$$ VIX Break Out

The VIX has broken above its 89-day moving average with conviction.  The last time it did so was late April.

$$ T Theory VO for Week of 11/29 - 12/3

Last week's Volume Oscillator for reference

11/22 = -27
11/23 = -68
11/24 = -27
11/26 = -39

This week's VO

11/29 = -37
11/30 = -54
12/1 =  1
12/2 =  38
12/3 =  49

This post will be updated nightly throughout the week, so check back periodically for new information or you can subscribe to this post and receive updates by e-mail.

$$ 75-Day Cycle

During the uptrend that started in March 2009, we have seen a selling climax every 75 trading days as defined by the T Theory Volume Oscillator.  Each of the dates listed below is the end of the selling climax.  In each case, the climax took several trading days to complete.  In all but one case, the final low came several days after the selling climax:

March 2, 2009

TTVO = -168

Climax length: 3 trading days

Loss during climax on closing basis:  65 S&P points

Final low: 4 trading days after climax

June 17, 2009 (75 days later)

TTVO = -126

Climax length: 3 trading days

Loss: 35 points

Final low: 14 trading days after climax

October 2, 2009 (75 days later)

TTVO = -156

Climax length:  4 trading days

Loss:  37 points

Final low:  October 2, 2009

January 22, 2010 (76 days later)

TTVO = -131

Climax length: 3 trading days

Loss:  60 points

Final low:  10 trading days after climax

May 7, 2010 (73 days later)

TTVO = -284

Climax length:  4 trading days

Loss: 90 points

Final low: 12 trading days later

August 24, 2010 (75 trading days later)

TTVO = -95

Climax length: 4 trading days

Loss: 45 points

Final low: 3 trading days later

If this cycle were to continue, the selling climax would commence on December 6 and end on December 9, 2010 (75 days after August 24).  The final low would not occur until the week of December 13 or December 20.

As a reminder, the January Barometer (see Stock Traders Almanac) says that there is a 91.5% chance we finish 2010 either flat (+/- 5%) or down compared to 2009, which closed at 1115.10.  This is because January 2010 closed well below 1115.10.  So, any yearly close under 1170.85 (1115.1 x 1.05) will satisfy the January Barometer.  

Should we get a selling climax the week of December 6 with a final low within 2 weeks after the climax, the January Barometer should easily be satisfied.

A Note about Dollar Signs

Maybe you have wondered why all of my blog posts have $$ in the title.  It's simple really.  

I have set up Twitter to broadcast any blog post I make.  In addition, I have created a StockTwits.com account.  StockTwits combs Twitter and pulls each Tweet that contains "$$" or "$(Stock Symbol)" in the Tweet.  It's a great site to see what people are tweeting about the financial markets.

So by including $$ in the title of my blog post, I know that my post will go out to the StockTwits.com audience in addition to my followers on Twitter.

$$ Funny Business at the Bell on Black Friday

Take a look at the spikes in price and volume of SPXU (triple inverse S&P ETF) and VXX (volatility ETF) during the last 5 minutes of trading on Friday after Thanksgiving when no one was looking:

Somebody waited until the last minute to place a sizable bet on lower prices resulting in higher volatility.  This bet apparently could not wait until Monday morning.  Which implies that the bettor thinks something will happen over the weekend which would make these securities more expensive to acquire come the Monday open.

Pretty brazen given the recent FBI crackdown on insider trading. 

$$ Volume Oscillator Study

The T Theory Volume Oscillator has now spent 19 of the last 26 trading days in the red.  Going back, the last time the VO spent so much time in negative territory during a topping pattern was May-July 2007. 

In 2007, the pattern included a holiday week (July 4th) towards the end.  After the holiday week was over, the S&P made it's high five trading days later.  Then it drifted sideways for four days before correcting 120 points over an 11 day stretch.

Should something a similar occur here (high on December 3, sideways the first part of the week of December 6, then a steep correction), it would fit with the story the Money Flow Ts are telling.

$$ Crash Warning

HSKAX is a market neutral quant hedge fund from JP Morgan.  It's one of the few such funds that the public can track, and therefore it serves to represent an entire industry.  Since JP Morgan is part of the Federal Reserve complex, it's not a bad representative.

