Tuesday, August 30, 2011

No change in outlook for S&P 500

This weekend I posted that I'm expecting some short term upside on the major market indices based on sideways consolidation on their daily charts. My position remains unchanged as we've seen this scenario play out.

Yesterday the S&P 500 traded up sharply and today closed flat. If we see another one or two days of flat to moderate downside trading, I expect to see another leg up into resistance at the 1250 level. I will look to short a hit or break of this level as it will complete the macro bear wedge that's been forming on the daily chart.

If we don't see consolidation, either by a large move up or down this week, I will switch to a neutral bias on the markets and will not hold any overnight positions. Ideally, any consolidation will take place within the range of the large up move created by Monday's rally.

Saturday, August 27, 2011

What to expect from the S&P 500 this week

This week the S&P 500 is positioning for a possible move to the upside. Since the week before last, the market has bounced considerably from the 1120 level and is trading sideways under the daily 20 moving average. As long as this sideways consolidation continues, a small bullish flag pattern has the potential to play out.

SPX consolidating micro bull flag for potential move up

A move up will have very little resistance until the 1250 level, at which point it will likely pullback. I will look to short a hit or break of this level. There will also be minor resistance at the pivot high at 1210 and the 50% fib at 1224.

My upside bias is unchanged since I suggested that a short term bottom for stocks was in after the bounce of August 8.  I also think that any movement up will serve to consolidate a macro bear flag formed since the large drop in late July.

If the market fails to move up and closes below the low of 1100, the bear flag will trigger and I will change my outlook to bearish. This is a distinct possibility as the markets are still rattled by European and American debt issues. Now more than ever, it's important to trade all up moves very carefully.

Key medium term breakout area for TSX 60

The TSX 60 index may have some upside in its future if it can make it above a key trend line. This trend line connects the highs from July 25 to the pivot high from August 17, as outlined in the chart below.

A break of this trend line could lead to medium term upside

Since Wednesday of last week, the TSX 60 index has been consolidating sideways underneath this trend line. This resulting bullish flag pattern means that the trend line should provide only minimum resistance.

A breakout above this trend line would be significant as this is a medium term 60 minute chart. I'll be looking to go long here for 1-3 days depending on how fast the price moves up. First resistance on any such breakout will be at the 200 moving average and the gap fill at 795. Secondary resistance will be at the pivot top at 804. A close back below the blue trend line triggers a stop out.

The XIU.to ETF is a good way to play this breakout, as well as individual stocks. If I find any stocks with supporting bullish patterns I'll post them here.

Tuesday, August 23, 2011

Trend line breakouts--identifying prevalent patterns

Every day I see hundreds of chart patterns play out. Some patterns I take note of while other less reliable ones I ignore. This can vary on a weekly or even daily basis. Today, my chart pattern of choice was the trend line breakout.

To find a trend line, simply connect multiple highs or lows with a line--the more pivots that connect, the better the trend line. Notice how this works on the SPY intraday chart below. I personally played this breakout for a move to approximately 115.25.

SPY 10 min shows clear break of trend line leading to higher prices

Trend lines are a useful addition to any trader's repertoire due to their reliability and straightforwardness in knowing when the trade is working in your favour or not. A break above the trend line is the buy signal and a break back below is the stop out.

Once a trend line has been identified on one of the major indices it's very likely that this pattern will repeat itself on individual stocks. The following charts are trades I took in sympathy to the SPY pattern above.

Notice the POT.to trend line double as an inverse head and shoulders pattern

Trend lines can also be bought on a retest of the initial breakout

The 200MA was the logical target on this SU.to trend line breakout

Identifying prevalent patterns from one day to the next is just as important as identifying key active stocks and sectors. When you see a pattern playing out in the major indices and key large cap stocks, you'll likely see it elsewhere as well. This is a strategy I use in my own trading every day.

Thursday, August 18, 2011

Deja-vu all over again for markets

Today the S&P 500 closed sharply lower, falling nearly 4.5% on the day. This fall was dramatic, but not entirely unexpected. Yesterday I posted about the possibility of a fall as we were trading within a macro bear wedge on the daily SPX chart.

The potentially bullish consolidation we saw over the last two days is now off the table. I recognized the distinct possibility for this consolidation to fail but I'll admit that I didn't foresee a return to the kind of trading we saw during the plunge last week. However, reviewing the charts late last night I noticed a pattern repeating itself.

In late July, the SPX put in a top and began to consolidate within a large green candle. It appeared to me, and others, that the market was due for a short term push up before ultimately falling. Of course, this was not the case as global indices would fall precipitously shortly after, negating the bullish consolidation.

