Great Trades

Gold bulls will want to see a successful backtest followed by a breakout to new highs


It took less than a week for gold to rebound and break out to another new high, with a strong $25+ rally today despite the U.S. Dollar moving higher on the day. Silver also rallied strongly, up over 4% today alone. The precious metals had been moving inversely to the dollar, so today's strong move higher in the face of a stronger dollar could bode very well for continued strength even if the dollar rebounds.

As we said last month, "The precious metals could be in for an extended rally period on this breakout. If so, the miners should be in for a strong bull move."


As this chart shows, the TICK 10-day EMA is below 0 for the first time since the June/July dip (though it has room to move lower)

And move lower it did, dipping down below the oversold line late last week:


On that move lower, the NYSE McClellan Oscillator (NYMO) moved lower than at any other point during this rally:


Previous spikes down in the NYMO during this rally have been followed by short-term rallies.


Also, the VIX spiked well over its upper Bollinger Band. It was the 5th time since this rally began in March that the VIX spiked to or above its upper Bollinger Band. The previous 4 times, the S&P 500 rallied back sharply short term after the VIX spike:


Given the recent history of the market rallying sharply short term after a VIX spike above its upper Bollinger Band and a spike down in the NYMO, combined with the upward market bias heading into the FOMC announcement, there's a good chance the market will move up into that announcement tomorrow afternoon. If recent history is a good indication, the market also should continue higher over the next few days.


Despite the recent market pullback, the S&P 500 has held its October lows, meaning a rally from here would mark another higher low. However, if the market fails to make a new high on this next rally, and then makes a lower low, the medium-term trend will have changed from upward to downward. A short-term rally followed by a lower low would likely also put in place a head and shoulders topping pattern, which might finally lead to a more significant market correction.

As we said last time, "Watch for a bearish cross on the weekly PPO and a break of the weekly uptrend to signal a more significant market correction. If the TICK 10-day EMA can't reach the 600 level on the next bounce, or the market fails to sustain a rally from oversold NYMO levels, the medium-term trend could be changing."

A number of indicators and negative divergences are pointing to a possible change in the medium-term trend to the downside. However, a new high would extend the rally and keep the trend moving to the upside. Aggressive traders may want to reduce long exposure and increase short exposure on the next rally, with a stop on the short exposure at a new high. More conservative traders and investors may want to wait for confirmation of a trend change with a lower high and lower low combined with other indicator confirmations.

The dip in the S&P 500 we mentioned last time did indeed prove to be a buying opportunity. However, unlike the previous 9 times the market rallied back from a short-term pullback after the TICK 10-day EMA peaked over 600, this time that 10-day EMA has not reached the 600 level on the rally back to a new high. That could mean this dip will take longer, like the June/July dip, or it could mean the trend will change. As this chart shows, the TICK 10-day EMA is below 0 for the first time since the June/July dip (though it has room to move lower):


Each time the NYSE McClellan Oscillator (NYMO) has dropped to this area during this rally, the market has rallied back to make a new high. If this rally is to continue without a more significant correction, it should do the same once again:


As this weekly chart shows, the S&P 500 has been trending higher since March with a bearish divergence on PPO, just as it had been trending lower into March with a bullish divergence:


Watch for a bearish cross on the weekly PPO and a break of the weekly uptrend to signal a more significant market correction. If the TICK 10-day EMA can't reach the 600 level on the next bounce, or the market fails to sustain a rally from oversold NYMO levels, the medium-term trend could be changing.


Gold has continued its breakout action, moving as high as $1070 before backtesting the previous all-time high level in the 1030-1040 area. Gold bulls will want to see a successful backtest followed by a breakout to new highs:



We continue to test our futures trading system across different markets. We await a significant downward correction in the stock market to see how our various programs perform under those conditions.

Today's reversal off the morning dip and close above $1000 is very bullish action, and could portend a push to take out the all-time high.

That didn't take long. In less than 2 trading days, gold has proceeded to break out to a new all-time high over $1040, as the action on Friday indicated. Silver was up over 4% today.

The precious metals could be in for an extended rally period on this breakout. If so, the miners should be in for a strong bull move.

In other commodities, gold has been consolidating around the 1000 level recently, threatening to take out the all-time high of 1,033 from early last year. If it holds the 1000 area and pushes through to new highs, the bull trend will continue, with a target in the 1300 area from the inverse head and shoulders pattern formed since early last year. A breakout in gold should also send silver much higher, with silver needing to more than triple to reach its all-time high. Adjusted for inflation, the all-time highs for both metals is much, much higher.


