Great Trades

Gold, Silver Breakout, Retest Success

2010-06-21T00:22:00.003-04:00

Just a quick note to point out that gold and silver continue to break out, with gold at a new all-time closing high both on the daily and weekly charts. This is what a strong bull market looks like:

Silver has even been outperforming gold recently. Since our last update, silver is up over 3 times as much as gold, and still has quite a ways to go to get to even a new high on the year.

The Silver/Gold ratio had a bullish MACD crossover earlier this month, and has now broken above its 20-day EMA. Watch for silver to continue to outperform as long as this ratio remains above the 20-day EMA. Investors are beginning to realize that silver is money, too, and is a far cheaper alternative to gold.

For the stock market, since our last update on the SPX testing the 1105 area, it sold off to retest the February low at the 1040 area. After a successful retest of that support, for a nice double bottom, the SPX again tested its 20-day EMA and 200-day moving average this week after the VIX broke down badly from its uptrend. Unlike last time, this time the SPX broke above those moving averages, passing the test with resounding success.

With these successful tests, we now have the summer rally we were looking for earlier. As long as the SPX remains above its 20-day EMA and 200-day moving average, odds favor the long side in the stock market. For month end, the 12-month EMA remains in the 1090 area, and remains critical support for next week. With some more strength likely early this week after the news of the lifting of the China Yuan peg to the US dollar, the market would be short-term overbought and due for a pullback, but as long as any pullback is shallow, the summer rally should resume.

Watch the VIX downtrend in addition to these moving averages. When the VIX next has a strong break upward, it will likely mark the beginning of the next stock market selloff, which would be confirmed with breakdowns of the aforementioned SPX moving averages. There's a good possibility of such a selloff beginning by fall, after this summer rally ends.

Test Failure! Focus on Gold, Silver

2010-06-06T15:22:00.004-04:00

The next test will be the 200-day moving average at around 1105.

On the other hand, another break of the 1090 support area probably means more selling is ahead before the market stabilizes.

On Thursday, the SPX rallied right up to 1105, where the 200-day moving average is, but couldn't get through that key level. On Friday, in reaction to the poor Non-Farm Payrolls report and more bad news from Europe, the SPX dropped well below the 1090 support area, selling down all the way to 1065 for its lowest close since February:

The SPX couldn't even make it up to its 20-day EMA before Friday's carnage.

You can see from the chart that using above/below the 20-day EMA as a guide to favoring the long/short side has worked well.

The QQQQ chart only could muster one day above its 20-day EMA, as Friday's selloff moved it back well below that moving average:

This action, as well as the SPX drop below its 12-month EMA, favors the short side for the stock market as long as these EMA's remain above current prices:

The SPX will likely bounce around with high volatility, but if it can't close this month above the 1082 area, that would likely indicate this weak period for stocks could last a while.

Meanwhile, both gold and silver remain above their 12-month EMA's, as well as their 200-day moving averages:

This stock market weakness has rewarded those who went long gold and short the stock market based on the monthly GLD/QQQQ buy signal we posted on May 2

The VIX, bonds, and the the Put/Call ratio all look like they could drop quite a bit in a more stabilized stock market environment, as long as the news flow gets less negative.

With the news flow getting even more negative on Friday, rather than less negative, the VIX and bonds moved right back above their uptrend lines that were broken earlier in the week:

While we thought the stock market might enter a more stable period with a successful close over SPX 1105, Friday's poor news and horrible reaction killed that possibility for the near future. The 1105 test for the market was an abject failure.

We continue to believe that investors and traders who favor the long side will be better off focusing on gold and silver during this period of stock market instability. With the global debt problems and currency devaluations, the fundamentals also favor these precious metals that have served as real money throughout history.

Summer Rally?

2010-06-02T21:43:00.002-04:00

Today, the market action at the SPX 1090 resistance area was significant. Instead of selling off hard from there, as it did yesterday, this time the market rallied right through this resistance area, closing over 1098.

The next test will be the 200-day moving average at around 1105. There's also an inverse head & shoulders pattern on the hourly SPX chart, which will get a confirmed breakout over 1105.

If the SPX can get through 1105, the market could be in for a nice rally. The VIX, bonds, and the the Put/Call ratio all look like they could drop quite a bit in a more stabilized stock market environment, as long as the news flow gets less negative.

Below is the QQQQ chart we posted last month in our warning to switch from stocks to gold. Now, with some follow-through rallying tomorrow, we could be exiting an unstable stock market period and entering a more stable period again.

Notice that MACD got a bullish crossover in February at the beginning of the stable February-April period. Now, an up day tomorrow would confirm another bullish MACD crossover, and would also move QQQQ over its 20-day EMA. You can see from the chart that using above/below the 20-day EMA as a guide to favoring the long/short side has worked well.

Here's a similar chart for the $VIX, which normally moves in the opposite direction of the stock market:

The $VIX looks like it's broken its uptrend and had a bearish crossover on MACD. If the VIX continues to drop, the market should be much more stable.

Here's one for TLT, the ETF for 20-year bonds:

Bonds, which have rallied during this unstable period because of their "safe haven" status, also could be breaking their uptrend and also have had a bearish MACD crossover.

And here's one for the Put/Call Ratio:

The Put/Call Ratio is also coming down from an extreme level. Selling panics feature increased put buying, whereas market stability features more balanced put and call buying.

There are lots of people calling for a market crash coming any day now, and they may be right, but these indicators are pointing to market stability instead if we get some follow-through strength in coming days, especially tomorrow, and especially over 1105 SPX. An up day tomorrow would also be the first time we'd see 2 consecutive up days since April, which would be another sign of renewed stability. On the other hand, another break of the 1090 support area probably means more selling is ahead before the market stabilizes.

If we do see a summer rally, that would keep the SPX above its 12-month EMA (if it lasts until at east the end of June) and keep this cyclical bull market going for at least a little while. This chart shows that the 12-month EMA has done a pretty good job of identifying the trend over the last 10 years:

It's still a dangerous market, but if we do see some follow-through strength tomorrow, it should become a lot less dangerous for a while. We believe any summer rally would be a selling/shorting opportunity, but if it happens, you won't want to short too soon.

Portfolio Re-allocation Update: Sell Stocks, Buy Gold and Silver

2010-05-09T15:41:00.003-04:00

From our blog update last weekend:

After the strong rally in stocks over the past year+, this looks like a particularly good time to reallocate portfolio assets from non-mining stocks into gold and silver. While stocks look like they could be in for more selling, gold is breaking out to new highs on the year, and is very close to breaking out to new all-time highs.

Right now, this portfolio re-allocation strategy indicates a shift to long gold and short the Nasdaq 100 should be made.

This breakdown from the rising wedge, along with the weekly bearish engulfing candlestick, VIX breakout over 20, and the excessive bullishness of newsletter writers, increases the likelihood that the market is in for more selling. A number of other indicators point to more selling to come, though there's a possibility of a short-term bounce first after Friday's sharp sell-off. Any market bounce or gold/silver pullback should be used to sell non-mining stocks.

We got the short-term bounce on Monday, which was the perfect opportunity to sell out and reverse to short on the Nasdaq 100. Then, there was a small pullback in gold on Tuesday into Wednesday, which was a great opportunity to add more gold, and a larger pullback in silver and mining stocks into Wednesday, which was a great opportunity to add more of both (we pointed that out in our Wednesday morning blog update.

After Monday, the Nasdaq, along with the rest of the stock market, was hit very hard, with its worst week since the March 2009 lows, highlighted by the intraday collapse during Thursday's historic selloff:

Meanwhile, gold has broken out to a new all-time closing high on the weekly chart:

The result has been a clear and powerful breakout on the GLD/QQQQ chart:

The monthly chart of this ratio now shows a clear buy signal:

Back in March 2009, near the beginning of this rally, we highlighted the importance of 9-to-1 up days in identifying bear market bottoms:

This award-winning paper, Identifying Bear Market Bottoms and New Bull Markets, discusses the fact that major market bottoms are identified by a series of 90% downside days followed by 90% upside days. This is exactly what we've had in recent weeks, and it looks like today we had a 3rd 90% upside day of this rally.

Now, coming off the recent peak, there has been a cluster of 9-to-1 down days:

The last time we saw such a cluster of 9-to-1 down days coinciding with the breakout of the VIX from a base in the 20 area was in September 2008, which was the start of the precipitous decline that ended in the March 2009 bottom. That doesn't mean that the same type of decline will happen again here, but it's certainly a possibility for which investors should be prepared.

There are some other indicators pointing to the likelihood of more selling to come.

