Sentiment Update

The latest AAII numbers show bearish sentiment multi-year lows.

And uber-Bear Marc Faber is sanguine on US equities but, of course, still likes gold.

Yesterday we asked if sentiment even matters anymore. Answer: it never matters... until it does.

Does sentiment matter?

Technical Take explores the bullish sentiment present for the past 5 months and the stunning bullish move.

Fading the contrarian indicators when all the bears have disappeared seems to be the play... or is this the top?

SPX: Bearish Wolfe Wave

TWM: high risk Wolfe Wave

Be careful with this set-up; use a half-position and use discipline with buy and sell stops.

Update: ESH10_F: Bearish Bingo!

Cha-ching. That's a target and I'm out for a quickie.

ESH10_F: Bearish Wolfe Wave

Target = 1107.75; Buy-stop = 1111.25

Sentiment Alert

Eric has done an excellent run-down of the various sentiment charts and his Davis Sentiment Indicator (TM) is pegged at 9.7 this morning (>5.0 indicates that bulls outnumber bears; >9.0 = Yikes!)

Also, the Rydex leveraged funds are telling us that the bears have gone into hibernation.

Good sentiment stuff on this snowy Monday to start off a likely low volume holiday week.

Ritholtz on the Market

Points he made:

1. We are still in a secular bear market.

2. The easy money has been made in the counter trend rally, but bias is still to the upside.

3. Inverse correlation of stocks to the dollar seems to be ending.

4. "We're giving the rally the benefit of the doubt. Innocent until proven guilty."

5. "The easy trade is to bet rally is over, and rarely is the easy trade correct."

6. Not a new bull market because valuations are still not as cheap as 1982.

7. Sentiment is middle of the road, and is not useful at the current juncture.

8. We could churn for 18 months, ala 1975 to 1978.

9. One graphic he had shows that bear market rallies average about 70%, and then show a 25% pullback before a 5 year churn. So, should we expect a 25% pullback soon?

IWM: Bearish Wolfe Wave

The small caps have been doing quite well this week in anticipation of a Santa Claus rally and the January Effect. Now we see a bearish Wolfe Wave for a pullback.

EuroUSD: Completed Bearish Wolfe Wave

EuroUSD has completed a bearish Wolfe Wave upon reaching the target today. The odd thing is that the indices, SPY, and especially XME had been moving pretty much in lock-step with the EuroUSD-- until this week

So despite a move up in the US dollar, stock including industrials and materials have also been moving up. I can't figure it out, but the has EuroUSD has achieved a goal, of sorts.

SPY: Wolfe and Elliot Waves

SPY targets based on both Elliot waves and Wolfe wave are approximately 108.80 in this cycle. Then we should bet a bounce consistent with the A wave of a counter-trend Elliot wave.

First the Elliot waves starting at last Fridays' gap up open:


















Then the Wolfe Wave on the same time frame. Both give a target of about 108.80 before the bounce. Or, the bounce at 108.80-ish could be the start of Elliot wave 4. But the near-term target remains the same.

SPY: Wolfe Wave Update

The bearish move that was set up this morning worked out well. I changed to a 65-minute chart for better viewing.

From Point 5 we dropped rapidly (more than I thought it would) to the red target line as sellers rode it down hard.

Another interesting item is the volume. Sure we had good volume on the morning high and the sell-off to the target, but what I did not appreciate at first was the high volume with the bounce from the target red line back up to the 20-bar EMA. That bounce was almost trade-able.

SPY: Bearish Wolfe Wave?

Eric commented this morning that it would be funny if we sold off on the "good jobs number". Well, that certainly didn't happen this morning with yet another yearly high on the SPY. It should be noted that other indices have not been making new highs this week as new money is running toward the safer big names... perhaps a sign we are near the top.

Eric also noted that macro man has stated the obvious: everyone has the 50% retrace level (SPX 1121) on their radar.

Also, Bespoke observed that we have had a few days where we gapped up or had a quick rise at the open, only to sell it in the afternoon. The adage is that dumb retail money buys in the morning and the smarter "adult" money sells it in the afternoon... another bearish indicator.

The next meme may be to protect the dollar with higher rates and the bond market has been (very subtly) signaling this. Gold and reflation names are being hit today.