July 21-26 consolidation fails just before precipitous fall

This week, we saw a very similar situation unfold. We had sideways, potentially bullish consolidation within a larger bearish pattern and expected a small push up before ultimately pushing back down. Instead, we saw the micro bullish pattern fail, triggering the macro bearish pattern as well as massive selling.

A similar failed bullish pattern to July's huge decline

None of this is surprising, especially when the market is as fragile as it has been over the past few weeks. But what it tells us is that we can continue to expect short term patterns to fail as long as extreme volatility remains.

The August 9th bottom is still intact and, as long as we don't close below it, it has to be respected. I will be referencing the fib levels in the chart above for support and resistance as we trade up or down.

Going forward, I will be closely monitoring the progress of the longer term bearish wedge on the SPX chart. Should it play out to completion, we could expect a break of the Aug 9 bottom and a plunge much lower in the coming weeks. However, I don't expect this to happen all at once, nor do I expect it to happen without dramatic bounces along the way. This is why it's so important to trade prudently and carefully as being on the wrong side of a trade in this kind of environment can lead to especially big losses.

Wednesday, August 17, 2011

Markets grind sideways setting up for possible move higher--then lower

The S&P 500 continued to grind sideways today, closing positive by just .09%.  This is in line with my expectations as outlined in yesterday's post.

As long as this market trades sideways, the odds increase that we see a push higher in the coming days or early next week.

Note the bear wedge pattern outlined in green arrows

Please note that we are still trading within a macro bear wedge pattern signalling that the markets will ultimately trade lower whether or not we trade higher first. This means that we are looking at two trade setups within a single pattern: (1) bullish consolidation to push us higher into resistance and (2) a pullback from that resistance triggering the bear wedge.

Tomorrow, I will be looking for an additional day of consolidation before I am convinced of a move higher in the short term. If we break lower first, the bullish pattern will be negated and will trigger the bear wedge.  And if we trade higher, as I suspect we might, I'll look for resistance at the fib levels in the chart above.

Tuesday, August 16, 2011

Doji candle signals indecision for SPY

Today the S&P 500 (SPY) daily chart ended in a doji formation. This is a classic sign of indecision in the markets.

To match this indecision, we have (possibly) the beginnings of bullish consolidation within an overall bearish wedge pattern. Note the sharp down-move followed by a sharp up-move compared to the sideways trading of the past two to three days.

What this tells me is that the market is poised to eventually move lower (bear wedge), but may need to move higher before doing so (bullish consolidation). If this is the case, I would expect a push into the 50% or 61.8% fib retrace levels before pulling back.

Tomorrow's trading will be the ultimate test of this thesis and if there is a significant pullback I'll revise my analysis. The ideal scenario is another day of sideways trading followed by a push into the upper fib levels and moving averages. But rather than to go long, the better risk reward play here is to go short at the resistance.

As the chart unfolds, I'll be updating my forecast. Check back here and follow me on twitter for my latest thoughts.

Monday, August 15, 2011

TSX levels to watch

As the markets normalize, and with US debt issues put to bed for the time being, we can again focus on secondary markets like the TSX 60.

The TSX 60 has bounced considerably from the lows made on August 8. If it continues to move up, there will be several resistance levels to look for. The first is a narrow range between the 61.7% fib retrace, the 20 moving average and the pivot low at 811. This should be very good resistance provided we don't consolidate below it for several days. If this zone is broken to the upside, look for resistance at the 50 moving average. The dominant pattern is a bearish wedge--This means I will maintain a bearish bias and look for pullbacks at these resistant levels.

On the upside, the key levels to watch are the 200 moving average and the down-sloping blue trend line. A confirmed break above these levels will signal a possible breakout and can be bought long.

Oil and other commodities will play a key role in determining the direction of the TSX. If they remain strong, favour upper levels of resistance as the TSX should remain strong in sympathy.

Markets float ahead of Merkel/Sarkozy meeting

The markets are, for the time being, beginning to normalize. This is a welcome change from the huge, almost untradable, volatility and whip-saws we've seen over the past two weeks.

The major indices have had sizeable bounces from the pivot low I called out last week. There has also been a drastic decrease in volume (from over 600m shares on the SPY last week to just under 120m currently) and this has helped to lifted the markets as well.

The markets are trading mostly sideways today as traders wait for the outcome of a meeting between the leaders of Germany and France tomorrow. This is a difficult trade as most stocks are well off their lows and any negative reaction could cause a pullback. On the other hand, volume is light and a positive reaction could easily lift prices.

Technically, the SPY is floating up within a larger bear wedge pattern. Notice the big down-move followed by an up-move in the chart below. The dotted blue lines will be good resistance, if we make it there.

