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The bitcoin boom

Posted by Danny on May 9, 2017

Stocks keep trading with a positive bias and major indexes are reaching new all time highs. Our LT wave for May suggests some weakness is up next. We will find out soon. Here is the current S&P chart:

^SP500 (Daily) 7_28_2015 - 5_8_2017

The S&P exceeded its March 1 high yesterday, but it didn’t manage to stay above the 2400 resistance level. It may push through in the coming days, but if that doesn’t happen it will start to look like a failed breakout and that would probably trigger some selling.
The Earl indicator (blue line) has turned down, but the slower Earl2 (orange line) is still headed higher. This can go either way. A continued rally would probably target 2500 where it would test the upper boundary of the blue trend channel. A pullback could give us a revisit of 2300 for a test of the lower boundary.
I am short term neutral until we get more clarity.

Bitcoin is getting a lot of buzz recently as it keeps climbing to new record highs. I try to do a post about bitcoin once a year, so this a good opportunity for an update. I have been quite lucky with my calls on the crypto currencies. I went bearish on bitcoin in December 2013, just weeks before it peaked above $1000. In my second article I called for bitcoins to drop as low as $180, which came true a year later. And in my most recent post in October 2015 I gave a long term buy signal for bitcoin and also tipped ethereum. Ethereum has indeed grown into a strong contender in this space. You could pick up ETH for less than $1 when I wrote my piece and it traded just below $100 in the recent weeks. That’s a nice 100-fold increase in less than 2 years.
So, what’s next for bitcoin? Here is a long term chart:


Bitcoin has been climbing in a nice trend channel since 2015. BTC trades above $1700 as of today, so it looks like it’s going to test the upper boundary of the channel. A breakout above $1900 is possible and would start a blow-off phase like in 2013. But that remains to be seen.
On the downside, the $1000-1200 zone is major support that must be held. A drop below that zone would tell us that newer crypto currencies (possibly ethereum) are taking over, just like Google took over from Yahoo at some point. I still think that most altcoins will go to zero once a crypto currency becomes the clear winner in terms of linking real value and services within its coin.
The next upside targets for bitcoin remain at $2457 and $4246.

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LT wave for May

Posted by Danny on May 1, 2017

The Nasdaq has climbed to new record highs while the S&P 500 keeps sitting just below its March 1 highs. The Nasdaq gained 243 points in the recent lunar green period, making it the best green period since October. Let’s take a look at the current Nasdaq chart:

^COMP (Daily) 9_22_2015 - 4_28_2017

The sideways pause that started in March has clearly ended, allowing this index to break out above 6000. The Earl2 (orange line) has made a nice bottom and all 3 indicators are pointing up at the moment. That’s a bullish setup, but the faster Earl (blue line) and the MoM have reached fairly high levels already. I think we can get higher highs in the coming days, which would allow the S&P 500 to break above 2400. But with a new lunar red period getting started I think it will be followed by a bit of a pullback.

The LT wave had another good month in April. Here is the wave for May:


Projected strength in the first week of April only resulted in a sideways and was followed by a pullback in the expected weak period. The final week was stronger again, nicely in line with LT wave. Not bad.
For May we see a very similar pattern. A positive bias appears to continue until around the 9th and then we get a weaker period until the 23rd. The final week of the month is stronger again. The highest LT wave value will come on the 18th, in the midst of the weaker period. The lowest LT wave values come around 13-15, which contains a weekend. Another low value comes on the 21st, which is a Sunday. When markets are closed on the expected weak days then the weakness may or may not show up on the subsequent Monday. This could make this month more difficult to read.