The market neutral quant funds are at the top of the liquidity food chain.  With their high frequency trading model, they more they trade, the more money they make.  When HSKAX starts to lose money, it's a sign that liquidity is drying from the market.  The less the market neutral quants are supplying the volume, the more the volume is supplied by the position players. 

That's a dangerous situation for investors.  It can lead to huge bid-ask spreads, failed trades, flash crashes, etc.  

ZeroHedge has written several articles about price declines in HSKAX being predictive of market corrections or crashes. I learned about HSKAX from ZeroHedge, and studied the patterns.  Here's what I found:

 

When HSKAX first breaks to a fresh 2+ month low in price, the market has a good probability of a  correction or a crash starting within the next 0 to 5 days.   

This signal has worked 6 times since January 2006 (August 2010 not shown).  It has given three false positives (December 2006, August 2009, September 2010).  No signal was given on  two 7+% down moves (May 2006, May 2008).  The signal was late on a down move once (February 2009).

Here are the charts.  HSKAX is in black.  The S&P is in red.  When the blue horizontal 2+ month support line is violated, a blue vertical line marks the date.  Focus on what the the red S&P line does after the blue horizontal line.

July 2007

October 2007

September 2008

October 2009

April 2010

All of which brings me to today's action in HSKAX, where we broke to fresh 34 month lows!

Consider yourself warned.

$$ T Theory VO for Week of Nov 22-26

Last week's Volume Oscillator for reference

11/15 = -41
11/16 = -98
11/17 = -84
11/18 = -29
11/19 = -18

This week's VO

11/22 = -27
11/23 = -68
11/24 = -27
11/26 = -39

This post will be updated nightly throughout the week, so check back periodically for new information or you can subscribe to this post and receive updates by e-mail.

$$ More Money Flow T Evidence of a December 6-8 Turn Date

Last time, we looked at the S&P chart which showed the Money Flow T ending on December 8.  Here's the current Gold Money Flow T ending on December 7:

And the inverted Treasury Money Flow T showing a bottom on December 6:

Normally, stocks and treasuries are supposed to trade inversely.  They are on the opposite ends of the risk appetite curve.  Over the long run, gold and stocks generally have an inverse correlation as well, although they can trade together from time to time based on the Dollar.  Clearly, both gold and stocks have benefited from (the rumor  at least of) Money Printing 2.  

It's very interesting that you have three markets with historical relationships all pointing to a turn the same week.  Putting two and two together, if we get a turn in these three markets at the same time during the week of December 6, it will probably be Dollar related.  Perhaps a crisis in the Europe (e.g. Ireland) that sparks a decline in the Euro.  The Euro is 58% of the Dollar index.  

Recall that on April 27, 2010, the day after S&P made its Spring high, Standard & Poor's downgraded Greek's debt to junk status amidst fears of default by the Greek government.  Afterwords, the dollar rallied for six weeks, treasuries rallied for four months, and stocks declined for two months.  Gold actually did OK in May and June as a safe haven play.

$$ Current Money Flow T

I show a cycle top in the S&P the week of December 6 based on the early July low as a starting point (blue lines).  My guess is that the December cycle top will not exceed the November 5 price peak, but I could be wrong.  

If we halve the time from the November 5 peak to the projected peak the week of December 6 (red lines), I get a projected cycle low on or about Monday, November 22.