The weekly chart of the S&P 500 now shows a bearish cross on PPO:

On the daily S&P 500 chart, the 13 and 34-day exponential moving averages have crossed back down (blue line crossing below red line):

These bearish cross signals are negatives for the stock market, but, as happened at the February bottom this year and July bottom last year (we pointed out the bullish 13/34 cross in our July 20 update ), they can be overcome with a strong rally back.

After this week's strong selloff, the market is at extremely oversold levels on a short-term basis.

Over the last 10 years, the NYMO (NYSE McLellan Oscillator) has dipped below -100 only 7 times, and only once below the current level (October 2008):

Each time the NYMO has reached these oversold readings, the S&P 500 has bounced for at least a day or two, starting immediately or within a couple of days. However, with the exception of November 2009, every one of these bounces has been met with selling to lower levels. Also, every one of these readings came with the NYSI at a lower level (NYMO is the rate of change of the NYSI), so there's now a lot more room for negative NYMO readings to come.

After the break of 20 resistance the previous week coincided with the beginning of the selling, the VIX has now more than doubled from that point, closing well above its upper Bollinger Band on Friday:

While previous spikes of the VIX above its upper Bollinger Band have indicated market bottoms in recent months, this time, the VIX is on a clear breakout from its previous trading range. The S&P 500 is also well below its lower Bollinger Band, so reversion to the mean would lead one to expect a market bounce fairly soon. However, these Bollinger Bands are moving rapidly toward current levels, and market conditions have changed dramatically, with Thursday's panic selloff fresh in investors' minds. It's hard for investors to have confidence in a market bottom so soon after seeing the bottom fall out, with no clear explanation or fix yet provided.

Given the current state of our technical indicators, we don't believe the selling is over for the stock market yet, and there could be much more to come. However, given the extremely oversold conditions in the short term, we could see a market bounce any time now.

With gold breaking out to new highs (weekly chart in U.S. dollars, all charts in other currencies) and the Gold/QQQQ ratio on a long-term buy signal, we continue to believe investors should use market bounces as an opportunity to shift portfolio allocation away from non-mining stocks toward gold and silver as well as mining stocks (those with large amounts of gold or silver), with aggressive investors also shorting the U.S. Stock market. Most people are only now seeing that fiat currencies are in a race to devalue in order to service their debt, resulting in the inevitable increase in the relative value of the hard currencies, gold and silver, which have over many centuries been the real store of value.

Update: Stocks Sell Off, Gold/Nasdaq 100 Ratio Buy Signal

2010-05-05T00:12:00.008-04:00

From Sunday's update:

This breakdown from the rising wedge, along with the weekly bearish engulfing candlestick, VIX breakout over 20, and the excessive bullishness of newsletter writers, increases the likelihood that the market is in for more selling. A number of other indicators point to more selling to come, though there's a possibility of a short-term bounce first after Friday's sharp sell-off. Any market bounce should be used to sell non-mining stocks.

Monday's short-term market bounce proved to be a great opportunity to sell stocks, and this pullback in silver and mining stocks, which were caught up in today's 225-point market selloff (likely hedge fund liquidations in thin markets), should prove to be a great buy opportunity for anyone doing this portfolio re-allocation.

As for the monthly Gold/Nasdaq 100 ratio chart, the stochastics lines have crossed back up:

Right now, this portfolio re-allocation strategy indicates a shift to long gold and short the Nasdaq 100 should be made. This ratio is just coming off the 36-month EMA, and the stochastics lines are oversold below 20, and look like they should cross back up soon.

Sunday's chart:

As you can see above (bottom pane), the black stochastics line was 11.84 while the red stochastics line was still above it at 13.50.

After today's action, the black stochastics line (16.62) has crossed back above the red stochastics line (13.93) to trigger a stochastics buy signal:

Keep in mind that this is a monthly chart, and May has just begun. It's the end of the month that counts on a monthly chart, so the stochastics lines will need to remain crossed back up at the end of May for this buy signal to be valid. Also, May is just one month -- this longer term chart could take several months to generate a stochastics buy signal if this cross doesn't hold.

It's a good start so far for this portfolio re-allocation strategy shift, but it won't be proven a success for a few more months.

Portfolio Re-allocation: Sell Stocks, Buy Gold and Silver

2010-05-02T13:44:00.005-04:00

From our last blog update, in March:

If recent history repeats itself, we should soon see a short-term pullback, which should be followed by new highs in the S&P 500.

The previous 10 times this EMA has peaked over 600 in the past year, the market has had a short-term pullback. Every one of those pullbacks has proven to be a buying opportunity, followed by new highs in the S&P 500.

Unlike the previous 10 times the TICK 10-day EMA peaked over 600, this time the market pullbacks were very brief, primarily limited to intra-day sell-offs. After this EMA dipped back under 200, it bounced back up toward 600 as the S&P 500 (SPX) rallied to a new high, peaking at 1219.80 this past Monday.

On the next day, Tuesday, something happened that we warned about in the last update:

However, a break of 20 resistance in the VIX could again spur a sharper pullback in the market.

Tuesday's break of 20 resistance in the VIX coincided with the largest market drop in months, as the SPX dropped from near 1220 on Monday to near 1180 on Tuesday. Since that VIX spike sent the VIX well above its upper Bollinger Band, and also sent other short-term indicators into very oversold territory (e.g., TRIN), the SPX bounced back to as high as 1209.36 on Wednesday and Thursday, dropping the VIX back under 19. On Friday, the VIX broke through 20 resistance again, as the market plunged again, with the SPX closing at 1186.69, closing out the week with a bearish engulfing candlestick sell signal on the weekly chart.

Now, the VIX is again above its upper Bollinger Band, but only slightly, at 22.05 vs. 21.59. The upper Bollinger Band is rising sharply, so the VIX can likely continue higher and still stay near its upper Bollinger Band. The TICK 10-day EMA is back under 200, but it can go significantly negative before rebounding, as it did in February, October, and a number of times in the previous 12 months.

The key level to watch for now is this past week's low, which was 1181.62 on the SPX. The Russell 2000 has already broken below its Tuesday low by over 3 points, and that small-cap index has been leading the market higher in recent months. If the other market indices follow, we should see a more significant market pullback. As this article points out, the three to one ratio of bullish to bearish newsletter writers is a red flag warning that could mean the market is in for a sizable correction.

On the Nasdaq 100 (NDX or QQQQ), the rising wedge uptrend since the February low was finally broken on Friday:

This breakdown from the rising wedge, along with the weekly bearish engulfing candlestick, VIX breakout over 20, and the excessive bullishness of newsletter writers, increases the likelihood that the market is in for more selling. A number of other indicators point to more selling to come, though there's a possibility of a short-term bounce first after Friday's sharp sell-off. Any market bounce should be used to sell non-mining stocks.

While the stock market looks like it's in for some more selling, the gold and silver markets look very strong. We've advocated accumulating gold, silver, and quality mining stocks on pullbacks, and that strategy has worked quite well:

Considering the longer-term trend higher in gold in its powerful bull market, this pullback should prove to be a great buying opportunity for longer term, for gold and silver as well as quality mining stocks.

After the strong rally in stocks over the past year+, this looks like a particularly good time to reallocate portfolio assets from non-mining stocks into gold and silver. While stocks look like they could be in for more selling, gold is breaking out to new highs on the year, and is very close to breaking out to new all-time highs.

Holding a portfolio allocation of long gold and short the Nasdaq 100 from early 2000 for 9 years would have made over 10 times your money, with similar results for silver:

Shifting portfolio allocation from gold and silver to the Nasdaq 100 and back based on stochastics signals (bottom pane) would have yielded even much better results, particularly when combined with the 36-month EMA and Bollinger Bands. Moving from gold to the Nasdaq 100 when this ratio was well above its upper Bollinger Band and the faster black stochastics line crossed below the slower red stochastics line above the 80 level, and then moving from the Nasdaq 100 back to gold when this ratio came back to meet the 36-month EMA while the stochastics lines were below the 20 level would have yielded tremendous returns with very little drawdown, and particularly strong outperformance during market corrections.

Right now, this portfolio re-allocation strategy indicates a shift to long gold and short the Nasdaq 100 should be made. This ratio is just coming off the 36-month EMA, and the stochastics lines are oversold below 20, and look like they should cross back up soon. Quality gold and silver mining stocks are also recovering from their financial crisis lows, and those that are well-financed with large deposits are poised to move up much faster than gold and silver because of their leverage. Mining juniors that have survived the financial crisis while maintaining large deposits and improving or maintaining healthy cash positions may perform the best of all because of their extreme leverage.

