$$ 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.