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LT wave for February

Posted by Danny on February 1, 2017

Markets climbed to new all time highs last week and the Dow finally got above the 20k level for the first time. But stocks appear to be pulling back from those new highs and that means we have to consider scenario two I described in my recent Dow 20k post. A sharper pullback could be in the making here.
Let’s start with the current Nasdaq chart:

comp-daily-6_8_2015-1_31_2017

The Nasdaq has outperformed the S&P 500 in recent months and is climbing within a narrowing wedge. That is always a dangerous setup, with or without Dow 20k, and is prone to a sudden drop once the high rate of change cannot be kept up.
The bearish divergence remains in my Earl indicator (blue line), while the slower Earl2 (orange line) has marked time by going sideways. This is typical for a market that has stretched itself out and up as far as possible, and that in itself is as dangerous as climbing inside a wedge.
The Nasdaq gained 41 points in the recent lunar green period and we are now starting a new red period. The setup suggests that we will finally get some downside action in a red period. A drop below 5550 would confirm this scenario.

I would remain cautious at this point and take some profits or at least keep stops very close to the market. A further climb is not impossible with this setup, but the odds are not good and the risk/reward ratio stinks.

To finish we have the LT wave chart for February:

ltwavefeb2017

The wave did a poor job in January, climbing higher when the wave suggested weakness and merely drifting sideways during what was supposed to be the stronger period. I have not seen this kind of “inversion” in the LT wave chart before, so I don’t know what it means (if anything).
The second peak on the 28th came close to the highs of the month and maybe that marks the return of normal cycles. If so, then market weakness should continue until the 8th and be followed by a brief period of strength until the 15th. The remainder of February is also weak, except for the last couple of days.
As always, this LT wave is experimental so don’t bet the farm on it.

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Indecision continues

Posted by Danny on January 23, 2017

Not much has changed since we looked at the S&P 500 a few weeks ago. The market continues to chop around in a narrow sideways range and the Dow still hasn’t made it above the 20k barrier:

sp500-daily-5_19_2015-1_20_2017

The bearish divergence in my Earl indicator continues to be in place and the slower Earl2 continues to go down. The good news is that the overbought situation is being resolved by sideways price action so far, but that doesn’t guarantee it will stay that way. With all indicators pointing down such a sideways could end with a sudden pronounced downturn.

The LT wave for January points to price weakness after the 21st, so there is good reason to stay cautious here. This kind of sideways movement with low volatility tends to make some investors feel safe. But when a market moves like this there is actually a growing risk for a sudden sharp move once the market decides which way it wants to go next.

I expect this market indecision to be resolved sooner rather than later and currently the base scenario is for a move down to come first. In that case a retest of the 2180 area would become the initial target.
A burst out above the obvious overhead resistance levels near 2300 would tell us that this base scenario is wrong.

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Hesitating to go higher

Posted by Danny on January 18, 2017

The S&P 500 keeps going sideways while the Nasdaq is setting a string of new all time highs. The market is probably trying to make up its mind here, burst higher or start a correction? The first lunar red period of the year ended with a 191 point gain for the Nasdaq, see Performance. The cycle inversion we have been seeing last year just seems to continue. I will do a special post soon on why and when normal lunar cycles may return. Stay tuned.
Let’s have a look at the current Nasdaq chart:

comp-daily-5_5_2015-1_17_2017

The Nasdaq has taken another swing higher, but warning signs remain. The Earl (blue line) is turning down with a bearish divergence in place. The slower Earl2 (orange line) has not done anything and still shows a top in place. The MoM indicator is also turning back down after another visit to the +8 zone. Not the kind of setup I want to buy, so I would just stay patient here.
We are starting a new lunar green period, but if the cycle inversion carries on then that is not a plus. The LT wave for January suggests a peak near the 17th followed by increasing weakness for the remainder of the month. We will soon find out if that projection holds up.