Most professional traders have been trading lightly or not at all these past weeks. This is the prudent way to approach this market as it is still fragile and prone to whips and "aftershocks". As a technical trader, I step aside when macro-economic and geopolitical events take centre stage. This is why my twitter and blog have been much less active lately.

Thursday, August 11, 2011

Possible bottom still in place

The possible bottom I posted about on Tuesday is still in play. I will continue to hold this belief until we close below the daily low of 1101.54 sometime in the next few days.

Going forward, I expect to see more upside. However, be careful as the market is still jittery and prone to selloffs.

As the market normalizes, I will be posting more trade setups. Check back often and follow me on twitter for my latest thoughts.

Tuesday, August 9, 2011

Possible bottom on the SPX?

Today the S&P 500 traded all over the map. The index opened higher and traded up for most of the day before flushing sharply lower on the announcement from the Federal Reserve that interest rates would remain low until at least 2013. After the initial flush, the major indices rallied to make new highs on the day.

From the low of today to the close, the SPX closed up over 70 points. This sort of action, combined with very high volume, is a sign of a possible reversal.

If this rally holds into the open on Wednesday morning, I am very cautiously calling for a short term bottom in the markets. I bought a small long position in the SPY shortly before the close of trading and it is already trading up sharply higher. If the rally holds, I'll be looking to sell at the following resistance levels:

Each dotted blue line corresponds to a fibonacci retracement and/or a pivot low or high. The SPX can easily pull back at any of these levels, but I think the best resistance will be at the 61.8% retracement at approximately 1250.

Monday, August 8, 2011

The flush continues

Today the S&P 500 fell another 6.66%. Technical support levels are giving only minor intraday pauses instead of the normal multi-day bounces we normally see. For the time being, fear is leading the market.

As long as this continues, I will only be trading intraday. Even though I believe that most stocks will have have huge rebounds when the market turns, right now it's simply too risky to hold significant positions overnight. The only position I continue to hold is a small short hedge on the SPY I took out against long swing positions I've since been stopped out of.

Until the market normalizes, I will not be posting any swing trade setups. When the market bounces, all stocks will bounce. But be careful and do not try to catch falling knives under these conditions.

Sunday, August 7, 2011

Catching the falling knife

With the S&P's downgrade of US debt a reality, the question now is finding and trading the bottom on the market.

The S&P 500, as well as nearly every other stock index, was devastated last week. Fortunes were made and lost, and the careers of many amateur traders likely came to an abrupt end. It still remains to be seen, however, exactly how much more downside is left.

It's very likely that a large part of the selling we saw last week was insider trading based on advanced knowledge that the downgrade would occur. This could mean that the majority of downside is already priced into the market. It's also possible that this is just the beginning and we have a long way to fall yet.

Personally, I believe the most severe selling has already happened. I think it's likely that Monday sees an additional reflex selling flush that possibly even lasts into Tuesday. From there, I think it's possible a short term bottom on the market is in.

Alternatively, fear and panic, as well as hedge funds liquidating their holdings, could drive the markets substantially lower. I think this is the least likely scenario as it assumes that large financial institutions have not yet begun to sell.

In any case, I will be trading carefully. I mentioned several times last week that I would not be holding any large positions into this kind of uncertainty and that continues to be the case. I will be looking mostly at short term scalp trades and closely watching for signs of a low in the market. Once the market bottoms, we should see a substantial relief rally.

Saturday, August 6, 2011

S&P US downgrade--highlights

Below are some highlights from the S&P's recent downgrade of the US's debt rating. Also, be sure read my thoughts on the circumstances that lead to the downgrade here.


"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade."

"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability."

"Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing."
"The [Budget Control] act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

"We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings."

"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade."

"When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015."

"The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'."

Choosing is not a choice

Friday night Standard & Poor's downgraded America's debt rating from AAA to AA+. The "bipartisan" budget deal worked out by US lawmakers last week apparently doesn't pass muster.

This should come as no surprise. The deal is the concoction of a government in gridlock and political parties without the will to make tough choices and risk alienating their most vocal and influential backers. Faced with the option of raising taxes or cutting spending--two very sacred cows--lawmakers chose none of the above.

The situation in the US is unsustainable because neither side of the debate is willing to concede anything, but now something has to give. Spending must be matched with revenue. When the two are out of sequence, the former must be cut or the latter raised--or better yet, both. A business can't survive without this careful balance and neither can a country.

In abandoning this basic principle, the US is now downgraded--and rightly so. Plans that appease everyone serve no one, and so it is with recent American fiscal policy. US lawmakers must prepare to make unpopular decisions or risk worsening an already grave budgetary tailspin.

