out. Consolidating here is bullish!

Small Cap loss of momentum

Small caps are consolidating in a constructive form.

There are many indicators that are still in full-on bull mode. The Semiconductors are doing well, Financials are still performing well and even Technology has finally been able to catch a bid, which could drive the market higher once more.

I chose to present the warning signs in today’s post, since I believe the market is too complacent.

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Posted in Finance, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged DAX, Investing, Stocks, Treasuries

Deja Vu Market – Tactical View 2013-02-02

Posted on February 3, 2013 | 1 Comment

SPY deja vu

As I suspected in my previous weekend post, there wouldn’t be any significant correction during the week and indeed, we ended the week on a high note. Although pundits are quick to point to record low implied volatility (VIX), we have to note that historic volatility is at record lows too. VIX is a synthetic product derived from supply and demand in the options market, and thus highly suspect as forecasting tool. It does however give us an indication of what is happening in the options market and what options traders are willing to pay for protection. Currently that is very little.

Historic volatility went below 6 this past week. The last time this happened was during the 2011 run up. The similarities in wave volume, fractal shape of the market and volatilities is astounding. If this plays out, we have a bit more to go. The chart above marks these two periods, with a red vertical line showing where we are now in relation to 2011. I have no clue if it plays out like that, but I didn’t see a topping formation last week and I don’t see one this week.

SPY volume

Option volume saw a spike, but I am wondering if this wasn’t just due to traders selling their hedge, that they had acquired to protect form the jobs report. The VIX collapse would certainly support this theory. In that regard, I wouldn’t read too much into this spike and wait for confirmation on price and share volume.

Bond Bubble over?

The 30 year treasury bond market broke down last week on climactic volume. We broke the rising wedge that was nearly 3 years in the making and have accelerated down.

Although we can see a potential bottom in the Elliott Wave count and climactic contract volume, I believe this isn’t over yet. At best we see a prolonged topping formation.

SPY vs TLT broke

SPY vs. TLT broke the last significant resistance. This is very bullish for the long term market picture.

Energy breakout?

Energy is getting close to a breakout.

Financials, stairway to heaven

Financials continue their stairstep pattern to higher prices.

Materials broad base

The material sector continues to be weaker, but together with technology, this is where traders can still gain an edge should the big rotation out of bonds accelerate.

Meanwhile, I wouldn’t chase this market. The run up seems mature, even though the deja vu chart suggests higher prices.

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Posted in Elliott Wave, Finance, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged Investing, Stocks, Treasuries

Correction in jeopardy – Tactical View 2013-01-27

Posted on January 27, 2013 | 1 Comment

S&P 500 weekly chart

The headline of this weeks post deserves an explanation: Although I am still awaiting a pullback in February, the longer the markets can cling on to these levels, the less severe the pullback will be. Markets managed to regain some energy in a slow melt-up similar to early 2012.

Despite the formation of the bearish rising wedge and countless EW counts floating around that have us completing a 5th wave of various corrective counts, the massive liquidity injection from all central banks should curtail the downside severely. The chart looks eerily similar to 1980, but we are still missing a washout and we will eventually get it. In the larger context, a correction or even a recession are not that unlikely, but until then the markets seem to have little intention to follow my call for lower prices.

Unfortunately the prevailing bullishness will result in a steeper correction, as the markets managed to draw record fund inflows. Sentiment is entering contrarian bearish territory (bullish sentiment) and the news is painting a rosy picture, which is another contrarian warning sign.

S&P 500 daily chart with DeMark indicators

The chart of the S&P 500 continues to straddle its rising channel on the upper resistance line. On the monthly chart you can see that the incline matches the bull markets of 2010, 2011 and 2012 well, so despite the massive surge, the bulls have yet to show signs of exhaustion. The bullish news will ensure demand at each dip.

It appears as if this market needs a catalyst for a sell-off. The debt ceiling negotiations have been put off for a while, giving us the possibility for a further rise.

On the daily chart above, you can see that the 2011 and 2012 tops were marked with a DeMark sequential sell setup that produced a 9 and a subsequent 13. The SPY ETF even gave a perfect sell and perfect countdown sell on both tops (the S&P narrowly missed the perfect countdown sell signal in 2011). This time however, the 9 and 13 flew by without any significant pullback, giving further credence to the unexpected strength of this bull.

S&P 500 hourly chart

The hourly chart looked tired but started to re-accelerate.

SPY volume analysis

A volume analysis on the SPY ETF shows no signs of topping yet. We can clearly see the VSA indicators (green triangles) that flashed on both lows, but no matching topping candle is in sight. The bullish wave volume has already exceeded the volume of the previous bullish wave and the bullish waves are still significantly larger than the bear waves. Yes overall volume was low (often used argument from bears), but the cumulative volume (wave) shows us that the buying was simply spread out over a longer timeframe.

