$$ 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.