medium and short term revisited #2

In last post the market did get about a 5% correction... though about 2 weeks after the post. Since then the major indexes have rallied back up to their November highs. In the meantime I noticed some speculative/leading stocks took big hits down and recovered less or mildly while some have recovered strongly with the major indexes.

We are now at an important level of whether the market either breaks out higher or turns down for about a 10% correction. The bullish seasonality and plenty of bullish professional 'smart' traders call for more upside. I believe we already had an earlier Santa Claus rally and could pause or correct for the time being.

medium and short term revisited

The last two short term posts for potential weakness did not pan out as the stock market continued to grind higher. The heads up now is that the negative divergences for recent weeks are still hinting of possible correction on the horizon. Note from the chart that the rally since the beginning of September has been quite similar to the February to April rally. Not that I suggesting a similar crash could happen too... just that if there is a correction around the corner then I expect the support level around the Nasdaq 2325 to halt further drop.

My last medium term post called for a large rally based on the Inverse Head and Shoulders pattern of the SP500 has worked quite well. My target of above 1130 have been achieved and the uncertainty of whether the April highs of 1210s remains possible... but as this post here is to warn of potential correction back down first.

short term alert: take some profit?

The last post of a short term weakness didn't happened (or it was very brief) as the medium term rally continued higher. Currently there are more hints of weakness as recent speculative stocks and popular stocks (Apple, Netflex, Google & etc) had been unable to rally higher despite the major indexes making new monthly highs. A strong rally since early September so good time to take some profit and see happens next.

short term alert: move down for now

Stock market looks short term overbought since the beginning of the week. Unsure if this would result in a brief pause and then powering higher or a move down toward the 1050-1070 level for the SP500. Looks like it could be the latter... a move toward the 1050-1070 level as the +1100 level is proving to be a tough resistance.

medium and short term revisited

The SP500 is at important support levels that I expect to hold and will drive prices higher. A potential inverse head and shoulders pattern is developing and if it does pan out then I look for the SP500 to break above its June and August highs... above 1130. Whether the old April highs of above 1210s will be challenge is a big maybe but I'm not anticipating it yet.

short term rally?

I'm looking for a short term rally to start either this early or mid week. But it looks like the lows could had been established this Monday morning. Whether the SP500 and Nasdaq will be able to rally to or above the resistance levels of this month August remains uncertain but I should have a post on my opinion at that point.

medium and short term revisit

While I have been bullish for the past month there are some hints that this month long rally higher could stall if the stock market can't break above current resistance levels (SP500 1130+ and Nasdaq resistance above 2310+.) If the stock market stalls then there could be a trading range behavior (SP500 1040-1130 and Nasdaq 2140-2310) for the next couple months. But a decisive break and hold above current resistance levels should reinstate the bullish stance I had for the past month. So this upcoming week will be pivotal.

short term outlook

Like the 2nd week of July, the short term outlook is overbought with some consolidation or correction to be expected. The first pullback during the 2nd week was within the 2% to 3% as I was anticipating. This current pullback could be the same BUT there's still possibility of a 4% to 5% correction.

Nevertheless the strong rally off the early July bottom has the market internals hinting much higher prices for the medium term...for the coming months.

Looking for a medium term buy setup

It's been about a month since last post in which a short term setup for a bottom was expected. Turned out there was four short term setups...a rally, a correction, a rally, and finally the current correction. At that time I questioned and doubted a medium term buy setup due to the January Effect. Unless the SP500 rallies back above 1074 (January monthly close) tomorrow June 30th then the January Effect will be full-filled.

The current correction have probed below the SP500 1040 support levels. No doubt I believe the SP500 will go down more before an important medium term and possibly a long term bottom will be established. This is a large bottom range but I'm looking for buy entries around the SP500 1000-1040 level and this is where I'm looking for a medium term bottom to occur. From these price level I'm expecting the SP500 (and stock market) for the rest of 2010 to attempt to rally back up, at minimum, toward the recent highs set in April.