Silver has been more volatile than gold in recent years, but remains severely undervalued relative to gold on a historical basis. Currently, the gold/silver ratio is around 63.5, but the historical average over the centuries has been around 16. That means that if silver returns to its historical ratio with gold, it should quadruple relative to gold, even if gold is headed to much higher levels. This article discusses some reasons silver should move much higher relative to gold. For long-term investors, silver and silver mining stocks, particularly quality juniors with large deposits, could have exponential returns if the precious metals bull market continues.

As for fundamentals, the sovereign debt crisis around the world is starting to evidence itself with the crisis in Greece and the downgrades of Spain and Portuguese debt. As sovereign debt issues decrease the value of paper currencies around the world, the value of the hard currencies, gold and silver (the word for money in many languages is the same as the word for silver), will increase significantly.

This article describes the fundamental issues pointing to much higher gold and silver prices

This NY Post article from April 11 described the gold and silver price manipulation to keep prices down.

This article from this weekend points out that the Department of Justice Antitrust Division is now considering launching an investigation into silver market manipulation by JP Morgan. Could such an investigation be the catalyst that propels silver back up toward its historic ratio with gold?

Given the current technicals as well as the fundamentals, it looks like a strategic shift of portfolio allocation from stocks to gold and silver will likely pay off handsomely, especially if anything comes of any DOJ investigation into silver market manipulation. Aggressive traders can go short the Nasdaq 100 while going long gold and silver to fully participate in this ratio strategy. Even if the stock market continues higher unabated, the likely faster increase in gold and silver should reward investors who make this shift. If stocks should finally experience a significant pullback while gold and silver break out, this shift could be a life changer for some.

Pullback time?

2010-03-08T23:34:00.000-05:00

Our last blog update was in December, when the VIX first broke below 20 support, spurring a S&P 500 breakout to the 1150 area in January:

If the VIX continues lower to establish a new range and the S&P 500 can break out above 1120 resistance, that would be bullish for the stock market in the short term, especially during this seasonally strong time of the year. However, the last time the VIX broke below 20 support, in August 2008, the short-term rally was followed by the precipitous market decline into the fall. Also, January has featured sharp declines in each of the last 2 years.

Given the recent market action, it looks most likely that the S&P 500 will finally be able to break through 1120 resistance (perhaps after a very short-term pullback) and spurt higher in a short-term rally as the VIX establishes a new range. Depending on the market action, such a rally could prove to be a selling opportunity, judging from the last couple of years.

As expected, the rally in January was a selling opportunity, followed by a sharp decline of over 100 S&P 500 points. The sharp decline into February proved to be a buying opportunity, featuring a VIX spike over 29, outside its upper Bollinger Band.

Since the February low, the S&P 500 has rallied back strongly, pushing the VIX back down to the 17's, the same area as the January low, which corresponded with the high in the S&P 500 in the 1150's. Again, the market spurted higher once the VIX broke below 20 support.

Now, for the first time since September, the TICK 10-day EMA is back above 600 again, and a number of other indicators are at short-term overbought extremes. The previous 10 times this EMA has peaked over 600 in the past year, the market has had a short-term pullback. Every one of those pullbacks has proven to be a buying opportunity, followed by new highs in the S&P 500.

If recent history repeats itself, we should soon see a short-term pullback, which should be followed by new highs in the S&P 500. However, a break of 20 resistance in the VIX could again spur a sharper pullback in the market. If the pattern of higher highs in the S&P 500 is broken this time, the market could be in for more than just a short-term pullback.

Considering the longer-term trend higher in gold in its powerful bull market, this pullback should prove to be a great buying opportunity for longer term, for gold and silver as well as quality mining stocks.

Indeed, the precious metals pullback in December proved to be a great buying opportunity, as did the February pullback. We continue to view all pullbacks in precious metals and quality mining stocks as buying opportunities in a powerful bull market.

As we've mentioned before, our blog updates will continue to be less frequent than previously, as we focus on expanding, updating, and testing our automated futures trading system across different markets, different timeframes, and various conditions.

VIX Break Below 20 Support, Gold Pullback

2009-12-22T20:53:00.004-05:00

The VIX has dropped sharply from the lower 30's to the lower 20's, which has been a strong support area recently, so this sharp short-term rally phase may be nearing its end.

At the time of our last post, the S&P 500 had rallied over 60 points in less than 6 trading days. In the ensuing 6 weeks, the S&P 500 has traded in a narrow range from 1085-1120.

Until today, the VIX has remained in the lower 20's during that time:

Today, the VIX finally broke below 20 support, for the first time in over a year. The S&P 500 closed at the upper end of its recent trading range, at 1118.02.

If the VIX continues lower to establish a new range and the S&P 500 can break out above 1120 resistance, that would be bullish for the stock market in the short term, especially during this seasonally strong time of the year. However, the last time the VIX broke below 20 support, in August 2008, the short-term rally was followed by the precipitous market decline into the fall. Also, January has featured sharp declines in each of the last 2 years.

If the S&P 500 fails to break through 1120 resistance during this holiday season, that would be a negative for the market, especially if the VIX break below 20 turns out to be a head-fake, and the lower end of the recent range (at SPX 1085) is broken instead.

Given the recent market action, it looks most likely that the S&P 500 will finally be able to break through 1120 resistance (perhaps after a very short-term pullback) and spurt higher in a short-term rally as the VIX establishes a new range. Depending on the market action, such a rally could prove to be a selling opportunity, judging from the last couple of years.

Gold has had a very strong rally recently, so a short-term pullback can happen at any time, but the longer-term trend continues to be higher.

After a very strong rally to well over $1200, gold has pulled back over $150 in less than 3 weeks in a short-term pullback, as the U.S. Dollar has rallied back strongly following a strong decline since March. Considering the longer-term trend higher in gold in its powerful bull market, this pullback should prove to be a great buying opportunity for longer term, for gold and silver as well as quality mining stocks.

Fund update: Our plans to start a fund have been placed on hold, pending the proposed onerous trader transaction tax. Such a tax would put many funds out of business. Until the dust settles on this silly legislation, we'll continue live testing across markets under different conditions. Testing continues to go very well.

Rally as Expected, Another Gold All-Time High

2009-11-09T23:01:00.004-05:00

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.

As expected, the market rallied into the FOMC announcement, and then continued higher the next 3 days. In the 4 trading days since our last post, the Dow has rallied over 450 points, making a new 52-week high. The S&P 500 hasn't yet made a new 52-week high, but is within 8 points of one and broke the September high.

This updated chart of the VIX and SPX shows the sharp short-term rally we were expecting after the VIX spike above its Bollinger Band:

The VIX has dropped sharply from the lower 30's to the lower 20's, which has been a strong support area recently, so this sharp short-term rally may be nearing its end.

The updated chart of the TICK 10-day EMA shows that it's once again approaching the 600 level:

As we said after the last peak over 600, "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." If we get a 10th higher high with another peak over 600, we'll then look for another short-term pullback, and see if that pullback will be yet another buying opportunity, or a trend change with a lower low.

Friday's small NYMO change had us expecting a big move early this week, and today was a very big move, both in terms of points and breadth, marking a strong 90% upside day (we first discussed 90% upside and downside days here). This chart shows that today was actually an 18-to-1 day in terms of NYSE Volume:

While the breadth of today's rally is impressive, there were also impressive 9-to-1 downside days in late October on higher volume. Those selloffs proved to be buying opportunities, so it's possible that this rally could prove to be a selling opportunity. However, if there are more 9-to-1 upside days in the near future, the market could be headed significantly higher.

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.

This updated weekly S&P 500 chart shows we haven't yet had a bearish cross on the weekly PPO, and though the uptrend line from the March low was broken in late October, the early October low held, keeping the weekly uptrend intact:

We should see soon whether the TICK 10-day EMA reaches the 600 level and whether this rally from oversold NYMO levels lasts. While it won't take much of a drop in coming weeks to trigger a bearish cross on weekly PPO, we won't be comfortable looking for a significant market correction until we get such a cross, along with some other indicator confirmations. A failure to make a new high in the S&P 500 would be the first indication of a more significant market correction, with a break of the October low a confirmation.

This expected short-term rally has brought some mixed signals. The new Dow high and strong breadth are positives, but the lower volume and negative divergences are negatives. In the very short term, the high closing TICK and very low closing TRIN indicate likely weakness early tomorrow. The market action in coming days should help point to the next significant move direction.

As expected, gold and silver have continued higher, with gold closing over $1100 an ounce for the first time ever today. Gold has had a very strong rally recently, so a short-term pullback can happen at any time, but the longer-term trend continues to be higher.