Since we posted that a week ago, gold has dipped below 990 4 times intraday, including today, only to close above that mark each time. Today's reversal off the morning dip and close above $1000 is very bullish action, and could portend a push to take out the all-time high.

Since Monday's close, the Dow has lost over 300 points, but gold has actually moved higher by over $10, even as the U.S. dollar has moved higher.

As long as the 1000 area holds, the gold action continues to look like a bullish consolidation. Traders can go long in the 1000 area with a well-defined risk using a stop below recent support (mid-980's intraday and 990 closing basis have been the recent support areas in December futures), giving a good risk/reward trading opportunity.

With this rally, the TICK 10-day EMA is back above 600 again. It has room to go higher, but once it peaks, we should see at least a short-term pullback like the last 7 times it peaked over 600 since March. Previous peaks over 600 have led to more significant down moves (e.g., late August '08 and early January '09).

If the next pullback holds the 970 area, it would be bullish for a continued rally to higher levels. If we get a short pullback like the last 7 times it peaked over 600, the second day could again be a great buying opportunity.

Since our last post early last month, the TICK 10-day EMA dipped back down near 200 in mid-August on a short-term pullback that held the 970 level, which did prove to be "bullish for a continued rally to higher levels." There were a number of consolidation days before the 2-day dip to the 970's, and the second day again proved to be a great buying opportunity.

On August 21, the TICK 10-day EMA peaked over 600 yet again, followed by several consolidation days, a short-term pullback to the 990's along with the TICK 10-day EMA dipping back down near 200, and yet another buying opportunity after 2 days of selling.

Last week, the TICK 10-day EMA peaked over 600 for the 10th time since March (each time marked with a blue vertical line in the chart above). After several consolidation days, we've now had yet another short-term pullback, with the TICK 10-day EMA dipping down near 100 on this drop to the 1045 area.

If the pattern from the last 9 times the market had a short-term pullback after the TICK 10-day EMA peaked over 600 continues, the selling the last 2 days should prove to be yet another buying opportunity. If that pattern breaks, and the market continues lower after this short-term pullback, we may finally see a deeper correction.

Since the first peak over 600 on the TICK 10-day EMA, back in March, there have been 9 straight higher highs marked by subsequent peaks over 600 on this EMA. Will there be more to come? The market action in coming days should be telling...

In other commodities, gold has been consolidating around the 1000 level recently, threatening to take out the all-time high of 1,033 from early last year. If it holds the 1000 area and pushes through to new highs, the bull trend will continue, with a target in the 1300 area from the inverse head and shoulders pattern formed since early last year. A breakout in gold should also send silver much higher, with silver needing to more than triple to reach its all-time high. Adjusted for inflation, the all-time highs for both metals is much, much higher.

Some of our long-term mining holdings have come back to life recently with the recovery in metal prices, along with improving project developments. If/when gold and silver break out, they could move much higher quickly as the sector attracts increased investor attention and shorts scramble to cover their positions.

This updated chart of the TICK 10-day EMA shows that, with today's breakout rally, it has moved well above 700, much higher than any reading in the last couple of years. If we get a short pullback like the last 6 times it peaked over 600, the second day could again be a great buying opportunity.

If the next pullback holds the 950 area, or even the 927-930 area, it would be bullish for a continued rally to higher levels. Given today's Dow Transports confirmation of the Dow Theory Bull Signal, we'll see next week if indeed such a pullback proves to be a great buying opportunity.


Here's the updated TICK 10-day EMA chart, along with the S&P 500 underneath:


As expected, we got a short pullback last week, and the second pullback day was again a great buying opportunity. The pullback not only held the 950 area, but actually held the 970 area, as dip buyers were out in force. As Friday's small NYMO change indicated, we got a big move day today, closing above the 1000 level.

With this rally, the TICK 10-day EMA is back above 600 again. It has room to go higher, but once it peaks, we should see at least a short-term pullback like the last 7 times it peaked over 600 since March. Previous peaks over 600 have led to more significant down moves (e.g., late August '08 and early January '09).

If the next pullback holds the 970 area, it would be bullish for a continued rally to higher levels. If we get a short pullback like the last 7 times it peaked over 600, the second day could again be a great buying opportunity. If that pattern breaks, and the market continues lower after 2 days on the next pullback, it should signal a deeper correction.

With all the bullish technicals, we're not likely to see as big a down day any time soon, but this indicator does point to a likely pullback very soon. If we get a short pullback like the last 6 times during this rally, the second day of the pullback could be a great buying opportunity yet again.

