Day Trading the SPY Pt. II

Reference the left side on this chart on the other post, Day Trading the SPY. The conclusions from that chart: Markets often collapse of their own weight. In trading terms “exhaustion”. Now we have another chapter in the story.

After the selloff from 273 1/3, the SPY dropped to around 268. At that point it rallied and has since put in a nice diagonal line of support, “A”. On the 12th we broke through that resistance at the previous high. The following morning there was follow through and the index made a high at 275.89 which became the first point of “B” followed by a slightly lower high of 275.67. For our purposes it creates a pennant or triangle, which is a continuation pattern should the price break the “B” line. There were a couple lows that day which formed “C”, and this is not a textbook bottom line for a triangle, but when the price dropped at the close, it made a small bump before breaking that line. Trust me it’s there, just very small.

Today’s close did the same thing at the close, it broke the “A” line, the larger area of support in which “B” and “C” are nested. Meanwhile all the oscillators are working overtime. We could call this “Too much of a good thing.” PartII, like the first part failed to push higher, this time it was on HIGHER volume. Now we just have to wait and see what happens in the overnight market.

Notice that the space above the first “A” line, is only about 1 2/3 SPY points above the previous high, while the drop to 268 was considerably more. Don’t underestimate the buying power in this market, however a test of the 268 low is possible, (wait for a signal that all is clear) and depending upon the internals that bottom might the last good chance to buy this for a move to 290.

Tomorrow is Friday and often times markets which have had a good week indulge in some “profit taking”. We might pull back 3% overall. There is a high from Jan. 18 at 267, which should provide support.

The overnights lifted the market, now it appears a small Head and Shoulders pattern might be forming, but the objective for that is of little consequence, but it would represent another point on the bears side, or rather bullish exhaustion. If it breaks it will almost certainly break yesterdays high. Looks like another good volume day, and volume precedes price by Murphy. In this instance volume always spikes on selling.

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Cloud (the)

This a cloud computing company. Been trading in a wide range, if you want to consider that volatility take off one point right here. The support line looks solid and there are far more tests at the resistance level, which is where this seems to want to go. The AD line is not too good. Stock made a small breakout once before, so not sure I would jump on this just because it moved above the green line, it’s a bit messy up there, I would have to wait and see if it breaks out then pulls back and if the pullback held at the old resistance line then you could buy on a tight stop. Here’s the 800 lb gorilla.

Lower lows and lower highs, not a good formula, the AD line is okay hey people buy it, it’s Amazon! Price below the 200ma, 50ma below the 200ma. Something else the duration of this selloff is approaching six months, and we still have a recession looming. Right now I would say this one might enter in a protracted bear market of its own, which is not good for the economy or the stock market. What about Oracle? A lot will depend on how cloud revenues figure I guess. If the recession overhang is more retail related that one might do fine. Keep them both in mind, and your charting will benefit.

Chart-a-Thon

I had another post with lots of charts, but I made the mistake of trying a new feature, and to paraphrase the banker in that episode of South Park where Stan deposits $100, the banker says “and poof it’s gone..”

Oh well maybe the reprint will be better, bad WordPress, very bad…

New Diamond Formation?
Old Diamond Formation
Has the grip of Higher Interest Rate Hysteria been broken?
Lower interest rates, weaker dollar, what’s the problem?
Strong hands are slowly buying into this

http://www.lbma.org.uk/assets/Alchemist/Alchemist_92/Alch92Mital.pdf

Breakdown

The size of the flag on the PPLT is about four points which makes the objective about 71. With the strong AD line and OBV there are some reasons to consider buying this at 71 if you like the fundamentals. It would be nice if the automakers rejiggered their mix for catalytic converters, but with the recession overhang this could go a lot lower. Probably not as bad as being long PALL however. There is a futures contract on that spread. Check CME website.

Diverging badly

Briefly, Diamond formation then and now?

Buying in the middle range bond ETF, rates coming down. What happened to 5% on the 10yr?

Gold glitters not as well as it ought to be.

Platinum approaching capitulation. Palladium over bought. Catalytic converter demand solid, and a global recession might set back the EV movement ten years. If automakers switch back to Platinum the price of the two components might revert to the mean. Long Platinum, short Palladium?