As we've been saying, "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." The XAU and HUI mining indices both closed at new 52-week highs today, and junior miners have continued their recovery.

Another Gold Breakout, Short-term Market Rally?

2009-11-03T22:16:00.003-05:00

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.

Another market dip, or trend change?

2009-10-27T23:32:00.006-04:00

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.

Breakout to New All-Time High

2009-10-07T02:49:00.001-04:00

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.

Gold Bullish Consolidation

2009-10-02T19:01:00.002-04:00

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.

Another dip to buy or is the 10th time different?

2009-09-25T04:26:00.003-04:00

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...

Rally Continues

2009-08-03T20:09:00.002-04:00

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.

Trend Day with Signs of Weakening

2009-07-23T23:52:00.001-04:00

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.

Rally Continues -- Short Pullback/Consolidation Time?

2009-07-20T23:41:00.000-04:00

...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.

Big Squeeze Trend Day

2009-07-15T23:51:00.004-04:00

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:

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).

Strong Action on Breakout from Resistance

2009-07-14T00:51:00.002-04:00

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.

Consolidation at 879 Support

2009-07-10T18:22:00.004-04:00

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.

Market Rebound

2009-07-06T16:46:00.003-04:00

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.

Confluence of Resistance and VIX Bounce Turn the Market Back

2009-07-04T15:06:00.002-04:00

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.

Confluence of Resistance -- VIX Bounce Coming?

2009-06-26T19:43:00.005-04:00

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.

Biggest Down Day since April 20

2009-06-22T21:02:00.002-04:00

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.

Down Monday?

2009-06-20T17:45:00.004-04:00

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!

Big move day likely

2009-06-17T21:58:00.003-04:00

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.

20 in a row

2009-06-05T19:01:00.001-04:00

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.

Gap Up Trader

2009-06-04T16:39:00.003-04:00

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.

The beauty of our automated trading system

2009-05-26T18:30:00.004-04:00

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.

Moved to cash

2009-04-24T11:28:00.001-04:00

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.

Nasdaq 100 stop hit

2009-04-24T11:16:00.001-04:00

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.

Why we shorted the Nasdaq 100/QQQQ

2009-04-22T16:39:00.003-04:00

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.

Shorting Nasdaq 100

2009-04-22T12:12:00.001-04:00

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.

Covered half S&P 500 shorts, MET

2009-04-21T09:35:00.004-04:00

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.

Big Down Day

2009-04-20T17:25:00.005-04:00

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.

Reshorted MET

2009-04-20T09:34:00.001-04:00

At the open, our trading model reshorted MET in the mid-27's.

Open Positions: Short 50% S&P 500, short 20% financials, long 1% May 84 SPY puts, short MET 5%, speculative trading portion short another 50% S&P 500 and 20% financials, and long 1% May 83 SPY puts, short another 5% MET.

Spike in Insider Sales, Newsletter Sentiment

2009-04-19T19:55:00.004-04:00

A couple of more indicators pointing to a pullback soon are Insider Sales and Newsletter Sentiment.

This Insider Sales Ratio chart (from Barrons) shows a huge spike in insider sales:

This article by Mark Hulbert shows that bullishness among newsletter writers has increased significantly over the last couple of weeks despite a minimial increase in the market averages. He calls it a "crumbling wall of worry," which is not a good sign for market bulls for the short term.

Of course, the market could override all of these indicators and continue higher without a pullback, but the odds significantly favor a pullback starting as soon as Monday.

Monday to start pullback?

2009-04-18T23:25:00.005-04:00

With April options expiration, and Friday marking the end of the 6th straight up week (wouldn't have been with a decent down day), as well as 875 SPX resistance so close to being hit, yesterday was a day to test that resistance and push the technical indicators a little bit more to the extreme.

We think Monday will be a big move day. A small change in NYMO Friday indicates a big move is coming, so we expect a big move early next week. Also, the Monday after expiration has had big market moves recently.

Today's late breakdown of the rising wedge that formed over the last 3 days, combined with some extreme indicators and negative divergences, make us think the big move will be down. Below are updates to the charts we posted Thursday:

Here's the updated close-up chart of the 10-day EMA of NYSE TICK:

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. If the huge rising wedge below breaks on this pullback, it should sell off much more.

Here's the updated chart of the % of S&P 500 stocks above their 50-day moving average:

Before this rally, spikes over 80% preceded significant selling. Today, this indicator moved even higher, to 89.6.

Finally, here's the updated hourly chart of the S&P 500 showing a huge rising wedge along with a bunch of bearish divergences on PPO:

The PPO histogram has started to turn over, and it looks like PPO is making an incredible 5th lower high while the market makes a 5th higher high. A bearish cross of the black line below the red line would confirm the sell signal and the start of the pullback.

Many technical indicators are pointing to a pullback starting Monday. That worries us a little bit, because it seems almost too clear, especially given the exact hit at 875 resistance (like the early March exact hit on the devilish 666 support) and all the obvious rising wedges/ending diagonals with many clean trend line hits. If the market instead launches higher through 875 resistance on Monday, it could be a big squeeze move up rather than the big move down we expect. However, we think the chances of that are remote.

Fascinating action--Rising wedge to resistance

2009-04-18T22:12:00.001-04:00

As we showed on Thursday , this entire rally has been one huge rising wedge, and there have been a number of different rising wedges within this huge rising wedge. Here's a 15-minute chart of the SPX rising wedge since late March:

The circled area on the right is the rising wedge that formed over the last 3 days. Here's a close-up chart of that wedge:

This chart uses the SPY ETF, since that's the SPX proxy we watch during the day so we can see buy/sell action and immediate price changes. To us, this was a clearly defined wedge, and today's action indicated that there were others watching this wedge.

This one-minute chart shows today's intra-day action:

The first couple of hours were a battle between buyers and sellers, with up volume and down volume taking turns taking over the lead, TRIN fairly high (indicating more volume going to the losers), both positive and negative TICK readings, and the SPY vacillating between positive and negative territory.

The next 3 hours looked like a strong trending day up, with up volume vs. down volume steadily increasing and TICK solidly positive almost without any negative TICK readings. That's the type of action you see on the huge several hundred point rally days. It looked unstoppable. However, the declining TICK readings formed a negative divergence with the rising market, portending a change.

Then the SPX hit the 875 resistance area (around 87.6 on SPY), which has been cited by many technical analysts as a target for this initial move of the rally, as that's where the February high was (also, late January high was 877.86). 875 also was where the upper trend line was on the first chart's rising wedge. Seemingly out of nowhere, a huge amount of selling materialized, rejecting the SPX and sending it back to the lower trend line of the rising wedge at around 870. The significant negative TICK action as the SPX reached 875 contrasted sharply with the previous 3 hours. It seemed clear that there were lots of people watching the 875 level as the place to sell longs or short the market.

Over the next hour, a fascinating battle between buyers and sellers ensued over the end of day direction, with sizable TICK spikes in both directions. The buyers tried to break the market out to new highs over 875 resistance while the sellers tried to break the market down from the rising wedge lower trend line. There were no fewer than 5 distinct attempts at taking out 875 on noticeably increased volume, but the resistance proved too strong.

Finally, in the last few minutes, the rising wedge lower trend line broke down and the market sold off to end the day without too much net change. The sellers ended up winning this end-of-day battle. If this battle marked a changing of the guard for at least the short term, there should be more selling action next week.

With the Dow ending up only 6 points, on paper it looked like a boring options expiration day, but a closer look at the intra-day action revealed one of the more interesting trading days we've seen.

Added shorts at 875 S&P 500

2009-04-17T14:40:00.002-04:00

With the S&P 500 now reaching the 875 resistance area, our trading model added to S&P 500 shorts and bought some May 84 SPY puts at 1.70.

Open Positions: Short 50% S&P 500, short 20% financials, long 1% May 84 SPY puts, speculative trading portion short another 50% S&P 500 and 20% financials, and long 1% May 83 SPY puts.

Pullback over next couple of days?

2009-04-16T23:01:00.005-04:00

Here are a few charts indicating that there's a good chance the market will pull back over the next couple of days.

The first one is one we've posted before, showing the 10-day EMA of the NYSE Tick:

Previous times when the 10-day EMA of TICK spiked to the 600+ area, the market sold off from there. However, this rally's been different, as evident in this close-up view of the same chart:

During this whipsawing rally, today was the 6th time this indicator spiked above 600. 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. If this time is like the 5 previous times, the market should sell off into Monday. If it's like the times before this rally, the selling should last more than just 2 days.