The healthiest thing for the market would be a short consolidation/pullback over the next couple of days that holds the 927-930 "Confluence" area. The next level of resistance is the June intraday high of 956. Above there, there's not much nearby resistance, so the market can move swiftly higher, especially after a bullish consolidation.


After two days of bullish consolidation, where the intraday dips of close to 1% were bought up but the SPX continued to close under 956 resistance, and where the small NYMO change yesterday indicated a big move day was coming, the SPX "moved swiftly higher" today on a clear breakout through the 956 area to close 20 points higher over 976. From the early breakout, indicators again pointed to a trend day up:

On a trend day, you'll see few or no significant TICK readings in the opposite direction (more than 800 negative, or positive on a down day, on the $TICK chart), greater than 9-to-1 up volume vs. down volume (above the blue line on the top green $NYUPV:NYDNV chart, or the second red chart on down days), and a $TRIN reading below 1 and trending lower. On these days, the market will move higher or lower in a trend without significant moves in the opposite direction, and will usually close at or near the highs (or lows) for the day.

You could make significant market profits trading trend days only, if you go with the flow. Remember -- the trend is your friend (until it ends).


As this chart shows, for most of the day, it was a clear trend day up, using the same signals mentioned last week:

There were no significant negative TICK readings through most of the day, up volume vs. down volume reached over 9-to-1, and $TRIN stayed well below 1. The breakout through 956 resistance was very strong, with lots of short covering helping to power the rally.

However, around 2:00 pm, some of the indicators started weakening -- There were more negative TICK readings (though no big ones), up volume vs. down volume was about cut in half from the high to close at 5.16, and near the end of the day, $TRIN rose above 1, indicating that more volume was flowing to the losers. Compare this chart to last week's, where up volume vs. down volume closed at its high and $TRIN closed at its low.

After a nearly straight up rally over the last couple of weeks, including a couple of days of minimal consolidation, these signs of distribution pointed to a likely impending pullback. MicroSoft, Amazon, and American Express all disappointing on earnings have moved the futures lower after hours, indicating the pullback these signals pointed to has already started.

This updated chart of the TICK 10-day EMA shows that, with today's breakout rally, it has moved well above 700, much higher than any reading in the last couple of years. If we get a short pullback like the last 6 times it peaked over 600, the second day could again be a great buying opportunity:


If the next pullback holds the 950 area, or even the 927-930 area, it would be bullish for a continued rally to higher levels. Given today's Dow Transports confirmation of the Dow Theory Bull Signal added to the bullish signals we mentioned last time, we'll see next week if indeed such a pullback proves to be a great buying opportunity.

...if the market can hold the 927-930 "Confluence" area on a closing basis during this consolidation, that would be extremely bullish, and then shorts should be prepared for some more squeezing. If the SPX rallies a bit more in coming weeks, the 13-day EMA should cross back above the 34-day EMA for a buy signal, and if it breaks out above June's high, it will invalidate the Head & Shoulders pattern.

On Friday's brief consolidation/pullback, the S&P 500 held well above the 927-930 "Confluence" area, and then shorts got squeezed more today as the SPX closed above June's closing high. As this chart shows, the 13-day EMA crossed back above the 34-day EMA for a buy signal (red line crossing back above blue line, with the black line above the horizontal line showing the 13/34 EMA difference is positive), and the Head & Shoulders pattern that sucked in more shorts is no longer valid:

So two of the signals that were in the bears' favor are no longer sell signals, and one has turned into a buy signal, joining the "Golden Cross" of the 50 day moving average crossing above the 200-day moving average.

The S&P 500 has rallied nearly straight up over the last 6 trading days, gaining about 9%. After such a sharp move, it could use a healthy consolidation/pullback to set the stage for the next move higher.


We posted this chart of the 10-day EMA of the TICK back on Saturday, April 18 , using it as one indicator pointing to a big down day on Monday, April 20 (when the Dow closed down nearly 300 points):

If Monday starts a pullback like the last 5 times this TICK 10-day EMA peaked over 600, the market should sell hard into Tuesday at least.

Each of the 5 previous times, marked with a vertical blue line, the market sold off the next couple of days, twice bouncing back up off the second day low.

With all the bullish technicals, we're not likely to see as big a down day any time soon, but this indicator does point to a likely pullback very soon. If we get a short pullback like the last 6 times during this rally, the second day of the pullback could be a great buying opportunity yet again.


