Wednesday, February 22, 2012

More small gains possible Wednesday

The Hoot 
Actionable ideas for the busy trader delivered daily right up front
  • Wednesday slightly lower, low confidence.
  • ES pivot 1361.75 .  Holding above is bullish..
  • Rest of week bias lower technically.
  • Monthly outlook: bias up.
  • ES Fantasy Trader standing aside.

Well I said it would be an interesting week and so far it's sure looking that way.  The Dow sent out no fewer than four separate patrols to scout out the 13,000 front around mid-day, but apparently none of them liked what they saw and they were unable to find a break in the enemy's lines.  Will they launch a full-scale assault tomorrow, or order a tactical retreat?  Let's call HQ and see if we can get some orders.

The technicals

The Dow: Today's 16 point gain not only hit the 13K line intraday but also the upper BB at 13,005 to form a star.  However, I don't think this indicates indecision as much as a massing of the troops in preparation for the next attack.  The daily indicators are still not overbought, so given the continuing upward bias I'd be hesitant to call this star a negative sign.

The VIX:  Meanwhile the VIX put in a star of its own, actually rising 2.3% from yesterday's close but down from today's open.  This one could go either way, but the VIX futures seem to be leaning more towards at least a bit lower on Wednesday which would be good for stocks.

Market index futures: Tonight all three are in the green with ES up 0.17% at 1:30 AM EST.  Despite this, today's ES chart is showing some signs of an impending reversal, in the form of a dark cloud cover, overbought indicators, and a stochastic just executing a bearish crossover.  In addition, ES just exactly touched its upper BB today.  Tonight's positive action is coming off the lower end of the daily candle.  I'm seeing more risk than reward on this chart right now.

ES daily pivot: Rose again from 1358.00 to 1361.75 tonight.  This briefly put ES below the pivot right at midnight, but then it broke through and seems to be slowly drifting higher, a positive sign.

Dollar index: The dollar continued a three day decline today and its indicators suggest more room to run lower Wednesday, implying higher stocks.

Morningstar Market Fair Value Index: Morningstar's chart is all screwed up today.  The number they're showing is 0.83 which is obviously wrong, and the chart doesn't go past the 17th.  How hard can it be to update this?

History: According to The Stock Traders Almanac, Wednesday is historically slightly better than Tuesday, but still bearish..

Sentiment: It's the start of a new week so once again it's time for the TickerSense Blogger Sentiment Poll.  We continue to track the poll to see how well it performs.  Here's the updated cumulative list for this year:

Wk.# Week   % Bullish  % Bearish  NightOwl SPX  Accuracy

  1   1/3        46         21        +    1258    1/1
  2   1/9        56         37        +    1278    2/2
  3   1/17       41         33        +    1289    3/3
  4   1/23       46         32        +    1315    4/4
  5   1/30       48         31        +    1316    5/5
  6   2/6        56         30        +    1345
  7   2/13       48         31        +    1343
  8   2/21       44         32        +    1361

Again, the SPX number is the closing price of the S&P on the Friday before each new poll comes out.  The "NightOwl" column is how I voted.  Since the poll is for 30 days out, after the first four weeks we're able to see how well we did.  This week we see that my bullish call on 1/30 was correct, the S&P now being higher than then.  I'm using the column "Accuracy" to track my calls.  So now I'm 5 for 5.  And of course that means that since I voted with the majority back then, the poll as a whole was also correct that week.  After five straight weeks of being correct, the contrarian "majority is always wrong" theory is really looking bad.  The Ticker Sense bloggers are batting 1000.

Interestingly, this week's numbers were little changed from last week.  The bulls came down four points and the bears barely budged from the 30-33% band they've been in since the third week of January now.  But I do note that bullish sentiment is on the wane, having declined now for the third straight week.  This makes me think that we could be in for a pullback sometime in the next few weeks.  I note too that the SPX Hi-Low index has now been pegged at 100 for six straight sessions.  It rarely goes this long without a down day following.

     And the winner is...

Another hard one.  I'm seeing both positive and negative signs in the charts.  The SPX weekly chart is now looking quite overbought, and right about the same levels as the highs of last year in May.  We do remain inside the rising weekly RTC though for the time being.  Meanwhile the daily Dow and SPX charts still look like they have some upside left.  Add in that the futures are up, the VIX remains below 20, and there seems to be relative calm on the European front at least temporarily, I'm going to go out on a limb and guess that we just might see some more small gains on Wednesday.  But I'm definitely getting more cautious and not looking to put any money to work at these levels for the time being.  I'm starting to not like the daily ES chart.