This chart shows the % of S&P 500 stocks above their 50-day moving average:

Before this rally, spikes over 80% preceded significant selling. This spike has reached higher than the last few, at 88% today.

Finally, this hourly chart of the S&P 500 shows a huge rising wedge along with a bunch of bearish divergences on PPO (similar on other indicators):

Each spike to a higher high over the past month has made a lower high on PPO. If this one does the same thing (it's still on a buy signal), it will be an amazing 5th lower high on PPO while the market makes a higher high. Such bearish divergences usually lead to selling, but this rally has been very resilient.

We'll see if the market pulls back the next couple of days, and if that pullback (if it comes) gets bought up quickly like the 5 previous ones. It should be interesting to see how this plays out.

Bought May SPY puts

2009-04-16T13:29:00.001-04:00

On the afternoon bounce, our trading model has bought some May 83 SPY puts at 2.12, for the speculative portion of the portfolio.

Open Positions: Short 30% S&P 500, short 20% financials, speculative trading portion short another 30% S&P 500 and 20% financials, and long 1% May 83 SPY puts.

Added to shorts on gap open

2009-04-16T09:32:00.002-04:00

On the big gap open, our trading model has added to shorts, adding to the S&P 500 short and starting a financials short.

Open Positions: Short 30% S&P 500, short 20% financials, speculative trading portion short another 30% S&P 500 and 20% financials.

Covered half of short positions

2009-04-14T16:02:00.004-04:00

With a nice 2% drop today, our trading model covered about half the short positions at the close to lock in gains.

Open Positions: Short 20% S&P 500, speculative trading portion short another 20% S&P 500.

Added to shorts

2009-04-14T10:50:00.003-04:00

On the bounce back from early weakness, our trading model has added to S&P 500 shorts, while the speculative trading portion of our trading model is also shorting the S&P 500.

Open Positions: Short 45% S&P 500, speculative trading portion short another 45% S&P 500.

Reshorted S&P 500

2009-04-13T15:58:00.001-04:00

With the rally over S&P 500 864 late in the day, our trading model has reshorted the S&P 500 with a partial position.

Open Positions: Short 25% S&P 500.

Took BAC profits

2009-04-13T09:51:00.001-04:00

On the rally to near 10, our trading model has taken the quick 10%+ profit on BAC and is back to cash.

Open Positions: None.

Long BAC breakout

2009-04-09T14:31:00.001-04:00

On its breakout to a new high, our trading model is now long BAC from the upper 8's. The double top didn't hold, so it's now a breakout.

Open Positions: 5% long BAC, speculative traders long another 5% BAC

Back to Cash

2009-04-09T13:00:00.001-04:00

With the market holding its gap, and the holiday weekend coming up, our trading model's moved back to cash. Back to focus on taxes...

Open Positions: None.

Reshorted MET, covered BAC

2009-04-09T11:58:00.001-04:00

With MET back near 26, our trading model is reshorting a 5% position.

Also, our very tight stop on BAC was hit at 8.55 from the 8.4's

Open Positions: 25% short S&P 500, 5% short MET, speculative traders short another 5% MET.

Covered WFC short

2009-04-09T11:44:00.001-04:00

With WFC dropping to its previous high area in the mid-17's, our trading model has covered the WFC short for a nice, quick gain.

Open Positions: 25% short S&P 500, 5% short BAC, speculative traders short another 5% BAC.

Shorted BAC

2009-04-09T10:42:00.001-04:00

On a possible double top, our trading model shorted BAC in the 8.40's with a stop at 8.55.

Open Positions: 25% short S&P 500, 5% short WFC, 5% short BAC speculative traders short another 5% WFC and another 5% BAC.

Shorted WFC

2009-04-09T09:39:00.001-04:00

On the huge opening gap, our trading model shorted WFC in the high 19's with a stop at 20.

Open Positions: 25% short S&P 500, 5% short WFC, speculative traders short another 5% WFC

Took long profits, started short

2009-04-08T11:50:00.003-04:00

With the S&P 500 up over 1%, our trading model has taken the quick profits on the long position and started a partial short position.

Open Positions: 25% short S&P 500

Started Long

2009-04-07T16:02:00.003-04:00

We're still taking a break from active market trading, but started a long position at the close on this dip.

Open Positions: 25% long S&P 500

Taking a break

2009-04-02T11:07:00.002-04:00

The below chart shows why we closed out our positions:

We had anticipated a breakdown from this Head and Shoulders pattern, but the breakout this morning above the head nullified that pattern. It was a nice setup, but it didn't work this time.

We're going to take a break from the market for a while to focus on taxes.

Back to Cash

2009-04-02T09:55:00.001-04:00

On the break of last week's high, our trading model has moved to cash.

Open Positions: None.

Rebuying SPY puts

2009-04-01T13:05:00.002-04:00

With the failure to take out yesterday's high, our trading model has rebought the April SPY 77 puts around the same level where we orginially bought them before taking a nice profit.

Open Positions: Short 40% S&P 500, short 30% financials, short 5% MET, 1% long SPY April 77 puts, speculative traders short another 40% S&P 500, short another 40% financials, short another 5% MET, long an additional 1% SPY April 77 puts.

Adding to Shorts

2009-04-01T10:25:00.001-04:00

On this morning's gap fill, with the market turning green and testing 800 S&P 500 again, our trading model is adding to S&P 500 shorts and reshorting MET in the 23's.

Open Positions: Short 40% S&P 500, short 30% financials, short 5% MET, speculative traders short another 40% S&P 500, short another 40% financials, short another 5% MET.

Year-to-date Performance through March 09

2009-03-31T17:15:00.006-04:00

Not including the February 3 intraday long for 200+ Dow points, and not including the short gold hedge from the exact peak day, our trading model's performance based on a hypothetical $10,000 account and our blog posts, updated from the February performance post, shows growth to $14,230, or 42.3%, vs. the S&P 500's -11.7% return on the year so far. Here are the March trades:

Speculative traders, using a separate hypothetical $10,000 account for calculation, would have made an additional 39.1%, including 16.4% through February:

Commissions are not included in the above calculations, nor is interest credited for cash or interest charged on any margin. Closing prices were used for end of day trades, and approximate intraday prices for intraday posts.

While definitely not a perfect month, we were able to cover our heavily leveraged shorts and get heavily leveraged long right near the early March low. Unfortunately, we sold out of our longs and got short too soon during the rally, leaving a lot of gains on the table on very well-selected longs that moved up significantly more later in the month (e.g., HIG, BAC, PTV, financials). For any future bear market rallies off an extremely oversold level, we'll try to be more patient with longs, perhaps holding on to such individual stocks and hedging with index shorts at overbought levels.

Open Positions: Short 20% S&P 500, short 30% financials, speculative traders short another 20% S&P 500, short another 40% financials.

Added financials short

2009-03-31T13:12:00.003-04:00

On the market's pop over 800 SPX, testing 803-805 resistance, our trading model added 10% more financials short, 20% more for speculative traders.

Open Positions: Short 20% S&P 500, short 30% financials, speculative traders short another 20% S&P 500, short another 40% financials.

Reshorted S&P 500

2009-03-31T11:30:00.002-04:00

With the S&P 500 testing 800 (SPY 80), our trading model is restarting a short on the S&P 500.

Open Positions: Short 20% S&P 500, short 20% financials, speculative traders short another 20% S&P 500, short another 20% financials.

Reversed to short on financials

2009-03-31T09:32:00.002-04:00

On the gap open, our trading model sold the financials long to take a nice overnight profit and started a short position in financials.

Open Positions: Short 20% financials, speculative traders short another 20% financials.

Updated indicators

2009-03-30T22:32:00.006-04:00

We said on Friday, "We'll show this weekend why we expect a more significant pullback soon." The weekend was hectic, so here are the updated indicators, with today's action included:

This daily SPX chart shows that today was the first 9-to-1 volume down day since the rally started, following several 9-to-1 volume up days:

Here's the weekly SPX chart, showing a bullish divergence with PPO, which last week had a bullish cross buy signal:

The SPX has broken out from its weekly downtrend, and is now backtesting that trend line.

On the hourly chart, the SPX broke down from its channel today after several bearish divergences during the rally:

This chart of the Tick 10-day EMA readings shows that this selloff has already relieved the overextended condition of this indicator, though it can go much lower:

The updated $CPC Put/Call ratio (10-day EMA) chart shows this EMA has come well off its lows, but is still relatively low:

The updated NYMO chart shows that the overextended condition of this indicator has also been relieved, but it can go much lower:

The Nasdaq/SPX ratio remains at a new high level, whereas its been at a low at previous market lows, but that divergence probably has more to do with the fact that bank stocks have been clobbered (and replaced Nasdaq stocks as the speculative trading stocks of choice), and there are far more bank stocks in the SPX than Nasdaq:

Finally, here's the updated NYSE Summation Index (cumulative NYMO) chart:

NYSI has reached the level of last summer, but still is well below the level reached at the beginning of January.

