More downside coming

The markets were lower today and I'm sure glad I had my short hat on. This was an interesting week technically and I plan on doing a review and look ahead to next week tomorrow when I have more time. Executive summary: I see more downside ahead.

Uptrend broken

Today's Dow action both opened and closed decisively below the lower RTC line of the uptrend going all the way back to the end of August for a 74 point loss. Accordingly, I have to call the uptrend over. I am now removing my long hat and putting on my short hat. It took three days of declines to call it, but that is the nature of the RTC. The lower line accounts for 95% of the price variance in the trend. Below that, it becomes fairly suggestive that any prices in that area are not part of the trend.

Interestingly, traditional candlestick theory would have called this top earlier, with a hanging man on the 5th and a red candle on Monday. A stochastic crossover also occured on Monday. By that technique, we could have turned around to a short position on Tuesday. In that sense, the RTC is slower to respond, but I think at this point we're in for a few more days of declines. Will November live up to its historical reputation as a good month on the Dow? We'll see. Obama's blundering around in Korea certainly isn't helping matters.

Trades

I may live to regret it, but I bought 100 shares of TIE just before the close at 18.85. The big runup in DRYS today helped me out and led to an above average return on the day for me, despite the overall decline in the market. My YTD return right now is 26.03%, on track for a 37.6% annual return.

Veteran's Day

Today, November 11th, is Veteran's Day. I urge everyone to stop for a moment today and reflect on the ultimate sacrifice made by many many thousands of brave men and women defending our great country from those who would destroy us.

To all those in uniform at home and far away, we salute you and thank you for your service. You are heroes and true patriots.

Close but no cigar

Today's confused and confusing action briefly saw us dip below the lower RTC line in the Dow but then close back inside for a meager 10 point gain. Take a look - what do you think? If you believe that today's candle was a hammer and that the finish inside the RTC averted a bearish setup, then the uptrend remains intact despite the losses of the past few days. And today's volume was slightly higher than yesterday. Finally, although the NYSE TICK took a number of deeply negative stabs throughout the day, the mean pretty much just wobbled around zero and actually improved as the day went on.

Personally, I think the recent action is being motivated primarily by the uncertainty surrounding the upcoming G20 meeting, or as one wag on CNBC called it, "G19 versus the US". But from a purely technical standpoint, I'm going to have to leave the green arrow in place and not call a turnaround just yet. Tomorrow may tell a different story. It won't take much of a dip from here to create the bearish setup ... but that candle today sure looks like a hammer, and the current RTC is quite strong with a Pearson's R of 0.959. We'll see.

No trades today. I went through my entire watch list and couldn't find anything with a sufficiently attractive risk/reward ratio to warrant jumping in.

The market takes a pause

Today was the third disappointing day in a row in the Dow, losing another 60 points. I've zoomed in on the recent daily action so we can take a close look at it. From a classical candlestick point of view, this chart looks bad (see the last three candles): a doji, followed by a hanging man, and then a confirming red candle. Along with an overbought stochastic and RSI, both of which have peaked, this makes for a bearish call.

However, note that despite the recent losses, we remain inside the RTC channel. It would take three more days at the current level (11,347) or one more day of declines like today's, to bring us into a bearish setup. Note also that although selling volume was higher today than yesterday, both days were below the levels on the previous two up days indicating a certain lack of enthusiasm for selling. Also, the sentiment on finviz.com is 58% bearish which, if we adopt a contrarian stance, is bullish. Also, today's close brings us pretty much to the 50% Fibonacci retracement level of last Thursday's big gain, implying a natural stopping point.

So all in all, I'm going to have to stick to my system and say that the uptrend remains intact, although I'm not expecting a major rally tomorrow.

Storm clouds on the horizon
Although I usually try to stick to purely technical analysis, the following news item that just came out caught my eye, courtesy of marketwatch.com:

SYDNEY (MarketWatch) — China’s credit-rating agency on Tuesday downgraded its rating for U.S. sovereign debt and warned of further cuts, in a pointed move ahead of this week’s Group of 20 major economies meeting.

You can read the whole article here. I don't know about you, but I find this more than a little worrisome for the future. In the meantime, since I can't set US monetary policy, I continue to watch the charts and try to make some money.