Copper pretty iffy

Look at this volume post 2016, those bullish on the economy didn’t get the results they were hoping for. Now we are in another falling rate economic slowdown, 2016 redux?

Day Trading the S&P

spy0208a

Apologize for the grainy photo. Its a multi-day chart, 5 minute I believe. Let’s call it anatomy of a top, in real time. Because I don’t have all the answers. We begin with the high at A, on 2/5 at 11am. We didn’t know it was the high until later than day, and we could draw a line across both tops, 3:30pm on 2/5 and we have article one, a double top, which is potentially bearish and the A line sets up resistance.

The next morning the price falls and rallies at 10:15 and that allows us to draw line B, connecting 1pm on 2/5. and for the moment we put the double top aside and construct an ascending triangle out of A and B. This is a potentially bullish continuation pattern. However on the rally back on 2/6 we fall short, we don’t make it all the way to the A line which negates the importance of the AB ascending triangle.

The high on the C line between 10:15 and 3:30 is bracketed by two lows that day forming a parallel D line which is a flag and also potentially bullish on the breakout. This is all confirmed at the 3:30 high, which completes the flag and the price at the close rests on the upper C leg of the CB triangle and the CD flag. A breakout above the C line would  provide a breakout on two levels, the inside triangle CB and the flag CD. The A line is still valid as an additional breakout level.

In the course of two days three different potentially bullish patterns have evolved, nested inside each other, giving the whole pattern added significance should the price move higher. To confirm the bullish momentum we see how many times the price has been over bought, with the green circles, (6) and how many times it has been over sold (1)

The new over sold reading should have been a clue we are losing momentum, as the market opened sharply lower the next day. After a brief rally it continued lower and finished the end of the day in an ascending flag, which is again a continuation pattern (bearish this time), but we did manage to break above the top line at the close on an over bought reading. No matter because by now we had put in a second over sold reading, and the momentum has changed. Notice a consistent pattern of rising prices at the close, day traders who are short closing their position, ETF managers balancing their holdings.

To add the S&P has been on an incredible run here, double digit consecutive up days without a major pullback. That it would stop abruptly is not likely, barring any news items. However we can see how momentum turned when the price could not push higher at a most opportune moment.

This selloff then has the character of a failed breakout. There is probably a new interim high ahead, where we break the A line, but it does show this market getting a bit extended. The uncertain nature of overnight futures trading makes these things doubly difficult to trade. Very seldom that the action in the overnight market leads the market the next day. The key to testing that A line will probably be a few consecutive over bought readings. There is also a point and figure signal which I will explore next time.

 

The Weather on Wall Street

bobdale

Bob Dale was the best weatherman in San Diego, ever. In those days the national weather service wasn’t the deep state think tank that it is today. Bob knew weather because he was a pilot, he looked at the weather the way a pilot would see it. He was a treasure trove of information in the era before doppler radar.

Lately the jet stream has been dropping down across California. El Nino is in place, though not a strong one, it may have been enough to draw the polar vortex down from Canada into the New England states. Remember that Thanksgiving in NY City was a record cold temperature for the day. Despite their sunny predictions winter has been brutal in the NE, and yet Natural Gas futures aren’t showing the change, and the reasons are probably financial, and even economic.

The correlation between energy and low interest rates has been established as the cause of the 2015 crash in energy prices, and on schedule for the 2016 redux WTIC fell out of bed last year, and the price dropped in half. That is the sort of news gives more credence to a recession, if only we didn’t know the cause (low interest rates).

The Fed paused and now might pause the other way, by cutting back on balance sheet reduction which contributes something to their goal of normal (higher) interest rates. We cannot quantify that. If lower interest rates imply lower energy prices, we should all fill up?

WTIC0203

 

Crude fell below $30 in the 2016 redux. It could go lower in this instance, if interest rates go lower, and they should. In my next post I will detail why interest rates are going to come crashing down, the bond market guru’s are wrong.  When interest rates fall precipitously, with no beneficial effect on the economy,  deflation occurs, and the barometer is falling.

