Friday, June 10, 2011

How long can this go on? Dow losing streaks

Dow weekly losing streaks

Well it's only 2:40 PM but I'm going to take a wild guess that with the Dow now down 150 points on the day so far that we're not only going to end lower on the day but for the entire week as well. That makes it six straight losing weeks in a row now. So the obvious question is now, how long can this go on?  (Or as Devo said, "Lord, how long can this go on?")

I thought it might be interesting to find out what the longest weekly losing streak in the Dow was, and while I'm at it, how the lengths of losing streaks sort out. I took 40 years of weekly Dow data, back to April 1971 (as much data as eSignal would give me) and looked for losing streaks. Here's the results:

As you can see, the longest losing streak in the past 40 years is seven. Seven straight down weeks. And there were three of those. The last one occurred in June 2001. You have to go as far back as 1980 and 1973 to find the other two.

Then there were (until now) just eight instances of streaks of length six. That's just 6 times in 2080 weeks.  The last one of those was in October 2002.  The raw numbers by streak length are: [307   119    42    32    13     8     3].

There were no streaks longer than seven weeks.
So there you have it. The historical odds favor an up week next week. The chances of next week being down are just 3 in 2080, or about 0.14%. Of course, the keyword here is "historical". We're living in funny times.  I'm keeping my short hat firmly in place for the time being.

Rally may be short lived

Well what do you know about that.  Last night I wrote about waiting for Godot, and today he finally showed up, in the form of a 75 point advance for the Dow, thus snapping the daily losing streak at six.

Unfortunately, I think it's premature to start popping the champagne corks.  Today's rally still leaves us right along the left edge of the descending regression trend channel.  At this rate, the Dow will hit its 200 day moving average on June 21st, at 11,808.  Those numbers are only seven sessions and 316 points away from today.

Can we go higher tomorrow?  Technically yes.  All of the Dow daily indicators are still quite oversold and point to more upside potential than downside risk.  And we now have a bullish three day "morning star" candlestick pattern that usually is highly reliable.

However, the VIX is now at the lower end of the narrow range it's been stuck in for the last six days and all three futures, ES, NQ, and YM are lower at 1:30 AM EDT.  ES in particular is back under its daily pivot, which for tomorrow is 1285.58.  If we can't get back over this number, we're going to close lower again.  And ES right now is down by a third of a percent, and that is not a trivial number at this hour of the night.

Meanwhile the Morningstar Fair Value Index dropped again today to 0.97, making four days now that it has been below 1.0.  That is a bearish indicator.  I just don't see a lot of gas in the tank to power the market higher tomorrow.  Given the amount of fear still in the market and the fact that tomorrow is Friday, I think people may use today's rally to do some selling tomorrow in anticipation of worse times ahead.

Thursday, June 9, 2011

You think this is bad? Here comes the 200 day MA

Ouch! Five straight down weeks.  Now six straight down sessions, and unless we can pull off some significant gains in the next two days, it's going to be six straight down weeks. Double ouch!

Beware the 200 MA

But if you think that's bad, check out what's coming next.  We're now at the point where the Dow's 200 day moving average is coming into view.  And if we go through that, then it's look out below.  Here's the daily Dow chart.  In this chart, you can see the 200 MA as the dotted orange line rising slowly up from the bottom of the chart.  You can also (obviously) see the steady downward march of the Dow since the start of May.

This presents an interesting opportunity.  If we extend the descending regression trend channel the Dow has been in for over a month now, and extrapolate the 200 MA out from today, eventually they will cross (the rising blue line).

And when does that happen?  Any time between June 21st and July 1st, assuming the Dow stays within the same RTC and depending on where it is inside the channel at that time.  So unless we can end the current down trend in the next two to three weeks, we are going to hit the 200 MA.  And that usually does not bode well.

The last time this happened was on May 20, 2010, a day the Dow dropped a whopping 372 points.  Check it out (remember the months in this chart are from last year).  This year's recent pattern looks a lot like last year's just before we hit the 200 MA.  Even the time of year is nearly the same.

Even the issues are the same.  Last year it was the Greek debt crisis, this year it's the Greek debt crisis.  And just like the Croaking Chorus from The Frogs by Aristophanes, this issue is irritating and you just wish it would go away.  But apparently, the Europeans are bound and determined to drag out the agony as long as possible, like slowly peeling a bandaid off a hairy arm.  Ugh.

The John Hopkins Newsletter, 10/15/04

Waiting for Godot

So what about tomorrow?  Honestly, after so many days of technically oversold conditions, waiting for this downturn to end is beginning to be like waiting for Godot. Will tomorrow be the day he finally arrives?  All the indicators say so, but we've been down that road for days now.  The VIX  is at the upper end of its range and should go down, but doesn't.