The healthiest thing for the market would be a short consolidation/pullback over the next couple of days that holds the 927-930 "Confluence" area. The next level of resistance is the June intraday high of 956. Above there, there's not much nearby resistance, so the market can move swiftly higher, especially after a bullish consolidation.

Despite the breakdown, the May 15 low at 879 has continued to hold on a closing basis. That's 4 straight days now the SPX has closed between 879 and 882. If the powers that be can continue to defend this level, those who have shorted based on the now widely reported Head & Shoulders pattern may get squeezed.

Voilà...


The VIX got within 0.07 points of the rally's closing low from 2 weeks ago. If it can make a higher low here and then break last week's high to reverse the downtrend, that would be a bad indication for the market. However, if it breaks down below the rally low, there could be more short squeezing ahead.


And more short squeezing we got today after the VIX made a new closing low yesterday. Today, it broke the intraday low from the rally and made a new low for the year, as the market had its biggest up day in a while.

Amazingly, despite the major market indices closing up around 3% or more, the VIX actually also closed higher by 3.5%, bouncing off its lower Bollinger Band intraday. When both the market and the VIX move up significantly on the same day, the market tends to pull back in the short term.


As shown in this chart, today was the first 9-1 up day in nearly 2 months, while we've had 3 different 9-1 down days in the last month:

If the selloff is over and we're headed much higher, we should see more 9-1 up days and fewer 9-1 down days in coming weeks.

Here's the updated chart including today:

So we did get another 9-1 up day only 2 days later, and this one was actually a 28-to-1 up day. This is a positive sign for those who think the correction's over and the market's going much higher.


Looking ahead, there's some SPX resistance nearby, but the big "Confluence of resistance" remains in the 927-930 area. If the market can break through that area, there could be a further squeeze rally from there -- there may be lots of new shorts based on the media reports on the Head & Shoulders pattern. If the pullback after this bounce holds the 879 area on a closing basis, that could confirm a bottom to this selloff, but if that area gives way, we should see some significant selling to potentially much lower levels. The nature of the follow-through to today's rally will help determine the next big market move.

The SPX basically blew through all resistance to get to the 927-930 "Confluence of resistance" area today. It paused at 927 at mid-day, but then powered through the resistance to close at 932.68, at least partially powered by short covering.

Today's reversal on the VIX from a new intraday low on the year at its lower Bollinger Band to up 3.5% may portend some short-term weakness/consolidation, but if the market can hold the 927-930 "Confluence" area on a closing basis during this consolidation, that would be extremely bullish, and then shorts should be prepared for some more squeezing. If the SPX rallies a bit more in coming weeks, the 13-day EMA should cross back above the 34-day EMA for a buy signal, and if it breaks out above June's high, it will invalidate the Head & Shoulders pattern.


On trend days like today, perhaps the best daytrading tactic is to buy the dips (or sell the spikes on a down-sloping trend day). One of the first programs in our new automated futures trading system was designed to do exactly that, and it has been amazingly consistent, with over 90% wins. Here's the equity curve for this program on the e-mini S&P 500 futures since March 12, when the June contract started trading in volume:


Note that the first couple of months were backtest results on historical data only, but the results since then have been just as consistent or better. While it doesn't need a big trend day to trade (it's traded at least once every week during the testing), it tends to have multiple trades and big wins on days like today.

These results indicate that it's much easier and more profitable to trade with the trend than to try to fight it. Especially on a trend day, it's much easier to go with the flow than to try to predict a turn.

This chart shows some indications to look for to identify a trend day:

Despite the breakdown, the May 15 low at 879 has continued to hold on a closing basis. That's 4 straight days now the SPX has closed between 879 and 882. If the powers that be can continue to defend this level, those who have shorted based on the now widely reported Head & Shoulders pattern may get squeezed. If it breaks down, though, we may see some significant selling.

Shorter term, there are some oversold readings and positive divergences that would normally indicate a bounce is likely. However, we've had several bounce attempts the last few days that have been very weak, and have worked off some of the oversold conditions (e.g., the VIX coming back down off its upper Bollinger Band). Whichever way the market breaks, the action could be strong after the narrow trading range late this week that has hugged the 200 day moving average (gold line).

Watch for a breakdown of this week's 869 low or a breakout above the 888 resistance level (former support at June lows, and also yesterday's high) for an indication of which way the next move will go. A close below 879 would also be a negative indication. Also, watch to see if the VIX can make a higher low and then a higher high to reverse the downtrend it's been in -- such a trend reversal would not bode well for the market. On the up side, a close over 888 would be positive, and a break of last week's low on the VIX would also be positive.