 

2016 Redux Update

xauindu0113

 

2016 Redux, the measure of gold stocks versus the DJIA is on schedule. If the 50ma breaks the 200ma that would be confirmation. I do wonder if a double bottom in the stock market will cause a double bottom in gold stocks. In that regard the current implied wave 3 in Elliott method is not quite large enough to be considered an impulse wave, but it could subdivide into five smaller parts and that would work. Assume that the sector flatlines the drop implied in the DJIA is pretty large and only just beginning. Will do some math later on.

xauindu0203

The bullish character has abated, while the 50ma rushes toward the 200ma, and the ratio remains above both, which we noted on the long chart has the potential to set up a pretty nice move in gold stocks, or one that can be relied on to last for some months. Should the general market crash, all projections are subject to recall.  This is all predicated in their ability to keep a lid on things…

The bounce off the 50ma is also noteworthy, there is no reason to think that traders are watching this chart, and would like to paint the tape as it were.

I have read some technical chatter about the GDX being ready to pullback here while the stock market rallies (and money goes out of gold and into stocks, ho hum) One writer thinks 45 days, but there are two counter arguments to that, one is the sharp nature of the rally at this point in the 2016 redux, by analogy, and the other is the overbought conditions in the current stock market rally.

Stock market bulls always seem to win these battles, and so I expect a few more days before the internals weaken. If things are back to normal then stock bulls will return to their BTD psychology, which is tough on the bears, who are always looking for a top, and always get their shorts squeezed.

They may have to wait for the old highs, or simply concede a few hundred points to the downside while the first group of sellers leads the way. A point against the bears, volatility has been slow to drop back to where it was  during the bull market, which puts a premium on put options. 

No one assumes the pullback in gold mining stocks to be severe, and always think about what no one else considers remotely possible. Fed chief Powell seems content channeling Janet Yellen, and the 2016 redux. He might even tell you (confidentially) that he expects the stock market to test those lows. 

He may get more than he wants… see my next post on the upcoming deflationary crash….

ief0203

Yields to Power

ief0111

This chart may seem odd, the ratio of the IEF or the 7-10 year bond, to the SPY. While the IEF is losing value the yield on the bond goes up, another way of looking at this, bond yields have been increasing relative to the gains in the S&P. The Federal Reserve raises short term rates and it tends to lift the market a bit at the long end.

The IEF has been increasing in value relative to the stock index since the selloff started in October. Rates are suddenly coming down. There are a number of reasons for this, money coming out of stocks goes into bonds, click click, it’s no longer that tough for a big institution to reallocate on the fly, in the middle of a trading day.

You can see the ratio clicks up during periods of stock market weakness. See 2008/2009 the ratio was about 1.3. 2011 it was 1.0, 2016, (see 2016 Redux)  it was .6. Down at the bottom the oscillator I chose is the ROC, or Rate of Change, because I am interested in the time frame, and playing this move with options.

I want to go back to the 2016 Redux, I am looking at a ratio of between .5 and .6, currently it is .4. Now through the magic of math, I multiply the S&P 258 1/2 by .4 and I get the current price of IEF. Let’s say all things being equal the S&P rises to 280, the IEF would therefore be equal to 112, which is eight points higher. I know the ratio will drop if the S&P rises, but in times of market stress the ratio was either .5, 1 or 1.3. Bond yields may flatten as the stock market improves, if the previous low volume bull market returns.

If the S&P continues weaker we might expect to see a return to higher IEF/SPY ratios. If for instance the ratio returns to .5 and the S&P drops to 235, the previous low, the IEF would be 117. At .4 that would only be 94 some ten points lower. One way up, one way down.

I suggested in a previous post that the ten year yield might go sub 2%. Should that happen the IEF will go higher, possibly much higher as these things tend to bend exponentially at extremes.

Finally the ROC has made a recent high which is higher now than the indicator was in 2016. (though it is currently negative and that may be a pullback in which to get positioned) You can see the ROC is capable of moving by a factor of 2 or 3 times during market stress.

The Fed has suggested that they will pause their rate hike policy and a recession is on the radar, and all that bodes well for lower rates. I have two objectives on the IEF, one is the previously stated 113, and other other is the official P&F objective of 117. From a traders position time is the critical factor, and I tend to believe that in this environment that changes can occur very suddenly.