The ES is now (at 1:45 AM EDT) up 0.27%, but we've seen futures higher before, only to see those gains evaporate the next day.  If it isn't those pesky Greeks singing brekekekek, it's Ben Bernanke.  If it isn't isn't Ben Bernanke, it's OPEC.  Or lousy job numbers.  The gloom on Wall St. has reached a point where any excuse to knock 'em lower will do.  I think we can pretty much write off having a winning week.  I just want to know when we'll ever have a winning day again.  As I wait for Godot and wonder if tomorrow's the day.

And if we don't get out of this slump by the last week of the month, things are really going to get ugly.

Wednesday, June 8, 2011

Close but no cigar

Last night I thought we'd go higher today, mostly based on technical indicators.  But I did add that there was nothing positive-looking about the Dow chart.  And so today we actually weren't doing all that bad posting some decent gains right up until Ben Bernanke opened his mouth, sending the Dow into a more than 100 point dive in the last 90 minutes of the day to close down 19 points.  So close to posting a winning day, yet so far.

Now after that big disappointment, just as I said last night, all of the factors that were in play then are still active, only now even more so.  Where we were oversold before, we're even more oversold now.  Technically, we're overdue for a bounce.  But where is it?  The failure of gains to materialize in the face of such oversold conditions only adds to my current unease over the state of the markets.

And on that note, tonight I bring you the Morningstar Fair Value graph, from  (Click on the image to view larger).  

I've started paying more attention to this number recently but I thought it would be interesting to look at a longer period, so here is a five year chart of this index.  In this graph, numbers above the reference line indicate that stocks are overvalued and below it, undervalued.

The important thing though is how well it correlates with market trends.  Note the blue area last year beginning on May 6th.  That corresponds exactly to the big market correction we saw beginning that same day.  Stocks did not recover until the end of September last year, just before the index went back above 1.0 again.

And of course the previous time the index went from above 1.0 to under it was on May 27, 2007, less than two months before the all-time high of the Dow and the start of the Great Recession, clearly seen in this graph as the huge blue area in the center that looks like frozen stalactites hanging from your gutters in the winter.

So what's that got to do with now?  Well, two days ago, the number flipped from above 1.0 to below 1.0. Yesterday was 0.99 and today was 0.97.  I believe that this is yet another warning that we are in trouble and that it's going to be a rough summer and fall ahead.

And if that isn't enough, even Jim "there's always a bull market somewhere" Cramer has been telling his viewers to take profits.

So is it time to go short?  I don't think quite just yet.  I still want to see that overdue oversold bounce.  The VIX fell today and its indicators are all overbought and headed lower.  That implies a lower VIX tomorrow which in turn implies higher stocks, hard though that may be to believe after five straight down weeks and now five straight losing sessions.

The futures meanwhile are essentially flat right now at 1:45 AM EDT, although they're trending higher after falling earlier in the the mid-evening hours.  Once again, the daily pivot will be important.  It's now 1287.58.  If ES cannot break above that then all bets are off.  Below the current level of 1284, ES has no support at all until 1250, the March lows.

Oil is decoupling from the market so I'm not looking for guidance there.  The only evidence for a bottom in the Dow comes from today's candle, a gravestone doji, but that's not a particularly strong reversal indicator unless followed by confirmation, which we don't have right now.

Tuesday, June 7, 2011

Overdue for a higher close

Last night I said there were two numbers to watch today in ES: 1301 on the upside (good) and 1291 on the downside (bad).  Well we never even came close to 1301 and ES did make two stabs down to 1291 in the morning, both of which were rejected at exactly that level.  But they say the third time's the charm and at 1:30 PM the 1291 support was effectively punctured and ES never looked back.

The Dow in the meantime dropped another 61 points for four straight losing sessions and five straight losing weeks, now plus one day.  But the factors I mentioned yesterday about the technical indicators being oversold in both the ES and the Dow remain true today, only now even more so.  And the VIX formed a hanging man candle today.

And right now, at 1:15 AM EDT all three futures are actually up for a change, with ES up 0.14%.  It's not much, but at this point I'll take anything I can get.  The important number here for tomorrow is now 1289, tomorrow's daily pivot.  If we can break above that number, then we have a good chance of closing higher.  Lord knows we're overdue for at least a rally attempt.  We'll have to see if the contrarians come out to play on Tuesday

And I'm waiting for any sort of rally to exit some more of my long positions, because I still see nothing to change my longer term view that the market, and the entire country is in for some tough times later this year (see my post earlier today on "Is the next recession imminent?")  There is no reason to believe that a higher close tomorrow suggests the start of an uptrend.  I'm usually an optimist, but I see nothing to cheer about here whatsoever.

