XLK, XLE, XLB Setting Up Nicely

The Technology, Energy, and Materials sectors are setting up the best for a position trade. I would not buy these names here because I anticipate a pullback in the market. I think over the next few months these sectors will be in a position to launch a very nice rally.

XLK- Technology

XLE- Energy

XLB- Materials

Market Losing Momentum, In Congestion Zone

There is now a negative divergence in Advancers and Upvolume, along with multiple levels of resistance. I wouldn't be suprised to see the S&P fail around these levels.

2002 Nasdaq vs. 2009 Homebuilders

The S&P Homebuilder Index has been declining since early 2005, well before the market peaked in 2007. The issues in the real estate market bled into the financials, and eventually caused the worst decline in the stock market since the Great Depression. We can use the Homebuilder Index as a proxy for the real estate market, and track the portion of the market that "caused all the problems".

Below is a weekly chart of the S&P Homebuilder Index, with the relative strength line plotted in the lower portion of the chart. Since late 2007 the Homebuilders have started to stabilize relative to the rest of the market. This is important because the real estate market is going to need to recover before the rest of the market can sustain any positive action.

S&P Homebuilder Index
The same thing happened during the bear market that occurred at the beginning of this decade. The burst bubble in the early 2000's was caused by technology companies, which can be gauged by looking at the Nasdaq. In the chart below you can see that the Nasdaq's performance relative to the rest of the market had to stabilize before the market could start the next bull market.

Nasdaq- 2000-2003 Bear Market

Small Bounce to end the Month

The Dow rallied back up to it's 5 day moving average before selling off. Tomorrow will be an important trading day. I think we will end up going down from here.

DIA- 60 Minute
If we do continue to rally however I don't think we will go far. The 150 day moving averages of all the major indices are sloping down. It is very tough sustain rallies when the long term moving averages are positioned as they are.

S&P 500
The picture is the same for almost every industry. Of the major industries I track, only 3 are above their 150 DMA. Those would be Gold Miners, Retailers, and Internet companies. Of those three, on the Gold Miners have a 150 DMA that is not sloping steeply downward.

I think it's likely that the market sells off soon. I will note however that there are some industries that could buck the trend. Some of the more oversold industries, such as financials and commodity names, could continue to rally quite a ways before they start to flirt with their long term moving averages.

Broad Based Selloff

The market sold off hard today on news that the White House forced out CEO Rick Wagoner. Decliners to Advancers was 5-1, and Downvolume was up substantially. I pointed out last week that Advancers and Upvolume have been weakening. Looking at that chart today does not make me want to own stocks. I think this is the end of the recent counter trend rally.

S&P 500- Advancer and Upvolume
We broke the recent uptrend and the 5 day moving average. I think it's possible we could rally back towards the 5 DMA, but we will probably fail there. That would be a good place to try to get short.

S&P 500- 60 Minute
The Dow has been weak relative to the other major indicies. I shorted the Dow today via a long position in the DOG. The Dow failed to rally back above it's January lows, while the QQQQ, SPY, and IWM all managed to at least penetrate those levels.

DIA

Watching Breadth

Here is a chart of the S&P with a 10 day moving average of advancers and upvolume plotted below. There have been multiple times within the past year when divergences in these indicators predicted a turning point. There is a possible divergence forming right now (highlighted in yellow).

741 Remains Key

The market didn't do much today. It made a push early on to make a new high, and the sold off the rest of the day. We did get a little bit of a push around 2:00, but that sold off as well over the last 20 minutes.

There is a level of resistance at 735, as well as the November low 0f 741, that need to be taken out if this rally is going to continue.

S&P 500 (10 minute)

Big Move 3/10

The market made a nice move today, with most major indices up over 6%. The S&P ended up breaking out of it's trend channel late in the day. We'll see if it can sustain this rally or if it was another head fake. As I've been saying for a while, 741 will be a big level for the S&P to get above and hold. If it then this rally could have some legs.

S&P 500 (60 minute) In terms of breadth the market had a very good day. About 90% of the Russell 3000 was up today. The interesting thing was that there was no dominant PV Relationship. 1489 issues were PUVD, while 1224 were PUVU. I would like to have seen more dominance from the Price Up Volume Up catagory. We had a similar rally similar to this one (although the rally in October was larger) that only lasted for about a week or so. On the day we bounced in October we had over 2,000 stocks that were PUVU. If the rally wants to hold I'm all for being bullish, I'm just having a hard time doing so right now.

PV Relationship

Trader Mike pointed out this chart on his blog.