As expected, the action today was strong after last week's narrow trading range. Last night, S&P futures came within 0.25 points of last week's low (corresponds with 869 SPX), but buyers came in and defended that level. Later, in regular trading, buyers rushed in when 888 resistance was taken out, pushing the SPX over 901 at the close, with futures over 30 points higher than last night.

The VIX got within 0.07 points of the rally's closing low from 2 weeks ago. If it can make a higher low here and then break last week's high to reverse the downtrend, that would be a bad indication for the market. However, if it breaks down below the rally low, there could be more short squeezing ahead.

As shown in this chart, today was the first 9-1 up day in nearly 2 months, while we've had 3 different 9-1 down days in the last month:

If the selloff is over and the market's headed much higher, we should see more 9-1 up days and fewer 9-1 down days in coming weeks.

Looking ahead, there's some SPX resistance nearby, but the big "Confluence of resistance" remains in the 927-930 area. If the market can break through that area, there could be a sizable squeeze rally from there -- there may be lots of new shorts based on the media reports on the Head & Shoulders pattern. If the pullback after this bounce holds the 879 area on a closing basis, that could confirm a bottom to this selloff, but if that area gives way, we should see some significant selling to potentially much lower levels.

The nature of the follow-through to today's rally will help determine the next big market move.

Our futures trading system had another great day, getting very long stock index futures for the breakout rally, and also getting nice profits on the gold rally. It continues to do well in both up and down markets, and live testing has allowed us to tweak the various programs as needed.

The next thing to watch for is either a decisive break of the June lows (the S&P 500 briefly dipped below 888 this morning -- the May 15 879 level is also support) or a breakout from the 927-930 resistance area. Given the VIX signals from last week and some other technical indications of a market shift, there's a good chance the next break will be down after this bounce is over.

However, strength early next week may provide a good selling opportunity, as "there are indications that a market shift is taking place..." A break of the June lows will confirm the Head & Shoulders topping pattern and likely mean more weakness is coming.



As expected, the market rebound from last week's selloff ended by early Tuesday, providing a good selling opportunity, and the market broke down quickly from there. The June lows at 888 broke down this week, confirming the Head & Shoulders topping pattern, which many in the media have now picked up on, and featuring the "bearish 13/34 EMA cross (red and blue lines)" that we mentioned last week. These two indicators have been fairly reliable sell signals for the intermediate term. However, we still have the bullish golden cross (purple line crossing above the gold line), which is a fairly reliable buy signal a little longer term.

Despite the breakdown, the May 15 low at 879 has continued to hold on a closing basis. That's 4 straight days now the SPX has closed between 879 and 882. If the powers that be can continue to defend this level, those who have shorted based on the now widely reported Head & Shoulders pattern may get squeezed. If it breaks down, though, we may see some significant selling.

Shorter term, there are some oversold readings and positive divergences that would normally indicate a bounce is likely. However, we've had several bounce attempts the last few days that have been very weak, and have worked off some of the oversold conditions (e.g., the VIX coming back down off its upper Bollinger Band). Whichever way the market breaks, the action could be strong after the narrow trading range late this week that has hugged the 200 day moving average (gold line).

Watch for a breakdown of this week's 869 low or a breakout above the 888 resistance level (former support at June lows, and also yesterday's high) for an indication of which way the next move will go. A close below 879 would also be a negative indication. Also, watch to see if the VIX can make a higher low and then a higher high to reverse the downtrend it's been in -- such a trend reversal would not bode well for the market. On the up side, a close over 888 would be positive, and a break of last week's low on the VIX would also be positive.

As we said over the weekend, "With the very high TRIN reading of over 3.5 at the close on Thursday, the market is likely to rebound some on Monday, at least for part of the day."

As expected, the S&P 500 bounced off the lower Bollinger Band and overcame strongly negative futures to rebound and close at its high, finishing in the green and up over 12 points from the morning low.

Our automated Gap Up Trader went long again at today's close, looking to exit higher in the first hour tomorrow, or up to one hour before the open, so there's a good chance the rebound continues into tomorrow.


However, strength early next week may provide a good selling opportunity, as "there are indications that a market shift is taking place..." A break of the June lows will confirm the Head & Shoulders topping pattern and likely mean more weakness is coming.

