Great Trades

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.