$$ Closing out 2010

Very light volume this week.  Hard for me to read too much into the price action, except for two things that stand out:

1.  The US dollar is currently down 2% for the week.

2.  Silver is making new 30 year highs.

As you may recall, I have Gold and the Euro making a cycle high on ~February 8, with the dollar making a cycle low about the same time.

As for equities, I have the S&P and Junk Bonds (equity equivalent) making a cycle high on ~February 1, with volatility making a cycle low about the same time.

These forecasts are based on the Money Flow Ts, and contradict the work of many other cyclists.  However, they tend to "fit" with Terry Laundry's current thinking of a "Short" volume oscillator T expiring in February, resulting in a cycle low in March.

Happy New Year to everyone!   I hope 2011 is joyous and bountiful for you.

$$ Gold Breaking Out this Morning

After quietly basing at the 50MA the last couple of weeks, Gold appears to be breaking out this morning.  The ADX is near 10, and the green line crossed the red line this morning (on GLD).  I always pay attention to ADX crossing signals when the ADX line is low because a low ADX line means there is excellent trend potential.

This is corroborated by the Bollinger Band width which is at a several month low, implying a potential BB squeeze play is at hand.

Should Gold punch through the bearish divergence resistance line on the RSI, it would confirm the break out.  It's not unusual to see a trend accelerate to the upside when such RSI bearish divergence resistance lines fail.

To illustrate, here's an end of day Gold chart.  It won't be updated with today's action until ~5:00 pm central:

$$ T Theory VO for Week of Dec 27-31

Last week's Volume Oscillator for reference

12/20 = 41

12/21 = 54

12/22 = 48

12/23 = 28

This week's VO

12/27 = 21

12/28 = 15

12/29 = 13

12/30 = 4

12/31 = -1

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.

$$ Questions about ZIRP

The Market Ticker posed some interesting questions today:

1.  Can the Fed's Zero Interest Rate Policy "work" in a world where not everyone is following the same course?  For example, China raised their rates again over the holiday.  Or will capital flow to where it's treated best, potentially subjecting the US dollar to a Japan-like carry trade scenario?

2.  Is the Fed's ZIRP primarily about protecting the US citizens from entering another Great Depression, or is it really about preventing the recognition of insolvency of most of the large major financial institutions in the US?  Or are those one and the same?

$$ Merry Christmas to All!

Or if you don't celebrate Christmas, Happy Holidays!

I look forward to continuing our conversation next Monday, December 27.  If I have anything to post in the meantime, I will.

Parker

$$ Uptrend Confirmed

Today we erased that bearish divergence that was brewing between the S&P and the NY Advance Decline line. 

I could be wrong, but I feel we are unlikely to get a serious correction unless and until there is divergence between the S&P and either: 1) the NY Advance Decline line (Issues), or 2) the NY Advance Decline Volume.

The Money Flow Ts show a cycle top in stocks and junk bonds around ~February 1, and a cycle bottom in volatility about the same time. 

$$ T Theory VO for Week of Dec 20-23

Last week's Volume Oscillator for reference

12/13 = 71
12/14 = 50
12/15 = 11
12/16 = 29
12/17 = 41

This week's VO

12/20 = 41
12/21 = 54
12/22 = 48
12/23 = 28

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.

$$ Year in Review: Prices Can Continue to Rise After a Long Range ADT Concludes

I believed that once T13 ended, we would start to see a decline in the S&P as the cash build up phase of T14 started.  Had I studied the history, I would have known better.

Once T11 concluded and T12 started in 1998, the S&P continued to rise into 2000 before starting its descent into the center post of T12:

Likewise, after T12 concluded and T13 started in the summer of 2007, the S&P climbed to its final peak in October 2007 before starting its descent into the center post of T13. 

Similarly, T13 expired in November of 2010, yet the S&P continues to climb.  

The corollary to this lesson, as BillH has repeatedly commented, is that long range Advance Decline Ts are much better suited to going long at the center post than going short at the expiration of the T.

