Saturday, May 4, 2013

IWM May 3 2013 - Shooting Star?

IWM after May 3 2013, showing Bollinger Bands

Japanese Candlesticks are useful for a variety of reasons. They differentiate between up and down days better than ordinary bars, and they form multi-day patterns. This analysis will look at whether a particular one-day candlestick is present in the above chart and what that might mean. Specifically, we want to know whether a Bearish Shooting Star occurred on May 3, 2013. Candlestick patterns usually have, on average, a three in four reliability of completing. Here, we are looking for the possibility of a Bearish Reversal.

Is This the Right Place for a Shooting Star?

First things first: to be considered a bearish reversal, there should be an existing uptrend to reverse. In the above chart, there is no question that there is both a short-term and medium-term uptrend. This also is part of a major uptrend that began in 2009.

Does The Action on May 3 Meet the Definition of Shooting Star?

By definition, the shooting star is made up of one candlestick (white or black) with a small body, long upper shadow and small or nonexistent lower shadow. The action on May 3 fits that definition.

The size of the upper shadow should be at least twice the length of the body and the high/low range should be relatively large. By "relatively large," we mean relative to the previous week or two. Looking at the previous ten candlesticks, the Candlestick formed on May 3 is larger than all of them.

For a candlestick to be in star position, it typically shows a gap away from the previous candlestick. While this chart does not show that because of the way I have it set up, in fact there was a nice gap after heavy buying hit upon the release of some economic data prior to the market open.The gap was roughly ten points. A gap is not necessarily necessary for a Shooting Star to form, but a gap enhances the robustness of the Shooting Star's effect.

Based on the definition, the action on May 3 2013 formed a Shooting Star pattern. This suggests the market is over-extended and is due for a break in the not-too-distant future. It does not imply that this will be "the big one" in terms of corrections, though in the market, anything is possible.

Might This Form Another Pattern?

Arguably, this could wind up forming an Abandoned Baby formation. This is a very rare pattern. The Abandoned Baby is characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day. The formation on May 3 2013 was not really a Doji, though it came close. I would argue, though, that if the rest of the pattern is completed, this would have the effect of an Abandoned Baby - a Bearish Reversal formation.

Another possibility, given the gap up, is an Island Reversal formation. The Island Top takes place whenever the price point “gaps” above a particular price range for a a quantity of days and also then is confirmed once the price “gaps” down below to the initial number. We won't know whether this is in effect unless or until there is a gap down below the May 3 gap up.

Is There Any Confirmation?

Candlestick Patterns always require confirmation, whether it be the price action of subsequent days or other technical indicators. Let's see if we can find any confirmation among the standard indicators, as the Shooting Star just formed and we don't have any subsequent chart data.

Incidentally, this is where it gets interesting. Indicators are only useful to a certain extent - if the market wants to go higher on Monday, it will, indicators or no indicators. We are simply using these as confirmation for the Shooting Star, which itself is just an indicator. Indicators give you some probability, based on historical data that justified their creation and continued use, but they never are a guarantee.

Overall, based on the below indicators, there is confirmation for the Shooting Star. Price action this week will provide the final verdict.

CCI indicator

Negative divergence in CCI.


Negative Divergence in the RSI EMA indicator.

Ehlers Distant Coefficient Filter

The Ehlers Distant Coefficient Filter has turned down despite the market hitting an all-time high again.


Negative Divergence in the MACD. The histogram looks primed to turn down.

Chaikin Money Flow

Negative Divergence in Chakin Money Flow.

Parabolic SAR lines

Rejection at the Parabolic SAR line. This isn't a common indicator like the others, so just disregard it if you wish. Also, obviously, with the market at an all-time high, there are no previous volume profiles at this level, which can be a positive, but also a negative, as the only volume attracting the market is lower.

Slow Stochastics

Negative Divergence, Slow Stochastics.

Fast Stochastics

Negative Divergence, Fast Stochastics.

Stochastic Momentum Index Signal

Stochastic Momentum Index Signal turned down on Thursday. It's just a black box signal, so nothing much to see beyond the little arrows, but these signals are fairly reliable. They have a tendency to take some time (sometimes several days) to really prove themselves, as shown by the previous such signal on the same chart, which was a few days before the last nasty little correction.

Williams percent Range

Negative divergence in the Williams Percent Range Indicator.