For new readers, please remember that LT wave is experimental and after two very good months it is probably time for a miss. Always stay skeptical and do not drop skepticism because a method or indicator has had a few good months…

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LT wave for April

Posted by Danny on April 3, 2017

Markets had a good week and the Nasdaq is close to new all time highs already. The S&P 500 has been a bit weaker. The recent lunar green period has ended with a 14 point gain for Nasdaq. Not a big gain, but the lunar cycle seems to be getting back to its normal rhythm after a long period of “divergences”. Let’s have a look at the S&P 500 chart before discussing the LT wave for April:

^SP500 (Daily) 7_24_2015 - 3_31_2017

The market tested important support levels and veered back up. That’s a positive and it has printed bottoms in my Earl and MoM indicators, but the slower Earl2 (orange line) is still headed lower. A pattern of lower highs and lower lows appears on the chart and that’s something we haven’t seen for a while. The thing to watch in the current upswing is whether it can challenge the March 1 highs or not. A clear push above 2400 would tell us the bull run is ongoing.

The LT wave had an almost perfect month in March and here is how it continues for April:


The up and down swings corresponded very nicely to the expected weaker and stronger periods in March and if the LT wave keeps performing well then the current period of strength can continue until the 10th or 11th. Then there is projected weakness until the 23rd, followed by a more positive final week.
There will be a major high value in the wave on the 8th, but that’s a weekend day so any related highs would probably come on the Friday before or the Monday after. If that is the case then it will be interesting to see if the market can reach new records. A failure to do so would indicate that the path of least resistance is shifting down.
The lowest LT wave values for the month come on 22nd and 23rd, which are also weekend days. If the market falls below the March lows around that time it would also tell us that a more serious correction is underway.
For new readers, please remember that the LT wave is experimental and a good month doesn’t mean the next month will be good too. So, don’t bet the farm on it.

Good luck.

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SKEW is high again

Posted by Danny on March 20, 2017

Stocks have been pulling back a bit in recent weeks, but so far it seems to be the “short and shallow” variant as described in my most recent post. The Nasdaq has easily held above 5800 and is already pushing back towards its recent highs. This means the scenario for a further 5% surge before summer stays firmly on the table and is gaining traction. Let’s have a look at the current S&P 500 chart:

^SP500 (Daily) 6_17_2015 - 3_17_2017

The trend line since the November lows is being tested but holds up well. The Earl (blue line) has bottomed out and is headed higher, this is short term bullish. The slower Earl2 (orange line) has a bearish divergence in place and that is a medium term warning sign. The MoM indicator is back in the neutral zone and can go either way. The bearish divergence in the Earl2 indicates a serious risk for a significant pullback, but it would get invalidated if the Earl2 turns back up near the neutral line. That would probably happen if the S&P 500 climbs above the March 1 highs. So, what will it be? This is the kind of situations where keeping an eye on investors’ mood is most important.

Right now lots of technical traders probably see a strong potential for a sharp pullback if the blue trend line gives way. And that’s why the CBOE SKEW index reached a new all time high last Friday. This means traders are overpaying for “crash insurance”. But, as I pointed out in this article a few years ago, major crashes are typically preceded by a period of relatively low SKEW readings. When there is widespread confidence and feel-good about the economy then people don’t buy crash insurance puts. Then SKEW becomes low and complacence high. But that’s not what we see at the moment. Here is a chart showing the recent years evolution of SKEW index:


The early 2015 highs were accompanied by relatively lower SKEW values for months and that’s when we got some significant drops later that year. Then SKEW reached new record highs in the days before the Brexit referendum, as investors were buying crash insurance again, but most of that crash insurance became worthless as the market surged to new highs in the ensuing weeks. More often than not overpriced cash insurance does not pay off. But bears keep trying and now we have record high SKEW again. Will their crash bets pay off this time? If history is a guide then the answer is: probably not.
And in that case we can expect something like this:


On a breakout above the March 1 highs the market will probably head for the upper boundary of its trend channel (blue) since the early 2016 lows. That boundary is currently in the 2500-600 area, so that would be my initial target for such a move.

This bullish case would go on the back burner if the S&P 500 makes a close below 2350. Such a failure could come this week, because our LT wave for March suggests weakness until the 29th. If no downside action is seen and the bullish scenario can survive this weaker period then we are probably headed for a mad April. Be ready.

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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:


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:


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:


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:


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:


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.


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:


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:


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:


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:


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:


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:

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