I would observe that shorting the first bearish divergence between the S&P and the NYAD after the end of a long range ADT was profitable in 2007 (9.4% correction) and 1998 (19.3% correction).

$$ Gann Inflection Points

Corey Rosenbloom at Afraid to Trade is one of the few people I have seen who use Gann inflection points like I do.  Here's his recent post on Gann inflection points, and the chart he posted:

$$ Year in Review: Where to Start Long Range Advance Decline Ts

This will be the first in a series of posts as we close out 2010 on lessons we have learned this year.  I have a few topics in mind.  Feel free to make suggestions.

Where to Start Long Range Advance Decline Ts

Instead of starting the Advance Decline T (ADT) at the ultimate peak in the NYAD line, I proposed starting ADTs in the middle of the first bearish divergence between the NYAD peak and the S&P.  

With respect to T12, this start date (May 27, 1998) produced accurate forecasts of: 

1) The Feb 2007 top when using the Oct 2002 low as a center post,

2) The July 2007 top when splitting the Oct 2002 and March 2003 lows as a center post, and

3) The Dec 2007 top when using the March 2003 low as a center post.

With respect to T13, the split divergence start date (June 22, 2007) produced accurate forecasts of:

1)  The late April 2010 top when using the Nov 2008 low as a center post

2)  The early Nov 2010 top when using the March 2009 low as a center post

For a recent post with charts showing the split divergence start dates for T12 and T13, please see:

Is T14 Starting?

For further/more detailed reference, please see the following videos:

A Look Back at T12

Tweaking the 13th Advance Decline T

$$ T Theory Volume Oscillator Ts

Terry Laundry discussed a short range VO T today at T Theory Observations.  The projected top date for that T is February 16, 2011 after which he expects a correction into March. 

The longer cash build up line that begins in June 2010 projects a VO T top date of May 17, 2011.

$$ Recent Uptrend Cycles

From November 2, 2009 to January 19, 2010, the S&P rose from 1030 to 1150 (9.2%) without making any significant corrections over that span of 52 trading days.  For example, the S&P never once retreated to its 50 day moving average, but stayed comfortably above it. 

After a 13 trading day "break" (correction), the next bull run started on February 5, 2010 and lasted until April 26, 2010.  The S&P rose from 1045 to 1220 (16.7%) over those 54 trading days without any significant corrections.

As we all know, the S&P promptly gave back all of its gains from these two bull runs and then some over the next two months, bottoming at 1011.

Starting August 31, the S&P embarked on a 47 day bull run with no significant corrections, rising from 1041 to 1227 (17.9%).

After taking a 16 day break/correction, the current bull run began on November 30 at 1174. 

If this pattern is to repeat, then we can expect a ~50 day bull run into ~February 9, 2011 without much in the way of corrections.  However, when the S&P finally tops out in February, we would then expect a correction similar in scope to what we saw in May-June of 2010. 

$$ SPX Inverted Head & Shoulders Continuation Pattern?

If we break the neckline next week, the formation suggests a target of ~1258:

$$ SOX and BKX Acting Much Stronger than the S&P this Morning

There may be some pinning of the S&P today on OPEX that might prevent it from closing where it would ordinarily close.  Certainly SOX and BKX are suggesting that equities should be rising, not falling:

$$ House Passes Tax Cut Extension

The bill is on its way to President Obama for signature.

This news should be priced in for the most part, and should not be cause for some huge new rally.  It does, however, remove a potential stumbling block to the rise in equities.

In other news, Moody's downgrades Ireland's bond ratings five notches from Aa2 to Baa1. 

$$ Analyzing Car Sales

Very interesting post at The Truth About Cars ("TTAC") comparing 2009 and 2010 sales volumes for the Top 6 models in the Top 6 sales categories.  The only models behind their 2009 sales pace are:

Toyota

Camry

Corrolla

Prius

Tacoma

Honda

Accord

Civic

One possible explanation:  the South Koreans (Hyundai & Kia) are doing to the Japanese what the Japanese did to the American auto makers 25 years ago -- building a better, cheaper mouse trap.

$$ Gold's Next Major Top

Since the late 1960s, gold has generally seen major lows every ~8 years, and major tops ~11 years after major lows.