Let's look at the obscure Wolfe Wave pattern for a clue. Yesterday I looked at the XME and the Wolfe was not very clean. Today's SPY Wolfe shows the peek above the trend from Point 1 to Point 3... so this may be Point 5 this morning?? The short-sell target is 109.60 and the time-frame is 12/9 (next Wednesday's close). A run above today's high would not invalidate the pattern, it just gives a higher Point 5 and the target would need to be re-calculated.

I do not do swing trades on SPY and prefer to use other indices or stocks, but it is worth looking at the SPY for the general view. I got some TWM (short smalls) and short GDX this morning... so I'm sure Eric will be fading me.

For more info on Wolfe Waves, Todd has done some good analysis on this indicator and I'm just starting to look at them. (He has no association with my lame attempt at Wolfe Waves!)

XME: Bearish Wolfe Wave

XME is a proxy for the inverse US dollar and a case can be made that the recent high is the top, based on the Wolfe Wave formation. Target is 46-ish.

What does AAPL tell us about the market?

AAPL monthly chart shows that new highs have recently been made and November was an "inside" month. This could be the beginning of a consolidation phase that lasts for a bit before a breakout to the upside. Or it could rollover. MACD is still bullish although slightly overextended.





Weekly chart shows AAPL having just completed a 3-push upmove, although not classically an Elliot Wave pattern (Wave 3 is too short), followed by a recent swing down which could be a consolidation pattern. Bears would need to be careful here.




Finally, the daily pattern shows the consolidation which could be the long bull flag formation. BUT, the MACD is clearly negative. Brian Shannon says repeatedly that MACD divergences are more useful at predicting a bottom than a top, so the significance of this may be limited. Conclusions below.



Conclusion: The 208 and 185 levels seem important. Any breakout above 208 would be significant and could tell us the entire market is healthy. A break down below 185 would tell us that even the market leaders, the big boys who are the last generals to be killed, have been shot.

XME at resistance for third time

EURUSD at resistance...

...back to the top of channel. Gold hit a recent high today intraday before dropping back again. If this is a range trade, then the EURUSD should come back a bit... but the odds are pretty good we get a continuation of the "orderly" take down of the dollar. Gold may be the "tell".

Pain!

The "Other 1-2-3"

...also called the "exhaustion pattern", is differentiated from the classic trader Vic 2B pattern, but is an attempt at calling a top nonetheless.

Looks upward, but a bearish case could be made with some type of 1-2-3 "exhaustion" pattern, or what T.Lo calls the "other 1-2-3" since this does not follow the classic Trader Vic 2B pattern.

If this were the case, the short-sale would be entered here or at the LOD from yesterday (= 110.60) with yesterday's high (= 111.784) as the buy-stop. Of course, the risk is that we keep trying to call a top and keep getting stopped out and die the death of a thousand cuts.

It seems the "other 1-2-3" is really as much a sentiment call as a technical set-up.

EURUSD Rangebound

...with some bearish features. Above 1.50500, we could go much higher.

SPY: Where's the resistance?

Alright, Eric has pointed out that we have multiple levels of support, but where is the resistance?

1. Near term high (today) of 111.69
2. After that, we have 112 (the 50% retrace from Oct 07 highs to March lows).
3. Then we have the red bar high from Oct08, 2008: 119.34
4. Finally, the 61.8% Fib retrace: 122.41

SDS day trade [Updated]

Anatomy of a day trade. Big gap up today so looking for a short entry. Eric's pointer (from T.Lo) is to look for an inside bar on the 5-minute. Entered buy on SDS at 10:10 bar price 35.60.

Sell-stop is the previous bar low which is also low of day. Target is just below the biggest gap down bar or the 2-bar EMA, whichever comes first.

Sold half at 35.76 (below the 9:55am bar high) at 10:36am
Sold 1/4 at 35.85 (20-bar EMA) at 11:30am
Holding 1/4 for now.



