Calling Monday cautiously higher

The Hoot 
Actionable ideas for the busy trader delivered daily right up front

• Monday higher, medium confidence.  Bull-bear ratio is 5:0.
• ES pivot 1253.33.  Remaining above is bullish..
• Rest of week bias uncertain, depends entirely on Europe.
• Monthly outlook: bias up on technicals and seasonality.
• ES Fantasy Trader remains long from last Thursday.

Recap

Well I finally got one right last Friday, although I can't claim too much credit - with this crazy market it's pretty much the luck of the draw.  Today we got a well-written thoughtful comment from alert reader Daniel (see the comments to last Friday's post below) in which he says "Within that range, brave prognosticators such as yourself have tried to discern a pattern from day to day or in short swing timeframes, in a Market where the day-to-day changes could have been sent to StockCharts by a random-number generator."

I don't know if it's bravery or lunacy that brings me to wade into this minefield every day, but all I can do is analyze the charts.  But Daniel is right - with a market that's hanging on every bit of news, every rumor of a rumor, and every hint of a rumor of news out of Europe, doing TA is pretty much a crap shoot.  As long as the news wires remain quiet, we usually do pretty well.  Keep that in mind as you read along this evening.  (And do read Daniel's comment - his analysis is excellent).

The technicals

Dow monthly

The Dow: On Friday the Dow shot up to its resistance point around 12,100, closing near its high.  I can't really fault it for not breaking this level given that it had already advanced 260 points.  But it does leave us in a quandary for Monday.  Two green candles are bullish and we handily broke both the 12K resistance and the 200 day MA at 11,976.  Interestingly, the Dow has visited the 200 MA in 9 of the last 11 sessions.  Each time this happens, it loses some of its character as a barrier, either up or down.  Just mentioning...

But the chart I really want to look at tonight is the Dow monthly here.  This is the basis on which I've been voting bullish in the Ticker Sense weekly sentiment polls lately (and for the record, I did so again in tomorrow's poll).  Note the five consecutive months of declines beginning in May and ending in September.  That coincided with a bottom in the indicators  October broke the decline in a big way and took us just to the right edge of the declining regression trend channel.  The action this month so far at least is a bullish setup.  I know its dangerous making predictions on the basis of a half-baked candle, but that's all we've got right now.

The other big thing about the candles here is that October formed a classic bullish engulfing pattern.  You don't often see this on a monthly chart.  I had to go back to November/December of 1991 to find something similar and that was followed by five months of further gains.

So bottom line, I'm going out on a limb to give this one +1 bulls for Monday because of the resistance on the daily chart, but with the longer term support behind us as well as the end of year seasonality, I'm a bit more confident.  If my system had it, I'd give this one maybe 2/3 bulls.

The VIX: Ah the VIX, the King of indicators.  All hail the VIX!  After touching its upper BB last week, it retreated and gapped down 8.4% on Friday to form a small doji.  That alone raises the possibility of a reversal on Monday.  And if you take out Thursday's odd spiky candle, it's looking like a bullish doji star.  Also, Friday closed right at 30, which has proven to be support recently.

But the VIX also ended right in the center of the Twilight Zone, that area in the middle of the Bollinger bands.  And with the volatility of the VIX itself remaining abnormally high since August, it is premature to call a higher VIX on Monday on this basis.  The best I can say is that we have a bullish reversal sign that requires confirmation.  That should come tomorrow.  So I can't give any points yet.

VIX futures: When the VIX lacks clarity, we seek it from the futures.  Unfortunately, this chart looks a lot like the VIX itself.  Even moving out to the weekly chart is of no help since that is simply a great big doji of indecision.  Too hard to call, no points.

Market index futures: I'm a bit encouraged this evening to see all three futures are up, with ES being up 0.4% at 1:45 AM EST.  Seeing some follow-through after Friday's big gain is a good sign.  So is the fact that ES opened today with a gap up over its 200 day MA of 1261.28.  That's our new support.  The indicators mostly continue to rise (RSI being the exception) but I'm wary of them right now - they tend to get distorted when the market has big swings like we saw last week.  Nevertheless, I'm feeling the love here, so +1 bulls.

ES daily pivot: Now 1253.33.  With ES now at 1268.00 we have a fair cushion against the pivot.  This is the sweet spot - not close enough to risk falling through and not far away enough to be overextended.  I'm liking it, so +1 bulls.

Dollar index: The poor dollar is really getting jerked around by the European brouhaha.  Last week it was up big and down big.  Sorry, I want nothing to do with this chart tonight - no points.

Oil: Broke over its 200 day MA on Thursday and did not retreat on Friday.  Oil remains firmly in a rising regression trend channel from 10/4/11.  There is now no resistance until 100.  With its indicators all broken-overbought, I can only assume oil will go higher again on Monday.  Higher oil is still good for stocks (for the time being anyway), so this one is +1 bulls.

Copper, weekly

Copper: After holding support on Thursday with a stubby doji that held support of its previous low, copper executed a nice bullish piercing pattern on Friday.  And speaking of symmetrical triangles as we've been recently, note the nice one forming on copper's weekly chart here.  Since these tend to resolve in the direction of entry about 75% of the time, this would imply that copper could be due for a breakout as early as this week.

This triangle is getting about as coiled as it can get.  It's looking about ready to blow any day now.  And as alert reader Daniel notes, "triangularity of any kind usually resolves in the prior major direction, and given the kaboom of October that still has to be seen as UP. And that UP must be especially respected as we come into year-end Bonus angst time". 

Note also that last week closed just about at the 50% retracement of the big jump three weeks ago and attempts to drive it lower in the past two weeks failed. On this basis, I give copper +1 bulls.

Morningstar Market Fair Value Index: No update on Sunday night so no points.

History: According to The Stock Traders Almanac,the Dow was down 7 of the last 11 on the Monday before November expiration.  However, they rate the day bullish.  To me, this sort of cancels out, so I'm not giving any points here.

     And the winner is...

The bulls, with a bull-bear ratio of 5:0.  While the shut-out is impressive, the low score strikes a cautionary note.  In fact, the astute J-Trader closed out his long position on Friday but did not go short.  But the Night Owl rarely equivocates, so tonight we move a bit further out on the limb than usual and call for a higher Monday, modulo the usual noise out of Europe.  That's all she wrote (that's enough!)

ES Fantasy Trader

We continue to hold the long position from three nights ago.  My decision to hold once again on Friday was a good one and we have no recovered almost all of the loss (the Italian job) on this trade. Portfolio stats: the account still remains $173,500 after 35 trades (26 wins, 9 losses) since inception on 8/18 with $100K.