BKX Bank Index

Even though the Bank Index was up 15%, it only made it to the middle of it's trend channel. He said he expects the sellers to come back into the market towards the top of this channel. With the structure of price and it's moving averages, I don't see any reason to try to jump on this rally.

Lastly, lets look at the weekly timeframe. If the short term bottom put in this week does hold, there are some positive divergences that would be very bullish for the overall market. We have had lower highs in the VIX and the NYSE New Lows. If the Summation Index holds above it's prior low, that would be a very bullish sign.

S&P 500 (Weekly)

Another Down Day 3/9

Not a whole lot happened today. We had a pretty choppy trading day, and ended up closing down about 1%. As I sated in my post last night, I didn't think we'd make much progress today. We are still trapped within our downtrend channel. We tried to make a run earlier in the day but failed at the declining 5 DMA.

S&P 500- (10 Minute)
The Dominant PV relationship today was PDVD, with 1418 issues. We didn't have any convincing selling today, and PDVD is typical of a continuation of a downtrend. It seems that some of the bottoming indicators are nearing levels that we have bounced from, we just need that panic selling to flush out the remaining bulls.

S&P 500- Bottom Watch I will also be keeping an eye on this chart.

QQQQ/SPY Ratio

Technology had been holding up very well but this ratio is very overbought. Some have been saying that the QQQQ's need to test their November low before the rest of the market can turn around. If this is true then we should turn around relativly soon because the Nasdaq 100 is fastly approaching that level.

Don't get too Excited

I heard a lot of chatter this weekend about that pop we got late last Friday. People are saying we completed a reversal day (Which we really didn't), and since we're so oversold we're going to get a huge bounce. I disagree. While I do concede we are very oversold and a rally is likely over the next week or so, I don't necessarily think it will happen on Monday. We did not get any climactic selling last week that would have signaled a bottom, other than an increase in NYSE New Lows. We still have a declining 5 day moving average and are within the downtrend channel that has existed for about a month. If we do get a bounce on Monday I think it will be short lived. I'll be looking for some sort of capitulation to identify the "real" tradeable bottom.

S&P 500

The Case Against the Dollar

The dollar index recently made multi year highs, breaking through the $88 level. I think it is going to reverse though. First I'll lay out the fundamental story, then I'll explore the charts.

My short bias on the dollar is based on the debt that the US government is taking on. This will eventually lead to inflation, which will devalue the dollar. Recently the dollar has been rising because all countries are taking on debt. It is also seen as a safety play during a time a crisis. Both of these things though should not last long. The United States is going to take on a lot more debt than any other country, and once the crisis subsides investors will sell their dollars for riskier assets.

To back up the inflation argument look at a chart of M2. The black line is overall money supply, while the red line is month over month change in M2. This chart is through February 2009, and does not include much of the spending from the stimulus package.

If President Obama continues to push through more of his agenda, such as nationalizing health care, money supply will continue to spiral out of control

Below is a daily chart of the Dollar index. It recently broke through $82 which was a prior high.

Looking out at the weekly time frame though, the Dollar is approaching resistance around $92.

Backing out to the monthly time frame reveals the dollar is still in a multi year downtrend.

I'm looking to short the dollar via the inverse ETF UDN. It has a level of support around $24. I'll place a stop below $24 and keep an eye on the dollar index to monitor it's progress.

Market Preview 3/9

After a week of hard selling last week, the bears finally backed off on Friday to form a doji. This candle usually signals a reversal so I wouldn't be surprised to see a small bounce to start the week off. None of the bottoming indicators signaled capitulation last week, so I think it would be a small bounce. 740 in the S&P would be the first level of resistance if we make it that far.

S&P 500- Bottoming Indicators
As for the bottoming indicators, we are getting close, but they have not yet signaled a bottom. The most encouraging is the NYSE New Lows. This indicator continued to increase last week and we should see a spike in new lows if we do see capitulation. NYSE Decliners/Advancers also continues to increase, which is what you want to see after an extended downtrend. The McClellan Oscillator and the CPC ratio are also close, but now quite there. Lastly, we still need to see the VIX spike above it's moving average envelope.

I'm not going to get too excited about a bounce from here. If we have a convincing looking up day on Monday, I'll be watching the Price Volume Relationship to see if we have volume to confirm the move. I will most likely add to shorts on a small bounce. If the S&P gets back above 740 then I will reevaluate.

There are no industry groups to get too excited about at this point, excluding Gold Miners. The Retail (XRT) and Agribusiness (MOO) ETF's had been holding up well, but they seem to be breaking down.

