Pattern Watch

That was an explosive move off the bottom trend line on the $VIX. Last week, I discussed the great deal of emotion involved in forming this type of pattern and the pop here didn't disappoint. Regardless the catalyst (Dubai was last week's excuse), there were plenty of signs pointing to significant market weakness well before the "news" and this pattern leads me to believe we're at the beginning of a more serious correction for the major averages...


Additionally, last Wednesday marked a massive selling on strength day for the SPY. With $675 million in outflows on a strong day for the S&P, a trader should take notice that institutions are unloading shares onto the retail crowd. This type of selling usually precedes an intermediate decline...

As a point of reference, the last time the SPY saw a major selling on strength number was on 9/16 when $445 million in outflows preceded an intermediate top for the S&P...

Looking to the 30 day, 30 minute chart on the $SPX, prices are once again below a flat 5 day moving average and near the bottom of the recent range. If the bears are to maintain control in the short term, keeping prices below 1100 would be the most likely reference point. The breakout/breakdown points of reference for the recent range would be 1113 on the upside and around 1085 on the downside...

I still believe the most potential to the downside lies in the following charts and I'm positioned accordingly...

IWM

USO

XLF - Head & Shoulders

Despite my bearish bias, I'll post a couple of imminent breakout charts for the bulls...

BIDU

JCG

Click Any Chart To Enlarge

In summary, a move back towards 1100 would be an easy to manage opportunity to get short, if you're not already, or add to existing short positions. My preference is getting short the IWM, USO, and XLF or taking positions in the correlated inverse ETFs as I've done in my MarketGuru portfolio. I think there are short opportunties in IYR and possibly XME down the road, but I'll have more on those at another time.

/ES Channel & Where's The Edge?

As you can see in the chart below, /ES futures have been struggling to push through the 75% line of this channel over the past few sessions. At the same time, prices have found support at the 50% line...

A pop above that 75% line may be the cue to take off shorts, at least in the short run, and wait for a better entry as new highs on the S&P would likely correspond (as well as new lows for the dollar). Otherwise, be prepared for a drawdown through a move up to about 1121 as we described last week. Hedging with a long position or two may also be a viable option. We'll see how it plays out.

As we've mentioned here recently, topping is a process, not an event and it looks as though the process may have finally completed for the energy sector as evidenced by the breakdown in USO today. However, I'm not so sure I can count on this as a leading indicator for the indexes as was the case in the past...

The early weakness this morning was enough to move the $CPC back into a neutral range. We're going to need to look elsewhere for an edge over the next session or two...


Perhaps we can turn to the $VIX, which is edging ever closer to the lower trendline of this broadening pattern...

Click Any Chart To Enlarge

The 30 minute charts didn't change much from what I posted yesterday, so there's no sense in posting them again tonight. Depending on the action tomorrow, I may or may not do a new post before the holiday. If not, I want to wish you all a Happy Thanksgiving and hope you enjoy the time with family, food, and football!

Setting The Trap

With all the talk about the weakness in the dollar today, one sure would have thought it was pushing through to new lows. Instead, $75 holds firm...

I still expect an upside breakout on the greenback and today's noise did very little to change my perspective.

The 30 day, 30 min chart on the S&P shows prices above a declining 5 day moving average. This often occurs as part of the short term topping process and I highlighted the last time we saw this type of action...

The same chart parameters as above, but this one is the Nasdaq and you can see how the 5 dma acted as support late in the session. Of note, the 5 dma is declining and there's very little room for downside tomorrow before that support turns into resistance. Remember, price moves above a declining moving average should be considered false (or traps) until the average line turns up...

Luckily for the bears, the bulls couldn't control their "late to the party" emotions and were once again piling into calls near the top today. Note the $CPC at one of the lowest reading we've seen over the past several months. This ratio is usually corrected very quickly with a bout of nasty selling...

Speaking of emotions, I've learned that one of the most emotional patterns in all of trading is the broadening triangle. This pattern is known to frustrate both bulls and bears by swinging the fear and greed factors to extremes before finally confirming a direction. Most often seen marking the tops of long bull runs, this pattern typically signals a reversal and is sometimes referred to as the megaphone pattern. I have a feeling the $VIX is beginning to shout through that megaphone and I'm all ears...