--------------------------
Update 1700hrs 11/23

Sold remaining 1/4 near the close for $35.97

SPY and IWM

SPY 135-minute charts show the beginning of a downslope with the 5-bar ema below the 20-bar ema. On shorter time-frame a bear flag has been forming (Wave B), but the tendency is for the trend be established with this 5/20 bar cross on the 135-minute chart. Any intra-day spikes above the 20-bar ema would be shorting opportunities. Be careful with shorts if the 5-bar rises above the 20-bar ema. As Eric has said, Monday may see a spike as part of the end of a Wave B, but the Wave C should follow shortly. MACD is bearish with negative divergence which, while not as reliable, corroborates a weak chart.






Likewise, the IWM (135-minute) has the 5-bar below the 20-bar ema. This chart looks weaker, having already made a lower high. Transports have not confirmed the recent high in large caps. T.Lo has pointed out that in the last gasps of a bull-run, the safe large caps tend to get the last buyers, so this could be a sign of weakness in the market.





Other charts to consider would be the dollar and Vix, whcih are both forming bottoming patterns.

AMAG: Holy Grail short sale

AMAG pharmaceuticals is in a down trend and recently made a lower high, so I am looking for a short set-up on a day trade.




















On the 5-minute, we are looking for a strong tend as determined by an ADX > 25. The we wait for a retracement up to the 20-bar EMA for a short entry. Buy-stop is set at the resistance level as determined, in this case, by the top of the previous large red bar.

Target is above the low of day for a day-trade, but this one could go much lower on a mutlti-day time frame. (Disclosure: I'm short this stock from 41.01 and have cover 1/3 already.)

SDS scalp this morning

I'm pretty sure I did this wrong, but I got lucky for a small scalp. Using the 5-min chart at the open, we opened weak (strong on the SDS), so I waited for it to come back to support-- in this case the 20-bar EMA.

Once it hit that trigger, I waited for the buy entry at the previous swing high (36.92) to buy. The target for sell is resistance, in this case yesterday's HOD 37.10.

Sell-stop was previous bar's low and target sell was 37.08 to take profits. It worked for a 16 cent scalp.

XLF at critical level

Yellin: "Not massively overvalued."

Ah, the last time a Fed governor commented on the equity markets was 1996 when Uncle Alan Greenspan warned of "irrational exuberance." But we continued for another 4 years before the crash, and Al continued the easy money to get us there.

"Not massively overvalued" and Rosie is "Not massively obnoxious."

EURUSD acting bearish

which means strong dollar, which means...

stocks go down.

easy concept; watched by *everyone*.

No other chart necessary.

All about the dollar

With the UUP burping last week, the technical analysis is messed up. Now we are looking at EurUSD. This shows it coming back to trend support and it may fall thru, but there is massive support in the 1.495 level. And weakness in the EurUSD should be short-lived.

SPY: Bullish vs Bearish?

We've had 5 up days after falling below the 50-d MA and the general upward trend from March has been respected. The case can be made for a bearish scenario as well as a further bullish move.

Bullish indicators: SPY is still above the 50-d MA. The trend is upward with a higher low made last week. The previous uptrends were 7-9 days and we are currently on day 5 of this one.

Bearish case: The uptrend is decelerating as evidenced by negative divergence on MACD histogram. SPY is now below the 20-d MA. Today we continued the uptrend with a higher high and IF this is a right shoulder of a bearish H/S, then we need to have a red bar or two.

SPY: Bullish Wolfe Wave?

This is what keeps bears up at night: the appearance of a suspicious Wolfe Wave bullish pattern. I still remain net short, but this warrants close observation.

SPY: Falling through support

Let's look at the longer view on the weekly. Last week was a big red pepperoni and this looks like a subtle warning ala Mamis. Strength in the US dollar was required for such a move lower in the stock market, so we continue to watch the DXY to stay above $76.00 and preferably $76.30.

The chart is necessarily busy and shows Elliot wave 5 resolving the motive with last week's high. Also, both Fibonacci price retracements and time extensions are depicted. Eighteen weeks passed from the March low to the July low. The July low resolved upward after the fake out a-b-c reversal. November 13 will be exactly 18 weeks from the July lows, so following the Fib time extension, this should be a significant date.

In July, the pullback was less than 38% and this pullback should be in that neighborhood if we follow Fibonacci rules. That would give us a target of about $95 on November 13th, which sounds like an aggressive pullback. We'll see.