Americans can either pay more for the services they receive or cut those services and pay less. Both options are valid, but a choice must be made as no combination of the two will work.

To be sure, the coming days and weeks will be crucial ones. Lawmakers and economists will be working hard to assess the damage that has been done and determine a way forward. Traders like myself will be looking to understand this changing dynamic of the global markets and identify opportunities therein.

As this situation unfolds, follow my latest thoughts both here and on Twitter @thetsxpert.

--Read the S&P's downgrade report here--

Wednesday, August 3, 2011

Wild trading leads to possible bottom on the SPY

Wednesday's trading was all over the map. The market opened flat and inched up before flushing dramtically lower, going from nearly 126 to 123.50. From there, the SPY staged an incredible rally pushing up to close near new highs on the day. This is an impressive move for a market that has seen seven powerful down days in a row.

A big flush followed by a huge rally on SPY 10 Min

The market was and is long overdue for a bounce. Financial turmoil in the EU and the US has created an enormous amount of fear and that tells me a short term bottom may be in place.

Technically, the daily SPX chart has a bottoming tail indicating the potential for higher prices in the days ahead. Until we close below this tail, I'll keep an upside bias on the markets. If I'm correct, expect a move back to a 50% or 61.8% fib level before ultimately trading back down.

A bottoming tail signals the potential for higher prices on the SPX

Because this is the first up day after several down, I'm keeping my analysis simple until a bottom is confirmed with a followthrough move higher. When and if that happens, I'll have more concrete support and resistance levels.

Going into the rest of the week I will be trading very carefully until I have a better handle on the direction of the market. Tomorrow's close will be telling.

Tuesday, August 2, 2011

TLT weekly resistance--possible bounce in stocks coming?

The iShares 20 Year Treasury Bond Fund (TLT) has run into major resistance on the weekly chart.

If you connect the last two pivot highs, you form a trendline that stretches all the way back to late 2008. The third hit of any trendline is usually a high probability short, especially when they're as nicely spaced as on the chart below. 

Treasuries often trade contrary to stocks as institutional investors look for refuge in seemingly safer assets. Note the vertical lines in the S&P 500 weekly chart below--this is where each pivot high on the TLT corresponds. You'll notice that each time the TLT makes a top, the SPX is either near or at a sharp up-side move.

It's unclear if this pattern will repeat itself again, but there are several reasons to believe that it might. The market is extremely oversold right now as well as extremely bearish. History shows that when sentiment hits an extreme, it's often a sign that a turnaround is near. This combined with a possible pivot high in the TLT leads me to believe that stocks may be due for some short term upside in the near future. 

If the market does bounce, I won't be expecting much--possibly a retest of the highs at 1350 or 1375. As you can see, the previous two pivot lows in the SPX were consecutively smaller declines leading to shallower bounces. 

I'll be watching this correlation closely in the days and weeks ahead. If Treasuries rally sharply higher from here, or if it pulls back while stocks continue to decline, I'll know the pattern has been negated.

Monday, August 1, 2011

Trade idea: SM long

SM has pulled back over the past week after an impressive up-trend that began in mid June. If it pulls back further, look for support between 70.50 and 71.14.

This range corresponds to three support factors: a 50% fib retrace at 71.14, a previous pivot high at 70.46 and the 50 moving average currently at 70.38.

I will look to take this trade long on a hit or break of the 50 moving average or the pivot high at 70.46--whichever comes first.

Trade idea: WFC long

WFC will hit good support at 26.88 if it continues down over the next few days.

This level corresponds to a gap fill and an important up-sloping trendline.

I will consider entering this trade on a hit of the gap fill at 26.88 and will be watching closely for it to close above the blue trendline. The closer the two levels are to each other , the better the odds of a successful bounce--this is why it's preferable for the trade to trigger in the near future.

As always, use a stop.

Trade idea: WAG long

Walgreen Co., (WAG) will have two important support levels coming up if it continues to decline.

The first level is at 36.68 and it corresponds to a gap fill and a 50% fib retrace. The second level at 34.71 corresponds to another gap fill and a 61.8% fib retrace.

As both of these levels have multiple support factors, both can be entered long for a short term swing trade. For either of these levels, be sure to use an appropriate stop and set it to trailing once in the money.

Trade idea: USB long

USB will have significant support at around 25 dollars if it continues to drop into this week. This level corresponds to a major daily gap fill as well as the 50 moving average.

I will look to enter USB long on a hit or break of 25, though 25.30 will also have good support as it corresponds to a 61.8% fib retrace. I'll keep a stop at a daily close below 25--higher risk traders can put their stop below 24.15.