Overall, I don't see how anyone could call these indicators Bullish. But the market can, and will, do whatever it wants.

Friday, May 3, 2013

SPY Weekly Chart May 3 2013

SPY Weekly chart May 3 2013

A look at the weekly chart of the SPY. As I explain in the chart, the SPY is acting exactly as it has been acting for several years, with clean uptrends followed by sharp, channelled corrections. However, the current uptrend is longer than the previous one despite a shorter preceding correction. It may mean nothing, but one could surmise from this chart that a market correction is overdue.

SPY May 3 2013

SPY May 3 2013

Now that everybody (at least the Bulls) is overjoyed with the sharp move higher today for surprisingly little reason (the jobs report was OK, not spectacular, with a boatload of statistical artifacts), the chart is set up for a nice correction to shake some money loose from the overconfident Bulls and the terrified shorts who had to cover today in a panic That largely wiped the slate clean of shorts, which leaves the downside wide open. A correction may not happen - we could go straight up forever on taxpayer money if this truly is Bizarro World - but the odds, based on the position of SPY in the channel, the big Dow milestone that was hit (always ominous for future market action), and the natural urge to protect profits and the Bearish to re-establish positions, now favor a pullback or at best lengthy sideways action.

I usually don't read too much into the candlestick patterns on the chart, because this market hasn't respected them. However, if an abandoned baby pattern forms on monday, that would be quite Bearish.

The bottom of the channel is roughly 1535. I would be very surprised if we do not see that at some point over the next few months. If that goes, we get an actual correction to the 1400s (similar to what happened last summer), but that hasn't happened in quite a long time - since, well, last summer. We have plenty of time to think about lower thresholds before we get anywhere near them. Even if the market somehow continues this buying frenzy, it will come to earth at some point, because it always has before. And, no, this time is not different.

Thursday, May 2, 2013

SAN May 2 2013

SAN May 2 2013

SAN is fleshing out the new uptrend channel that we tentatively identified in our previous chart. It is performing nicely, and the dividend is a nice way to get paid to wait it out. Banco Santander is a huge, geographically diversified bank that has shrugged off Spain's economic troubles.

SAN was downgraded on May 3 2013, after this was posted, to Sell by Citigroup. As old hands of upgrades/downgrades know, a downgrade to Sell in the crazy world of investing actually is a good thing - because that means they've shot their last bullet. They don't have "Double-dog Sell" ratings. But be aware of the downgrade when you look at SAN, maybe it will mean something to you. The stock was up 1% on the day of the downgrade, showing how much downgrades mean these days to the investing public, who have wised up to the big brokers' games.

LGF May 2 2013

LGF May 2 2013

LGF took off after our last chart. Always a winner in our book, LGF. Still looks great.

TNK May 2 2013

TNK May 2 2013

TNK is at its lows. It could go lower, but that's always the case. This is a highly speculative play that either bounces quickly so you get a quick gain, or you can put a tight stop if you choose and get out. The base is forming nicely and it looks like a decisive move one way or the other is coming in the not-too-distant future.

DSX May 2 2013

DSX May 2 2013

Shipping is an economic recovery play. It also is a sector that could take some time - years - to really recover from overbuilding and Europe's economic contraction. When all that is shorted out, though, this could be trading at a multiple of where it is now. So, you need to decide if you want to sit and wait it out.

MGM May 2 2013

MGM May 2 2013

MGM is breaking out after earnings. Casino stocks are pure plays on economic recovery. With the US recovery in gear, and the Europeans showing some signs of life as well, this is a sector that could get hot.

MGM is one of only six casinos with the ability to service Macau, which dwarfs Vegas in size. That's the jewel in the crown, and the reason you might want to take a look at this while it's still fairly cheap.

DRYS May 2 2013

DRYS May 2 2013

DRYS continues to drift along under $2. Shippers are showing faint glimmerings of life. DRYS has a history of sudden surges (which then fail), so it's a good idea to start keeping an eye on it, because it is due.

SPY May 2 2013

SPY May 2 2013

Today was a fantastic day because we went through it without once hearing "Sell in May and Go Away." The routine losses of yesterday were recouped with routine gains today. You can try and read things into the candlesticks if you want, but this market has been ignoring candlestick patterns. All it cares about is the uptrend channel.