Revisited: The Jaunary Effect

It's the last week of May and the SP500 closed at 1087.69 last Friday. As we discussed back at the end of January when it closed at 1073.87...the January Effect implies a high probability of another monthly close lower within a half a year.

Here's the rule for the January Effect...

The old Wall Street saying "As January goes so goes the year."

At the last 30 years when the SP500 closed up for the month of January then 90% of the time it remain positive for the remainder of the year.

2007, 2006, 2004, 1999, 1998, 1997, 1996, 1995, 1993, 1991, 1989, 1988, 1987, 1986, 1985, 1983, 1980, 1979, 1976, 1975, 1972, 1971, 1967, 1966, 1965, 1964, 1963, 1961.

Only three cases where this effect failed and closed down for the year.
2001, 1994, 1966

When SP500 closed down for the month of January it doesn't necessary mean the rest of the year will be down. But since 1930 it usually does predict medium term weakness for the coming months.

In majority of cases, the SP500 closed lower within 1 to 3 months.
2009, 2008, 2005, 2003, 2002, 2000, 1992, 1984, 1984, 1982, 1978, 1977, 1974, 1973, 1970, 1969, 1968, 1962, 1960, 1957, 1953, 1948, 1941, 1939, 1935, 1932.

In rare cases it took a little longer before the SP500 made another monthly low.
1990, 1981 in 7 months. 1956 in 13 months. 1940 in 4 months.

So far the stock market has gone almost four months without making a new monthly low. Could the month of May be it this time? Last Thursday I anticipated a short term rally higher soon. Will the rally be long and high enough to extend the streak to 5 months without making a monthly close lower than January's closed? That I unsure of yet.

Buy Alert: Is this a short or medium term turn?

Talks of a crash flying around as the stock market is at very oversold levels that "should" warrant at least a short term bounce soon. There are hints that a medium term bottom is likely too but we'll see what the stock market gives us for now.

Potential short term pattern developing

As the stock market rallied higher last week and retreated this week, traders are looking for a possible retest or probe lower of the 'crash' lows of May 6th. Another price pattern that could be developing is a 'symmetric triangle pattern.'

Link below for illustration...
http://en.wikipedia.org/wiki/Triangle_(technical_analysis)

What this means is that the stock market (Nasdaq and SP500) could trade around in a coil pattern for another week or so and then make a final 'fake' breakdown below the crash lows before reaching a medium term bottom.

Short term bounce and then retest lower

About two months worth of rising stock market prices ripe away in less than two weeks. That's what being too extremely overbought for quite a long time can do. For the short term we could seen a rally back up toward SP500 1150 and then back down to retest (and likely probe lower) the low of yesterday 1065. An alternative scenario would be retest of the lows first before moving higher.

Unless this is a renewal of a long term bear market...which is in doubt... most indication is to look for a medium term bottom first within 2 to 3 weeks.

Short Term Alert: Sell signal if more downside

For the short term, with Friday sell-off and today's current weakness should very likely give a sell signal. With the very strong rally coming off from February to early April, which based on breadth-wise comparative to internal strengths witnessed in April and August of 2009...these types of rally usually hinted continued strength forward to 6 and 12 months later. That's been the case for the first 2 scenarios. So even though we could be in for a short term weakness (or worst case a medium term correction of over +5% to 10%) which could be similar to the January correction, but 6 to 12 months forward the market should likely be higher or near current price levels.

Amazing rally with caution

The stock market is having an amazing run-up this month with rarely ANY BRIEF pause. The breadth readings (advancing stocks vs. declining stocks) during the streak are similar to past bull markets of the underlying "internal" strength and could apply here again (as was the case in spring and summer of 2009) of continuation in higher stock prices 6 and 12 months from today.



But there is hints of negative divergence even though the major indexes are making new highs such as the Nasdaq, SP500, Russell 2000 (RUT). The above chart shows the Nasdaq rallying above the January 2010 highs. Thus far there are several other indexes such as the semiconductors, China Xinhua, hardware, internet, and Russell 1000 technology that are still below or at their Jaunuary 2010 highs. Unless they rally above their recent highs soon then this negative divergence could hint at least short term weakness if not medium term weakness.