Accordingly, I will be looking to close out my short position starting this Friday, November 19 if we reach one of the price support levels I have identified below.  

$$ Price Support Zones

This morning we have dipped into the 1180s on the S&P and it's time to start looking at potential price support zones for this first leg down:

1.  50-day moving average = 1165

2.  38.2% Fib retrace from late August low to November high = 1155

3.  90% Gann turn from November high = 1146

     38.2% Fib retrace from early July low to November high = 1144

4.  50% Fib retrace from late August low to November high = 1133

     Old tops become bottoms = 1130

The deeper the support zone, the less likely we hit it before we bounce. 

$$ T Theory VO for Week of Nov 15-19

Last week's Volume Oscillator for reference

11/8 =    51

11/9 =    6

11/10 =  23

11/11 =  4

11/12 = -41

This week's VO

11/15 = -41
11/16 = -98
11/17 = -84
11/18 = -29
11/19 = -18

 
This post will be updated nightly throughout the week, so check back periodically for new information or you can subscribe to this post and receive updates by e-mail.

$$ Downtrend Intact

Today, we rose up and tested but could not break the down sloping resistance line connecting the tops on November 9, 10 and 11.  We also tested but could not break through the 61.8% retracement level (1207.31 S&P cash) from high on November 11 to the low on November 12.  Subsequently, we took out the 61.8% retracement level (1199.18) from the low on November 12 to the high of today.  

All of this is consistent with normal price movement in a downtrend, the diagnosis of which stays intact.

If you were not already short, you had a nice opportunity to get short mid-day today with a pretty tight stop at trend line and Fibonacci resistance. 

$$ Money Flow T Rules: Where to Start the T

$$ Money Flow T Rules: Where to Place the Center Post

$$ Alert: Channel Support Broken on November 12 Target End Date for T13

Today is November 12, the end of T13 according to my calculations, and we finally got an 30-minute candle that closed below 6-week channel support.  We've had several candle "tails" that dipped below the channel, but no candles that closed below the channel.

I took a short position this morning when we broke horizontal support at S&P 1204.3 cash with a stop at the 3-day (Fib 233 period) moving average on the 5-minute chart (then 1213, now 1211).

I was looking to see whether channel support would hold or break before deciding whether to dump the position before the weekend.  Now that channel support has broken, I've moved my stop to break even and continue to monitor. 

$$ AAII Bullish Sentiment Makes a New 45-Month High at 57.6%

Highest AAII bullish sentiment since January 2007. 

The 51.2% bullish reading on October 28 was the previous 2010 high.

By historical comparison, the end of T12 saw a similar bullish reading of 54.6% on October 11, 2007 (the day that marked the top).

Anyone else find it "ironic" that while the AAII bullish sentiment is making a 45-month high, ZeroHedge reported today that Insiders sold an all-time record amount of shares last week?

Hmmmmmmm.

$$ QE2 Starts Tomorrow

The Fed has released the POMO schedule for the next month.  It looks like the old POMO schedules, except on steroids.  

Under the old "sustain the balance sheet" treasury purchase plan which we saw from mid-August through early November, there were usually two POMOs per week for a total of $7B per week. The new POMO schedule combines the "sustain the balance sheet" purchases with the "increase the balance sheet" purchases. 

Now, we are due to get a POMO almost every trading day at an average of $25B per week.  Starting tomorrow.

It will be interesting to watch the comparative performance of stocks vs. commodities over the coming weeks.   Rising oil prices, for example, increase production costs while hurting the economically depressed consumer, squeezing corporate profits from both ends.

$$ Projecting the Next Rising Bottoms Pattern

Terry Laundry had a very interesting update today.  Here's the audio, and here's the chart.  Terry has noticed a time symmetry in the rising bottom "lows" of the Volume Oscillator.  

Rising bottoms is usually another term for bullish divergence.  The oscillator makes a spike low, then makes a higher low as price makes a lower low compared to its price on the day of the oscillator spike low.

I went back and put pen to paper.  Here's the information on the oscillator spike lows that began rising bottoms patterns in 2010:

Jan 22 =  -131

May 7 = -284 (73 trading days after Jan 22)

Aug 24 = -95 (75 trading days after May 7)

Projecting 74 trading days from August 24 produces an oscillator spike low target of December 8, after which the VO should make a rising bottoms pattern over the next week or two while price continues to fall.  This correlates nicely with the December nulled echo low concept we've discussed before.

