$$ 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.

$$ Studying the T Theory Volume Oscillator

Here's how Terry's Volume Oscillator ("VO") looked in the first half of April 2010:

3	1-Apr-10
26	5-Apr-10
29	6-Apr-10
5	7-Apr-10
12	8-Apr-10
25	9-Apr-10
29	12-Apr-10
9	13-Apr-10
39	14-Apr-10
18	15-Apr-10

The VO turned negative on April 16 and stayed negative for five trading sessions as prices continued to rise, tipping off investors that the up trend was losing strength:

-66	16-Apr-10
-54	19-Apr-10
-16	20-Apr-10
-27	21-Apr-10
-17	22-Apr-10

The VO climbed to 0 on April 23, before turning over on April 26 and becoming vastly negative as the rout ensued:

0	23-Apr-10
-19	26-Apr-10
-97	27-Apr-10
-56	28-Apr-10
-11	29-Apr-10
-71	30-Apr-10
-33	3-May-10
-99	4-May-10
-129	5-May-10
-231	6-May-10
-284	7-May-10

Compare how the VO has been behaving recently:

1	4-Oct-10
52	5-Oct-10
38	6-Oct-10
22	7-Oct-10
39	8-Oct-10
27	11-Oct-10
33	12-Oct-10
61	13-Oct-10
27	14-Oct-10
-2	15-Oct-10
17	18-Oct-10

On October 19, the VO turned negative for four trading sessions:

-40	19-Oct-10
-11	20-Oct-10
-18	21-Oct-10
-12	22-Oct-10

The VO climbed back to 0 yesterday, before rolling over to -5 today:

0	25-Oct-10
-5	26-Oct-10

I thought this was an interesting similarity.  We'll see how it plays out.

$$ Coiled Spring

Looks like the S&P is winding up tight in a symmetrical triangle.  Note the convergence of all the various moving averages.  Whichever way the triangle resolves should show us the market direction over the next couple of days.

$$ Dow Theory Confirmation Alert

We are very close to a Dow Theory up trend confirmation.  The reason I point this out is because if we get the confirmation, you can expect some technical buying as well as capitulation of shorts which could produce a steep climb (at least in the short term) in all the indexes.

Strict Dow Theory only uses closing prices, but I will give you both the high and the close.  Here is today's DJIA vs. late April:

Close

11164 today (41 points away)

11205 April

High

11247 today (11 points away)

11258 April

Here is the information for the Dow Transports:

Close

4774.86 today  (31 points away)

4806.01 April

High

4823.98 today (already exceeded April)

4812.86 April

$$ Shooting Stars and Gravestone Dojis

The Dow and the Russell saw shooting star candles today.  A gravestone doji appeared on the Nasdaq.  The S&P was either a shooting star or a gravestone doji, depending on how liberal you are - there was a "real body", but it was tiny. 

On the S&P, price closed near the bottom channel of the rising wedge/Wolfe Wave. 

POMO tomorrow.

$$ Potential Wolfe Wave in Action

Target is the dotted line.  Patten invalidated if price rises back above Point 5.  Note:  Wave 5 is supposed to overshoot the trend line from 1-3.  We'll see how this plays out.

See Investopedia for more information on Wolfe Waves.

$$ Ending Patterns

We have two bearish patterns on the S&P 30 minute chart right now, the Megaphone and the Bearish Rising Wedge.  Both patterns would remain valid even if the S&P rose into the low to mid 1190s early next week.  Whenever the S&P violates the lower red boundary of the Rising Wedge may well spark the anticipated correction.  

$$ Rallies and Suckers

I was watching the 1189 level on October 21 to see if we were going to breakout.  However, the TRIN was well over 1.0 all morning leading into the top at 1189. This indicates distribution. Here's why:

TRIN is the ratio of two ratios. (Advancing issues to Declining issues) to (Advancing volume to Declining volume). So, if you had 1800 advances to 1200 declines but 6M shares of advances to 8M shares of declines, then TRIN would be 1.5/0.75 or 2.0

If a rally is being bought into, you would expect the ratio to be less than 1.0, i.e., volume supporting the move. Here, the ratio was greater than 1.0 all morning and during those 30 minutes the market hovered at 1189, suggesting that the rally was being sold into. Distribution rallies are often sucker rallies and usually offer false breakouts. 

This got me thinking.  Have we seen bearish divergence between the cumulative NYSE Advance-Decline Volume and the S&P at tops recently?  Turns out we have.  Check out the tops in January, April and August:

This bearish divergence at tops is excellent evidence of distribution.  Don't look now, but we have some divergence already in October:

Note:  for whatever reason, bullish divergence between $NYUD and $SPX does not appear very often at bottoms.

$$ From the Mailbag

I received a good question today:

"As of 2:30pm on OCT 20th- the market is again relentless in its strength. We are nearing the OCT 18 high in the S&P500 and other markets. Do you foresee any sort of sustainable correction before we reach your NOV 12th peak date? 

Terry's Aug 26 peak date turned into a massive low. Do we face a similar situation come Nov 12th?" 

Let me preface my remarks by saying that on my interpretation of how to calculate T13, November 12 is an end date, not necessarily a peak date.  For example, using the same methodology on T12 produced a mid-December 2007 end date.  That target date was nowhere near the October 2007 price peak, but it was within a week of when the downtrend started in earnest.   Likewise, I believe November 12 will be within several days either way of when the downtrend starts for good.

While this thing can play out many ways, only one of the original three scenarios I am watching is still in play:

"October 13 started a fresh divergence topping process where October 20 may be the middle of the divergence, suggesting a final price top for T13 on or about ~October 27.  From there, there is a short term correction and then a rally that falls short of the October high and fails, leading to a steep decline into the nulled echo low.  Basically, a fractal of what happened in April-May."  Here's how that might look:

Let's examine what's going on.  Here are the highs of the last few days on the S&P:

Oct 13 = 1184.4

Oct 14 = 1178.9

Oct 15 = 1181.2

Oct 18 = 1185.5

Oct 19 = 1178.6

Oct 20 = 1182.9

It's clear that price is still struggling with Gann 180 degree resistance at 1182.4, which has a margin of error of approximately +/-0.5% (5.9 points either way).

On the bottom end, we are making lower lows since October 13.  ~1167 on October 14-15, and 1160 on October 19.  This is a Right Angled Broadening Formation on the 30 minute chart:

Normally, this pattern is bearish.  However, if it breaks through the horizontal resistance zone at 1182-1188, then that's  usually a bullish sign regarding the continuation of the up trend.  If we get one last up leg, it will come on the momentum of breaking this horizontal resistance. 

$$ Double Ts

This video examines a peculiar double-time symmetry found at the end of major moves.