As depicted below, we saw a double bottom in gold in July 1999 and April 2001.  Splitting the bottoms gives us a May 2000 start date for the 11-year cycle.  Which means we should expect the next major top in gold around ~May 2011.

This projection squares well with the Gold Money Flow T discussed below, as well as gold's seasonality in which important tops are often made in the Spring.  See, e.g., May 2006 and March 2008.    Finally, it also correlates with the end of QE2 as well as Martin Armstrong's 8.6 year cycle turn date in economic confidence (June 2011). 

$$ Current SPX Weakness

The bearish rising wedge broke down late Monday, and tested the former support line early Tuesday before starting a new downtrend channel on Tuesday afternoon:

Unless the tax cut extension bill gets bogged down in the House or we get some OPEX craziness, I don't see this correction getting out of hand or lasting much longer than Monday, December ~20.  

In his midweek update today, Terry said he expects any weakness to bottom out around 0 on the T Theory Volume Oscillator. As of December 15, the VO has fallen to 11.

$$ The Big Question

Most commentators agree that we are due for a 7-10% correction in the stock market.  Bearish divergences abound.  Yesterday, we got a Hindenburg Omen. 

However, from a seasonality perspective, it's difficult to imagine getting much of a correction before year end unless the tax deal somehow falls through.  Practically speaking, this is the last trading week of the year.  The second stringers will be in control from December 20-31, and the market usually doesn't show much volatility  during that time.  Certainly it would be odd to see a major dump during the holidays.  If we don't get any serious downward movement by Friday OPEX, I would not expect any correction to start before 2011. 

Terry's midweek update suggests a T with a top in mid-February with a 75-day selling climax in mid-March.  This confirms the Money Flow Ts I have showing an early February top date for gold, junk bonds and stocks, and bottom date for volatility and the dollar. 

However, there are some cyclists who show a late December turn date.  They expect a correction to start in early January.

What are your thoughts?  When does this stock market rally end and the next serious correction begin?

Personally, unless something major happens over the next couple of days, I will be positioning myself long with the expectation that equities and gold will rally through January. 

$$ Strategic Planning

As previously discussed, the Money Flow Ts show an early February turn date for:

Dollar = low
Volatility = low

Euro = high

Gold = high

S&P = high

Junk Bonds = high

If the Money Flow Ts are accurate, then strategically a leveraged ETF in gold or silver is likely to outperform most other ETF alternatives.

However, there are some individual stocks I would like to highlight that also show Money Flow T tops in the February time frame.  Each of these stocks has the potential for enormous gains between now and February if bought on a pullback.  

As always, please manage your risk.

$$ Volume Oscillator Bearish Divergence

Over the last two trading days, both the S&P and Dow have made successively higher closes, while the T Theory VO has made lower closes (79 to 71 to 50).

I went back and reviewed 2010 to investigate bearish divergences between price and the VO in  uptrends.  I found no cases where the divergence persisted over back to back trading days.

I did find the following "double tap" bearish divergences between the VO and both the S&P and Dow that signaled a correction ahead:

1/11 & 1/14 bear divergence preceding the correction that started 1/19.

4/13 & 4/15 bear divergence preceding the correction that started 4/26.

10/26 & 11/1 bear divergence preceding the correction that started 11/5.

However, I also found bearish divergences on the following dates that were signals of, as  the Smiths might say, "nothing in particular:"

3/9

3/15

3/30

7/12

9/15

9/17

10/11

10/21

$$ Best Buy Shares Down 16% Today

Best Buy reported earnings of $0.54 for the quarter vs. estimates of $0.60-65.  Same store sales were down 3.3%.

This is the first significant earnings report that: 1) includes Black Friday data and 2) focuses on the activity of the US consumer.

$$ T Theory VO for Week of Dec. 13-17

Last week's Volume Oscillator for reference

12/6 =  38
12/7 =  56
12/8 =  57
12/9 =  67
12/10 = 79

This week's VO

12/13 = 71
12/14 = 50
12/15 = 11
12/16 = 29
12/17 = 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.

$$ Is T14 Starting?