So is this hint of negative divergence significant? This is the most significant divergence since a year ago when all the major indexes were making a new low in March 2009 (lower than their November 2008 lows) while the semiconductor, China Xinhua, hardware, internet and Russell 1000 technology indexes did not but instead made higher lows. Compare the charts above for the lows of November 2008 and March 2009. This was a significant positive divergence which resulted in the bear market low made in March 2009 and start of this current new bull market.

Short Term Alert: Mixed feelings

Part of my gut feeling says this is the top...but another part says maybe after the monthly job employment report on Friday. Two events I usually don't like to hold big positions the day before...options expiration (usually the 3rd Friday of the month) and the job employment report (usually the 1st Friday of the month.) As in this case, I have no position and if I do plan to trade tomorrow it'll be a small trade.

Short Term Alert: bullish pattern good for now

Last Thursday's rebound from an early morning big sell-off had a potential of a bullish pattern developing from several major indexes (like the FXI (China) and GLD (gold) indexes.) Should had posted this earlier but waited too late until Monday, yesterday's big rally for confirmation. The confirmation means there should follow-through upside for the remainder of this week. But like the February 9th post where another new low developed into a more constructive rally...this time around another new high could developed into a more constructive selling as early as next week.

Revisiting the short term alert

The stock market have already started to turn down since my last post. I noted one of the two scenarios I see developing was a brief short term move down before another move higher. So the stock market could get one more push higher back around the highs of last Friday and yesterday Monday. From there a more aggressive selling should lead to a push toward or below the recent lows of this current medium term down trend.

The other scenario has a more weak view as the stock market should continue to move lower from current price levels. Whether which scenario it'll be, better to had all of your selling done already or very soon.

Short Term Alert: Near or at sell signal

Will be a quick message here as I've been a bit busy. Stock market did continued to move higher as I anticipated from my last post. But we are now reaching price levels where I consider to be at or near a short term top. If it is then there are two scenarios I see developing... 1) a brief short term move down before another move higher... 2) a bigger move down that could break below the recent lows set in early February. I'll update more later as I see any new development. Another note, my medium term forecast continues to be the view of further weakness for the 1st half of 2010.

Short Term Alert: Overbought but still more upside?

With today's rally the stock market is reaching what is technically short term overbought levels. But there is hints of potentially more upside due to the oversold nature from last few weeks. That's the positive story I'm reading here. To counter, the negative story is that all that work to move higher since last week hasn't been as strong thus far compared to last year's short term rallies. Overall for the short term picture, I'm expecting higher prices for this week but use it as opportunity to do some selling of existing long positions.

Revisiting the short term alert

About two weeks ago due to oversold conditions I anticipated a short term rally to start soon with a warning that a weak few days of rally could result in one more strong sell-off before a better constructive short term rally to finally materialize. Well, instead of one, there were two rounds of sell-off (with the scare of debt problems in Europe last week.)

In technical jargon...what occurred is new price lows but not confirmed by momentum new lows (my indicators went from oversold, barely move toward neutral, and then went back to oversold but not lower than when my first alert occurred.) The result, this should be the better constructive short term rally I'm looking at. How much of a rally I'm unsure but expecting the major indexes...Dow/SP500/Nasdaq will attempt to recover half of the correction from their January highs. But the medium term outlook remains for move downside and half of the move down may had already been done.

The January Effect

The old Wall Street saying "As January goes so goes the year."

At the last 30 years when the SP500 closed up for the month of January then 90% of the time it remain positive for the remainder of the year.

2007, 2006, 2004, 1999, 1998, 1997, 1996, 1995, 1993, 1991, 1989, 1988, 1987, 1986, 1985, 1983, 1980, 1979, 1976, 1975, 1972, 1971, 1967, 1966, 1965, 1964, 1963, 1961.

Only three cases where this effect failed and closed down for the year.
2001, 1994, 1966

When SP500 closed down for the month of January it doesn't necessary mean the rest of the year will be down. But since 1930 it usually does predict medium term weakness for the coming months.