The big news of the morning was all positive - unemployment claims hit their lowest level in five years, and the ECB were good boys and did as they were supposed to by cutting rates by .25%. It's difficult to believe at this point that any economic numbers will throw this epic bull run off course, because it has shrugged off everything to date, but today's events did nothing to upset the AAPLecart..

The market is in the middle of the uptrend channel. We play both ends against the middle, so all possibilities are open for the next move. As yesterday proved, the market can still surprise you. Much easier to play moves to the channel lines than try to guess moves in the middle. What we are left with is to play intraday moves while always bearing in mind that this remains a trending market where you are more likely to get trapped short than long - until we break the channel.

Wednesday, May 1, 2013

SPY May 1 2013

SPY May 1 2013

The pullback we were thinking might happen around the all-time high happened roughly where we thought it might. For a market top, though, it was very muted, on average volume and without much fanfare. It also was smaller than some of the major sell-offs we've had during this rally. For those who think "This is it," the charts don't show that, so it would have to be confirmed. With all the chatter about "Sell in May and go away" this year, today, May 1, was the perfect day for gamers to induce a sell-off that was sure to hearten Bears and frighten just about everyone else.

We could very easily have more selling down to the lower trend line, particularly if the Europeans don't follow through with the rate decision. Needless to say, the vicinity of an all-time high is a very treacherous region, with plenty of opportunities for spikes in both directions..

Tuesday, April 30, 2013

SPY April 30 2013

SPY Touches All-Time High

SPY daily chart April 30 2013

Market acted early as if it wanted to correct, but the selling lacked conviction. Buying then picked up steam throughout the day, drifting off a bit during the afternoon as hot money played around, until staging a strong finish at the highs. The action today was restrained, but in keeping with how SPY has acted throughout this rally. Getting and staying long has been the proper strategy, though that could change at any time, as always. The average touched but did not break the all-time intraday high, that will likely happen tomorrow.

As I discuss here, there usually is follow-through on new all-time highs for weeks and months thereafter.

Monday, April 29, 2013

All Time High Effect

So, What Do All-Time Highs Really Mean for the Market?

All-Time Highs Beget More All-Time Highs

The accompanying charts suggest that, once you make an all-time high, there is a carry-over effect that lasts at least a few months, and perhaps as long as a year. The moral of this story is: don't try to time the top of this market. You can and most likely will get burned. Wait for the market to show its hand. Markets don't stop on a dime: the reasons that brought them to the all-time high in the first place remain in effect for some time thereafter, whether we think they are justified and valid or not.

Part of this involves NOT listening to people moaning and groaning in chat rooms every weekend about how the market is just teetering on its last legs. It most likely isn't (though some weekend they will, in fact, be right, and then they won't let anyone hear the end of it). That has been going on for a full year now, and longer. Many won't accept any S&P 500 level above 1000 as being rational, that's just the way some folks think. They, in fact, were right a couple of years ago, when the S&P 500 briefly ducked below 1000. But at that time they were saying the S&P 500 needed to go down to 600 to reflect fair value. And if it went to 600, then they would say it was too pricey at any level over 150. And so on and so forth.

Sir John Templeton was an amazing investor. During World War II, he decided to start buying stocks. Now, it turned out to be a good time to invest because prices didn't really recover from the 1929 Crash until the mid-1950s. However, his strategy worked, and here it is: he bought the Dow Jones Industrial stocks that were making highs. That's right, he bought the most expensive stocks of  all. How did he fare? He made a fortune! He realized, perhaps just intuitively, that if a position is going to double or triple or quadruple, it has to go through a succession of new highs, and those out-performers identify themselves each time they nudge up to a new high. That's simple math, and also simple market logic.

The Psychology of Bears

I know, you don't want to hear psycho-babble about motivations and reasons. The longer you are in this game, though, the more you will come to realize that you - the person reading this - make all your trading decisions for psychological reasons, and those reasons may be completely antithetical to your investing health.