Sadly, there's absolutely no indication of a rally coming from looking at the Dow daily chart.  That last Wednesday's crushing drop was not only not followed by any sort of bounce but actually three more days of solid declines bodes poorly for the Dow.  And these last three days form a "bearish identical three crows" candlestick pattern.  This is all indicative of growing panic.
If there is to be any turnaround tomorrow, it will have to come from the indicators, the VIX, and the reversal we're starting to see in the overnight ES trade. .I think we have a shot at it.  If ES can't break over 1289 and the Dow breaks 12,000 (only 90 points away now) then it's look out below.


Today I sold some NLY and NCZ.  NLY is looking overbought and NCZ was just some profit taking.

Monday, June 6, 2011

Is the next recession imminent?

Joe Flaherty as Count Floyd 
 Scary stuff

Lately I've been reading some pretty alarming commentaries about how we're about to head into another recession.  The latest one,by Peter Brimelow, is titled Five down weeks stir crash whispers and just appeared today in Marketwatch.

You can read it here:  It's the number one story on Marketwatch today.  Of couse, MW's readers seem to be eternally pessimistic, but this article really got me thinking.  Apparently, Richard Russell of Dow Theory fame, not normally known for his pessimism, goes so far as to say
"we could see the beginning of Great Depression No. 2.”
Whoa! As Count Floyd on Second City TV's Monster Chiller Horror Theater  used to say, "Scary stuff, eh kids?"

The Dow monthly chart

So I decided to take a look myself (at the charts, not SCTV). Here's a monthly chart of the Dow going back to late 2006. It completely encompasses the Great Recession and the follow-on rally bringing us to today.

The regression trend channels

I have drawn in two regression trend channels here.  Both have pretty high Pearson's coefficients, so they're pretty good.  The first documents the run-up in 2006-2007 to the peak in October 2007.  The second is the run-up from June 2010 to the April highs of this year.

Let's look at that first.  Last month the Dow touched the right-hand edge of the RTC.  That is a bearish setup.  Now admittedly this month's candle is not fully formed, so it's a bit early to draw any conclusions, but so far we are entirely beneath the lower RTC line.  That is a bearish trigger.

And does this work?  Well take a look at the 06-07 RTC.  We touched the lower line with a monthly doji candle in October 2007.  November closed below the line and then December fell entirely outside the line.  You don't need a magnifying glass to see what happened next.

The technical indicators

Now let's look at the indicators.  The line with the red and green boxes is the RSI.  Red means overbought.  Note how not only have we been overbought for some time now but the RSI has peaked and is going lower, just as it did in November 2007.  In fact, it's at the same level now as back then.

The next line down is momentum.  That has been running at overbought levels since March of last year.  Going into the October 2007, momentum had also been at very high levels for a long time.

The next line down is money flow. The current level is 84.95, which is even higher than the entire 06-07 rally, when it was in the 50's and 60's running up to the October peak.  But more importantly, it has started coming down.  Last month it was 87.4.  Now look back at money flow in 2007.  Once money flow starts decling, that is not good for the market.

Finally, check out the short stochastic on the bottom line.  This has been reading highly overbought all year.  But just now it's starting to turn downward.  That is always very very bearish.

Now going back to the candles, notice how after running up the upper Bollinger band for five months this year, we have now pealed away from that line.  The same thing happened in October 2007.


Now let's look at oil.  A couple of weeks ago, I was reading a newsletter put out by Colin Twiggs at  This one was called "Crude spike warns of trouble ahead."  His basic premise was that every time we get a spike in the price of oil and commodities, a recession is sure to follow.  He included a chart demonstrating the effect.  In fact, by the time these items have started coming back down, we're already in a recession.

Here's a daily chart of oil futures, the CL N1.  Notice the big dump it took early in May.  This was followed by an attempt at a retracement that ultimately failed, leaving us rangebound in the 96-102 area.  And the stochastic of this chart has also peaked and is now headed lower.  This is not a chart that looks like it's going higher any time soon.  Earlier this year, I thought we were going to go back to $140 like we did in 2008 before peaking.  Now I'm not so sure anymore.
Right now, we're looking at oil that peaked on May 2nd.  Last time around, oil peaked in July 2008.  By that point, the market had already peaked nine months earlier and had undergone a significant correction.  But worse, much worse was just around the corner as the Dow then crashed from 11,344 to 6470 in March 2009.