In majority of cases, the SP500 closed lower within 1 to 3 months.
2009, 2008, 2005, 2003, 2002, 2000, 1992, 1984, 1984, 1982, 1978, 1977, 1974, 1973, 1970, 1969, 1968, 1962, 1960, 1957, 1953, 1948, 1941, 1939, 1935, 1932.

In rare cases it took a little longer before the SP500 made another monthly low.
1990, 1981 in 7 months. 1956 in 13 months. 1940 in 4 months.

Note that in 2009 the SP500 closed down for January and made a final low in March. Finally in my first post I have my medium term forecast for stock market weakness for the 1st half of this year. With the January Effect also hinting weakness (since the SP500 closed down for January) this reinforces my medium term forecast. Nonetheless, my short term forecast is for a rally.

Short Term Alert: Looking for a rally soon

In my first post I stated that the stock market could get a sharp sell off if it wasn't able to move above last Friday's highs before this week was over. Looks like the stock market decided to be early with selling on Thursday. I also stated that if this sell off should occur then I am looking a better short term rally to start after the sell off.

Below the charts of the Nasdaq and SP500 where both are sold off on Thursday.


In my first post I stated that January 2010 seems to resemble that of January 2004. If this continues to occur then compare the early February 2004 charts below with the current charts above. There was an one day sell off before a decent 5 day rally back higher. I believe the resemblance hints the stock market will get about a 5 day rally in the coming week.

Final note, 'relative strength' refers to one entity being relatively stronger or weaker than another. In looking at the 2004 charts the more speculative technology heavy Nasdaq is showing weaker price action than the SP500. So the medium term down trend for the coming months will mean much more weakness for the Nasdaq than the SP500.

Use of 200 day moving average as a 'mean aversion' trend reversal

The 200 day moving average (200dma) is the average price of the last 200 trading days. When used on major indexes rarely does the 200dma goes beyond 12 months without touching the current price again. In most cases, the 200dma touches the current price within 6 to 9 months or less. When it doesn't and goes beyond 9 months then there should be 'rubber band' effect where the 'reversion to the mean' back to the 200dma should occur within months.

The above chart is of the Gold and it last touched (or came very close to) its 200dma (the blue line) back in April 2009. As in the cases of the 2006 and 2008 highs, by around the 9th month since the 200dma was last touched, the prices peaked and fell back to touch the 200dma within the 12th month time frame. So in one of my trades, I am expecting current gold prices to fall about 10% which is close to where the rising 200dma is currently at.

Using this method on other major indexes we can see that the Nasdaq, SP500, and the Shanghai indexes are due to touch their 200dma either very soon or around summer time. What this means if one had been bullish on the stock markets then it's either time to do some selling and/or to hold back buying/adding until the 'mean aversion' has played itself out.

Note that the Nasdaq (late 1998 to early 2000) and Shanghai (2006 to 2008) indexes went way beyond 12 months in the charts above. No doubt these marked major bubbles.

Conversely, the 'mean aversion' of the 200dma can be used to anticipate important bottoms. Notice that the Nasdaq and SP500 (March 2009) and Shanghai (November 2008) bottomed and rallied back up to touched their 200dma again within the 12 month time frame.

This trading method using the 200dma can be used to help gauge whether a long momentum trend up or down is about to reverse or it will continue on.

2009 to date thus far resembles that of 2003 to date

So far the huge rally of 2009 has resembled that of 2003. Now the first month of January 2010 seems to continue to resemble that of January 2004.

Short term: Very oversold so a short term bounce is expected (and as I'm writing it is occurring.) But the stock market is still very risky to the downside for the short term. If the Nasdaq/SP500 can't rally back intraday above their last Friday highs (2262/1115) by the end of this week Jan. 29th then there's a possibility of the Nasdaq/SP500 will drop over +1% below last Friday's low (2200/1091) first before we get a more constructive short term rally back higher.

Medium term: The highs of early January has very likely marked a medium term TOP for the stock market. We are now in a medium term downtrend for the 1st half of 2010. The current correction thus far is about half way over. So the pain down is half way done. The stock market will get some short term moves up and down, but I expect it to be much lower several months from now.