Overall, the market is likely to pull back/consolidate some more before resuming the rally. We'll watch the nature of this pullback/consolidation to determine when/how much to increase long exposure, or whether to reshort first.

There have been some wild intraday swings recently, sometimes several percentage points in both directions multiple times. These conditions have made it very difficult to trade without closing out and opening positions intraday. We were hoping to only do posts after the close, but as conditions warrant, we'll continue to post intraday updates as well.

Partial long financials

2009-03-30T15:47:00.002-04:00

After a steep late drop in the financials, our trading model has restarted a long in financials for a rebound. With end of month and mark-to-market news coming out soon, there's a good chance for a good bounceback coming.

Open Positions: Long 20% financials, speculative traders long another 20% financials.

Back to Cash

2009-03-30T14:25:00.001-04:00

With the market's rather tepid rally off the lows, our trading model has moved back to cash.

Open Positions: None.

Rebought GE in upper 9's

2009-03-30T12:15:00.002-04:00

With GE back below 10, our trading model has rebought some long GE.

Open Positions: Long 20% financials, long 20% S&P 500, long 5% GE, speculative traders long another 20% financials, long another 20% S&P 500, long another 5% GE.

Partial long S&P 500

2009-03-30T11:10:00.002-04:00

With some positive divergences showing up on our intraday indicators, our trading model has added a partial S&P 500 long position for a potential bounce into month end.

Open Positions: Long 20% financials, long 20% S&P 500, speculative traders long another 20% financials, long another 20% S&P 500.

Partial long financials

2009-03-30T10:46:00.001-04:00

With financials' relative strength since the open, our trading model has started a partial long position in financials for a bounce into month end.

Open Positions: Long 20% financials, speculative traders long another 20% financials.

Took profits on SPY puts

2009-03-30T10:24:00.002-04:00

With the retest of the day's low after a big gap down, ahead of quarter end tomorrow, our trading model has taken profits on the SPY puts, moving to cash for now.

Open Positions: None

Covered MET short

2009-03-30T09:46:00.001-04:00

On the huge gap down, our trading model has covered the MET short in the lower 22's for a quick 10%+ gain.

Open Positions: 1% long SPY April 77 puts, speculative traders long an additional 1% SPY April 77 puts.

Took profits on financials short

2009-03-27T14:03:00.001-04:00

On the very quick 3.5%+ drop in financials, our trading model covered the short financials position to lock in a quick profit and make room to reshort on a bounce.

Open Positions: 5% short MET, 1% long SPY April 77 puts, speculative traders short an additional 5% MET, long an additional 1% SPY April 77 puts.

Reshorting MET at 25+

2009-03-27T12:12:00.002-04:00

Last week, our trading model shorted MET in the 25's and covered in the 20's. MET again is at 25, so our trading model is shorting MET again.

Open Positions: 5% short MET, 20% short financials, 1% long SPY April 77 puts, speculative traders short an additional 5% MET, short an additional 20% financials, long an additional 1% SPY April 77 puts.

Started financials short

2009-03-27T11:23:00.002-04:00

With financials turning positive on the day, near yesterday's highs, and not far from their rally highs, our trading model has started a short on financials.

Open Positions: 20% short financials, 1% long SPY April 77 puts, speculative traders short an additional 20% financials, long an additional 1% SPY April 77 puts.

Took profits on remaining longs

2009-03-27T11:14:00.001-04:00

With the S&P 500 bouncing back over 1% from this morning's low, and well above our long entry yesterday, our trading model is taking profits on the remaining S&P 500 long.

Open Positions: 1% long SPY April 77 puts, speculative traders long an additional 1% SPY April 77 puts.

Took profits on financials

2009-03-27T10:57:00.001-04:00

With financials bouncing over 3% from this morning's low, our trading model has taken profits on the financials positions for a nice, quick gain. We're reducing long exposure on the bounce and plan to reverse to short soon.

Open Positions: 40% long S&P 500, 1% long SPY April 77 puts, speculative traders long an additional 40% long S&P 500, and an additional 1% SPY April 77 puts.

Added long on dip -- short term

2009-03-27T10:11:00.003-04:00

On the market's early weakness today, our trading model added to longs for a short-term bounce near yesterday's lows on the S&P 500. However, we don't intend to hold this trade for long, as the market is very extended and we plan to reverse to short soon.

We'll show this weekend why we expect a more significant pullback soon, but we're buyers of this dip, at least for a day trade. As we mentioned yesterday, "All dips are getting bought up quickly, and month end is coming up," so we expect a bounce from this early weakness, and possibly one more new high.

Open Positions: 40% long S&P 500, long 40% financials1% long SPY April 77 puts, speculative traders long an additional 40% long S&P 500 and 50% financials, and an additional 1% SPY April 77 puts.

Bought long for breakout

2009-03-26T12:58:00.002-04:00

With the market holding on to yesterday's late gains as well as additional gains today, our trading model has bought long S&P 500 and financials for a likely breakout, with the SPY puts held as a hedge. Also, covered MET flat in case of breakout.

All dips are getting bought up quickly, and month end is coming up, so we're buying this dip for a likely breakout to a new high, though it may be fairly short-lived. The action late yesterday and this morning indicates there are many traders caught short this market.

Open Positions: 30% long S&P 500, long 30% financials, 1% long SPY April 77 puts, speculative traders long an additional 30% S&P 500 and 30% financials, and an additional 1% SPY April 77 puts.

Reshorting MET at 25+

2009-03-26T10:21:00.002-04:00

Last week, our trading model shorted MET in the 25's and covered in the 20's. MET again is at 25, so our trading model is shorting MET again.

Open Positions: 5% short MET, 1% long SPY April 77 puts, speculative traders short an additional 5% MET, long an additional 1% SPY April 77 puts.

Covered shorts, holding puts, anatomy of a crazy day

2009-03-25T16:21:00.010-04:00

With the Dow selling off over 300 points from the high to the low today, and then bouncing back to close only 113 points off the high, it was a crazy day. Our trading model covered shorts, holding the SPY puts bought earlier today in their place. Even with the market recovery, the puts bought earlier are still up over 17%, and will act as downside protection when we go long, likely on either another pullback or a breakout of today's highs.

Here's a 1-minute chart of today's action, showing why the lower high just after noon was a great short entry and then why the 3:00 panic selling was time to cover shorts:

At the top of the chart in green and red are the up volume vs down volume and down volume vs. up volume graphs. Below that is the TRIN chart, which shows the volume going to advancing issues vs. declining issues. The TRIN moves inversely to the market. Below that is TICK, which shows issues upticking vs. downticking. Finally, below the TICK are charts of the S&P 500 ETF (SPY) and the triple long financials ETF (FAS).

Just after noon, the market retested the day's high but couldn't make a new high. Up volume, shown at the top, had dropped dramatically vs. down volume. TRIN had moved up dramatically from under 0.5 to 2.00, a strong negative divergence. TICK was downtrending despite the rally. Our trading model signaled it was time to add to shorts.

Over the next 3 hours, the market sold off dramatically. Just before 3:00, TICK hit an extreme level of -1450, signaling panic selling. Just after 3:00, TRIN peaked at an extreme level well over 3.0. TICK began to turn positive. The market was clearly turning around again.

The S&P 500 bounced off its 50-day moving average and rebounded to close almost 1% higher after dropping to almost 2% lower. It was an impressive rebound from a sharp pullback.

The strength of the bounce off the lows, particularly in the last few minutes, indicated significant short covering. As we mentioned yesterday, there have been "clear bouts of frenzied short covering after recent pullbacks," and today's late action proved that to be true yet again.

While yesterday's and today's pullbacks have relieved much of the short-term overbought conditions, the market is still likely to have a more significant pullback at some point fairly soon. However, that pullback could come from a significantly higher level now. If it comes immediately, we still have our puts to profit from it.

Given our bullish intermediate-term outlook, month end coming up (where portfolio managers will want to show long exposure during this rally), and the high amount of short buying power in the market, we're more comfortable for now holding our puts and going long with put protection on a pullback or a breakout.

Open Positions: 1% long SPY April 77 puts, speculative traders long an additional 1% SPY April 77 puts.