ES Fantasy Trader

My decision not to jump in last night was correct.  The big weekend pop we had in ES on the Greek news was all over by the time I got around to it, and even though ES ended the day higher, it was still below the level I was looking at in the overnight trying to find an entry point.

Tonight we do not trade again, as I still don't see an edge for me.  No point just guessing. We're working the market, not playing it.

The account remains  $112,750 after 14 trades (11 wins, 3 losses) starting from $100,000 on 1/1.


  1. Michele-

    You’ve been doing a ton of heavy lifting lately for your grateful readership, and since February is the month of valentines, I thought I would drop off an appreciative Valentine’s poem, and some observations and reflections on a key market sector which is approaching an inflection point.

    Our belle,
    You analyze so well!”

    There, I didn't say it was a good poem I said it was a ‘poem’.

    There’s been a goodly amount of chatter lately about the transport sector, and whether its recent weakness has broader implications, and imo rightly so.

    Rising oil prices combined with recent more-mixed economic reports have hurt transportation stocks, and in the past two weeks the Dow Jones Transportation Average has lost 4%. There’s every indication that a representative ETF, like IYT, is about to plunge into the abyss; and since the Transports (on daily and weekly timeframes) often lead other sectors, in both directions, the implication is that the rest of the key indexes will soon join these stocks and also plunge into the abyss. However one defines ‘abyss’.

    Should this occur, the pullback might be nothing more than a journey for a long cool drink back to the refreshing blue waters of the 200day SMA. To short-term traders that would be an abyss.

    Since another sensitive index--which also often leads--the Russell 2000 smallcaps, is also exhibiting recent relative weakness, it seems a done deal that this downside weakness should accelerate, and that the large cap indexes should meekly follow in an abyss-ward direction. Especially as we are in the weakest part of the generally-favorable Best 6 Months of annual calendar seasonality.

    IWM vs SPY, dog on dog RS, peaked in the smallcaps favor on the 3rd of February, in retrospect clearly the day the ‘January Effect’ ended. That was also the day of a momentum peak on several other key ETFs. Price has held up better since then than this RS ratio.

    Sentiment is widely reported as overly bullish. And just today the Investor’s Intelligence newsletter survey showed the most dangerous pattern there is-- a first step DOWN from a multi-week high in bullish sentiment. B.Schaeffer always stresses that it’s the alleviation of the excessive bullish sentiment, the unwinding of the one-sided holdings, and the crowded rush for exits, which gives the kinetic energy to the downside whoosh. Until the unwinding begins, there is no danger to such steady bullishness--it yields buying and holding, and the market grinds up.

    However, into all this lovely clear gloom and doom, comes a couple of annoying silver linings in the clouds. The Transports are testing their 50 day simple moving average. Since early October there have been only four prior daily closes on the Dow Transports ($TRAN) below this line, and on every occasion they closed back above 1 or 2 days later, and it was up and away from there. Today’s close was only the 5th. And that 50day SMA is currently strongly upsloping.

    My experience is that when this is so, then the first test is usually successful. Especially when there has not been a “bowtie cross” or “rainbow cross” of some trio of short-intermediate moving averages, each longer than the prior, such as a 5day/10day/20day, or a 10/20/30 or 10/20/50.

    And in the classic Connors and Trading Markets reversionary approach, where all pullbacks of stocks or ETFs above their 200day SMA are inspected as possible “temporary pullback within confirmed uptrend” opportunities, this is seen as a strong buy zone for IYT and TRAN on a couple of their signal generating models. Transports would be a buy, for at least a snapback to median levels.

    Frankly, a “snapback” does not sound at ALL to me like an “abyss”.

    The trend of ANY leading-indicator sector of the influential US Market has broad repercussions for all sectors and markets, international as well as domestic. Given how often Dow Theory works out, and how widely watched it is, some time spent looking at how this plays out with $TRAN is probably worthwhile.

  2. Ah, long time no hear from, Daniel. I'm always delighted to get your insightful and thought-provoking commentary. I spent a while looking at the $TRAN daily chart. And I compared it to an index no one else has - the graph of my trading account balance.

    Interestingly, while I'm still up 10.5% on the year so far, my account was on a pretty steady trajectory upward until the beginning of February - right about the point where $TRAN peaked. I've sort of been spinning my wheels, if you'll excuse the transporation metaphor since then.

    Your comment on bullish sentiment was also quite timely. If you look at my "Sentiment" section in this post, you can see how bullish sentiment in the Ticker Sense poll began declining also at the beginning of February. Perhaps I should have given that observation more weight.

    I am quite a fan of Dow Theory in general. Right now I'm seeing some signs, particularly in regression trend channels, that the long-awited pullback may be upon us any day now.


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