Are We There Yet?

On the short term charts, there's still no sign of a bottom and Friday's "GDP" bounce was clearly rejected at the declining 5 dma. While I still believe the 1035-1040 level will come into play, I'm seeing more calls for that level to mark an intermediate bottom. This leads me to believe we'll either see a rally before that 10% decline mark is reached or we'll likely take that level out in an ugly manner before recovering. Fortunately, we don't need to know the exact level. We'll continue to watch for prices to pop back above the 5 dma and for the average line to turn up for a low risk long entry...

There's still plenty of room for downside for the Nasdaq. I see very little in the way of support here on the 30 minute chart. The next fib level (not shown) is at 2063...

The DOW is closing in on 10,000 and it may take a break of this level to create the selling panic needed to establish an intermediate term bottom...


If we do get a selling panic from the retail crowd, watch for the $CPC to spike above the 1.10 area that marked bottoms late last year. As you can see below, we're not quite there yet...

Speaking of not quite there, the dollar looks ready to challenge the $80 mark and I'm expecting that level to act as formidable resistance. While the dollar was able to spike above the 40 week moving average, that line is still falling steeply and I haven't bought into this being anything more than an overdue bounce assisted by a heavy dose of short covering...


I mentioned last week that the McClellan could fall further before reaching a level that has coincided with recent bottoms. We're getting closer and the chart below gives you a visual of what I was referring to. I highlighted the last two times this oscillator declined to these readings...


Remarkably, given the extent of this recent decline and all the headline risk regarding the banks, the financials have held up relatively well. As crazy as this sounds, once we do see a bottom, I'll likely look to get long a name or two (or ETF) in this sector considering the relative strength here...


Our short term chart of the /ES indicates we may see a bounce at the open, so be prepared for that possibility. Perhaps a strong break lower from this channel will set the process in motion for an end to this decline early in the week. That scenario actually fits in well with the rest of the discussion above...

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Bears Remain In Control

Today marked a confirmed breakdown of prices from the /ES channel. Often these breaks serve as a shakeout before rallying higher and other times they signal an imminent change in trend. Still too early to tell which this will be, but sentiment has certainly turned negative in a hurry...

The last five sessions give us a declining channel on the 30 minute chart of the /ES, in which prices are near the bottom of the range. If prices are able to find some traction early in the session tomorrow, this may be worth keeping an eye on...

Prices are once again below all short term moving averages on all indices. The bears remain in control and continue to sell into any strength. In fact, their aggressive selling at the open this morning didn't quite allow prices to test the 5 dma...

That bear flag at the close also appears to be an ominous sign heading into tomorrow. I cashed out my QID position today, but would look to take another stab up near 2200...


It appears the next obvious level of support for the DOW is the psychologically important round number of 10,000...

If there's some good news for the bulls, it would have to be the massive amount of "buying on weakness" in the SPY today... nearly half a billion dollars worth! You can see for yourself here. That kind of number leads me to believe this correction is getting close to a meaningful bounce. So much so that I took off shorts and hedges today and am 100% long, although holding nearly 70% cash.

Now, if I were looking to put a little of that money to work tomorrow, I could take a shot with NVDA here on strength. At this point, I'd want to see strength not only in the individual stock, but also in the averages and the semi's...

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As things stand, the bears are firmly in control and while that can certainly change in a hurry, I'm going to wait for a little more conviction from the bulls before pressing from the long side. The easiest trade that's being rewarded right now is selling short or buying inverse ETF's into strength and that should continue to work. At least until it doesn't! I do think we'll see a bit more downside before this correction is finished. Nothing wrong with taking a few shots on the long side, but mind those stops... otherwise you could end up with a portfolio full of gold miners that are 25% off their highs and... oh, nevermind! ;)

Brief Update

The Fed saves the day!! Or, perhaps, it was simply this trendline that managed to hold as support. Either way, it sets up an interesting session for tomorrow...

On the S&P, not much has changed from last night's update. Prices briefly dipped below support before rallying late in the session. The consolidation continues as the 5 dma rapidly approaches...

Ditto for the Nasdaq...

The DOW rallied back up to resistance...

The dollar was finally able to break out. Whether you're following via the UUP...

Or the $USD (popped above the 200dma)...

Chart courtesy of http://stockcharts.com

It seems there's been some disconnect in the inverse relationship of the dollar and equity prices recently. It will be interesting to see if this can continue should the dollar shorts get squeezed and the greenback ramp higher from here. I see no reason why the dollar and indices can't rally together in the short run, but history shows that's not likely to be the case over an extended period.