At the start of T12 and T13, we saw the following pattern:

1.  Divergence between the NY Advance Decline line and the S&P.

2.  A fairly sharp correction in the S&P after the divergence.

3.  The S&P moving to higher highs before starting to its descent into the center post of the Ts.

Start of T12:

Start of T13:

The reason I bring this to your attention is because the NYAD is currently showing bearish divergence with the S&P 500.   If we are to get a correction soon as suggested by the Money Flow T, what you are seeing may well be the start of T14.  This would be true even if  the S&P goes on to make higher highs after the correction.  This would not be true if the NYAD goes on to make higher highs.

Of course, the bearish divergence we are seeing could only be temporary, and prices as well as the NYAD could both blast to new highs soon thereby invalidating the T14 theory.  But I thought I would bring the bearish divergence between the NYAD and SPX to your attention since this is the first time we are seeing it, and highlight the potential ramifications.  

$$ Trend Support Line

If we are to get a correction next week, the first sign will be a 30 minute candle that closes below the blue trend support line (see red arrow).

Of course, not all violations of that trend line will result in correction.  And that trend line might hold up all next week.  

But the pattern that has been developing since the open on December 7 is a bearish rising wedge.   If you see it start to break down, you might want to take profits if long. 

$$ CBOE Equity Put Call Ratio Too Bullish/Complacent

The 10MA of the CBOE Equity Put-Call Ratio (blue line) broke below its declining channel today, and has made a 6-month low at .502.  Any time the 10MA drops to .500 and below, it's considered too bullish/complacent.

With options expiration coming on Friday December 17, the Theory of Maximum Pain suggests a correction take place next week.  

Combined with the 5-day ARMS Index which remains historically low (i.e. overbought), I believe that next week is an extraordinarily risky time to establish a new long position.  

$$ Gold Correction

I was looking at some gold charts and Gann inflection points last night, and the probability is that the current gold correction does not go much lower than $1336/oz.

$$ Fed Z1 Report

Total Credit Market Debt (TCMD) = $52.281T.  This is deflationary since Q4 2008 at $52.435T.

The two largest segments of TCMD are Household and Financial.  They have both contracted for 7 straight quarters, shedding/defaulting/writing off a combined $3.1T in debt in the process.  

The Federal Government is now the 3rd largest debtor, having increased its debt by $2.7T in the last 7 quarters in an effort to offset the deflationary forces from the contracting Household and Financial sectors.

Since Q4 2005, Federal Government debt has nearly doubled ($4.7T to S9.0T). In other words, our government has incurred nearly as much debt in the last five years as it did from 1776 to 2005. If this keeps up, our debt will be 100% of GDP within a few years. 

Spam Folder

Just a quick note that Blogger has a Spam detector with a mind of its own.  I have no control over it.

If you write a comment and don't see it published, please don't assume I have intentionally deleted it.  I rarely delete posts.  Instead, alert me to your missing comment, and I will check the Spam folder for you.

Many thanks, and apologies for any confusion caused by the Spam detector.

$$ ARMS Index at 50+ Year Extreme

ZeroHedge has an article today about the $TRIN at levels not seen since 1956.

The ARMS Index, of course, is the ratio of Net Advancing Issues to Net Advancing Volume.  Jeff commented yesterday about how peculiar  it was to see Declining Issues lead 3:2, but Advancing Volume lead the other way at 3:2. 

$$ Anyone Notice the $60 Sell Off in Gold Since Yesterday's Highs?

Looks like the daily Gold Money Flow T was right on.

The S&P is down 15 points since yesterday's highs.

We'll see what kind of follow through we get.

$$ Money Flow T Status Review/Update

Here's an overview of where we are.

Dollar/Euro

On the daily chart, the Dollar shows a bottom in the early February time period:

Likewise, the Euro daily MFT shows an early February top:

From the relationships these currencies have recently demonstrated with stocks and gold, we can draw the general conclusion that equities and commodities (which we will examine specifically later) should generally perform well through the end of January and into early February. 

However, the fifteen minute Dollar chart shows it's weakness that began last week should be over, while the hourly Dollar chart shows a top coming on December ~20.

The only conclusion I can draw from this is that weakness in equities and commodities should develop soon and end sometime around December ~20.