There is no reason for instant panic, but the setup doesn’t look great and I am getting a lot of partial profits and sell signals in my reversal levels method. So, I would be careful until the sky clears and take some profits in positions that have grown too large. Most indexes keep bumping into overhead resistance and without a strong catalyst they will probably not succeed to climb much further in the short term.

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Why Dow 20k matters

Posted by Danny on January 10, 2017

Stocks have been trading rather flat in recent weeks, and several attempts for the Dow to get above the 20k milestone have come up short. More on that later in this article. First, let’s have a look at the current situation in the S&P 500:

sp500-daily-4_24_2015-1_9_2017

A few weeks ago we observed how stocks needed to catch some breath, giving indicators the time to revert from rather overbought levels. We now see that the faster Earl (blue line) has bottomed out and turned up already and the MoM is back to neutral levels. The slower Earl2 (orange line) is still headed lower and nowhere near a bottom.
The bearish divergence remains in place and an index making new all time highs with Earl below the zero line is a tricky setup. The overhead resistance levels are still putting a ceiling above this market and it appears as if momentum is not strong enough to push much higher at this moment.

***

When and how the Dow gets above the 20k mark is widely watched and is determining the near term price action right now. Much like an athlete would do if he has failed to clear a hurdle, this market may need to take a few steps back before it can try to get over on the next attempt.
Some observers contend that Dow 20k is not really relevant. That may be true from a long term investor’s point of view, but most of the daily market volume is coming from short and medium term traders, not from long term investors. And for them it matters. Why?

It is human nature to try to simplify things when faced with something as complex as a stock market. That’s why investors tend to use round numbers as reference points and mental stop or target prices. An investor who has bought a stock at $67 and sees it climb to $76 may tell his wife that he is going to take some profits when it hits $80. That’s easier to remember than $81.27. This simplification in traders’ minds creates a “round number effect”. Options being priced at round numbers contributes to that effect as well. There is also the known psychological phenomenon that makes a $19.99 product look cheaper than a similar item priced at $20.00. This “left digit” effect in combination with “round numbers” effect makes for psychological barriers in widely watched stock indexes like the Dow Jones. Some common patterns can be observed when an index heads into a major round number. We can see the most typical price action in this S&P 500 chart from 2014, when the index climbed above 2k for the first time.

spx2000

The first variation is: coming up just short and falling back. That’s what we saw in July 2014. The reason for this is simple. There are always some traders who have decided to sell some if market hits 2000 and they put their sell orders just below that mark. Other short term traders who anticipate that behavior add some sell orders just below 2000 as well, just hoping to benefit from an expected pullback. This supply coming in just below the round number causes the pullback.
The second variation is: crossing above, but not able to hold up there (= fear of height sets in). That’s what we saw in Aug-Sep 2014. The hurdle was cleared but the market never got properly away from the 2000 level. This is left digit effect. Traders’ minds need some time to get used to see “2” in front. Failing to get away from 2000 was followed by another pullback.
In Nov 2014 the market got back above 2000 again and then it got away from it. Subsequent pullbacks retested the 2000 level, which acted as strong support, very typical price action after a breakout.

Of course, things do not always evolve in this exact fashion. If a market has a lot of “juice” left when coming into a round number barrier then it will often cut straight through without looking back. There are sell orders just below the round number, but they are easily absorbed and the market moves on.
If on the other hand the market is rather tired and momentum is fairly weak, then the predictable sell orders sitting just below the round number will stop the advance. And when that becomes clear more investors may decide to sell. It becomes a self-fulfilling prophecy at that point.
And with each new failed attempt at a psychological barrier it becomes more visible for investors. It can go on for years and become a market obsession. That’s how the Dow ended up taking more than 15 years to get above and away from the 1000 level in 1965-82. That’s how the FTSE 100 has been spending the last 16 years trying to get above and away from 7k.
Will it take that long to get above and away from Dow 20k? We don’t know. But if the Dow happens to struggle for weeks at that level, then weeks become months and eventually months can become years. A big round number is not a strong psychological barrier on the first attempt to clear it. But it comes a stronger and more visible barrier with each new failed attempt. If and how the Dow gets above 20k will probably tell us how much “fuel” is left in this market and that is an important takeaway.