The next thing to watch for is either a decisive break of the June lows (the S&P 500 briefly dipped below 888 this morning -- the May 15 879 level is also support) or a breakout from the 927-930 resistance area. Given the VIX signals from last week and some other technical indications of a market shift, there's a good chance the next break will be down after this bounce is over.

As we said last week, "Now, the market is near a key resistance area, and how it reacts to that resistance will likely determine the direction of the next big move."

The market's rejection at that "Confluence of Resistance" 927 area indicated that the next big move would be down, especially given the failure during this historically positive week, along with the rare VIX action.

On Monday morning, the S&P 500 quickly rose to the 927 resistance area, but was unable to break through it, closing right at 927, for the highest close of the week. The "double violation of the lower Bollinger Band" I mentioned last week turned into a triple violation with Monday's third consecutive VIX close below its lower Bollinger band. As we mentioned last week, even a single close of the VIX below the lower Bollinger Band has been a pretty reliable sell signal.

Tuesday had a sharp drop when the 927 area didn't hold, falling 15 points to the 912 area, providing nice, quick profits to those who shorted Monday's strength as we suggested. The VIX bounced back nearly 10% from its intraday low, but fell back into the end of the day as the market rebounded.

Our automated gap trader indicated the market was likely to bounce back on Wednesday, at least early on. Despite quarter end and pre-holiday favorable timing, the failure of the market to break out through the "Confluence of Resistance" area on Wednesday (the May high around 930 also added to this resistance zone), along with some other technical sell signals, was a strong hint that the market was headed for a big down day on Thursday.

The VIX broke to an even lower low on Wednesday, again piercing the lower Bollinger Band (for the 5th straight day) before bouncing back as the market rally faded. The VIX action clearly indicated a VIX bounce was due, which would mean market weakness.

With the failure at resistance, we very nearly posted another warning of a big down day to come on Thursday, but the unknown reaction to the employment report on the normally bullish day before the holiday gave us pause, and we already had made it clear the reaction to the resistance area would determine the next direction. We were also busy preparing our systems for Thursday's selloff -- It's easier to do blog posts on the weekends when the futures markets are closed.

The disappointing employment report sealed the market's fate for Thursday, as it had its worst day before the July 4th holiday ever. The VIX bounced back over 15% from Thursday's low to Friday's high. Our automated trading system had its biggest one-day gain ever (on an absolute dollar basis, but not % basis, as there were bigger % gainers when the account was smaller -- e.g., on June 22 when the big down day came as expected and the system also had big gains from other commodities).

As we said last week, "This confluence of resistance means it's important for the market to power through through that 927 area next week in order to have the month-end/quarter-end/holiday rally one would expect. If it fails to break though that area and rolls over instead, a break of this week's low would confirm a head and shoulders topping pattern and would also feature a bearish 13/34 EMA cross (red and blue lines)." The market rolled over, but it did not yet break last week's low to confirm the head and shoulders breakdown, and the 13/34 EMA lines haven't crossed yet.

With the very high TRIN reading of over 3.5 at the close on Thursday, the market is likely to rebound some on Monday, at least for part of the day. The VIX bouncing back down off the 20-day moving average (mid-line of Bollinger Bands) and the SPX near its lower Bollinger Band add more reasons to expect a bounce early next week. However, strength early next week may provide a good selling opportunity, as "there are indications that a market shift is taking place..." A break of the June lows will confirm the Head & Shoulders topping pattern and likely mean more weakness is coming.

Another indication that a market shift is taking place is the 9-to-1 up days vs. down days:


As this chart shows, in the rally from March 9 until early May, there were far more 9-to-1 up days than down days. In the last few weeks, that has reversed, with Thursday being the third 9-to-1 down day in 3 weeks.

All in all, it was another great week for our automated trading system, which still has yet to have a down week during this development and testing phase. It was its biggest week ever on an absolute dollar basis, and the gains are getting more diversified, as we've added programs for silver, copper, oil, and natural gas. We continue to tweak the system as needed and adapt it to market conditions.

We'll continue to update this blog periodically, but again, our current focus is on expanding and extensively testing our automated futures trading system. We've had several inquiries into our plans -- as long as the extensive testing in different market conditions continues to show strong results, we plan on starting a hedge fund based on the system. Interested parties can always contact us through the Email GreatTrades link at the bottom of this blog.

After Tuesday's small NYMO change day signaled a big move day coming, the big move came on Thursday, as the S&P 500 moved sharply off its lower Bollinger Band and powered up toward last week's high. Now, the market is near a key resistance area, and how it reacts to that resistance will likely determine the direction of the next big move.

