A tough call for Friday

Last night I wrote that it would not surprise me to see the Dow go lower today, but that an overall up week was not out of the question.

Well the Nasdaq did go lower today but while the Dow also went lower for a while today it finally managed to close up a respectable 64 points. And it was the kind of points I like to see. I'd much rather get two 64 point up days than one 128 point up day followed by 192 points down. And interestingly, unlike the last 10 straight sessions the 3 PM sellers failed to show up today. That's different. Indeed rather than knocking 'em down into the close, they kicked 'em up.

Turning to our daily Dow chart with my four 200 MA possible intercept points, we see that the 200 MA continues to creep up, standing now at 11,726, just 236 points away from today's close. Point B is now off the table, but my earlier prediction of point C (11,835 next Friday) is still on track. That said, being as today's close actually leaves us 17 points above Monday's open, it's also still possible for us to end the week up, thus breaking the six week losing streak.

So will the Dow close higher tomorrow and break the streak? Hard to say. The VIX today put in a shooting star today, albeit not a great one. Shooting stars are usually really good reversal patterns, but the real body of this one is a bit on the long side, so it may not work. However, today makes two days that the VIX closed above its upper Bollinger band and even in the depths of the Great Recession, whenever this happened, it goes lower the next day, implying higher stocks.

However, all three futures are lower right now at 1:30 AM EDT and ES in particular just broke under its new daily pivot at 1267. That is bearish. On the other hand, ES is near a support level (1266) that has been tested three times in the last five sessions and has held each time.

Unfortunately, tomorrow is a triple witching, with all the volatility that implies. According to The Stock Traders Almanac, the Dow has been down 7 of the last 12 years on this day by an average of 0.5%. So it really could go either way.

As I write this, ES has found support and bounced off 1266.25. If we do go lower tomorrow, that will be particularly bearish, momentum-wise for next week. It will be very interesting to see what happens when we reach the 200 MA.  But I'm still not comfortable making a call right now for tomorrow.  Just watch that pivot.  On the other hand, I'm fairly sure we're going to see some lower action by the end of the month.

Trades

I just completed a quick trade in OMEX, Odyssey Marine. In at 3.02 on Tuesday, out today at 3.63. In this kind of crazy yo-yo environment, I'm making trades that are either shorter or longer than usual, when I'm trading at all.  I'm now overall 2/3 cash, 1/3 long.

No rally in sight, more bad news in store next week

Last night I thought the Dow would go lower today, but only by maybe 50 points. But I wasn't expecting the Spanish Inquisition. That or the 179 point tanking we got. We're now in one of these stages where Mr. Market is totally off his meds, up big, down big, up, down, with the VIX today blasting to 21.32 for nearly a 17% jump.

There's absolutely no way to predict where we're going the next day in this kind of environment, so I will bring back the daily chart I put up four days ago to see where we might be by the end of June. Recall that the descending RTC's we're in intersect the rising 200 MA at four different points I labeled A-D. Point A has already gone by. I still think we're headed towards point C, which would be 11,835 on 6/24, that being next Friday.

Point B is still not entirely off the table though.  After today's pounding, it's only 168 points away from here, and we dropped more than that today alone.  However, if we don't go down that much tomorrow, then we have a few more days to go before hitting the 200 MA.

Wherever it is, I still believe that when we do reach the 200 MA, it will trigger a quick drop to test the March lows at 11,615.  Below that, there's no support until 11,434.  Then we go straight to  the next support at 11,000, the early 2010 highs.

Until then, every time some overpaid, keep your hands off my stack Greek railroad conductor decides he needs to start throwing Molotov cocktails to ward off the possibility that he might (gasp) have to work beyond 50, then the market will go down more.  That or our pal J.C. "zut alors" Trichet opening his mouth for any reason, or Uncle Ben, or actually just about anything at this point.

Can we go lower tomorrow?  Sure - I see no technical reason not to right now.  At 1:30 AM the futures are all flat.  The daily ES pivot is now at 1271 and we're already 5 points below that.  ES is going to be hard pressed to break over that level tomorrow.  And tomorrow there's a whole slew of economic news coming out, including the Philly Fed that a lot of people seem to put a lot of stock (no pun intended) in.  And given how stinko most of  the recent news has been lately, I doubt we're going to get anything that will give the market a boost.

But right now, perhaps surprisingly, a higher close for the week is actually still not yet out of the question, as we're still only about 50 points below Monday's open.  And here's something reallystrange: today the weekly RSI number hit zero.  It doesn't go any lower than that.  That's lower than it was at any point during the Great Recession, including the Lehmann panic week.  In the whole time I've been trading, I've never seen RSI go this low.