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LT wave for January

Posted by Danny on January 3, 2017

Stocks had rather flat end of year trading with some weakness surfacing in the final days of December. The lunar green period produced a 54 point loss in the Nasdaq, a fitting close to a year which has been difficult for lunar cycle trading. More on possible reasons for this bad year and when “normal” cycles may return in a later article. Let’s first have a look at the current Nasdaq chart:

comp-daily-5_21_2015-12_30_2016

As I reported a few weeks ago, my indicators appeared stretched and a choppy ending to the year would be healthier than an ongoing surge to new highs. All my indicators are now coming down, including the slower Earl2 (orange line). This means the overbought situation is slowly getting worked off. But none of the indicators is showing any signs of bottoming out at the moment, so I would be patient here. Chances are we will see further downside action before we get an attractive setup to enter new longs.
We are also starting a new lunar red period and perhaps we are due for a normal cycle. The technical setup looks right for it. If we do get an early new year drop then Nasdaq 5250 becomes first target and just above 5000 if things turn ugly.

The LT wave for January also points to early weakness:

ltwavejan2017

The wave for December did OK, not perfect. The expected weakness in the 2nd week did not pan out, but the neutral/flat trading for the rest of the month came true. Highs in the S&P came close to noticeable peaks in the LT wave on the 12th and 20th.
For January the wave projects weakness in the first week with a low value on the 4th. Then a strong period from around the 11th until 21st with a major peak value on the 17th. Last 10 days of the month are weaker again.
As always, don’t bet the bank on this. The LT wave is purely based on natural cycles and doesn’t use any market inputs.

As a final extra I want to point to the number of bullish stocks in the S&P 500. This is a chart I also post on Twitter from time to time, e.g. Dec 7. In a healthy bull market the number of S&P 500 stocks in bullish mode (based on my reversal levels method) is well above 250 (50%). In the beginning stages of a market advance the number of bullish stocks normally goes above 400 (80%) and stays above 300 during minor pullbacks. Once the number of bullish stocks drops back below 300 a deeper correction could be starting. This is the current situation:

spx

The number of bullish stocks did climb above 400 on Dec 12, but has since come back down and is now at 278. This means a lot of stocks and sectors are already quite bearish and only a small majority of stocks remains in bullish mode. Maybe this is just year end profit taking… Or the market is about to turn lower. We will find out soon.

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The next leg up

Posted by Danny on November 14, 2016

Stocks performed a major turnaround last week and are breaking out to the upside. Chances are good that markets will keep rallying into year’s end. Here is the current Nasdaq chart:

comp-daily-2_23_2015-11_11_2016

The October highs are likely to offer some resistance. But all my indicators have turned up from major lows. And there is further room to rise. We will also start a new lunar green period later this week. A climb towards 5400-5500 is a reasonable expectation. A revisit of the 5000 level would not look good. If that happens we will have to re-evaluate the picture.

The number of bullish stocks in the S&P 500 is also back above 300:

spx

This number had been signalling weakness since late August and was stuck in a downward trend. We would want to see this number get back above 400 (=80%) if this rally is for real. That’s also what we had in February and July. A drop back below 250 (=50%) bullish stocks would put question marks behind the bullish thesis. When there are important changes in this indication I usually post them on Twitter, as I recently did here: https://twitter.com/lunatictrader1/status/791993232792092673