More random thoughts...

1099.51 was the high for the S&P today. For those of you looking for a swing low on the daily chart, tomorrow offers a very good opportunity to mark that low. It would take very little strength from here, as prices closed only a couple of points away.

I didn't post it on the charts, but the S&P bounced off of the 100 dma in today's session. This was the first test of that line since April of last year.

Despite today's gain, the $CPC moved higher. That's usually a caution sign if you're looking for more upside over the next couple of sessions. With more puts being purchased than calls on an upside day, I typically look for more guidance from the $CPCI (smart money), but the gain was similar to the $CPCE (supposed dumb money) and just appears odd. Not sure there's much of an edge there, but worth noting.

Rally Flops + Strategy Talk

A day that started out rather ugly, then became promising, only to turn ugly again into the close. Prices are at an important area of trendline support as evidenced by the S&P futures chart below...


I'll spare you the charts, but I could draw that same trendline above on any of the three major averages and find prices similarly dancing around it. With an air of uncertainty surrounding the markets, the selling is not surprising given the news, speeches and data coming out over the rest of the week. The sell first, ask questions later mentality has seemed to grip the market as all rallies are finding their fair share of sellers rather quickly. Dip buyers, myself included, have been getting punished of late and a break lower from here could find prices at the 10% decline spot in a hurry. If there's an area of support that could spark a rally, I think this is it. Scratch that... I think this HAS to be it. Otherwise, the next support level is significantly lower (another 5%+). We shall see.

The shorter term charts appear to be showing a much clearer picture of the distribution and prices are again below all short term moving averages. Beginning with the S&P, instead of a rally up to the declining 5 dma, it now looks like a consolidation that may or may not allow the 5 dma to catch up and provide resistance before rolling back lower. Of note, there's possible support a little lower at 1087, but it's along way down from there (1035 or so)...


The Nasdaq is at "that spot" again and I'm looking to jump into QID on a breakdown...


The DOW is acting as the laggard of the group as prices have dipped below, retested, and rolled back over from former support that's become resistance...

There's been a lot of talk about the $NYMO being in the range for an intermediate bottom. Agreed, but it can and has gone lower. Along those same lines, the $CPC was in the rally range after yesterday's session, but today's action has sent this ratio back to neutral...

Chart courtesy of http://stockcharts.com

I view individual stocks in a very similar manner to the major averages. They're always in one of three stages... distribution, accumulation, or consolidation. When I can spot a stock that's bucking the general market trend or consolidating while the rest of the market is in a state of distribution, it's usually a good idea to add it to my watchlist. A few high quality names for potential purchase once the correction is over and the accumulation begins can give a trader a great head start on the next leg up. Take GMCR as an example...

On the other hand, stocks that rally up to test a declining 5 dma in the distribution phase are great candidates for short entries, especially as the correction in the major averages continues. This is a low risk opportunity entry when taken at or near the average and a strong move or close above the 5 dma can be used as a stop. A trader who wants to take on a little more risk could wait until the 5 dma turns back up to exit. Take FSLR as an example...

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I present the above strategy as an alternative to the price patterns I usually present here in the hopes that some of you will take something of value from it. If you can possibly apply it, in some manner, to your own individual plan/style, then it was well worth discussing. A trader can never have too many weapons in their bag of tricks and used in conjunction with price patterns, support/resistance, stochastics, fibs, etc. can be very powerful. Confluence is a great thing!

Pattern Watch

Taking a look at the /ES channel that we've been following, it didn't take long to retrace back to the lower trendline and I believe we're likely to see a bounce tomorrow from this level. I'm positioned fully long going into the session, but ready to add inverse ETF's on strength and certainly on any signs of weakness...


The 30 minute chart of the S&P shows prices near support at about 1087. A move back up to 1114 and a meeting with the declining 5 dma would present a great low risk opportunity to add to short positions. If 1087 fails to hold, there's very little support down to about 1035, which would represent a 10% correction and could be where this decline is ultimately headed in the short run...


Zooming in a little closer on the recent S&P price action and adding in the shorter term moving averages, one can see the value of watching price action on the 30 minute chart. Note prices finding resistance at the shortest term moving average (red) with brief pauses at horizontal support before resuming the downtrend. However, I want to point out that prices are stretched nearly 40 points from the declining 5 dma (brown). Rarely do prices get this extended without a snapback rally that I often refer to as "the regression to the mean trade"...


I closed my QID position on Friday for a quick 8% gain based on the following chart...

