$$ 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. 

$$ 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.

$$ Indecision 2010

Take a look at the S&P.  We've had seven straight closes that are within 2.6 points (0.22%) of the opens on light volume.  Six of these seven closes were within 1.3 points of the open!

I can't remember the last time we've had seven small bodies in a row of less than 1/4 of 1%, but it's been years.  You think people are waiting to see how the election and Fed meeting go?  Nah. 

By the way, if the Republicans don't take control of both the House and Senate, the Bush tax cuts are in serious jeopardy.  If that happens, you'll have accountants, tax planners and money managers all across the nation advising their clients with long term capital gains to take those gains during 2010 at the 5% or 15% rate.  It remains to be seen, but such a scenario could be akin to shouting fire in a crowded theater. 

By the same token, the markets have already priced in a healthy dose of QE2.  What if the news is not as juicy as the rumor?  

The way I see it, against the backdrop of great indecision, the only surprises we are likely to get next week will be negative surprises. 

$$ Bradley Turn Dates

Donald Bradley devised a turn date indicator based on the position of planetary constellations.  They don't always coincide with turn dates in the financial markets, but sometimes they are uncanny.  Here's some recent Bradley turn dates:

October 25

November 15-16

December 25-26 (business days =  December 23-27)

Note that to date, October 25 marks the intraday high on the recent stock market up trend.  Also, November 15-16 is within several days of my projected November 12 end date for T13.  December 23-27 could easily coincide with Terry Laundry's nulled echo low.

$$ Long Term Gold Money Flow T

My friend Bill H. got me thinking about long term Money Flow Ts on the weekly charts.  I found an example in the weekly Gold chart below which projects an end to the up move in gold in the middle of December 2010.  

I calculated some Gann inflection points, and found that 180 degree turn from the $1226.40 high in early December 2009 is almost identical to a 240 degree turn from the $1030.80 high in March of 2008 = $1415/oz.  I view this as a minimum target.  If price materially exceeds $1415, then the next inflection zone is $1464-77.  The maximum target is ~$1610, which is a 360 degree turn from both $1030.80 and $1226.40.

Come December, we'll revisit this post and see where we are.

$$ Example of Pulling the Trigger

Quy wrote:

"I'd love to see you posting your trades so we can learn how & when you pull your triggers."

Thanks for your question, Quy.  While I have written about many of the things I look at on this blog, I have not disclosed:

1.  My actual trades,

2.  The details of my algorithm for producing buy or sell signals,

3.  The actual buy and sell signals in real time,

4.  How I implement those signals, or pull the trigger as you say. 

I doubt I will ever disclose #1 & #2.  Depending on how things go, I might disclose #3 in the future.  But let me give you an example of #4.

Assume you received a sell signal based on the October 21 close.  For October 22, you would place a sell stop order at the low of the October 21 candle at ~1171.

Point of clarification:  clearly you can't trade $SPX.  I am just using the $SPX chart as an example.

October 22 did not trade below 1171, so the order was not executed. 

For October 25, you move your sell stop order to the low of the October 23 candle, or ~1179.   October 25 did not trade below 1179, so that order was not executed.

For October 26, you move your sell stop to ~1185, the low of the October 25 candle.  This order gets executed on October 26, and when it does you place a stop loss order at the top of the October 25 candle (~1196) in case you are wrong.

Further, because price is above the 10-day exponential moving average when the trade was executed, you would take a smaller initial position than you would if price was below the 10-day moving average.  If you catch the corner and the trade starts to go your way, you can add to your position later. 

$$ Potential Head & Shoulders Pattern

These patterns are not confirmed until they break below the neckline on high volume, but the potential pattern is setting up:

$$ AAII Sentiment Survey = Extreme Greed/Complacency

The weekly AAII sentiment survey hit 51.2% bullish, the highest mark this year.  Bearish sentiment was 21.6%, the lowest mark this year.  The bull-bear spread was 29.6%, the highest since October 11, 2007, right before the T12 price peak. 

$$ Martin Pring's KST

Martin Pring is prolific.  He has written many books about technical analysis.  He has a website which contains lots of free information as well as subscription services.   And he has created several different technical indicators.

One of the momentum indicators Pring devised is called KST or "Know Sure Thing."   He offers free daily short term KST charts at his website.  These charts are updated each night. 

Here is the current KST chart for the SPY ETF that tracks the S&P 500:

You'll note that some of the price bars are brown, and some are green.  This depends on whether the black short term KST line is above the red dotted KST line (green) or not (brown). 

Normally, you see brown price bars at bottoms, and green price bars at tops.  I take note when you see the opposite.  For example, we've put several brown bars in a row recently.  This is a warning that we are in the process of topping out.  It's not 100% foolproof, and that process can take time, but it's evidence.

Noticed what happened in May after the flash crash.  We rallied back up to the red dotted moving average on price, but the bars stayed brown.  This was evidence the downtrend was still strong despite the rally.  SPY fell hard after that rally lost steam. 

Likewise, look at the pull back in mid-July.  Price bars stayed green despite the correction, signifying that the uptrend was strong.  SPY shot up off that pull back into the early August highs.

The Pring website offers some other free charts and explanatory articles in addition to the short term KST chart.  Check it out.

$$ T Theory VO for Week of Oct 25-29

Last week's Volume Oscillator for reference

10/18 =  17

10/19 = -40

10/20 = -11

10/21 = -18

10/22 = -12

This week's VO

10/25 =  0

10/26 = -5

10/27 = -22

10/28 = -24

10/29 = -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.