Friday, January 28, 2011

The Red Sea

Whew! The 1 PM market heat map here (courtesy of pretty much says it all. Ugly ugly ugly. Today was one of those news-driven days that you couldn't see coming on any charts. I was right about the market closing lower if we fell below the daily pivot, but I certainly did not expect a 166 point cratering in the Dow. And that wasn't the worst of it. The S&P and Nasdaq were both hit even harder.

My only consolation is that I wasn't alone today in this sea of red ink. That and the fact that even though I took a 1.38% pasting today, that still barely beat out the Dow's 1.39% loss, and was better than the Naz and S&P's -2.48% and -1.73% respectively. But it's unfortunate that I was too late to the party this morning to get in on any sort of hedging activity. The best thing that can be said for today is that it mercifully ended at 4 PM. That and the fact that all the unrest in Egypt happened on a Friday. Hopefully, things will have cooled off over there by Monday.

So where does that leave us now? We blew right through the 11,867 support level like it wasn't even there before finally holding the line in the 11,850-11,820 area set in the middle of the month.Here's the weekly chart of the Dow. Although I'm by nature an optimist, I have to say I don't like the looks of this pattern. This week formed a dark cloud cover and today's action took us right out of the ascending RTC channel. Accordingly, I'm taking down the green arrow. Of further concern is that all of the weekly indicators appear to have topped. So despite today's losses, I don't think we're out of these particular woods yet. Monday's action should tell a lot about whether we can rally back or if this is the start of a larger correction.


Today gave us almost a carbon copy of yesterday, another doji day with a tiny 4 point gain in the Dow. The outlook for tomorrow is unclear. We're still riding the top of the RTC which places us a long way from any bearish signals and tomorrow is Friday. The last Friday in January is historically a good one. We took a second stab at the 12,000 level today and I expect another one tomorrow, although I still don't think tomorrow is the day we close above 12K. Given that all three futures are in the red at the moment (2:25 AM) with ES leading the way lower with a 0.21% decline, it's not looking like we're in for a big up day tomorrow.

Also note that we closed right on the daily pivot today - 11,989. A lot depends on which way we fall off this fence in early action tomorrow morning. A lower open could lead to a lower close, and vice-versa. Watch that number. I plan on skipping the early action as I always do.

No trades today. My new low price/high yield portfolio members, ZTR and ARR basically went nowhere today, which isn't a bad thing. I'm holding them primarily for their yield. That said, the LP/HY basket has done exceedingly well since I started it last summer, providing a 16% return on top of the dividends generated. Every member of this basket is up since I bought them.

Wednesday, January 26, 2011

Get ready for another push above 12K

Yesterday I wrote that the assault on the 12K level might take a few days and indeed today the Dow sent out a scouting party to explore the territory, reaching a respectable 20 points behind enemy lines at 12,020.5 before retreating to close at 11,985.4. So we have two doji days and the State of the Union and the Fed meeting out of the way. Now we can get down to business.

The past three sessions have established 11,980 as new support. The psychological 12K mark is still resistance but I sense that the wall is starting to crumble. With the ES and YM futures both up over 0.1% right now (1:15 AM EST, the pivot point having risen another 10 points today to 11,954 and the VIX still having room to fall before reaching its lower Bollinger band at 15.73, I see another attack on the 12,000 mark in the works.

We remain in the upper reaches of both the daily and weekly regression trend channels, so the swing trend remains upward. Once we cross the 12K level on a closing basis, there is no further meaningful resistance until 12,891, set all the way back in April of 2008 and the high of that year.

The only question left is when is this correction coming that everyone is talking about. The current rally is now 9 weeks old. Every other rally since 2008 (a year which saw no rallies at all) has lasted between 9 and 11 weeks. So I'm going to give this one another week or so. In the meantime, I'll be watching carefully for signs of toppishness. The RTC I use will not call the exact top but it will indicate with 95% certainty whether any decline is a trend change or just noise in the system.


My Intel (INTC) play from last week is perking along nicely, gaining almost another percent today to close at 21.75. Its daily chart posted an ominous looking evening star today, but the weekly chart is still looking good, so barring disaster tomorrow I'm going to let this one ride a bit longer.

Today we welcome two new names to the low price/high yield portfolio:

ZTR, Zweig Total Return Fund Inc., currently yielding a juicy 11.25%. I'm in at 3.53; it closed today at 3.52.

ARR, ARMOUR Residential REIT, Inc., which yields a whopping 18.58%. I bought at 7.73 today; it closed at 7.75.

I won't bore you with the complete technical analysis here but both of these names have been in decline and are now looking fairly oversold.

