$$ 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.