Adding financials short, buying SPY puts

2009-03-25T12:06:00.002-04:00

With the market retesting the day's highs amidst negative divergences and indicators (e.g., higher TRIN, wosening internals), our trading model is reshorting the financials shorts covered yesterday and buying S&P 500 April put options (SPY April 77 puts at around 1.33). Financials did not break yesterday's high, so our stops were not hit.

The SPY puts are meant to be downside protection for when we cover our shorts and go long, as we'll want protection for the downside when we reverse to long. A 1% position in the SPY puts will provide protection for a good percentage long allocation.

Open Positions: 25% short S&P 500, 30% short financials, 1% long SPY April 77 puts, speculative traders short an additional 15% S&P 500, short financials an additional 40%, long an additional 1% SPY April 77 puts.

Covered yesterday's shorts at the close

2009-03-24T16:04:00.004-04:00

With the S&P 500 down over 2% to near 805 support and financials down about 5.5% at today's close, our trading model is taking profits on the shorts added at yesterday's close. After yesterday's huge rally and today's pullback, the S&P 500 is only 3 points (less than .5%) above Thursday's high, and financials are over 7.5% lower than Thursday's high.

Despite overbought short-term conditions, this market has powered higher from every pullback in this rally so far. Given our positive intermediate view of the market, along with clear bouts of frenzied short covering after recent pullbacks, we're being conservative on our shorts, with a stop at today's high for remaining shorts. With a large number of shorts looking to cover, and 800-805 previous resistance now providing support, we could see another surge higher even with short-term technicals extended.

Looking back over the last couple of weeks, our trading model got heavily long right at/near the bottom for this rally in the upper 600's on the S&P 500 (after being heavily short from the 780 area, and the upper 800's before that). However, it reversed to short based on short-term overbought conditions too soon, as this rally has been much more powerful than other recent rallies. It also covered on the pullbacks only partially, when in retrospect it should have reversed to long given our positive intermediate-term outlook.

We're fine-tuning our trading model to be much more careful reversing during a trend, and much quicker to close out counter-trend moves going against our outlook. Also, when we see upside coming, such as during yesterday's consolidation just under 800, our model will reverse to long rather than partially close out positions, as it did ahead of the Fed meeting last week.

Here's the updated weekly S&P 500 chart, again showing one reason we have a positive intermediate-term outlook:

The bullish divergences, bullish cross buy signal on PPO, and the breakout over the January low and downtrend line from the January high are all very positive signs for the intermediate term, despite conflicting signs from shorter-term charts.

Here's a daily chart of the S&P 500, along with 90% upside volume days and 90% downside volume days:

This chart, along with the article we linked last week , illustrates another reason we have a positive intermediate-term outlook. The strong series of 90% upside days during this rally, after the many 90% downside days in recent months, are a clear example of the major turning point signals discussed in the article.

We continue to be bullish over the intermediate term, though the market could pull back as far as the lower 700's on the S&P 500 before resuming the rally.

Open Positions: 25% short S&P 500, 15% short financials, speculative traders short an additional 15% S&P 500, short financials an additional 20%.

Reshorted at the close

2009-03-23T16:01:00.003-04:00

After the huge ramp into the close, which looks like a giant short squeeze, our trading model has reshorted the positions covered under 800 S&P 500, at about 25 points higher.

Open Positions: 50% short S&P 500, 30% short financials, speculative traders short an additional 30% S&P 500, short financials an additional 40%.

Covered half remaining shorts

2009-03-23T14:02:00.002-04:00

With the S&P 500 consolidating under the 800 level rather than selling off sharply like the two times it reached this area late last week, our trading model is covering half the remaining shorts to reduce risk.

We did get the pullback we were looking for late last week, though it was shallower than we would have liked. We said last week that "we believe it will be a buying opportunity for a strong rally over the intermediate term."

As we mentioned last Tuesday http://greattrades.blogspot.com/2009/03/bought-back-ge-identifying-bear-market.html , 90% upside days following a series of 90% downside days is very bullish. Today we may have yet another 90% upside day.

So the intermediate term picture looks strong. However, the market is still very extended shorter term, so we will hold half our remaining short positions until there's a better buy opportunity.

Open Positions: 25% short S&P 500, 15% short financials, speculative traders short an additional 15% S&P 500, short financials an additional 20%.

Reshorted some covered on Friday

2009-03-23T10:17:00.001-04:00

With the S&P 500 testing the 800 level, our trading model is reshorting some of the S&P 500 and financials covered on Friday. Adding 10% S&P 500 and 10% financials, with speculative traders adding 10% additional S&P 500 and 10% additional financials.

Open Positions: 50% short S&P 500, 30% short financials, speculative traders short an additional 30% S&P 500, short financials an additional 40%.

Sold remaining GE

2009-03-23T09:32:00.002-04:00

With the big gap up almost 8%, our trading model sold the rest of the GE long position.

Open Positions: 40% short S&P 500, 20% short financials, speculative traders short an additional 20% S&P 500, short financials an additional 30%.

GE March $10 calls expire worthless, market action

2009-03-20T19:39:00.005-04:00

With GE closing under $10 at options expiration, the GE March $10 call options we sold for .30+ are expiring worthless.

For speculative traders who were able to buy back GE in the upper 9's, sell near the $11.20 open yesterday, and hold on to the short March $10 calls naked (i.e., not covered by long stock), that means a very nice gain of about 15% in two trading days. For the GE shares sold and calls bought back early yesterday, the gain was much smaller, but allowed room to add to shorts around the 800 level on the S&P 500. For the GE shares still held, the calls expiring worthless lowered the cost basis by .30+.

The GE call expiration, along with the partial covering of short positions today to lock in some nice gains, has significantly reduced the risk in our open positions and allows room to reshort in case of a market bounce. Still, because our open positions were nearly maximum short, they're still heavily short considering our more positive intermediate-term outlook, especially with speculative trader positions still leveraged short (over 100%, using margin or leveraged short ETF's).

Based on various indicators, including some we posted on Wednesday night, we believe there is more selling to come before this market pullback is over. Below are the updated hourly charts on the S&P 500 and financials ETF:

Both charts clearly broke down from rising wedges, with bearish divergences on indicators that moved lower while prices moved higher. Amazingly, the financials ETF closed today's after hours session down for the week, despite the strong 18%+ rally during the week. The triple-long financials ETF (FAS) closed the after hours session down over 4% on the week after rallying over 51% during the week. There was definitely some frothy action this week.

We plan to continue to scale out of shorts on further weakness, eventually getting back long when our indicators turn more positive. This has been a very interesting market, and should remain so in coming weeks.

Covered partial S&P 500 short

2009-03-20T12:08:00.003-04:00

With the 780 area holding so far today on an unpredictable quadruple expiration witching day, our trading model has covered 1/3 of the S&P 500 short to lock in gains.

Open Positions: 40% short S&P 500, 20% short financials, 5% long GE w/covered calls, speculative traders short an additional 20% S&P 500, short financials an additional 30%, short 5% GE March 10 calls.

Covered MET, partial financials

2009-03-20T09:54:00.003-04:00

Our trading model has covered the MET short in 20's for a quick near 20% gain from 25's. Also, covered partial on financials after a near 15% drop from yesterday's high. Locking in some big, quick gains.

Open Positions: 60% short S&P 500, 20% short financials, 5% long GE w/covered calls, speculative traders short an additional 30% S&P 500, short financials an additional 30%, short 5% GE March 10 calls.

Added to shorts on gap open

2009-03-19T09:35:00.005-04:00

With the opening gap to resistance, which we believe is an exhaustion gap for this rally, our trading model is adding to shorts. Adding 10% short S&P 500 and 10% short financials, while selling half of GE and covering the calls. Speculative traders can short an additional 10% S&P 500 and 10% financials and sell GE, leaving calls short naked.

Open Positions: 60% short S&P 500, 30% short financials, 5% short MET, 5% long GE w/covered calls, speculative traders short an additional 30% S&P 500, short financials an additional 40%, short an additional 5% MET, short 5% GE March 10 calls.

Updated indicators -- Pullback soon

2009-03-18T23:12:00.009-04:00

This weekend, we posted a number of charts with indicators illustrating how this recent low looks very different from other significant lows in recent history.

Yesterday, we posted a paper showing why this time may be different, and the recent low may have been a major market turn. If it is a major turn, the weekly and monthly charts are so oversold, the market could go a long way in a bear market rally or new bull market:

There are bullish divergences on the above weekly chart, with buy signals hitting or about to hit on that timeframe (keep in mind the week isn't over, so that can change).