Another run at Dow 12,000 possible

Today's action ended up pretty much the way I called it yesterday, a pause, with the Dow losing just over 3 points. I was a bit surprised by the range though, hitting 11,898 intra-day before rallying back up to finish almost unchanged. The resulting doji clearly indicated uncertainty in the face of the double whammy of Obama's upcoming speech and the Fed meeting.

Anyway, now that the first of these events is out of the way it looks like the markets liked what Obama had to say on TV tonight, with the ES futures up 0.35% at this moment (12:45 AM EST) and the NQ and YM up almost as much. On this basis alone I'd say we're poised to take another run at the 12K level tomorrow. The only remaining wildcard is what pronouncements come out of the Fed but it doesn't sound like people are expecting anything dramatic.

Now let's look at the VIX. It hit its upper Bollinger band and formed a dark cloud cover yesterday. Sure enough, that bearish signal was confirmed with a red candle today. Note also that the VIX formed a double top intra-day today. And significantly, the VIX formed a bearish crossover in the short stochastic today, and that is always a very strong indicator. VIX lower, stocks higher.

And also take a look at the chart I posted yesterday from 2006, the last time we approached the 12K level from below. Doesn't today's action look a lot like what we saw back then? And finally note that the daily pivot point has now risen to 11,944 which means we're no longer as far away from it as we were yesterday, reducing the downward pull on the market. So all in all, the green swing trend arrow remains up and I'm fairly confident about tomorrow. Probably no big gains but almost certainly no big drops either. We may spend another day or two knocking on the 12K door before walking through. We'll see.

No trades today.

Monday, January 24, 2011

Big gains today, possible pause tomorrow

As I suspected yesterday, the attraction of the daily pivot was not enough to keep the Dow from gaining 109 points today to close at 11980.52, putting us within shouting distance of the 12K mark. Today was clearly a very good day indeed. So what's next?

First of all, today's gain propeled us so far above the top of the RTC, I may have to start a new channel. In fact, we're now approaching the top of the weekly RTC that goes back to the beginning of last December. From the current level, it would take a one day drop to 11,836, a 145 point tumble just to get us to a bearish setup. I just don't see that happening tomorrow, not with a Fed meeting starting. I expect tomorrow to be fairly quiet, pending the utterances from the Oracles at Delphi. Also, tomorrow night we have our Fearless Leader who will no doubt deliver a real rah-rah business-friendly pep talk that should help out the markets on Wednesday. I can almost guarantee he's not going to say "Now is not the time for profits". So that's the good part.

The bad part is that today's volume was noticeably lower than yesterday's, despite the big run-up in prices, implying that we're running out of buyers at these levels. Also, we now have the psychological 12K resistance level to deal with. These "even number" levels usually take a few days to cross successfully. Check it out - here's a trip down memory lane of the last time we crossed the 12K level (going up).

So given all of the above, I don't think we're going to see much of an advance tomorrow, if any, but I also don't see a big tumble (though I have no doubt we'll see a pullback of some sort within two months).

Weekly Review

Last Thursday night I was really expecting a bad day on Friday. While the Nasdaq did end the day down half a percent, the Dow, which is what I was looking at, was actually up 49 points. I was just plain wrong, but that's how it goes on options expiration days. Anyway, I'm happy to be wrong when the market ends higher.

Now looking at the upcoming week, there is nothing at all in the weekly chart to indicate anything but a continuation of the current uptrend. The Dow has been riding the upper edge of the weekly RTC since the beginning of December. And last week's volume was higher (in a four day week) than the full week before. Add to this the fact that right now (1:30 AM EST), all three futures are up by about a third of a percent. So all in all, though the correction everyone seems to be clamoring for may be coming, the charts don't show it arriving tomorrow. Of course, with a Fed meeting coming up, anything's possible, so I don't want to go too far out on a limb here, but I think we still have higher to go.

Note particularly that we closed last week at 11,872, thus finally breaking out over the 11,867 resistance level. With the momentum indicator at levels that leave a lot of room to run, this is further evidence that we may see higher this week. My only concern right now is that we closed on Friday pretty far away from the daily pivot currently at 11,804. When we get extended this far from the pivot, the Dow tends to be attracted back to it. I guess we'll have to see if the positives can overcome this one point tomorrow.


Though the Dow gained last week and I was up three days out of four, I still managed to lose 0.59% on the week, due entirely to some bad luck on Tuesday, when my low price/high yield portfolio took a 10% tumble. So this leaves me up 1.18% YTD which is OK, but below the Dow's 1.72%. One of my trading goals is to outperform the Dow, so I'm going to be looking into this this week.