If the S&P 500 can break through the resistance in the area of last week's 927 high, it should make a push toward the 956 high of the week prior. Earlier in this rally, such an up move would have been a given considering next week is month end, quarter end, and a holiday-shortened week. However, there are indications that a market shift is taking place...

Here's a blog post indicating that the VIX closing below the lower Bollinger Band has been a pretty reliable sell signal, and sometimes significant market turning point: http://www.trivisonno.com/vix-up-to-trix

Not only did the VIX close below the lower Bollinger Band yesterday, but it did so today as well, with the VIX closing down 1.6% even though the S&P 500 closed down (as you can see from the chart, they normally are inversely correlated). This chart of the VIX and SPX shows this double violation of the lower Bollinger Band, as well as the S&P 500's bounce off the lower Bollinger Band earlier this week:


You can also see in this chart that the 20-day moving average (gold line) sits right at the 927 area, and the PAR SAR Stop and Reverse indicator (little pink boxes above the SPX) will also be in that area early next week. This confluence of resistance means it's important for the market to power through through that 927 area next week in order to have the month-end/quarter-end/holiday rally one would expect. If it fails to break though that area and rolls over instead, a break of this week's low would confirm a head and shoulders topping pattern and would also feature a bearish 13/34 EMA cross (red and blue lines).

Given the current setup, a low-risk, potentially high-reward strategy might be to short any strength in the S&P 500 early next week, and stop and reverse to long on a breakout of the 927 resistance area. That would allow one to profit from whichever way the market breaks.

The double VIX lower Bollinger Band penetration argues for a market break lower, while the "Golden Cross" bullish 50/200 day moving average crossover this week and the quarter-end/holiday week next week argue for a break higher. The key is to be ready for both and profit either way.

The big move down today came as expected, with the Dow losing over 200 points, the Nasdaq losing over 60 and the S&P 500 losing over 28. It was the biggest one-day loss in the stock market since April 20, which happens to be the last time we called for a big down day on this blog.

Our automated trading system had another great day, as it was well prepared for the big down day, and also profited nicely from the bond and dollar rallies as well as the gold pullback.

We will continue to focus on expanding and testing our automated futures trading system, but will also continue to post on this blog periodically.

While the S&P 500 had a nice rally of about 20 points from Thursday morning's low to Friday morning's high, it was not really the big move in one day that has usually occurred recently after a small NYMO change day. With the somewhat muted reaction to this indicator so far, we're looking for a potential big move day on Monday, the first trading day after quadruple witching expiration.

Whereas on Wednesday we were looking for a move up, which we got, we're now leaning toward the next big move being down. The lackluster rally in response to the NYMO indicator could portend a down move, though it's hard to tell if quadruple witching expiration had an effect.

If Friday's lows get broken on Monday, we'll be looking for a more sizable down day. However, if the market breaks out above Friday's highs, we'll be looking for continued up side. In any case, we'll be ready for a break in either direction, as our system will react to wherever the market goes. There should be some nice volatility on Monday from which active traders can profit.

Live testing of our automated system continues to go very well, with strong returns and minimal draw down. With the arrival of our new hardware, we continue to expand the system's coverage. The bond and U.S. dollar futures trading so far has provided very nice gains to supplement the stock index futures trading, and we're now adding gold futures trading. We'll continue to expand the scope to include oil and other commodities.

To all the fathers out there, have a Happy Father's Day tomorrow!

With a small NYMO change today, there's a very good chance the market will get a sizable move within the next couple of days.

This indicator doesn't indicate market direction, but after 3 straight down days in the S&P 500, and after today's doji candlestick and bounce at the 200-day moving average, odds would favor an up day. However, if the 200-day moving average breaks, the big move could be down. Either way, we'll be ready for it.

With quadruple witching this week (contracts for stock index futures, stock index options, stock options and single stock futures all expire), anything can happen, but this week often features extra volatility.

As our Gap Up Trader expected, the S&P futures did trade higher, and significantly so, during the hour before the open after a lower than expected number of job losses were reported in the May unemployment report. The automated strategy took very nice profits right after the report came out, spiking S&P futures well over 10 points higher than yesterday's close.

Despite the major market indices ending near unchanged, it was a very nice 10%+ day for our automated futures trading system, led by the big US Dollar rally (we added US Dollar futures trading this week as we expected a reversal from the downtrend to an uptrend).

Testing continues to go very well, and we continue to expand the system with new strategies and new futures coverage. Because of the increased computing power required, we've ordered additional hardware to handle the workload.