The dotted red trend line is from the March lows as is the solid red trend line.

It's all about the dollar

OK, I'll chime with other traders who are harping about the latest market moves being inversely correlated to the US dollar. The longer term move from March lows, however, did not start out nearly as correlated to the dollar decline.

As the first chart shows, the SPY (red line) has risen 55% while the US dollar has declined 15% (the blue line is the UDN, the inverse dollar ETF)... correlation in direction, but not in the degree of movement.

The next chart shows the market for the last nine weeks, with the dollar and SPY showing near perfect inverse correlation in direction and magnitude. If the dollar shows regression to the mean over the next few weeks, or a short squeeze in the shorter term time frame, this should bring the SPY back to end of August levels of 104 or below.

Ambrose Evan Pritchard has an excellent commentary on dollar sentiment and economics, the news of its certain demise may be a bit premature.

BAC: breaking down

BAC is falling below weekly lows and a significant support trend here. With technicals in broader indices looking weak, this is a decent short set-up with a buy-stop at $17.25 and a target at $16-ish. This stock can be considered a bellwether for other consumer-oriented banks.

SPY: short with stops set

Alright, I'm officially short this beast that won't die. Granted this is a high risk set-up, but I'm in. Buy-stop is $109.70 which voids the head and shoulders top. Some financials are ripe for a fall, too. (See the next blog post.)

Now the meme will be when the Fed is going to raise the rates. Whether the spigot is actually turned off is immaterial, it's the fear of tightening that can fracture this pattern here. At some point the dollar will need to be defended and it is showing a somewhat reliable bottoming pattern with some decent sentiment indicators as well.

Sure, AAPL and TXN blow the doors off their quarters and we have a little "profit-taking." This can definitely continue to climb from here, but I think the risk/reward here warrants going short with a buy-stop.



One caveat: while I think the market is a bit vulnerable here, I still don't see a wholesale sale of the market here. There are enough support levels and sideline money for some buyers to come in along a subtle downward trajectory.

UUP: entry here?

Everyone is looking at the dollar and when this bottoms most of the other asset classes should be toppped. We have a pattern that could be a head and shoulders bottom...IF it breaks above $22.53.

Teresa Lo has pointed out the Cramer segment today where he is exchanging his dollars for Iraqi dinars. Now all we need is a Newsweek cover to ring the bell any louder.

LQD: Canary in the coal mine?

LQD went ex-dividend for 49 cents today, but it is still down $1.28 and has broken below the long term trend from March. Unlike SPY and stock indices, LQD has shown a much more smooth trajectory and is an easier read as far as a trend.

This may represent a premonitory indicator of a "renewed belief in the negatives" as investors eschew corporate debt. I guess I'm not calling for a "crash" since support levels are plentiful in LQD as well as other indices, but rather a more sober view of the capital markets and time to take some off the table.

SPY: Elliot wave and Time frames

SPY is at a critical level based on my Elliot wave analysis. A close below the Aug high of 104.35 (intra-day) or 103.80 (closing price) would invalidate the Wave 4 I've been considering.

Using time frame analysis, a Wave 5, should it occur, may run into resistance in mid-October. Since Wave 3 cannot be the shortest motive wave, a Wave 5 can be no higher than 110.50.

Remember, a close below 104.35 should cast doubt on my analysis, and a close below the highest close in August-- 103.80 --would render my EWT analysis invalid and the "Wave 4" broken.

TLT: preparing for deflation

TLT has followed pretty classic Mamis bottom formation.

"It's toilet shaped"

David Roche: "We need real investment, not the kind that punters play with..."

SPY Elliot waves and shorter term

SPY Elliot waves are not very clear. Wave 3 cannot be the shortest of the motives. Off the July a-b-c correction, we had a long Wave 1 and I cannot be exact on where it ended. I believe we are in Wave 3 now or perhaps the early part of a flat wave 4. Either way, we should still have a Wave 5 to come, and I'm looking at the 112 level since this is the 50% retracement from the Oct 07 high.