This is a broad topic, but let me throw out a few random ideas. I think some of many Bears' absolute conviction in the face of overwhelming, continuing evidence against their short position has to do with their innate revulsion at modern finance. All this deficit financing and stimulus just isn't right and flies in the face of common sense, some believe. It is "phoney" and "robs from the next generation," and certainly is "unsustainable" and will "lead to huge inflation" so it is "evil." That is a perfectly legitimate and maybe even laudable attitude. I tend to agree with this line of thought: we are in an economy built on shifting sand, and the tide is rolling in. The only problem with the theory is that it doesn't predict the market. We currently are in an economic recovery. It may not seem like one, it may not act like the ones we remember from days of yore, and the way it is being nurtured with unnatural government cash inflows may be ruinous for the economy in the long run - but it still is a recovery. Markets rise during economic recoveries. You can look it up.

Another factor at work with Bears is a bit of veiled snobbery. I don't say that to besmirch people who short, because I short myself when I feel the time is right. What I mean is that there are some who are pessimistic about investments and tend to feel that buyers just don't understand the dangers of owning or don't have enough experience to know how fragile everything is. As usual, there is a grain of truth there - owning is dangerous, the bottom could drop out at any moment, valuations are fragile because they depend on nebulous public confidence in the value of whatever you own. With some Bears, however, it is almost an elitist thing, where they've seen market panics, remember wishing they had been short and how much money they could have made in half an hour, and feel that anyone else without their fear and with the willingness to be long in the face of the risk one of those occasional selling panics simply doesn't understand what they're doing.

In response to that, I submit this: buying and owning doesn't mean the buyer doesn't understand what he or she is doing. Buying is a legitimate response to some market conditions, just as selling is a legitimate response to other conditions. If the market is on an uptrend, doesn't it make sense to participate on the long side? Yes, it will end eventually, we all know that. But why not go short then, when conditions turn, rather than avoid the upside as that's happening and take losses on your shorts to boot? Living in a constant state of fear that the market will tank will occasionally be reinforced, so, like Pavlov's dogs, the tendency to be that way can grow in some people. The downfall of that, though, is that the market by some reckoning spends 70% of its time rising. Do you really want to be losing money or not making money 70% of the time? Also, valuations do increase over time for a variety of reasons such as inflation and wealth accumulation, so simply being short is a losing game unless done at the proper times.

Another factor is that some people, for whatever reason, psychologically feel that everything in nature returns to the mean, so that if stocks make an advance, they must later decline so that everything is in balance. That can be true under the right conditions, but a lot of the time it simply isn't. A clear case of "common sense" not being the same as "market sense," assuming an equal and opposite reaction of market prices has sent many a Bear to the poor house. Sell-offs are spasmodic and unpredictable. You might get lucky in a static market, shorting the rips which then fall off, but in a trending market, waiting for the countermove that never comes will just trap you with a loss. Sell-offs are tricky, and they occur when you least expect it. Also, to get the full return, you not only have to be short, but you have to time the bottom and cover at the right time, or else much of your profit vanishes. V-bottoms mean you have very little time to cover before everyone else leaps in to cover/buy, and prices will be back up before you know it. That's part of the reason why shorting is so tricky and dangerous.

Add in the fact that once a wrong decision is made, it takes real strength of character to realize your mistake, admit it, and reverse. You won't be a good trader until you can do that. That sounds easy to do, but it is the most difficult to learn as a trader. It requires you to take the opposite viewpoint than you had just minutes before. Doing this also can get you whip-sawed if you do it wrong, which is a deterring factor, but more likely it will save you if the market trends away from you and at least limit your losses. We all have egos and all must have faith in our decisions, so learning to reverse course when the market moves against you can leave you feeling lost and confused. People don't like to feel that way, so they avoid actions that will cause this feeling. This, I think, is why many Bears initiate a short position that they easily could get out of, but refuse to do it. They then spend countless hours on message boards touting all the evidence in their favor. In the end, they will be proven right to some extent, but there are better and more profitable ways to trade than that.

The final factor is raw fear. The stock market is scary, and everyone has heard stories about losing their fortunes and jumping off of buildings after being ruined (which actually was extremely rare in 1929, believe it or not, and may not have happened at all). Being short and buying puts controls that fear, even as it robs you of wealth in a trending market. My own rule of thumb is that my investment makes me feel too comfortable, too positive, and allows me to get much restful slumber, that's the time to be wary. The money is made when you are tense and nervous about your positions and it's hard to sleep, because you are going against the grain and so much that you hear seems to prove that the market will not go where you are betting it will.