Have you seen the mini-series Band of Brothers?  Remember the part in Bastogne where Sgt. Compton tells Lt. Nixon, "I have every confidence in my men.  On the other hand, I have no confidence in our leader.  Lt. Dyke is an empty suit".  Well guess what, today in Washington we are being led by another empty suit, this time in the form of Emperor Nerobama, who is happily fiddling away while America burns $100 imported oil.

Obama seems far more interested in his own re-election than the good of the country.  That's unfortunate but also perhaps to be expected when you elect a product of the Chicago political machine to the White House.  The scary part is that he seems so clueless.  I have to hand it to Jim Cramer, who a couple of weeks ago called on Obama to raise oil futures margins.  That would take care of the speculators who are busy driving the last nail into our coffin while they make out like the bandits they are.

But there doesn't seem to be anyone home at 1600 Pennsylvania today.  "Yes we can" is now more like "yes we kick the can down the road".  Only the can is getting bigger and bigger and is about to start rolling backwards crushing everything in its path.

I'd pinned a lot of my expectations for 2011 on the pre-presidential election year phenomenon by which the party in power pumps up the market to ensure victory at the polls in the coming year.  Unfortunately, it looks like Obama isn't listening.  He's apparently not even paying attention and this is most worrisome.  This is causing me to question whether this might not be the year the pre-prez year phenomenon stays home.

So I am now going to go on record that while I still think we may have a short rally before the end of this week, my longer term outlook for the rest of 2011 is gloomy in the extreme.  We are certainly in for some significant additional downside from here.  Is it going to be another recession?  Maybe.  Is it going to be the Great Depression?  Probably not, but given all the gathering storm clouds, on the horizon I don't even think that's out of the question.

The bottom line

Right now I'm holding onto my low price/high yield portfolio.  It's about 1/3 of my trading account.  It should be fairly secure until interest rates start going up, and it sure doesn't look like that's on the table any time soon.  The other 2/3 of my account are 60% long, 40% cash.  I'm going to use any rallies coming up to liquidate long positions and I'm going to start looking seriously at good shorting opportunities. 

I am more pessimistic right now than at any time since I started trading back in 2003, with the exception of September 2008.  FWIW.  I could be wrong.  I hope I am.  But those monthly charts are haunting me in my sleep.  I don't like it, not one bit.

History to the rescue?

Five straight down weeks for the Dow.  This is getting ridiculous.  It's starting to look like my prediction last week that the end (of these declines) was near might have been premature.  Or was it?

I had to go back to June of 2004 to find the previous instance of five losing weeks in a row.  We never even had a run that bad during the entire period of the Great Recession.  Before 2004 though, there was a run of six straight down weeks in the summer of '02 (remember those fun times?) when the Dow went from 9017 down to 7461, a 17% drop.  In fact there were two six week losing streaks in 2002.  1999 had one too.  1997 had a 5 week streak.  Then you have to go back to 1984 for another 6 week streak.  There was one awful seven week losing streak back in 1980; another 6 week one in 1977, and a 5 in 1973, which is where I got too depressed and stopped looking.

So in the last 38 years, or 1,976 weeks, the longest run of straight losing weeks was one instance of seven, then six instances of six week streaks, and three instances of five week streaks (not counting the one we're in now).  Using this as a guide, history would seem to indicate that the odds favor an up week ahead.  Only 7 times out of the last 1976 weeks has a losing streak gone longer than five weeks in the Dow.

And looking to tomorrow, there is (for once) no major economic news coming out.  Since that news has been mostly bad lately, that's one less excuse for the market to tank.  We also have indicators that are entering extremely oversold territory.  The Dow's momentum now stands at minus 454.  The last time it hit that level was at the very bottom of the March Japan-induced sell-off.

Then the VIX hit its upper Bollinger band again last Friday.  Every time it has done that in the last two years, the VIX has gone lower either the next day or the day after that.  In addition, the ES futures have been wandering about the flat line in Sunday evening trading and are now at 1296.25.  They have some fairly good support at 1291.  The next support level in the Dow meanwhile is only the psychological 12,000 level, just 151 points away.

Also note that the Morningstar Market Fair Value Indicator  has declined again to stand now at 0.99, slightly below fair value.

That said, we remain firmly entrenched in descending regression trend channels in both ES and the Dow with no signs of any candlestick reversals.  So some more downside is still possible for tomorrow, but there's only a 7 out of 1,976 chance that the entire week will end lower.  I almost hesitate to say it because I was badly wrong last week, but this sort of decline can't go on forever.  And that said, the monthly charts are a different story, and they're not pretty.  But this is long enough now, we'll go into that later.

Important numbers to watch on Monday: pay attention to the ES.  If it breaks support at 1291, that's bad.  If it breaks above its daily pivot of 1301.42, that's good.