The Red Sea

Whew! The 1 PM market heat map here (courtesy of finviz.com) 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.

Consolidation

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.

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.

Trades

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.

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.

Performance

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.

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.

Continuation

Not really much to write about tonight. Yesterday I said

[I] would not be surprised to see a bit of a pullback.

and sure enough, we dropped 23.5 Dow points today but remain just below the center of the rising short-term RTC. Thus, the green arrow remains up. I see no sign of a major drop for tomorrow. And we still have about another 160 points to go before encountering any significant resistance. Contrariwise, we have a support point just 16 points below our current level of 11,732.

Trades

No trades today. My Intel trade from last week paid off nicely today after they reported good numbers. My gold trade in AUY didn't fare quite as well and I'm down a bit, but I'm going to let that one continue for a while. Everything else continues to run.

Uptrend confirmed

Yesterday I wrote

[I'm] looking for more upside over the next few days.

Well we sure got it today with an 83 point gain in the Dow. This number took us right back to the top of the RTC going back to the beginning of last December. Yesterday's bearish setup is now completely off the table. This is the value of the RTC - it keeps you from getting faked out by the sort of incremental declines we saw in the three days before the last two. My long hat is now pulled down over my ears. That said, after today's gains I'm not looking for much more tomorrow and would not be surprised to see a bit of a pullback.

Trades

Today I bought some more AOD AT 6.09 for my low price/high yield portfolio. The LP/HY portfolio has been doing great and has returned over 15% in capital appreciation since I started it last summer, in addition to its 10%+ average yield.

I also took a speculative flyer in Windstream (WIN) at 13.35. We'll see if that can blow some profits my way. Finally, the Intel (INTC) I bought last week has started to move the right direction, closing up 1.2% at 21.30 today.

No bearish trigger; uptrend resumed

Today's 34 point gain in the Dow brought us right back to the lower edge of the rising RTC I had abandoned yesterday, Since this is also a bullish candlestick pattern, I'm going to take a chance that the three days of declines before today were not in fact the start of a new downtrend. Clearly yesterday's bearish setup did not trigger today. So I'm returning the green swing trend arrow and looking for more upside over the next few days.

Trades

Today I bought some Frontier (FTR) at 9.42. It's looking oversold on a short-term basis and bounced off its 40 day MA today. It doesn't hurt that it's paying an attractive 8% dividend.

I also think I've found the pullback in gold I was waiting for. I bought AUY at 12.31. Actually, I should have picked this one yesterday as it was just breaking out of its downtrend and looking very oversold technically. But today's action just confirms that and I think it still has plenty of room to run.

Bearish setup but no trigger yet

With today's 37 point drop in the Dow we closed below the lower edge of the rising RTC for the first time since the beginning of December. The more adventurous will call the uptrend over at this point. Technically, we need to see one more down day to declare the uptrend dead.

But note the shape of today's action, forming a nice hammer candlestick. That is a bullish sign. And note that volume has been decreasing over the last three losing sessions, suggesting the bears are having a tough time driving the market lower. Also, the indicators are off their recent overbought levels and all three futures are up 0.1% to 0.18% right now (1 AM EST). Also, tomorrow is Tuesday, which is generally a good day for the market. And the VIX, which gapped up this morning, hit its daily upper Bollinger band before retreating to close at 17.54, its low for the day.

All of these factors may combine to keep us from going lower tomorrow. So the best I can do at the moment is to call the current swing trend over but not declare a downtrend yet. Note though that we are still well within a longer RTC uptrend going back to last year's lows in June. Right now, it wouldn't surprise me to see the market go higher tomorrow.

No trades today

Weekly Review

With the first week of 2011 now in the books, it's time to review what happened and look ahead a bit. Here, submitted for your perusal, is a chart of six months worth of the Dow in weekly candles. I've drawn in two different ascending regression trend channels. The first starts at the lows of 2010 at the end of June. The second, narrower, channel starts only at the first week of December, when Santa Claus was still just loading up his sleigh with profits for all the good little traders. Note that the Dow at its current level of 11,675 is right in the center of both channels.

Lately I've been reading a lot of contrarian-style chatter to the effect that the market is "due for a pullback" because "everyone is optimistic" and "the technicals are overbought". I don't know how true any of those are, but looking at the RTC channels, I don't see this big downturn coming in the next few days. Which is not to say it won't happen at some point. I just don't think that point is at hand yet. The RTC is good at verifying the end of a trend. It does not call the top ahead of time.

In fact, the daily Dow is not looking as good as the weekly chart. Although with two consecutive days of losses in the Dow we're still three days from a bearish setup if we get sideways action, a one day drop of just 16 points could do the same. In fact, Friday's action took us below the lower RTC line intra-day. And as of this writing (8:30 PM EST), all three futures are down slightly. Also, note that Monday's are typically not very good in recent times. So given this divergence, while I'm not all that confident about tomorrow, I have to leave the green swing trend arrow in place and take a wild guess that the week will end higher.

Also of interest is this quote from The Stock Traders Almanac:

The last 37 up First Five Days (of the S&P in January) were followed by full year gains 32 times, for an 86.5% accuracy ratio and a 14% average gain in all 37 years.

That's pretty impressive. And in 2011 the S&P closed at 1271.50 with a gain of 14 points, s gain of 1.1%. That's good enough for me. Add to the fact that 2011 is a pre-presidential election year (which historically outperforms) and I'd say we're looking for some more gains by the time Santa Claus comes back to town.