Trades

No trades today. I spent some time going over my watch lists but was unable to find anything that looked like a compelling buy, despite today's down market. And, although I was down a bit today, I also couldn't find any compelling reasons to sell anything either. Not just yet anyway. Again, I must remind myself to exercise patience. Let the market come to you, never the other way around. In the meantime, I was pleased to see that LOW was down another 44 cents after I dumped it yesterday.

Continuing consolidation

Today's slight 37 point decline in the Dow is pretty much what I expected when I suggested that a period of consolidation might follow last Thursday's big gain. At this rate, it would take six more days of similar action to reach the lower edge of the rising regression trend channel and suggest a possible bearish setup. Or, it would take a 174 point loss tomorrow to achieve the same thing. I just don't see either one of these happening this week.

Note how the current uptrend has proceeded in stepwise fashion - big one day gains followed by around a week of sideways or even slightly declining action. With today's loss still keeping us in the center of the RTC, it looks like we're in for more meandering for a bit.

Of course, this all assumes we don't get any alarming news out of Europe. Since Greece has apparently been removed from the PIGS, we're now left with an even more unfortunate acronym for the Club Med countries, which CNBC neatly sidestepped today by coming up with an anagram of IPS, promoting Ireland to the front of the class.

Trades

Today I gave up on my Lowe's trade, taking a 1/4 point profit and selling at 21.98. LOW fell out of its recent rising RTC today and put in an unusual green candle that was still a 20 cent loss, due to having gapped down on the open. This, coupled with a doji last Friday and an ugly looking stochastic plus oversold RSI, makes me think that it's time to bail. The trade was a bit disappointing, but I'll take a 25 cent gain over a 10 cent loss any day.

My low price/high yield basket continues to perform well. CIM recovered from its bad news last week and DHY closed at 3.01. Though I only got in at 2.95, this one is such a low beta that I consider a 6 cent gain to be quite nice. And AMD, which I mentioned as a breakout candidate at 7.29 closed at 8.14 today. I may actually finally turn a profit on this one.

Note

With today's post, I'm adding a new feature to the blog. In the right hand pane up top, I'll be including either a green or red arrow indicating the general trend I'm expecting in the Dow, and by extension the market in general insomuch as it tracks the Dow. This direction is based on regression trend analysis from the last top or bottom. It is not necessarily an indication of where I think the Dow will close tomorrow. It is a trend in a swing time frame.

Weekly review

Before this week, a lot of people were saying that the election results were already "baked into" the market. A look at the weekly Dow chart below shows pretty convincingly that if the results were baked in then someone forgot to turn on the oven.
Last week was the best in what is now a ten week rally. The climb to a weekly close of 11,444.08 brings us right to the upper RTC line. This in itself is bullish. Even more importantly, look at the volume. The great Dr. Brett Steenbarger always made a big point of paying attention to volume to determine the significance of any given move. We see that last week's volume was not only higher that the previous week, but in fact the highest since the start of the rally on August 31st.

Compare this to the April rally, which ended on a large green candle, but with diminished volume compare to the preceding week. Although the indicators such as RSI and stochastic are looking overbought right now, I don't think we've seen the end of this rally. Also note how in April, the rally ran out of gas shortly after crossing above the 200 week MA, but this time we handily motored past it without looking back, and broke through the resistance of the April highs. We now stand at a level of the "summer shelf" way back in 2008. This ought to provide some resistance but right now I think the market will continue to drift higher into the end of the year.

As The Stock Trader's Almanac points out, November ranks as the second best month of the year on the Dow and Nasdaq since 1950, and the third best in the Dow. Accordingly, I'm not looking for any major downturn in the coming week. Indeed it would take four consecutive days of sideways action just to bring us to the lower RTC line to even begin a bearish setup.

Performance

Last week was one of my better weeks this year. I ended the week up 4.03% for a YTD gain of 26.72%. This puts me on track for a full year return of 38.45% which is slightly better than last year when I ended up 35%. The Dow meanwhile is up 9.74% YTD, so we're not doing too badly. In fact, at Friday's close, my trading account was at a YTD and 52 week high.

Thanks to the recent gains in the market, I am now just 3% in cash, not counting the bond redemptions over the last few months. With those, I'm just under 50% cash. I haven't found anything sufficiently compelling yet to put all that money to work.