Equities

Turning specifically to the S&P, the daily Money Flow T shows an end to the move that started in July as of December 8:

More specifically, the 30 minute SPY Money Flow T showed a top as of the open today:

In addition, the Volatility Money Flow T shows a bottom in December 8, and another bottom in early February which confirms the currency Money Flow Ts:

Finally, JNK acting as a surrogate for FAGIX and the S&P also shows a late January top:

The only conclusion I can draw from the equity Money Flow Ts in conjunction with the currency Money Flow Ts is that December 7-8 is a top date for equities, with the correction expected to last until December ~20, at which point we will see a rally into late January/early February.   I would add that the ARMS Index remains historically overbought. 

Gold

Which brings us to the Gold daily Money Flow T, which shows successive tops on December 7, early February and late May:

The Gold Money Flow T is consistent with the currency and equity Money Flow Ts, at least with respect to the December 2010 and early February 2011 top dates.  

It's interesting that a final top for gold is projected in late May 2011 (which would be seasonally correct for Gold).  Martin Armstrong's 8.6 year cycle low in economic confidence is early June 2011.  Given the QE2 schedule, I believe that Armstrong's cycle will coincide with a low in confidence in the US Dollar, meaning Gold should peak in May 2011.  This also correlates well with the Aden Sisters' 8 and 11 year cycles in Gold, which suggest an important top in Gold during the 2011-12 time frame based on the 2000-2001 low in Gold. 

$$ Opening 30-Minute Range Pivot

The daily pivot is 1231.50, with S1 at 1227.95 and R1 at 1235.75.

Halfway back from yesterday's lows to today's highs is 1227.81, which is quite close to the first pivot support level at 1227.95.  This will be a key area to watch today.  If it holds, I would not recommend a new short position. 

However, if it fails and we take out 1226.10 (the 61.8% retrace from yesterday's lows to today's highs, then we have a potential trend reversal. 

$$ "Framework" for a Deal Extending Bush Tax Cuts

Here's a New York Times article about it.

Meanwhile, ZeroHedge reports that China may be raising interest rates by the weekend. 

$$ T Theory VO for the Week of Dec. 6-10

Last week's Volume Oscillator for reference

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

This week's VO

12/6 =  38
12/7 =  56
12/8 =  57
12/9 =  67
12/10 =79

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.

$$ Miniscule Volume Today

In a full day of trading with no obvious vacation disruption, SPY traded ~99 million shares today (the count as of 3:24 pm central).  To put this in context, SPY volume has not traded below 100M shares in the last 2 years except for half days or days where the first stringers were likely to be on vacation, and the second stringers were running the show:

Nov 26, 2010 (half day after Thanksgiving = vacation/second stringers).

Dec 24-31, 2009 (half day on Dec 24, followed by short week to close the year = vacation/second stringers).

Dec 22, 2009 (second stringers).

Dec 24-26, 2008 (half day plus vacation = second stringers).

The 200-day moving average of volume in SPY is over 205M shares per day.

$$ Gameplan

We gapped down at the open today.  I expect at some point we'll attempt to close the gap today (at S&P 1224.71).  If we do, I'll be looking to short any breakdown after the gap fill attempt.  To manage my risk, I'm out if the S&P breaks to new highs at 1227.25.  I will gladly risk ~3-4 points for a potential huge gain if we get a selling climax.  

If we don't get a gap fill attempt but start to sell off straight away (gap and go day), I'll be looking to get short under 1211.50.

$$ Thank You

I just wanted to give a shout out to all the readers and participants of Position Sizing.  Over the last thirty days, this blog has accumulated more than 50,000 page views.  Thanks again, everyone!

$$ No Deal on Taxes Yet

Congress could not reach a deal on the Bush Tax Cuts today.  In particular, the status of the Capital Gains tax remains uncertain.  The lame ducks have until their self-imposed deadline of December 17 to work something out on taxes, as well as several other pressing issues. 

$$ Long Range View: The 85-Month Cycle

I started exploring the 4-year cycle a bit, expecting to find an 8-year cycle.  What I found, however, is an 85-month (7.1 year) cycle from low to low.  