If this forecast is accurate, how does this square with the end of T13 on or about November 12?  I'm sure Terry has his own ideas.  Here's a potential explanation that occurs to me:  

We get an "ABC" style move where A corrects off the ~1229 S&P Fibonacci level down to perhaps to the mid-channel at ~1155, then B retraces perhaps 61.8% of A back to say ~1200, then C takes the nose dive into the VO spike low on or about December 8, resulting in price perhaps at the lower envelope at ~1085.

$$ T Theory VO for Week of Nov. 8-12

Last week's Volume Oscillator for reference

11/1 = -21

11/2 = -1

11/3 =  10

11/4 =  61

11/5 =  69

This week's VO
11/8 =    51

11/9 =    6

11/10 =  23

11/11 =  4

11/12 = -41

This post will be updated nightly throughout the week, so check back periodically for new information or you can subscribe to this post and receive updates by e-mail.

$$ 1228.74

The 61.8% Fib retracement of the move from the October 2007 high to the March 2009 low on the S&P. is 1228.74  On Friday, we reached 1227.08 before closing at 1225.85.

We are entering the second week of November.  If we get a top this week as forecast, we should begin a topping process where we move sideways several days with 1229 serving as significant resistance before turning over.  If we carve through 1229 with ease, then look for a blow off top that fails spectacularly.

A word of warning: the Dow and Nasdaq have already left this 61.8% level behind.  In the case of the Dow, 61.8% was 11246 (retrace from Oct '07 to March '09).  The Dow's April high was 11258, so 61.8% worked as resistance for the Dow in April.  But the Dow was up to 11444 on Friday.

$$ Make it Viral

It's Time: Prohibiting Anonymous Comments.

There have been some very helpful and insightful comments from anonymous posters on this blog.  But as this blog has grown, it appears now that the anonymous posts are getting out of hand.

So if you have been commenting anonymously and want to continue to contribute comments to this blog in the future, please create a Google or Blogger account or some other acceptable profile.  It's simple and free to do.  That way, I can keep track of who is saying what, and better moderate the comments.

Thanks for your cooperation.

$$ Volume Oscillator T

Thanks to JT for pointing out a Volume Oscillator T I had overlooked.  Here's how the VO looked in early September.  If we start a T on June 15 (VO = 134) and put a center post at the end of the August 24-26 rising bottoms pattern (VO = -95, -88), I project a November 8 end date.  JT notes that VO T targets can be a bit early compared to the actual turn. 

This VO T lines up with other forecasts for a top in the second week of November, and explains why we appear to be going to new highs on the VO -- we are setting up the left side of the next (presumably bearish) T.

$$ T Theory Confidence Index

I don't know if you remember, but back in May I sent Terry Laundry some charts showing divergence between the S&P and his T Theory Confidence Indicator (FAGIX:VUSTX) at every market major turn in the last 10 years.

With today's close on the S&P eclipsing April's high close, we are back in divergence mode on the Confidence Index:

For the record, in early 2009 we were in divergence mode on the T Theory Confidence Index for ten trading days before the reversal. 

$$ Where We Are

Achal asked a good question:

"Do you have an update on your initial scenario (peak on Oct 27th, and a final peak later in Nov)?"

As you know, on October 13 I projected a cycle top "on or about ~October 27."  We got an intraday top on October 25 at 1196.14 at the top of the price channel.  Off that October 25 peak, instead of starting a correction all we got was a trip to the bottom of the price channel at 1172.  

I was surprised it was not more than that, but once the channel held it was clear we were not going to get a change in trend.  The October 25 peak held until the day QE2 was announced, so I don't view that forecast of a cycle top as a complete failure. 

Today, the S&P reached the 1220 target I mentioned yesterday in historic fashion:  the S&P closed higher than its 3 standard deviation upper Bollinger Band for the first time in at least 10 years.  

In September of 2007, the S&P pinned its 3SD upper BB intraday.  What happened next was 6 days of sideways action before price rose into its October peak at the end of T12.  Likewise, in June of 2005 the S&P pinned its 3SD upper BB intraday.  It traded sideways for three days after until correcting hard.