The Financials continue to be the worst industry group. I'll continue to short them on rallies back towards resistance. One thing to note however is the talk about removing Mark to Market Accounting. If there is even a whiff that it's actually going to happen the financials are going to take off. Keep tight stops on any short positions.

Gold continues to perform well. It pullback to it's 50 DMA on decreased volume, so I expect the uptrend to continue. I have a position in the GLD, and I may consider the GDX as well.

GLD

One of the reasons I am bullish is because the Dollar is running into some resistance. The Euro and Yen are both nearing support levels while the dollar is closing in on resistance. Below is a monthly chart of the US Dollar.

US Dollar Index

I am also bearish on the dollar because of fundamental reasons. Money supply is increasing at a disturbing pace, and will keep increasing for the foreseeable future. Below is a chart of M2 Money Supply. The Black line shows the overall money supply, while the red line shows the month of month change in M2.

To finish off, I want to touch on some longer term trends I see developing. The first thing I'll note is the Baltic Dry Index.

Baltic Dry Index
This index tracks the rates dry shippers charge, and can be used as a gauge for economic activity. Late last year the index dropped so low that shippers were not evening delivering goods. They were just left sitting idle. Since then rates have gone up which means somebody is starting to ship industrial materials, such as copper, steel, and things of that nature.

Along those same lines, Copper has started to show signs of bottoming. Although I wouldn't commit capital to Copper at this time, it's something to keep an eye on. Like the Baltic Dry Index, Copper prices can be used as a gauge for economic activity.

Copper

Next I want to touch on the debt market. It made big news when the 1 Month T-Bill was auctioned off at a rate of nearly 0%. Since then rates have steadily gone up, signaling increased risk appetite for investors. Below is a chart of the 2 Year Treasury Yield. Conditions in the debt market have improved considerably, while equities continue to fall apart. I look at this as a positive divergence and a leading indicator for equities.

2 Year Treasury Yield
I'm not sure when we'll make a bottom in the equities market. I do know however that global economic activity is improving. I'll be keeping an eye on these things to see if they keep improving.

Dominant Price-Volume Relationship

Technician Don Worden uses price-volume relationships to confirm price action. He analyzes all stocks within the Russell 3,000 and breaks them into four groups; Price Up Volume Up (PUVU), Price Up Volume Down (PUVD), Price Down Volume Up (PDVU) and Price Down Volume Down (PDVD). The dominant PV relationship is the one that contains more stocks than any other. For example, consider 1900 stocks were PUVU, 500 were PUVD, 400 were PDVU, and 200 were PDVD. The dominant PV relationship would be PUVU, which is bullish. The dominant PV relationships can mean different things though, depending on whether the market is trending up or down.

PUVU: Price Up Volume Up is bullish regardless of whether the market is trending up or down. In an uptrend it confirms the continuation of a trend. In a downtrend, it signals a possible reversal.

PUVD: Price Up Volume Down is regarded as somewhat bearish. In an uptrend, it means the buyers are losing strength and the trend my reverse soon. In a downtrend, it means the bulls were able to stage an up day, but on weak volume. It usually signals a continuation of the downtrend.

PDVU: Price Down Volume Up means different things depending on recent price action. After an extended uptrend PDVU signals strong selling pressure, and a new downtrend may ensue. After an extended downtrend, PDVU signifies oversold conditions and the market will often reverse course.

PDVD: Price Down Volume Down can be either bullish or bearish like PDVU. In a strong uptrend, PDVD shows decreased selling pressure on the pullback. The market will often continue upward after the consolidation. In the middle of a downtrend PDVD shows complacency between bulls and bears. The downtrend will often continue downward when the dominant PV relationship is PDVD.

Below is a chart of the S&P, with some key PV Relationships called out.

At this point, the dominant PV relationship continues to be PDVD, which is a bearish continuation signal.

GLD Update

I entered GLD at $89 last Tuesday. Heres a look at what the GLD is doing on a 10 minute time frame.

GLD
GLD pulled back from the $93 level today and ended up closing at $92.35. I think that the GLD may pull back a little more next week before continuing higher.

Percent Above/Below 150 Day Moving Average

Here is a chart showing the percentage above or below that price is relative to it's 150 day moving average. We are now at the lowest levels seen since last November, signaling very oversold levels.

S&P 500

TED Spread

Here's a look at the TED Spread and the events that fueled the credit crisis.

Bottom Watch 3/5

Lately everyone seems to be trying to call a bottom. Below is a chart that highlights characteristics of bottoms and tells us if we have one or not.