Click Any Chart To Enlarge

I know, I know... another bearish post! Have I gone permabear the way of Evil, Slope, & Xtrenders? Not exactly, but there's some serious conviction behind this post (for better or worse). While I enjoyed profiting from the ride up, I will admit to being the most bearish on the market that I've been in quite some time. Now, I'm not one to typically make big, bold calls and try to be a hero, but I feel like I've read this book before. While I can't tell you all the details of each and every chapter... and I can't quite tell you how long it will take to finish... I can tell you exactly how this story ends! It's ugly and it's coming very soon!!

Pattern Watch

Going into the holiday shortened week, I'll be watching to see if last week marked a weekly swing high for the S&P. The level to watch is 1086.81 and would likely lead to a more significant decline should that level get taken out. I've highlighted the last couple of weekly swing highs in the chart below...

Zooming in on the 30 day, 30 minute chart, I'll continue to watch for a move up to around 1100 or so as a low risk opportunity to add to short positions...

While going through my watchlists this weekend, I noted a number of head and shoulders patterns in the oil & gas sector...

BHI

BJS


CNX


NFX

I'm sure you get the picture and some have already confirmed (see CRZO). There are many more that are set-up the same as the ones I've highlighted above so this entire sector looks shortable. As always, I'll likely take a position in DUG or ERY on MarketGuru since shorting is not allowed. If you see one of those added to the portfolio, you'll know I'm getting short a name or two in the sector.

There may also be a short opportunity on GES should this double top confirm...

For those of you looking for long exposure, there may be a few opportunities in the following...

CDE - Symmetrical Triangle

BVN - Still waiting for a confirmed breakout above $40


IMA - Breakout Retest


WLT - Breakout Retest

Click Any Chart To Enlarge

Bearish Divergences

Despite the market being only 2% or so off yearly highs, I see a number of bearish divergences that may be pointing to underlying weakness. I'll point a few out in tonight's post, but I want to begin by noting the 30 day, 30 minute chart of the $SPX. Price action finally reveals a close below the 5 day moving average which is beginning to rollover. We haven't seen this since 10/23 with the S&P at 1080. That move marked the beginning of a 50 point move lower to 1030 on 11/3. As you'll see in the chart below, a move up towards 1100 would be a low risk short entry opportunity. I've also etched out a possible head and shoulders pattern that would play out well with a little strength tomorrow to form the right shoulder...


I've discussed the volume divergences during the rally and pointed to the signs of increased distribution over the past few weeks. Also of note, the following chart shows the bearish divergence of the relative strength of the S&P. Note the lower highs of the RSI vs. the new highs of the S&P. A healthy market will show the exact opposite action...


Again looking at the chart above, it doesn't escape my attention that the breakouts to new highs are becoming less and less powerful as evidenced by decreased percentage gains to the next swing high.

The $USD also appears to have found support at the $75 level and the cross of the MACD has been a reliable indicator of recent rallies. While the pattern here is a descending triangle and a bearish continuation pattern, here's another instance where the RSI has failed to confirm new lows along with price. I'm looking for a breakout above $75.75 here, rather than a breakdown below $75. Regardless, it's well worth keeping an eye on...

I'd say the weekly chart of the $USD is also set for a bounce and without going into too much detail, both the daily and weekly cycles for the dollar are aligned in the window for an intermediate term bottom...

One can always look to the charts of a couple of the leaders for guidance, too. AAPL is undoubtedly the leader of the tech sector and this potential double top doesn't look too promising for the bulls and tech should it confirm. Hat tip to OldA for pointing this one out...

Speaking of tech, the Nasdaq index of New Highs - New Lows ($NAHL) doesn't look so bullish considering how close the index is to yearly highs...


I can make a strong case for GS being the leader of the financial sector. Like AAPL, this leader looks to have topped and is now trading well below the 50 dma. A move below $168 here and I believe things could get ugly for GS, and thus the financials, in a hurry...