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A very clear situation

Posted by Danny on November 7, 2016

Stocks have come under increasing pressure and important support levels are slowly giving way. The recent lunar green period ended with a 190 point loss for the Nasdaq, one of the worst green periods this year, and continuing the pattern of lunar cycle inversion we have seen all year. As we have been pointing out for weeks, the path of least resistance has turned down. But will it stay that way? Let’s have a look at the S&P 500:

sp500-daily-1_26_2015-11_4_2016

The important 2120 support level has not held up the market and I would now expect 2120 to become overhead resistance for any upward move. This index has dropped to the lower bound of the down trend channel we pictured a few weeks ago. This means it is still not a break down from which it is hard to come back. But it offers us a very clear situation now.
If the S&P drops any further, say below 2070, then we are likely to get a downside acceleration with the first meaningful support just under 2000. If on the hand the S&P bounces back and makes a convincing move above the 2120-2140 zone, then the road towards new highs would open up.
My 3 indicators are all in bottom territory, but not turning up yet. The MoM is entering the blue-depressed zone, which normally happens only a few times a year. We just don’t know yet when and where it will turn back up. But I will be ready for it.

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LT wave for November

Posted by Danny on October 31, 2016

Stocks came under some pressure last week and the S&P 500 is struggling to stay above the important 2120 support level. As we pointed out last week, price action has been weak and there is nothing going on as long as there is no clear breakout, up or down. We are still in that situation but now my indicators are starting to turn down, suggesting that a breakout to the downside is gradually becoming the more likely scenario. Here is the current Nasdaq chart:

comp-daily-2_5_2015-10_28_2016

Earl and MoM indicators have turned down after a very weak rally attempt and the slower Earl2 is languishing at low levels, apparently unable to get back above the zero line. The lunar green period will be ending later his week and it looks like we will be lucky if it ends near breakeven for the period. This suggests the path of least resistance is down.

Looking at the LT wave chart for November offers more reason for caution:

ltwavenov2016

We got the expected weakness in the first half of October, but the positive bias after the 15th was very weak. Most of the peak LT wave values happened to come on weekend days when markets are closed, but the other days didn’t produce any convincing green candles either.
Going into November the wave tries to hold up in the first days, but then shows a drop with weakness to continue until around the 17th. The rest of the month is hardly above neutral. The lowest LT wave value for the month comes on the 10th, and the high is projected for the 19th.
Does this mean the market will crash? No. Does this have anything to do with the upcoming US election? No. Four years ago when Obama was re-elected the S&P 500 dropped 6% in the next two weeks. I guess that whoever wins the election, some half of the population will be disappointed and may see it as a good reason to sell stocks. Everything is possible and there is no guarantee whatsoever that the projected LT wave pattern will pan out.

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LT wave for October

Posted by Danny on October 3, 2016

An up and down week for S&P 500 ended with little change for the week and the month. Major indexes are once again close to new all time highs.
The direction of the next significant swing is still very uncertain. Here is the current S&P 500 chart:

sp500-daily-1_20_2015-9_30_2016

A push to record highs looks quite likely, but a new lunar red period will start later this week. The Earl indicator (blue line) is flattening out, but the slower Earl2 (orange line) keeps pointing up. It is an indecisive picture. The LT wave for October isn’t very clear either:

ltwaveoct2016

The wave did quite well in September, with the market peaking early in the month and a clear period of weakness from the 6th until the 25th.
For October another period of weakness is projected to start around the 4th. After the 15th there is more strength but it could come with high volatility.

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Looking up again

Posted by Danny on September 26, 2016

Last week we wondered whether the market would continue to correct, or gradually turn up again. It now looks we did indeed muddle through the week and stocks are searching for new highs again. We remain in a lunar green period and the technical situation has improved. Here is the Nasdaq chart:

comp-daily-12_18_2014-9_23_2016

The slower Earl2 (orange line) has finally bottoming out and the Nasdaq is printing new record highs. The Earl and the MoM indicator have further room to rise. So, a climb to overhead resistance near 5400 is feasible, but of course not guaranteed. Around 5400 I would look for selling to come in at the long term trend line (green).
Reversal levels are in bullish mode for all major indexes and time will tell where this upswing ends.

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