Cycle Lows

1.  October 1966 low 

2.  January 1974 low (87 months later)

3.  April 1980/August 1982 double bottom
(split = June 1981; 89 months later)

4.  November 1987 crash low (77 months after June 1981)

5.  November 1994 end of consolidation (84 months later)

6.  September 2002 low (94 months later)

7.  March 2009 crash low (78 months later)

So, the cycle has taken between 77 and 94 months to complete, with an average of 85 months.  Projecting into the future, we should expect another low in 2016 and the final low for the 40-year cycle to come in 2023.

Stockcharts.com does not let me go back past 1980, but here's how the cycles look since 1980:

Notice how the last several cycle highs have come in the last half of the cycle.  Since we are in the bearish phase of the 40-year cycle, I speculate that the high for the current 85-month cycle will come in the first half of the cycle, or within 42 months or less from March of 2009.  Which means before October 2012.  

$$ ARMS Index Overbought Warning

The 5-day ARMS Index ($TRIN) closed at 0.6 today.  This is the lowest 5-day reading since 2003.  Ultra low readings (which suggest the market is way overbought) usually occur early in rallies coming out of deep bottoms.  It's very rare to see such a low ARMS reading at a top -- in this case, a  triple top vs. the April and November highs. 

$$ Refining the Daily S&P Money Flow T

We know the daily MFT projects a December 8 end to the current up move in the S&P.  Then again, daily MFTs are sometimes imprecise. 

So I have dug down to smaller time frames to see if we can refine the forecast.  I found nothing on the hourly, but when I looked at the 30 minute chart of SPY, it forecasts an end to the up move at about the close of December 6 or open of December 7:

This time frame is confirmed if we look at a 15 minute chart of the Dollar, which suggests that  temporary Dollar weakness should end on the afternoon of December 6.  Recall that: 1) stocks are trading inversely with the dollar, and 2) the hourly Dollar chart shows a Money Flow top on December 17-20:

$$ Horrid Jobs Report

S&P futures traded up to 1227 right before the release of the Jobs Report, which was a huge disappointment.  Per the household survey, 185K people were added to the working age population, but the employed number actually fell 334K.  This means over 500K jobs were lost before "adjustments" (wink wink). Futures immediately dumped to 1213 before recovering to 1220 at the open.

We have traded between 1217 and 1220.5 during the first hour.  1216 is important support, as is 1211.5. 

Interestingly, gold shot up on the jobs report, and the dollar faltered.  This was due to the fact that a couple of Fed governors said yesterday that QE2 could be suspended early if conditions warranted.  Gold immediately sold off yesterday on those statements.  In a perverse way, the bleak jobs report has given the market confidence that QE2 will not be cut short any time soon. 

$$ Currency Money Flow Ts

I have a long range Money Flow T in place for the Euro showing a top date in the second week of February (see blue lines).

However, the hourly MFT on the US Dollar shows a top on December 20:

Taking a look at the dollar chart, you'll notice that stocks are trading inversely to the dollar.  I expect dollar weakness to continue into next week, and then reverse into dollar strength heading into the 20th.   After that, the bigger daily Euro MFT should take over, and the dollar should decline into early February as the Euro rises.

Accordingly, whatever selling climax we get in equities should not last past December 20.  After it's over, I expect equities (and gold) to shine through January. 

This is confirmed by the volatility Money Flow T, which shows a final low in early February (black lines).

An early February final top for stocks would be important in terms of the four year cycle that Terry spoke of, referring to Orville's work.   The four year cycle is a low to high to low cycle.  If the 4 year cycle started at the early March 2009 low, then we can expect the next low in March of 2013.  The cycle will be interpreted as bearish if the high comes before the halfway point (March 2011).  The cycle will be interpreted as bullish if the high comes after March 2011.  

So if the high comes in early February, then the cycle will be considered bearish (if  March 2009 is the correct start date) and we should expect the lows of March 2013 to be lower than the lows of March of 2009.   

Note, however, that there is not universal agreement on when the four year cycle should start.  Some would argue that the four year cycle began at the November 2008 low, which would make a February top date considered bullish, not bearish.