Of note, unlike the S&P and Nasdaq, the DOW closed below horizontal support and is currently the laggard of the three...

Looking at the chart of the UUP, the dollar has again found resistance at the fib retracement and has now printed a daily swing high (highlighted). Dollar weakness could certainly help the market's rebound efforts...

I have a few bounce candidates that may provide a quick pop in tomorrow's session. All are sitting on or near support making risk easy to manage...

BUCY - Trendline Support

CSKI - 50 DMA Support

MTL - Breakout Retest (Earnings on 1/26)

NIHD - Breakout Retest

TII - Anticipatory Spot on Ascending Triangle

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CMG and IBN are also on my watchlist. I highlighted the breakout retest on CMG last week and it's still in a manageable spot. IBN is also at lower trendline support of a symmetrical triangle, which may present a good anticipatory position on strength.

I would not try to be a hero here and load up on the long side, as I think we have further downside to come, but the above present a few ideas for those who may want/need a little long exposure over the next couple of days.

That's all for tonight... off to watch the second half of the NFC Championship game!

Correction Arrives

In last night's post, I pointed out that the level to watch on the S&P would be 1141 today. That was indeed the level that sellers stepped in and marked the high of the day. It was a relief to see some price action that actually makes some technical sense... at least to me! If the choppy action is to continue, I think there's a good chance to see a retest of 1130. In fact, I think this is the most likely scenario and prices could meet the declining 5 dma at that level. That scenario would create a great low risk opportunity to add to short positions. However, if the selling pressure continues and 1114 breaks, there's little meaningful support until roughly 1087...

Of note, the S&P found support at the 50 dma, but the distribution days are rising rapidly. Typically, 4 or 5 distribution days in short order will lead to a more serious market correction (thinking 7-10% or more)...

The Nasdaq has plenty more room for downside. I included the shorter term moving averages on this chart and you can see that prices closed below all of them and the trend is aligned for more downside. I'd expect any rally to be capped by the 5 dma...

Next support for the DOW is closer to 10,250, but a pop back up to resistance at 10,500 is not unrealistic to expect here...


The dollar was mostly unchanged today and remains at resistance. Much of the short term action will likely be dictated by the next move here...

Of interest, the dollar is not only up against horiz./fib resistance, but battling a declining 200 dma, too. I've mentioned that this market decline could be brief and this resistance for the greenback is one of the many reasons for my stance. The rejection today is typical of the first attempt and we'll be watching closely to see how this unfolds. A brief pop above would not surprise me, but with the average declining, the odds favor a roll back over sooner rather than later...

I don't think now is the safest time to take on long positions, but if one wants to take a shot on a day trade or two into strength, here are a few charts of interest that I'll be watching tomorrow...

BCSI - Trendline Support

CERN - Breakout Retest

RHT - Horizontal and Diagonal Support

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Chop at the Top

Looking at the chart of the UUP, we appear to be at resistance again and prices got here in a hurry. The inverse head and shoulders pattern would confirm on nearly any strength from here and the pattern projects to a target of $24.30...

The short term chart of the S&P looks to be toppy, but it looked that way on Friday, too. If you remember, that was right before the index pushed back to the highs. The range is clear from 1150 to 1130 and I'm watching 1141 (5 dma) if we should see a bounce at the open tomorrow morning. Here's what my short term chart currently looks like...

The Nasdaq trendline dating back to early October was broken in today's session. There's plenty of room for downside here on continued weakness and looking at this chart now, I'm not sure why I don't already have a position in QID...

The price action in the DOW looks more like a broadening top and things could quickly get ugly here on a move below 10,500...

Just so we keep the bigger picture in mind, the /ES channel has room for action in either direction and the longer term trend remains up. While I believe there's more short term weakness to come (and possibly significantly more), I still believe this will be a buying opportunity for those with a time horizon longer than my 30 minutes or so! ;)

Lastly, I've received a few emails regarding my positions in miners. As I've stated before, I try my best not to trade in and out of these names. There's too much volatility and I've learned from past lessons not to try to time these swings on the daily charts. I still think there are plenty of reasons to be long here. For now, I'm assuming the weekly swing low is in on GLD (highlighted below) and I will reevaluate my thinking if/when this level gets taken out. I'm also watching the dollar carefully, but prefer to stick with my long PM positions even on dollar strength as I believe this relationship could disconnect to some degree at any time (like we saw on Monday). FYI, I'm still stalking one more position in GDXJ, but have held off for now...

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