Click Any Chart To Enlarge

The shorter term timeframes have now come into alignment and agreement with some of the divergences I've been describing on the longer term charts. Given that scenario, I have no intentions of making any purchases on the long side and will look for increased short opportunities into market strength going forward.

Brief Update

I wouldn't be surprised to see another dip back below 1100 over the next couple of days to test the 5 day moving average near 1097. Here's my short term view with moving averages...

It will be important to watch how prices react at that level to determine the next big move, but I'm currently viewing the recent action as an intermediate term topping process. Fib retracement levels suggest we're very unlikely to see a move above 1121 on the S&P without seeing a more serious pullback than what we've seen most recently...

Click Any Chart To Enlarge

Bear-ly Hanging On

The bears fired a warning shot across the bow today. Given the number of failed breakouts recently and the lack of upside volume, it may be most wise to heed the warning. If there's one caveat, prices were supported by the rising 5 dma at the close...

I think any strength up towards 1095 would be a gift at this point both to increase short exposure and unload longs. That trade would be easily managed by using 1100 (on a closing basis) as an exit.

Here's the updated chart of the Nasdaq channel that I posted last night. As you can see, once the channel was broken, it was a steady decline to the 5 dma...

Same story for the DOW...

Traders can't ignore the fact that the dollar may be trying to put in some kind of bottom here. Whether it's a double bottom or sloppy inverse head and shoulders, a breakout here would not be good news for equities...


When it comes to short opportunities, nothing looks better to me right now than IWM...

Except maybe this anticipatory head and shoulders pattern on XLF...

Click Any Chart To Enlarge

Despite today's weakness, the $CPC didn't spike and sits at .85... welcome news for the bears as mild weakness has been pushing that ratio above 1.0 as option players pile into puts. This means there could be plenty of downside to come before we'd expect to see the bounce that usually accompanies the higher ratio.

Should the 5 dma give way early tomorrow morning, I'll likely cut losses or take profits on longs and add to short positions and inverse ETF's (slowly and methodically). Funny thing is... any strength up towards 1095 and the plan is exactly the same. A move above 1095 and the plan needs to be reevaluated... stay tuned!

Pop or Drop?

This shorter term channel on the Nasdaq has contained all price action since the first of the month. Looks like tomorrow's open will be pop or drop time for this one...

Besides the 30 day, 30 minute charts with moving averages that I'm constantly posting here, I also like to watch the daily VWAP (Volume Weighted Average Price)for a general sense of whether buyers or sellers are in control during any given session. It tends to give a clearer picture during choppy sessions like we had today. As you can see in the chart below of the SPY, sellers took control after about 10:30 this morning and the VWAP served as resistance for any attempted rallies...

When using the VWAP, it's important to note not only where prices are in relation to the centerline, but also the direction that same line is headed. In the chart above, the VWAP was declining, so all breaks above are considered false moves. In the example below, the VWAP supported prices in RINO all day today. Note how the couple of breaks below the VWAP early in the day are false moves and should be considered such when the VWAP is rising...

The Daily VWAP... a very handy tool. Know about it!

Many of the charts posted last night remain valid if the market decides to break out above 1100, but here are a couple more that made my radar...

CHSI - Ascending Triangle

FFIV - Imminent Breakout

Click Any Chart To Enlarge

So do we pop or drop tomorrow? I'm nearly 40% invested entirely long, so I guess you can tell which way I'm leaning. Yep, volume is scary light on the way up, but I'm beginning to think we may not see any meaningful volume return until 2010. We shall see!

Imminent Breakouts

I expected and positioned for a correction in price today and what we got was a correction in time. Today's choppy action allowed the short term moving averages to play catch up and may provide the bounce for new highs tomorrow...

It was a low risk set-up and one that I wouldn't hesitate to take again, but I closed all inverse ETF's into this afternoon's strength and am now looking for breakout candidates as prices look poised to move to new highs. The list of strong fundamental companies poised to breakout is impressive and should be welcome news for the bulls. Here are some of my favorites...

ATW

BCSI

BVN


CVLT

FTI

IMA

JDAS

OPLK

Click Any Chart To Enlarge