Meanwhile the monthly charts are looking grim as ever.  The 200 month MA now stands at 9,532.  Since it's slowly rising, it's not even out of the question that we could reach that in a month or two.  The monthly indicators have all peaked, but they're still just coming off their overbought extremes.  And to round things out, the Morningstar numbers remain entrenched below 1.0.  Don't look for any meaningful rally until that improves.  It is what it is.

Maybe lower Wednesday but seven down weeks looking less likely

What a difference a day makes.  Last night I wrote "I do think we're going higher tomorrow.".  And did we ever.  The Dow gained 123 points and I had my best day of the year so far, up 1.58%.  The Dow's gain completes a truly classic morning doji star pattern, and this is one of the strongest bullish reversal patterns around.

It also brought us entirely outside the steep descending RTC from the start of June, strongly suggesting that this particular trend is now broken.  In fact, looking at the Dow daily chart, it looks like we're now more in a sideways consolidation pattern than a steep decline.  And at this point I'm willing to say that point "B" from my earlier post is now also off the table (where the RTC would hypothetically intersect the 200 MA).

In fact, the indicators are also quite bullish.  Right now, the stochastic, RTC, money flow and momentum have all bottomed and turned upward from their mega-oversold levels.  That's bullish.

Then we have the VIX.  Last night I said

As I've noted before, whenever [the VIX hits its upper Bollinger band], the VIX goes lower, most often the next day or a day later. That sort of reversal would also be bullish for stocks.

And sure enough that's exactly what we got today. The VIX gapped down, the market went up.

Now while this all makes me think that a seventh straight down week for the market is looking less and less likely, I'm not so sure that tomorrow won't be down. The futures are all down at 2:15 AM, with ES down a third of a percent. It may be that the profit-takers who showed up at 3 PM today will reappear tomorrow taking us back to the 12,000 area. I am impressed however with how well that 12,000-11,950 support level held up.

Tomorrow's daily ES pivot is 1284. We're just above that now. If we go through it, look for a lower close. I would not be surprised to see a 50 point drop tomorrow, but the call tonight is not nearly as easy as it was last night.

Looking for higher

Last night I thought that we might get a short respite from the month-long pummeling the market's been taking.  And after some give and take, the Dow actually managed to close up, a whopping one point, but hey I'll take one point up over 270 down any day.

Particularly telling was the action in ES.  Last night I mentioned the daily pivot at 1275 as being the number to watch.  And indeed ES came up to periscope depth at 8:35 AM, then actually surfaced shortly after the market opened, took a look around, didn't like what it saw and headed for the bottom.  Until 1 PM, when it came back up for another look around.  Then it slowly descended just underwater for the rest of the day.  But the important thing is that the markets did not tank today.

The pivot: And even more important, all three futures (ES, NQ,  and YM) took off around 9:30 PM this evening, possibly on news of China inflation, and right now (1 AM EDT) are up significantly, with ES up by two thirds of a percent, the highest gain at this hour in a long time.  That also brought it convincingly about its daily pivot, which for tomorrow becomes 1271.25.  We're now 10 points above that.  Watch this level closely tomorrow.

Technically, the slight stochastic reversal in ES I noticed yesterday is now more pronounced and RSI is also turning around.  Both of these are quite bullish in the short term.  And with the overnight action providing a relatively long green candle, it looks like a bullish resolution to today's doji, at least so far.

On to the VIX.  While it managed to climb over its 200 day MA today, it also hit its upper Bollinger band in the process.  As I've noted before, whenever this happens, the VIX goes lower, most often the next day or a day later.  That sort of reversal would also be bullish for stocks.

Meanwhile, longer term, looking at the Dow chart, there's nothing on the radar yet to suggest we're not still headed for the 200 day MA sometime before the end of the month, and that's sure to be bad.  We remain firmly in a descending regression trend channel.  But in the meantime, I do think we're going higher tomorrow.

And finally, Mark Hulbert had a piece in Marketwatch.com yesterday basically reiterating what I've been saying recently about market streaks.  This was accompanied by a particularly clueless comment from someone who claimed that market action is like flipping a coin and has nothing to do with what's happened before.  Of course, that's a quite naive view and demonstrably wrong.  At this point, if we do go higher tomorrow, I think we may even break the six week losing streak.  As I've been saying, going down for seven would be highly unusual indeed.  That's all, she wrote.

Weekly outlook: tough sledding ahead

OK, let's start with the easy part. Here's a monthly chart of the SPX going back to 2008, just before we fell off the cliff into the Great Recession.

Compared to the fall of 2008 (pun intended), the last two months don't look so bad, do they? However, take a look at the stochastic on the bottom of the chart. It's still just coming off its most oversold levels. And just when does the market rally? Well look at where the stochastic was in July 2010 and March 2009 the last two turning points. That's right, down near the zero line. By this measure we have at least one more down month ahead of us.