On a shorter time frame, we can see that we may be in the flat Wave 4 since 9-17. Now we are forming an ascending triangle that could break out to Wave 5... the Terranova "superspike"? I'm looking at the 112 level as I stated above as the end of the Wave 5. wave 5 cannot be too high since our wave 3 is already somewhat short. Alternatively, we could be in the middle of a larger Wave 3 that can go for quite a while...

SPY Purple Crayon Elliot waves

I rummaged through by desk drawer and found the biggest purple crayon I could find to do some Elliot waves. Using Fibonacci time extensions I found that September 18th would be the 38.2% extension from the October 07 high to the March 09 low. this could be a proper time for a near-term top in the market. This corresponds roughly with the 8 week pivot highs we have been getting as well.





Not much to hang your hat on, but it does tell us that the run-up from March is not excessively long or large from a percentage standpoint in the grand scheme of things.

My Rant on "Sentiment"

I'm not picking on Eric, but there seems to be this obsession with trying to determine "sentiment" based on news stories or bloggers' entries. How can anyone determine if the market is overbought or oversold based on a few cryptic remarks by random people?

Every individual trader or investor is an isolated bubble of sentiment, a conglomeration of fear and greed... except that one guy at Goldman Sachs who decides to buy a zillion dollars of RIMM and then the Nazzy takes off with AAPL and MSFT following. Also, if Newsweek, with a circulation of tens of million, has a cover stating the recession's over, or Barron's talks up a stock, sure this might have a material effect for a while... but blogs? and Stocktwits? Come on, dude. I'm absolutely at a loss to figure how some jamoke on Stocktwits, or Slope of Hope, or IBankcoin, who trades maybe 2000 shares a day can be any indication as to how "the market" will move. Are they indicative of some large population of market-movers? Doubtful.

I think this is why technical analysis was invented. There is no way to predict anything based on an individual's biases, especially an individual who 1) you do not know and 2) trades too few shares to matter, and 3) influences almost nobody, and 4) might change their mind in 30 seconds.

There is no way to really "know" where the market is going. To chase alpha, one has to play the odds: 1) buy high and sell higher, or 2) short sell low and buy back lower, or 3)perhaps hardest of all, find the elusive reversal. That's it. Those are the only three ways to make money in the market. Which scenario has the highest percentage? Certainly not throwing money at reversals... fighting the trend is a fool's game and the odds are stacked against it.

Sentiment cannot be determined any reliable way except to look at charts. Period. And even then, it's really playing percentages. If a stock breaks above it 20-d moving average, or above it's 50-d high, what are the odds it will tick up still more? 51%? 70%? That's the game traders play.

Reversals can be found, but for every successful call that makes $1000, there might be 5 false calls that each get stopped out for a loss of $198. Can you make money? Sure, but it takes eternal diligence and you have to take every reversal call on the chance it's the "big one."

Sentiment can be determined, but is it actionable? Was the NASDAQ euphoric in 1999? Absolutely. It was euphoric in February 1999 at 2300, and it was euphoric in July 1999 at 2800, and it was definitely euphoric in December of 1999 at 3600. If you had shorted that market looking for the elusive reversal in February, you would have been sweating bullets with a 100% loss by March of 2000 when the Nas hit 5200.

So where are we now? Sentiment cannot be determined with any confidence. Some people are really really bullish--- buy the dips! the recession is over!-- and others are really really bearish-- we're going bankrupt! the Fed and Treasury are incompetent!

The way to trade this sucker is to look for a trend and follow it. If there is no trend, then hedge or go to cash.

Other than that, just try to find safety in beta.

Renewed Belief in the Negatives

It's time to uncrumple the Justin Mamis model that I jettisoned about three weeks ago. The Bloomberg headlines tell the sentiment story: Renewed belief in negatives. The goldilocks economy is showing some gray hair and bald spots. No positive stories. We have a jobless, consumer-less recovery, and the rest of the world is even worse.

The mamis chart depicting market bottoms and the corresponding sentiment puts us at Point DD.

Then we plug in the Points on the SPY and see that the sentiment of shitty news matches perfectly with the beginning of Point DD. Target is SPY 80-85. The 38.2% time retracement is from the market high Oct 07 to the bottom of Mar 09 and ends at 38.2%, or Sept 09. I'm not sure if this would be Point E time target.

Having said all that, we'll probably bounce tomorrow.