In the weekend post, we also posted a chart showing that in the very short term, a pullback was likely because of a bearish rising wedge on the 60-minute chart and extended indicators. We got that very short-term pullback Monday afternoon into Tuesday morning to reset those indicators, and used that pullback to cover a portion of our shorts.

From the Tuesday morning low, the market rallied sharply on decreasing volume into a volume climax this afternoon on the Fed announcement, forming a new rising wedge:

The SPX rally also ran into resistance at January's low, the downtrend line from January's high, and the 50-day moving average. If this afternoon's spike was both a short-term volume and price climax, the S&P 500 should pull back in the short term to relieve the stretched technicals and resolve the bearish divergences.

The below chart of the Tick 10-day EMA readings shows that extremely high positive readings have previously preceded sharp selloffs:

The current level of the Tick 10-day EMA is extremely high, increasing the likelihood of a strong pullback very soon. The December 1 selloff doesn't look that sharp on this chart, but that one-day loss was one of the biggest in history, with the SPX down 9%. That selloff was later fairly quickly recovered, so if we do get a sharp selloff now, the same could happen this time.

Here's the updated $CPC Put/Call ratio (10-day EMA) chart, with the SPX (S&P 500) chart for comparison:

The 10-day EMA is now at a multi-year low, and as we said this weekend, based on recent history, it's "at a level that has preceded selloffs, not huge rallies. There's way too much call buying (usually a good contrary indicator) for us to be comfortable thinking that the market will have a huge rally from here."

Here's the updated NYMO chart, with the SPX chart for comparison:

We said this weekend that "It has room to go still higher, but it's starting to get extended on a historical basis" and "We still have a ways to go to get to" the levels at the November and January highs. Now, after the last 2 days of rallying, it has surpassed the November level and doesn't have much more room to go higher on a historical basis, since in Stockcharts' database, only in early January has it ever gone higher.

Here's the updated chart of the Nasdaq vs. the SPX over the last 8 years:

The chart hasn't changed much since this weekend, but the Nasdaq/SPX ratio has come down off the peak a little. As we said this weekend, "You can see that all the significant lows in both the Nasdaq and SPX have come after spikes down in the Nasdaq/SPX ratio, where the Nasdaq had been underperforming the SPX. Now, this ratio has spiked up, to a multi-year high, which has been a sell indicator in the past, not a buy indicator."

Finally, here's the updated NYSE Summation Index (cumulative NYMO) chart:

As we said this weekend, "NYSI is coming off an extremely negative level, and has lots of room to move on the upside. However, it also has room to move on the downside if NYMO turns around." NYSI is a lagging indicator -- it will continue to move higher in the short term, even if the market sells off, as long as NYMO, currently over 105, remains positive. It would take NYMO several days to turn negative, even in a sharp selloff.

In sum, based on the technicals, we're looking for a fairly sharp pullback to start very soon, and we believe it will be a buying opportunity for a strong rally over the intermediate term.

For speculative traders, we will remove the "short gold to hedge" phrase from our open positions. We added it on February 20, the day of gold's peak over $1000, but now that gold dropped well below $900 today before bouncing back, we believe the gold hedge against long-term gold and mining positions has served its short-term purpose. Today's announcement from the Fed increases the likelihood of high inflation coming, which is great news for gold and mining stocks longer term.

Sold FITB for nice, quick gain

2009-03-18T15:01:00.003-04:00

On the quick rally to 2.38, our trading model has sold out of FITB to lock in nice profits.

Open Positions: 50% short S&P 500, 20% short financials, 5% short MET, 10% long GE w/covered calls, speculative traders short an additional 20% S&P 500, short financials an additional 30%, short an additional 5% MET, long an additional 5% GE w/covered calls, short gold to hedge.

Reshorted S&P 500, MET, financials

2009-03-18T14:26:00.005-04:00

With the quick rise to next resistance near 800 after the Fed announcement spike, our trading model sold the long S&P 500 and is reshorting the S&P 500 as well as shorting MET over 25.

Open Positions: 50% short S&P 500, 20% short financials, 5% short MET, long 5% FITB, 10% long GE w/covered calls, speculative traders short an additional 20% S&P 500, short financials an additional 30%, short an additional 5% MET, long an additional 5% FITB, and an additional 5% GE w/covered calls, short gold to hedge.

Long to next resistance

2009-03-18T14:10:00.003-04:00

With the pullback after the breakout over 780, our trading model is going long the S&P 500 for a rise to next resistance.

Long 20% S&P 500, long 5% FITB, 10% long GE w/covered calls, speculative traders long an additional 20% S&P 500, long an additional 5% FITB, and an additional 5% GE w/covered calls, short gold to hedge.

Stopped on Shorts

2009-03-18T13:40:00.002-04:00

With the break to a new high, our trading model stopped out on the shorts and will look to reshort higher. Also, on its breakout to a new high, our trading model is now long FITB at 2.12.

Open Positions: Long 5% FITB, 10% long GE w/covered calls, speculative traders long an additional 5% FITB and an additional 5% GE w/covered calls, short gold to hedge.

Reshorting, selling covered calls on GE

2009-03-18T11:07:00.003-04:00

On the retest of the day's high, after an apparent double top, our trading model is reshorting the 10% S&P 500 and 10% Russell 2000 we covered yesterday morning.

Also, we're selling March $10 covered calls on GE at .30+, which will either lower our cost basis by .30 or, if GE closes over $10 on Friday, give us a 3%+ profit in 2 days when options expire.

Open Positions: 50% short S&P 500, 20% short financials, 10% short Russell 2000, 10% long GE w/covered calls, speculative traders short financials an additional 40%, short an additional 20% S&P 500, long an additional 5% GE w/covered calls, short gold to hedge.

Bought back GE, "Identifying Bear Market Bottoms"

2009-03-17T16:56:00.009-04:00

We had bought GE in the 6's less than 2 weeks ago, and sold it last week in the 9's. Here in after hours, we bought back GE in the upper 9's after it has consolidated its big gain the last few days.

The pullback in the market yesterday into this morning gave this rally additional energy to move higher. There are still some negative indicators on the market, as well as strong resistance close by for the S&P 500, but GE should hold up well on any pullback, and it may have set its bear market panic bottom around when we orignially bought it. It provides a good hedge against our remaining short positions.

As we said this weekend, "Whether the next pullback results in new lows or just a shallower correction, we plan on covering shorts and getting back long for what we expect to be a strong intermediate-term rally." GE is the first of the longs, in case the market breaks resistance and continues higher before the next pullback.

The reason we wanted to cover shorts on the pullback and get back long for a strong rally is that there are some strong indications that such a rally is either under way or will come after a stronger pullback. This award-winning paper,
Identifying Bear Market Bottoms and New Bull Markets, discusses the fact that major market bottoms are identified by a series of 90% downside days followed by 90% upside days. This is exactly what we've had in recent weeks, and it looks like today we had a 3rd 90% upside day of this rally.

Because of this major bottom signal, we were tempted to cover all shorts and get back long this morning after this first pullback. However, with negative signals still around, strong resistance close by, and the market very extended short term, we chose to cover partially and will stop out of the rest of the shorts on a breakout of resistance, or will cover on the next pullback. Also, there have been a number of both 90% up days and 90% down days in this bear market, so this signal doesn't mean the bear market is over.

Beyond the short term, we believe the signals discussed in this paper can outweigh signals that would normally be negative for the market. However, the market is very extended in the short term, so we still expect another pullback to start fairly soon, and it could be a sharp one, though the break of yesterday's highs means it may start from higher.

Open Positions: 40% short S&P 500, 20% short financials, 10% long GE, speculative traders short financials an additional 40%, short an additional 20% S&P 500, long an additional 5% GE, short gold to hedge.

Stopped on today's adds

2009-03-17T16:13:00.002-04:00

With their break of yesterday's highs late in the day, our trading model stopped out of the Russell 2000 and Nasdaq 100 short positions reshorted/added today.

Open Positions: 40% short S&P 500, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

Reshorting Russell 2000

2009-03-17T13:44:00.003-04:00

With the Russell 2000 up over 2.5%, after covering our Russell 2000 short when it was down this morning, our trading model is reshorting the 10% Russell 2000 that we covered this morning.

Open Positions: 40% short S&P 500, 20% short Nasdaq 100, 10% short Russell 2000, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.

Adding Nasdaq Short

2009-03-17T12:10:00.003-04:00

With the S&P 500 bouncing back over 760 and the Nasdaq 100 up over 1.5%, our trading model is adding 20% Nadaq 100 short.

Open Positions: 40% short S&P 500, 20% short Nasdaq 100, 20% short financials, speculative traders short financials an additional 40%, short an additional 20% S&P 500, short gold to hedge.