Option volume showed significant activity around the last low, which is mostly due to hedging. The fractal energy has managed to recover, due to the slow grind.

So far this chart gives does not indicate an immediate pullback.

Spy vs TLT still strong

SPY vs. TLT broke out and is challenging its next level of resistance already.

US regaining momentum

US vs. world is back in the channel. The complacency (low vix) in face of the pending debt is almost insane.

Financials still strong

Financials still look good, dragging the S&P 500 to new bull market heights.

Material sector broke relative downtrend

Thans to China, the Materials sector has broken its downtrend.

Semiconductors

Semiconductors have turned up strongly and are performing slightly better than the broad market, but the falling channel line will be the real test of their outperformance.

Technology in the Dumpster

Thanks to Apple, Technology is still looking awful.

Energy nearing breakout level

Energy is nearing its breakout level.

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Posted in Finance, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged Finance, Investing, Semiconductors, Stocks

Slowest week – Tactical Update 11/19/2013

Posted on January 19, 2013 | Leave a comment

This week nothing significant happened. The market continues to get whipsawed in a small range, levitating to new multi year highs on suspect earnings grows.

Most charts still look the same as they did last week: Last weeks post.

I have nothing to add. Still waiting for a correction. We don’t have enough energy built up to just explode higher, but we could slowly grind up as we did almost one year ago. I think this is not very likely.

Last weeks gold prediction played out so far. The low I called held. Meanwhile I resorted to theta burning options strategies to take advantage of the slowness.

See you when something actually does happen and is worth analyzing.

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Posted in Stock Market, Strategy, Tactical Portfolio

Party on the titanic – Tactical View 2013-01-13

Posted on January 13, 2013 | Leave a comment

S&P 500 long term chart

The S&P 500 is becoming quite overheated.

This is my first post this year. I did have some computer issues, but my new mac is up and running and I can post charts again. Unfortunately, I didn’t find much time today to draw on the charts, but I believe that my readers are capable of a correct interpretation, so I will keep it short.

After the massive gap up on the resolution of the fiscal cliff and the unprecedented collapse in VIX (volatility index, that basically represents hedging activity and thus indicates how much traders spend for insurance), we are quite overstretched and should pull back very soon.

The S&P 500 has been trading in a rising wedge for the past 1 1/2 years, that should eventually resolve to the downside, possibly even breaking the blue long term channel. We aren’t there yet and we should get ample warning signs.

Currently, we see a warning sign of overbought conditions and the forming of even smaller wedges and channels in most indices, that will eventually resolve to the downside.

S&P 500 daily chart

On the daily chart, we can see a smaller channel and when you observe the hourly chart, you will see an even small one (dark blue here) that contains this rally ever since the gap up. Some indicators are showing negative divergence, but that is fully expected after such a steep rise.

Financials breakout chart

I have posted about this many times last year and finally over my break the financials broke out to the upside. That is good news for the S&P 500 and the reason it leads the DOW and NASDAQ at this point. The NASDAQ is the polar opposite. It has underperformed.

: Technology still weak

Technology still looks poor.

Gold Weekly

Gold Daily

Gold Daily 2

Gold has backtested it’s long-term trend-line and turned back down. However the pullback is corrective so far (overlap) and we appear to have seen a washout 5 days ago, which could mark the low of this correction. I am bullish on gold, but it could break down further.

With the policy of central banks around the world centered around printing, I will further buy the pullbacks.

Small Cap may pull back

Small Caps have had a great time after we saw the breakout of the shorter downtrend. We have now come all the way to the long term trend-line. I would at least expect a pull-back before we go through.

REIT vs S&P

Real estate still looks good, although the recovery is slowing.

SPY VS TLT

SPY vs. TLT indicator looks very good for bulls. A backtest of the breakout would not surprise me at all.

US vs. World

The US markets are still underperforming, but have had a small bounce since the fiscal cliff resolution. I would still expect us to hit the lower trend-line.

The German Stock Index (DAX) has gained nearly 30% in 2012. In previous posts I have always maintained that the US fiscal cliff would resolve in an upside move and at least a partial catch up to the DAX. The DAX however has shot so far ahead, that a pullback in the DAX would not surprise me. Maybe the cyprus situation will escalate?

FOrex

EUR/JPY

The strongest chart in Forex right now is that of the Euro / Yen pair. The massive inflationary policy of the Japanese government and the recovery of they Euro have led to a massive bounce. We are due for a pullback, but I would not dare shorting into this rise, especially with the BoJ policy. I would however be interested to buy a decent pullback (Cyprus maybe)?