S&P 500

There are a couple of things that are needed in order for a bottom to be put in. We need a spike in the VIX, NYSE New Lows, and the Decliners/Advancers ratio. The CPC ratio and the McClellan Oscillator also need to be in oversold territory.

We are starting to get spikes in the NYSE New Lows and the Decliners/Advancers ratio. We still need to see a spike in the VIX as well as oversold conditions in the market oscillators. I think that if we get another day or two of hard selling, we could have those conditions on our hands.

This chart was based off of Cobra's Market Top/Bottom Watch.

2003 Bear Market Bottom

Here are two charts, comparing today's market to the bottom of the last bear market. There are a couple of characteristics from 2003 that we are starting to see now. We are a ways from the start of the next great bull market, but we are showing signs that the bottoming process may be under way.

The most important thing you will notice is the long term (150 day) moving average. It flattened out in 2003 before price was able to hold above it. Currently the 150 DMA is downward sloping and far above the current price. The next thing that was important was the occurrence of positive divergences (Divergences are where price makes a higher high or lower low, and an indicator fails to do so). During the bottoming process in 2003, there were positive divergences in the NYSE New Lows as well as the summation index. As the market made new lows, there a fewer amount of stocks that made new lows, and the summation index held above it's prior low. Today we are starting to see a divergence in the NYSE New Lows.


2003 Bear Market Bottom

Current Market

S&P Relative Strength

Below is a chart of the S&P, with the relative strength lines of a couple of industries plotted below.

GLD Pullback

Gold has pulled back quite a bit over the past 8 trading days, so I bid into the GLD yesterday at $89.00. It was lower again today, but recovered some of it's losses. I'm highlighting GLD because it is nearing three important areas of support: trend line, moving average, and Fibonacci. It has also made this pullback on lower volume, which is bullish.

GLD

Panic Selling

We are approaching levels where we have seen panic selling and subsequent buying on the following trading days. Here are a couple of things to watch for:

NYSE New Lows- New lows need to spike to the highest they've been over the past couple of weeks.

NYSE Decliners/Advancers- There have been four instances (counting the past few days) where this ratio has been over 9. Look for multiple days in a row where this ratio is above 9.

NYSE Up Volume/ Down Volume- This is not quite as important, but still worth keeping an eye on.

VIX- The VIX also needs to spike to a recent high. We may not see it go to it's November levels (which I would welcome), but in order to see fear and a possible (short term) bottom, it needs to take out recent highs.

We are overdue for some type of bounce, and we could see it any day. Still, I would be skeptical of any rally until it got back above prior support.

NYSE Composite Index

Slaughtered

Agribusiness had been holding up well until today. We could see money starting to flow out of this industry after 4 months of outperformance.

MOO

A couple of names within this industry that got hit the hardest were POT, MOS, BG, and AGU

Mean Reversion

Below is a Quarterly chart of the Dow Jones Industrial Average. The chart goes back into the 20's, while the linear regression actually measures all the way back to 1915. As you can see we have been way above the linear regression line for the past decade. We are now just "reverting to the mean", which does not imply a sharp reversal.

Dow Jones Industrial Average

Market Preview: March 2

We are starting to see some divergences in the breadth indicators, but for the moment the odds favor another move down. I'm short a couple of financial names that popped over the past few days. I am also long a couple of technology names that I might have to let go if we get a breakdown in the market.

S&P 500: Weekly
I was expecting some type of bounce last week after breaking down, possibly back up to the 800 area. We simply didn't get it. Some of the oscillators moved out of oversold territory while the S&P did nothing. That is not a good sign. With that being said, it is very likely we could see a "snapback" rally that could burn all the bears, so make sure your stops are in place.

S&P 500: Daily

iShares Regional Bank ETF (IAT)

The Financials look like the best names to short right now. Everything else is pretty far extended to the downside and is too risky for me to mess with. If we do end up getting any type of pop, I would look to short some of the laggards. Even though the breadth indicators show signs of potential strength, we're still in a bear market. All trades should be biased towards the downside. Playing strength on the long side can work, but it can also burn you. An example of this is what happened to Health Care last week.

Health Care (XLV)

One last thing I want to touch on is Gold. On a long term basis I am very bullish on Gold. The debt that America is taking on is going to cause very high inflation in the future. In an enviornment of high inflation, investors often flock to hard asses such as Gold. At this point in time though I think the recent surge in Gold is due more to the flight to safety. T-Bills have stopped falling in price, which means investors are losing that confidence they had a couple of months ago. Gold has pulled back over the past week, and I'm looking to enter between 890 and 935.

Gold