Second, I would note that it took 51 trading sessions from the low close on Feb 8, 2010 to establish the high close on April 23, 2010.  Currently, we are at 50 trading sessions since the low close on August 26.  

As you can see from the chart above, we threw above the price channel today.  While I expect us to take a breather tomorrow, we may well get a parabolic blow off top here (as discussed below).  Note that the inverse Head & Shoulders pattern suggests a potential target at 1250:

Likewise, here are the next Gann resistance levels to watch:

1240 is 240 degrees from the early July 1011 low

1250 is 120 degrees from the early August 1129 top

On the other hand, note the bearish divergence on the Money Flow Index.  One way or the other, this condition usually does not last long.  Price and MFI will start to mirror each other.  

On the weekly chart, we can see that we are in a steep bearish ascending wedge much like we were this Spring:

There is also some bearish divergence on the weekly RSI.  We did, however, break through the 200 week moving average.  The 200MA had served as resistance in April. 

The T Theory Volume Oscillator shot up to 61 today.  This matches the previous peak reading on October 13.  So we have readings of 

June 15 = 134

July 26 = 124

Sept 10 = 100

Oct 13 = 61

Nov 4 = 61  

We certainly blew through the extension of the green line from 100 to 61 that was dropping at 1.7 points per day.  But Terry is the expert at interpreting the VO.  I'll leave it to him to determine whether we started a new VO T today or whether we can connect the 61s and keep that green line intact.

To answer Achal's question, recent price action while historically bullish is not inconsistent with my forecast of an end to T13 within several days either way of November 12.  This rally is long in the tooth, overcooked, and due for a serious correction.  Can I be wrong?  Certainly.

One of the things I will be watching for is the establishment of a third, steeper trend line for this move.  Parabolic moves usually come in three waves.  As you can see from the chart below, the green trend line is the shallower than the black trend line.  I anticipate that after taking a little breather, we are going to set an even steeper trend line (for example the red dotted line). 

There are usually excellent shorting opportunities available when the steepest of the three trend lines in a parabolic move fails.  But as always, manage your risk.

$$ Response to QE2 from BOE & ECB . . . Crickets

This morning, the Bank of England left rates alone and decided not to engage in further QE.  The European Central Bank left its minimum bid rate alone.  As a result, you can expect the dollar index to suffer.  

As I noted six weeks ago, the dollar was carving a head and shoulders pattern that suggested a target of 71.  We may get there. 

$$ Dow Theory Confirmation

The Dow closed at 11215 today, 10 points higher than its high close in April.  In concert with yesterday's Dow Transport breakout close, we have a Dow Theory confirmation.  This could result in additional buying on a technical basis.

The Dow has yet to take out its April intra-day high of 11258. 

The S&P 500 broke above its recent October 25 intra-day high of 1196.14 at 1198.30 today, and closed at 1197.96, some 19 points shy of its April high close and 21 points shy of its April intra-day high. 

Should the uptrend continue, resistance zones on the S&P are anticipated at 1203 (Fib), 1220 (old resistance), and 1240-1250 (Gann).

$$ GDP Price Deflator

Karl Denninger at Market Ticker has hit on something that strikes a chord with me. 

In an address a couple of weeks ago, Bernanke said the Fed had a mandate to maintain inflation at 1-2% per year.  This was news to me.  I thought they had a mandate to keep inflation under control, not to make sure it always existed.  Inflation, of course, is a silent tax on the people.

There are all sorts of measures of inflation.  According to Denninger, Bernanke has indicated in the past that one of his key inflation indicators is the GDP deflator.  Every quarter, nominal GDP is reported.  Then the BEA deflates nominal GDP to get "real" or inflation-adjusted GDP.  

I researched GDP reports through the last several years, and here's a history of the GDP deflator:

2003 = 2.1%

2004 = 2.8 to 2.9%

2005 = 3.0 to 3.3%

2006 = 3.2%

2007 = 2.7 to 2.9%

2008 = 2.2%

2009 = 0.9%

Note the deflator ramped up in 2004-06 as the Fed blew bubbles, and declined steadily into 2009.  But every year except 2009 was above 2%.  In other words, above the inflation mandate Bernanke feels he must maintain. Is it any wonder we got QE1 in 2009?

