Not Looking Good

I don't know - I have a bad feeling about tomorrow. Tomorrow is options expiration day and this has been a really really bad day for 10 of the last 12 years. I see nothing in the daily Dow chart to make me think 2011 is going to be any different. Also, all three futures are down at least 0.1% right now (1:15 AM EST). So today's little 2.5 point loss still keeps us in the middle of the rising RTC and therefore the swing trend remains intact.

However, the indicators are still all very overbought (the RSI is actually more overbought than it was on Tuesday) and today's down volume was higher than yesterday. Although the shape of today's candle is a doji indicating indecision, I'm really not looking for any gains at all tomorrow and would not be surprised to see a drop to the 11,778 area which represents minor support for the Dow.

Note also as I mentioned yesterday how the action of the last three days seems to be replaying what we saw starting January 6th. From the peak on the 5th, we had two declining dojis, very much like we saw today and yesterday. If this pattern plays out, look for a hammer tomorrow, though still ending lower.

The one bright spot is that the VIX hit its upper Bollinger band today and then retreated from that. Almost every time when this happens (going back over a year), the VIX goes lower within two days, implying stocks go higher. So if tomorrow is in fact lower, and especially if tomorrow replays the action of the 10th and forms a hammer, I'd expect to see a rally start early next week.

Trades

Today I bough a bit more ANH at 6.86 for my low price/high yield portfolio. It has pulled back over the last three days and reached some strong support, forming a bullish gravestone doji today. Although the LP/HY portfolio took a 10% hit yesterday, that still leaves it above the level it was at just six days ago. I think its downside from here is limited regardless of tomorrow's broader action.

Possibly lower soon

In an article on marketwatch.com today, we read Michael Gibbs, director of equity strategy at Morgan Keegan opining

“Markets don’t move in straight lines, and to me, it looks like the normal course of a little bit of profit-taking kicking in. Does it turn into that pullback that everyone is calling for? I don’t know"

You and me both. Yesterday I discussed the possibility of getting a doji or hanging man soon and sure enough, the Dow formed a doji/spinning top today. But that is not necessarily the reversal everyone is waiting for. Indeed, we remain above the middle of the ascending RTC, thus the uptrend is actually still intact, even though I got a bad feeling from today's action. I even tried to hedge my position with some SDS around mid-day and naturally the market started going back up. I got out at break even and then watched the charts gyrate aimlessly the rest of the afternoon.The closest thing I can figure is that today looked a lot like January 6th, and that was followed by two more down days.

And check out this ominous warning from The Stock Traders Almanac:

January Expiration Week Horrible Since 1999, Dow Down Big 8 of Last 11".

This coming Friday could be really bad. And it would only take a 30 point drop over the next day or two to generate a bearish trigger.

At least I was right with my call that the 11,867 level was going to be tough to crack. Tuesday's high was 11,859 and today's was 11,861, with both days finishing off those levels. Where tomorrow goes, I have no idea, but I'm not as optimistic as I was at the start of the week and I don't see us breaking the 11,867 level once again, which means there's not much upside from here. And as of this writing (1:50 AM), all three futures (ES, NQ, and YM) are down slightly. I may try again to get a decent entry into SDS tomorrow to do some hedging if we're not up meaningfully by 11 AM.

Uptrend continues

The purpose of stock market forecasters is to make fortune tellers look good.
- Warren Buffett

So it seems. I really did not expect the market to be up at all today, much less the impressive 50 point gain we saw in the Dow. I'm not too disappointed though as I ended the day up 0.8%, fueled mainly by the 9.27% pop in CSIQ, my last remaining "trade that turned into an investment", left over from last year. But apparently I'm not alone in expecting lower. Even our local newspaper had a short article to the effect that "markets may be lower today based on futures action the night before". Yup, they got fooled too.

And if that wasn't enough, today I got an email newsletter from the great Dr. Alexander Elder. In it, he writes,

In summary, the US stock market appears poised at razor’s edge. While the trend is clearly up, both on weekly and daily charts, the NH-NL is flashing red warning signs. It reminds us that bull markets do not move in straight lines, and this uptrend is ready for a pause.

(You can read more from Dr. Elder at elder.com)

But if we look at the RTC in the daily chart here, it still does not look like this "pause" is at hand. But I now think it's coming soon. Note that today's close brings us very close to the 11,867 resistance level marking the top of the "summer shelf" of 2008. I think at this point there's only 30 more points of upside before the market takes a rest for the assault on that line. So although I'm going to leave the green swing trend arrow in place, my feeling now is that it might be changing before the beginning of next week. We'll be looking for a doji candlestick or a hanging man.

Weekly Review

After a few days off, it's time to review last week and look ahead. The markets had a good week last week with the Dow gaining 115 points. In fact, all of January has been good so far, as you can see in this weekly Dow chart. Too good, some are saying. As you can see, all of th indicators are quite overbought. However, going back over a year now, the indicators spend a long itme in overbought territoray before any correction. The last two major corrections were preceded by indicators saying overbought for seven solid weeks. We have only been overbought for three weeks now. So while the market may be starting to look toppy now, I don't think it's quite time to jump ship just yet. The RTC in fact is looking quite healthy. It would take three weeks at current levels to get a bearish setup, or a one day drop to 11,651. I don't really see that happening any time soon.

That said, tomorrow being "Monday" (OK, it's Tuesday but it's the first trading day of a holiday shortened week) and all three futures currently being down by non-trivial numbers (ES, NQ, and YM down 0.31%, 1.08%, and 0.13% respectively), I'm expecting some downside action. BTW, I think the Nasdaq futures decline is due entirely to Steve Jobs apparently not feeling too well. While I wish the man well, is he really so important as to move the market that much?

So basically, I'm looking for a pause tomorrow, followed by upside continuation later this week. Thus, I continue to claim we're in a rising swing trend and the green arrow remains in place.