This theory is supported by the two regression trend channels on the chart. Notice how we fell out of the RTC in May 2010. That was followed by another down month before bottoming. Where are we now? Well we just fell out of the latest RTC. Clearly, on a monthly basis, this market is going lower before it goes higher. Position yourself accordingly.

And if you need more supporting evidence, look at the Morningstar Market Fair Value graph.

This is a one year chart. Just off the left edge is the line crossing under the 1.0 level in May 2010. The market then sold off until July. The Morningstar chart bottomed right there, with a reading of 0.90. Today's reading is 0.96. The current market downtrend is not going to end as long as the Morningstar numbers continue to edge lower.

I know, you're saying, but what about this week, Michele? OK, this is where it gets interesting. Here's a daily Dow chart with some extra added tea leaves.

Point X is where we are now. Points A, B, C, and D are all places where the last two descending RTC's intersect the 200 day moving average (and I'm using the SMA, just to be generous). I don't think the real fireworks will start until we get to there. Right now, I'm fairly certain point A is off the table. But we're still inside the latest RTC, and that puts point B four days away.

If we manage to climb back into the May 1st RTC, then points C and D are on the table. C is on 6/23, and D is on 6/29. My best guess is that we're headed for point C, at 11,820.

Now here's where it gets interesting. As I've pointed out in my last two posts, the Dow has fallen more than six weeks in a row only five times in the last 82 years. And the longest losing streak in that period was seven weeks. The Dow has been technically oversold for a week now. And the chorus of gloom and doom on the net is rapidly reaching a crescendo.

Like today's headlines from marketwatch.com, "Economic data may be as grim as bad summer movie", "Another losing week looms", "How to time you exit move". Holy moly! On a purely contrarian basis, I'd say we're going higher. Are things really that bad to merit a record that's only happened 5 times in 82 years?

And while it's still early (I may update this post later tonight as we enter the Night Owl's favorite time of day around 2 AM) the futures are all actually up right now at 8:40 PM EDT. ES in fact is up 0.20%. And the ES short stochastic has actually now reached an inflection point, intimating that a short term bottom may be at hand.

Also the VIX is now at the upper end of its recent range.  It also hit its own 200 day MA last Friday and was rejected there.  That suggests a lower VIX tomorrow, and implies higher sotcks tomorrow or Tuesday.

It's still a bit early to call it but I'd say that for tomorrow at least, things aren't looking all that bad. That's all she wrote... for now.

2 AM Update: Well the ES has given back some of its earlier gains this evening but it did test Friday's closing lows once and that held.  We're still up 0.14% at 1271 right now and the daily pivot it just 4 points away at 1275.  That's the key number for tomorrow.  If we can break above that early in the day, then we're going higher.  If the 1275 level is rejected or we never get close, we're going lower.  At this point, the overnight action is looking sort of like the overnight from June 8th and that led to an up day on the 9th.  We'll see.

A seven week losing streak? Do you feel lucky?

Update on losing streaks

Since my post last Friday about what the longest Dow weekly losing streak was (seven weeks since 1971), I found some additional weekly data.  This let me go back to the week of October 1, 1928, or an additional 43 years.  So now I can say that since 1928, or in the last 82 years, the longest weekly Dow losing streak has been (drum roll, please): still seven.

Yes, looking back 43 more years found no streaks longer than seven.  We did pick up just two more streaks of length seven.  (And the number of six week losing streaks went up to 15).  So it looks like the final tally is 5 losing streaks of 7 weeks in 83 years.  There were no streaks longer than seven weeks.

Now of course there are still 32 years missing, being the period between 1928 and the Dow's founding on May 26, 1896.  Maybe one day that data will turn up online somewhere too, but I think we now have a pretty good historical perspective. The historical odds of the Dow ending lower this coming week are 5 in 4264.

I know what you're thinking. "Did the market go down six weeks or only five?" Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a major stock average, the most powerful stock market in the world, and would blow your account clean off, you've got to ask yourself one question: "Do I feel lucky?" Well, do ya, punk?

Let's look at it this way.  You go to Vegas.  To your left is a roulette wheel.  You put your stash on red or black and you know your odds of winning are slightly less than 50-50.  Then you look to your right and you see a  table where everyone is playing Pai Dow Poker.

The odds there are constantly in flux but there's a big sign advertising the current spread: your odds of losing here are just 5 in 4264.  Which one do you put your money on?  The 50-50 roulette wheel, or the 4259 out of 4264 poker game?  Or more to the point - are you going to bet against odds like that?

I guess it all depends on how lucky you're feeling.  Fortunately, we can help our luck a bit by looking at the charts.  I'll post some more on that after the futures start trading this evening.  Stay tuned.