Compare the annualized GDP deflator reported by the BEA during first three quarters of 2010:

Q1 = 1.1

Q2 = 2.0

Q3 = 2.2

First, it's growing fast.  Second, it's at or above 2% for the last two quarters.  Which makes today's FOMC statement troubling:

"Consistent with its statutory mandate, the Committee seeks to foster . . . price stability. . . [M]easures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its mandate.  Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objective [of 1-2% inflation] has been disappointingly slow."

Huh?

I believe this is one of the reasons why you had Bill Gross of PIMCO on CNBC today warning of the inflationary risks inherent in QE2. 

And as Warren Buffett wrote in his 1977 Fortune article called "How Inflation Swindles the Equity Investor," when stocks are properly thought of as equity-bonds, then stocks are not a hedge against inflation over the long term. 

$$ QE2

In addition to the POMO schedule that everyone knows about, the Fed announced it will buy $75B in long term treasuries per month for 8 months, totaling $600B in QE2. 

The S&P rallied 9 points in about 6 minutes on the announcement, from 1187 to 1196.  Then the S&P sold off 13 points down to 1183 (low of the day) in the next 12 minutes before rebounding to 1189. 

$$ Lame Ducks

According to the Senate calendar, the Senate is back in session November 15-19, off for Thanksgiving Week, and then reconvenes again on November 29 "until business is complete."  The House is expected to follow a similar "lame duck" session.

While the Bush tax cuts in general, and the capital gains tax cuts in particular, are crucial items for investors to follow, note that the Emergency Unemployment Compensation (EUC) program is set to expire on November 30. If it is not extended, 1.2 million unemployed workers will lose their federal jobless benefits during the December holiday season that is so critical for the retail sector (anyone remember 2008?), and nearly 5 million Americans will have their benefits lapse over the next several months.  

This lame duck Congress will have its hands full when it reconvenes.

$$ Dow Can't Take Out April High

The Dow closed at 11205 at the peak in late April.  

On October 18, the Dow closed at 11143.  In the 11 trading days since (with POMO and heading into an election), the bulls could not manage to push the Dow 63 points over the hump.  Today the Dow closed at 11188.

While Terry Laundry usually refers to the S&P 500, he has spoken of a "double top" ending to T13.  I think it's fair to say that 11205 and 11188 are double tops with respect to the Dow.  

On the other hand, the Dow Transports closed today at 4818, eclipsing their April high close of 4806.  The breakout of one index but not the other is is known as a "non-confirmation" in Dow Theory parlance. 

We await the election results and the Fed statement tomorrow afternoon.  Please also note that while the Fed statement is only a few paragraphs, members of the Fed will be making all sorts of speeches beginning on Friday which should clarify any ambiguities in their statement tomorrow. 

$$ T Theory VO for Week of Nov 1-5

Last week's Volume Oscillator for reference
10/25 =  0

10/26 = -5

10/27 = -22

10/28 = -24

10/29 = -18

This week's VO

11/1 = -21

11/2 = -1

11/3 =  10

11/4 =  61

11/5 =  69

This post will be updated nightly throughout the week, so check back periodically for new information or you can subscribe to this post and receive updates by e-mail.

$$ Not all POMOs are Created Equal

On October 13, the FOMC announced their POMO schedule for the next four weeks:  nine sessions totaling an estimated $32B in treasury purchases.  Three sessions remain:

Monday, November 1

Thursday, November 4

Monday, November 8

While we don't know the size of each POMO beforehand, the Fed does release historical data on their operations.  So we know that the Fed has purchased slightly less than ~$18B in treasuries during the first six POMOs announced on October 13 (about ~$3B per).  Which means these last 3 POMOs should be significantly larger than the first six, accounting for ~$14B total with a mean of ~$4.7B per POMO. 

The Fed will announce their next POMO schedule on Wednesday, November 10.