We'll continue to post on this blog periodically, but our primary focus is on expanding and testing our automated futures trading system.

One of the strategies in our automated futures trading system is a gap up trader. Below is the equity curve for this strategy for June E-mini S&P futures:

This is an unusual equity curve, as there have been no losses since the June futures became actively traded. After today's gain, it now has had 19 winning trades in a row during this strong rally period.

This strategy went long again at today's close and will exit during the first hour tomorrow (or up to an hour before the open). If it exits above today's close, it will be the 20th winning trade in a row.

One could say it's overdue for a loss, and with the employment report due out before the open, this could be the first one. In any case, we thought some might be interested to know that this indicator is looking for higher trading early tomorrow.

After development, backtesting, and some tweaking, initial live testing of our new automated S&P futures trading system has gone very well. The system made nice profits last week shorting and also made nice profits today long -- the beauty of the system is you don't need to predict which way the market will go, as it reacts to price either way. It doesn't get caught getting squeezed on the wrong side, but rather just goes with the flow.

We will continue live testing in coming weeks/months through different market situations, and plan to expand the testing to various commodities and equities. The system's unique use of both traditional and proprietary indicators in a number of different strategies has worked great on S&P futures so far, with high returns on very low risk, but we'd like to see consistent success in various markets and time periods before further rollout.

The big move days last Monday and today were especially rewarding for our system. Since our previously mentioned indicators correctly pointed to these big move days coming (as they did the big move on April 20 and other days), we plan to activate strategies to take advantage of these expected big move days when our indicators anticipate them.

With the Nasdaq's breakout, our trading model has liquidated the other positions to move to cash.

We're shifting our focus to developing an automated futures trading system that takes advantage of intraday volatility. Initial development looks very promising, with very high return potential on very low risk.

Open Positions: none.

On the breakout over Wednesday's high, our trading model's stop was hit on the Nasdaq 100 short.

Open Positions: Short 25% S&P 500, short 20% financials, long 1% May 84 SPY puts, speculative trading portion short another 25% S&P 500, and another 20% financials, and long 1% May 83 SPY puts.

This chart shows why our trading model shorted the Nasdaq 100/QQQQ today near the highs today.



While the other indices remained well off their highs of last week, the Nasdaq 100 was retesting its highs, with strong resistance keeping it from breaking out. One of the best technical sell indicators is a failed buy signal. This 15-minute chart of QQQQ shows the clear bullish cup & handle pattern that failed to break out. This market has been extremely resilient, but normally this setup at the highs would signal more downside ahead.

With the Nasdaq 100 retesting last week's high at 1361, hitting 1359.96 so far today, our trading model is shorting the Nasdaq 100 with a stop at new highs.

Open Positions: Short 25% S&P 500, short 20% financials, short 25% Nasdaq 100, long 1% May 84 SPY puts, speculative trading portion short another 25% S&P 500, another 25% Nasdaq 100, and another 20% financials, and long 1% May 83 SPY puts.

On the gap down after yesterday's big drop, our trading model has covered half the S&P 500 shorts, and has covered the MET short from 27.5 in the 23's.

Open Positions: Short 25% S&P 500, short 20% financials, long 1% May 84 SPY puts, speculative trading portion short another 25% S&P 500 and 20% financials, and long 1% May 83 SPY puts.

The big down move day came today as expected . This chart shows that today was the biggest down day since the rally started, and the second 9-to-1 down volume day:

It was actually a huge 27-to-1 down volume day, with the SPX closing at its low and breaking last week's low, meaning the S&P 500 will have its first lower low since the rally started, breaking the trend of higher lows. In this one day, the market gave back the gains from the last 2 weeks and more.


Today was clearly a trend down day, with hardly any positive ticks seen on this 1-minute NYSE Tick chart:


There was hardly a bounce during the day, with down volume vs. up volume steadily increasing, along with TRIN, indicating strong volume going to the losers. TRIN closed pretty high, near 3, so there should be a rally attempt at some point tomorrow, or a gap higher.


The updated hourly chart of the S&P 500 shows a break of the huge rising wedge along with a continuation of the PPO bearish divergences with the amazing 5th lower high on PPO (accompanying 5 higher SPX highs) and its bearish cross sell signal:

The break of the huge wedge should mean this pullback will go significantly lower, though there may be a short-term bounce back toward the breakdown area first.


If this pullback follows the pattern of the previous 5, the S&P 500 should make a lower low tomorrow, though it might bounce back short term from there.