Performance

At the start of every year, the numbers are all a bit askew because we're just getting going, but for what it's worth I finished the first week of 2011 up 0.52%. That would be an equivalent annual run rate of 27.2%, which is in the ballpark of what I've gotten the last two years (a bit over 30%).

Almost there

Today's lackluster performance in the Dow cost us 26 points but still keeps us riding along the top edge of the ascending regression trend channel as you can see in the daily chart. At this rate it would take four more days of sideways action or a one day close at 11,646 to signal an end to this uptrend. Given the recent action, I think this is unlikely tomorrow. Also note that today brought us just a bit under the pivot point at 11,706. And the Dow has not traded meaningfully below its daily pivot since last November, indicating a continuing bias to the upside.

It's also unlikely, with just one day left, that the S&P will close out the week below its Monday open. That would confirm the historical "first five days" indicator. We'll find out tomorrow. As of this writing (12:30 AM EST), all three futures are up modestly leading me to keep my long hat one and the green arrow in place. There is no indication yet that this uptrend is over.

Many people have commented that we're due for a pullback based on the indicators currently at overbought levels. However, in extended trends, the indicators eventually become "broken" and lose their predictive power. For example, the RSI has been showing overbought since December 3rd, and yet December was a terrific month. I think the RTC will be a more accurate predictor of the trend change when it comes.

No trades today.

3 down, 2 to go

Today's gratifying 32 point advance in the Dow, along with gains in the S&P and Nasdaq extend our 2011 YTD advance to three days. That leaves just two more days to conclude the "January early warning system" from The Stock Traders Alamanc. If we can finish the week up, that will be bullish for stock for the year. Since 2011 is a pre-presidential election yeat, that is even more bullish. As you can see from today's daily Dow chart, we are still riding the upper edge of the ascending RTC channel.

And as I mentioned yesterday, there is no resistance in sight for what is now another 100 points. Our TTBS (time to bearish setup) is now extended to seven days of sideways action or a dne day drop to 11,624. Failing that, the green swing trend arrow is still up and my long hat is still on.

Trades

No trades today, though I note that HIMX, which I dumped two days ago and rose higher yesterday, lost 2.33% today and put in a dark cloud cover. That is a bearish confirmation of yesterday's evening star doji. That's what I get for not waiting for the confirmation. Anyway, watch for HIMX to go lower tomorrow again.

Uptrend Intact

Well, they tried to knock 'em down shortly after noon today but the Dow got right back up and finished with a 20 point gain to close at 11691. And despite the S&P's slight 1.69 point loss today, we're still on track for the "first five days" of January indicator. The Dow remains at the upper end of its rising RTC channel. At this rate, it would take either five straight days of sideways action, or a one day drop to 11,558 to cause a bearish setup. I've been hearing a lot of talk about excessive optimism in the market lately and people calling for a pullback. I don't doubt it will happen at some point, but I don't think that point is the next few days. So the green swing trend arrow remains in place.

I see no real Dow resistance until 11,867, representing the top of the 2008 "summer shelf". Also, although we have now reached the upper Bollinger band in the daily chart, we are only 38 points above the daily pivot at 11,653. Staying above this number is bullish.

Trades

No trades today. My INTC buy last Friday was up 1.44% today, but I bailed out of HIMX too soon. Despite going exponential, there were apparently still enough people who wanted to get on this bus today to drive it up another 7%. Oh well - I'd rather leave something on the table than lose it when everyone runs for the exits.

I'm also watching gold again. I think there may be an entry point here by the end of this week or early next.

Off and running

2011 got off to a great start with a 93 point advance in the Dow. This keeps us at the upper end of an RTC channel established December 9th when the Dow broke out of its week long consolidation. Not only was price up but volume was higher than any point last month except for the first two days of December which saw those awesome gains. Even the short stochastic is giving a bullish crossover right now. And even after today's gains, the futures are all up modestly right now (1 AM EST).

So technically, there's really nothing to suggest we don't have more room to run. The green swing trend arrow remains in place and my long hat is on. Keep your fingers crossed that we can get five up sessions in a row. That would be a major bullish indicator for the rest of the year. And note that historically, pre-presidential election years, of which this is one, tend to finish positive.

Trades

Today I booted HIMX from my low price/high yield portfolio, not because it was too bad, but because it was too good. It basically became a victim of its own success. Check out this chart. Over the last four sessions Himax went exponential in a big way, ending up in a classical evening star doji candle today. That's a major bearish sign. Because of the parabolic run-up, I'm not even waiting for confirmation tomorrow. I bought it at 2.03 purely for its dividends, but after selling it today at 2.38 I made more in appreciation than the dividends would have paid. I'll consider getting back in after the pullback that's sure to come. It may still go higher in the long run, but we are swing traders and this swing trade is done.

The Week Ahead

The week ahead, the first trading week of 2011, is going to be crucial. According to The Stock Traders Almanac, when the five days of January were up, the rest of the year was up, in the last 32 out of 37 years. That's a pretty good track record. And while historically the first day of January is not so hot, the fact that right now (7:45 PM EST) all three futures (ES, NQ, and YM) are up about a third of a percent, following their sharp rise in the closing minutes of last Friday, I'd say the odds are good that we'll see some positive action over the next few days. Accordingly, I'm leaving the green swing trend arrow in place for now.