Crude vs. AUD/USD

Watching crude, we appear to be at an important inflection point. The AUD/JPY pair seems to want to lead crude oil higher. Looks like the inflationary play is heating up.

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Posted in Commodities, Elliott Wave, Finance, Forex, Oil, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged Investing, Stocks

Resting for the summit ? – Tactical View 2012-12-09

Posted on December 9, 2012 | Leave a comment

S&P 500 still below major resistance

In last weeks tactical view I expected a pullback due to the overbought condition and negative momentum divergence, after which I expected more upside. The market however chose to hold on and burn off some of that excess in a sideways movement. We are still below a strong support zone on the S&P 500, unable to make much progress to the upside.

Meanwhile the DAX (Deutscher Aktien IndeX – German Index) managed to set a new bull market high, suggesting that the massive under-performance of the US markets (see relative performance charts below) is mainly due to to concerns over politics. Either the DAX will come down hard or the US market will have to catch up. I am going to suggest the latter in this posting. However, I believe that we should experience some sort of pullback soon, possibly after testing the 1430 level on the S&P 500.

Lets review the evidence.

SPY daily volume analysis

The volume analysis still shows that the bottom on 11/16 was signficant. Option volume gave an early warning (peak on 11/15 vs. opex day 11/16 could have some impact) and the wave volume is still looking healthy, showing a lot of accumulation.

Spy hourly volume shows still buying

The hourly chart is even more revealing. Upon close inspection (see arrows with S), we can conclude that the buying near support still exceeds the selling at the tops (arrows with R).

Small Caps relative performance good

Small caps often lead recoveries. We therefore compare them to the broad market by inspecting the ratio of the small cap ETF (IWM) price to the broad market ETF (SPY) price. We can see that the small caps are still leading.

Small Caps look exhausted

However, examining the fractal energy chart, we can also see that the small caps are getting very tired.

The fractal energy study is a brilliant way of examining the amount of energy left in a move. Doc Severson introduced me to this method. You can check out his youtube channel here: http://www.youtube.com/user/OptionsMD.
Doc is a brilliant analyst.

You can see that the energy on the daily chart has reached levels of exhaustion, whereas the 78minute chart (please see his videos for the reasoning), shows that we have gathered enough energy on that timeframe for an explosion up or down. The daily energy however would limit the upside quickly.

US still underperforms

The relative performance of the US vs. the world has accelerated to the downside, mainly because most regions are showing strong data and strong recovery. Europe looks very strong and the data coming from China is very encouraging. I therefore view this as a long term buying opportunity. So far, the correction doesn’t show signs of finishing.

SPY vs TLT looks bullish

SPY vs. TLT has reclaimed the area above the falling trendline. It is still in an uptrend, suggesting the risk on rally could continue. However, just like the SPY ETF itself, this indicator is struggling with overhead resistance. This means we need to be cautious of a quick washout.

Technology is weak

Technology has failed my expectation and is breaking down. Apple has set up a very bearish pattern and if it plays out, we could see a lot more weakness here. This would most likely start the pullback I mentioned in my introduction.

The poor performance of this sector is a clear warning sign. We could just have back-tested the lows at this point, but further weakness would be bearish.

Financials near resistance again

The relative performance of the financial sector is quite the opposite. We are back near resistance and could have gathered enough momentum for a breakout.

The stark difference between the tech sector and financial sector suggests that it could be time for a significant rotation away from tech.

Materials still in trading range

Materials pulled back very strongly, shying away from the long term downsloping trendline again.

SOX strong again

Semiconductors often lead recoveries and announce declines. The strong under-performance of this sector has loudly broadcasted that the next two declines were about to start (see chart). At this point the SOX still looks strong. SOX is a sub-sector of technology, which makes this performance even more remarkable. Semiconductor manufacturers are very far up in the supply chain and are thus the among the first companies to see advances and declines.

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Posted in Finance, Stock analysis, Stock Market, Strategy, Tactical Portfolio, Technical Analysis

Tagged fiscal cliff, Investing, Semiconductors, Stocks, Technology

Category Archives: Strategy

Treasury bonds make waves – Tactical Update 05-13-2011

Gartley or not – Tactical View 2013-04-27

Chop Chop making a Top – Tactical View 2013-04-20

Dangerous Lullaby – Tactical View 2013-02-17

Climax Top still missing – Tactical View 2013-02-09

Deja Vu Market – Tactical View 2013-02-02

Correction in jeopardy – Tactical View 2013-01-27

Slowest week – Tactical Update 11/19/2013

Party on the titanic – Tactical View 2013-01-13

FOrex

Resting for the summit ? – Tactical View 2012-12-09

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