Jesse Livermore

The Bears' patron saint is Jesse Livermore, the "Boy Plunger" of the 1920s who wrote must-read "Confessions of a Stock Operator." I admire Livermore, and the more I trade, the more sense his dictums make. He was a genius in his own way, far ahead of his time, and with market insight better than almost anyone in history. Here's the scoop of Livermore: he did predict the crash of 1929 and profit from it, but it was a last-minute revelation to him. He wasn't sitting around short for months at a time. Instead, through his own unique market office he had access to more more daily market information than almost anyone else alive at that time, more even than major brokers. Reading it day after day, that information slowly added up to signs of a market top in early September that started rolling downhill through the following two months. He was on the phone like a madman during the crash - that's when he was shorting. If you are sitting around with short positions from 100 S&P 500 points ago, you are no disciple of Jesse Livermore.

Another thing about Livermore: he played it long more than short. This got him in trouble in the 1930s, because that was a time when the declines weren't spasmodic and shocking, telegraphed ahead of time to those with the proper information sources. People now understood the danger of stocks and they went out of fashion. The major averages began a slow, grinding death where Livermore's information advantages did not come into play. The values were amazing, but as usual, the market over-corrected. Livermore went long too soon and wound up all but bankrupt, showing that even the greatest market timer in history encountered conditions he couldn't master. Jesse Livermore wound up shooting himself in a hotel bathroom.

Relying on Gut Instinct is a Losing Strategy

Which is not to say the market can't correct at any time, and hard. It most certainly can correct, and often does. Just don't mistake prosaic corrections for "The End." An uptrend continues until the proper indicators show it has ended - and the indicators many of us use don't show that yet during this particular uptrend. Find your own indicators and use them, but please make sure they reflect what the market actually  is doing, not what you think it should be doing. I respectfully submit, in the very best helpful spirit, that if the indicators you are using repeatedly suggest that the uptrend at the time of this writing is over and a precipitous fall is imminent, that you are using indicators that are not reflecting the market's true nature. Also, simply deciding based on gut instinct and what you know about the world that the market must correct hard and soon will lead you to poor decisions.

I am savvy enough to know that simply writing this isn't going to convince anyone. You must come to these realizations for yourself, that's why people lose so much when they are learning how to trade. Maybe reading this will help you on your own journey. Someday Bear-biased indicators and your gut instinct that other people have made too much money from rising stocks will, in fact, be right. Will you still be solvent if you blindly stay short until then just to prove yourself right?

Play the market, not preconceptions. Forget the two numbers, the 15, at the beginning of the S&P 500 level. If you just think of it as being at 88, with a chance to go to 95, it will be a lot less intimidating. Also, keep repeating, "We're still 25% from the all time high in real terms." You'll sleep better.

SAN April 29 2013

SAN April 29 2013

SAN has its earnings out of the way, and guaranteed the dividend through this year. Its shares rose when its CEO quit today. A new uptrend may be forming.

SPY April 29 2013

SPY April 29 2013

After a mild head fake lower, the market roared higher again. Clearly, there is pent-up buying demand even at these levels. You don't have to believe it, but it is there, today's action proves it. Where does it come from? Who cares, as long as it continues. You have to play what's there, not what you think should be happening.

Watch the uptrend channel, that is your guide in the wilderness.

The market is very cautious about bright lines - expect resistance at the intraday all-time high 1597 and at 1600. We may cruise past them, but then suddenly stall and reverse. The likelihood of a straight run to the upper channel level of 1620 is remote because the big boys will start selling as if it's a panic. The money men do this because they know the false significance traders place on these levels, and they prey on that fear to flush out weak hands and take their money. Just stay on your toes as those levels approach and trail stops or watch conditions carefully or do what you normally do to protect your positions, that's the likeliest spot for an induced shakeout that ulitmately will reverse to the upside at some lower level.

Sunday, April 28, 2013

IDXJ April 28 2013

Indoneian IDXJ April 28 2013

For risk-tolerant investors, some of the emerging market funds are looking fairly appetizing. I'm thinking of the Asian funds such as the Indonesian, Chinese, and Singapore ETFs, maybe the Vietnamese one if you truly are adventurous. The Indonesian small cap IDXJ chart above shows a large Bullish cup and handle formation in a mature state.

Note that ETF's like this, when concentrated in a very narrow niche such as a particular country's (Indonesia) small cap stocks, can be volatile. No pain, no gain as they say, so do your due diligence.