Sunday, February 26, 2012

Market Outlook

Both the ES and NQ broke out above the upper Key Areas and appear bent on continuing their rally higher. By the way, the market internals still continue to not confirm the move up. You can see how the ES traded significantly higher into the close on Friday. This suggests a strong market with the intention of follow through on Monday. However, the internals certainly did not confirm this.

The broad market ended flat to slightly higher . The NASDAQ 100 outperformed other indexes by climbing up 0.36% while the Russell 2000 lost 0.24%. Of the last 6 sessions, the S&P 500 has closed green 5 times. On the NASDAQ 100, we saw the 20th up-close in the last 26 sessions. The Russell 2000 are now down on 10 of the last 14 sessions as well. The NASDAQ 100 index climbed 0.36% (resulting in a weekly gain of 0.77%). The S&P 500 rose 0.17% (resulting in a weekly advance of 0.33%). The Dow lossed 0.02% (bringing its weekly gain to 0.25%).
The day ended with a daily volume of 2,186 million shares on the S&P 500. This volume was 19% less than the daily volume average of the past 3 months.

Negative money flow  would suggest the possibility of negative trading on Monday after the market open. Similar sentiment in money flow direction could be seen on the 30-day charts which would suggest the odds of having bearish trading session on Monday.

If the ES trades above Friday’s high on Monday, look for long entries, but stop the position below Friday’s high. This should not be traded through. If the ES does not have follow through on Monday, it suggests the move up on Friday was speculation and the entire range of Friday’s trading can be traded through. This would suggest a test of 1355 or 1352. Also, keep an eye on the NQ on the open on Monday. If it does not follow the ES higher, expect roation down.

 If the rotation down to test any lower Key Level is on low volume, look for long entries when those  are traded to. However, if any move to the downside has higher volume than you see in the rally in the 60min chart , then look for short entries. This would suggest the correction will last for at least a couple of days. The first intermediate timeframe Key Level to the downside to watch carefully is 1336 VPOC. If the rally is going to continue, this should hold.

Friday of last week the S&P made a high at 1367.50. This is only six points away from the high made on May 2, 2011. The technical and internal weaknesses of the market are exactly the same as May of last year. I get the feeling we have already experienced this before.

This does not necessarily mean we will have a selloff that begins on Monday. We very well could because the market is showing a lot of signs of topping. However, until the top has been confirmed, it is not time to short  this market. What is important to understand, especially those who are tired of trying to short a market that continues to rally on low volume, is the Stock Indices and in particular the S&P are at fourteen month extreme and the internal strength of the Indices is waning. This is not the type of environment in which long term bull markets begin from.

In fact, this is the type of environment in which large moves lower are made. Therefore, until you see volume increasing on the moves higher and breadth strengthening, use much caution to any long positions you have in the market.
I am very close to a 75% probability the market is close to or reaching at least an intermediate term top. The 25% probability of an alternate course could show up. If it does, we will see it first in breadth. That means there will be more and more companies trading higher as opposed to lower in each of the Indices. Currently, there are more and more trading lower. Next, we will see volume begin to increase on the moves higher, as more and more people are drawn to the market to buy those shares. Currently, we are seeing the opposite. Volume increases with the selling and declines with each attempt to push the market higher. Therefore, I am not bullish the market and will not be until I see the information from the market that tells me the 25% probability is beginning to occur. I will attempt very short term long trades, but all of my intermediate and longer term positions will be to the short side of the market.

The degree of timeframe of any move lower is difficult to assess at its beginnings. That can only be determined by analyzing the strength of any decline and watching the market trade through important Key Areas. Therefore, if the S&P trades below 1359.25, short entries should be considered. Immediate support is at 1350.25. If the market cannot get through 1350, expect some rotation back up. However, if 1350 is traded through, add to short positions or look for initial short entries with initial stops just above it.

Breaking 1344 will open a potential test of 1328. With each move below one of the Key Areas listed above or in the Daily chart , that Key Area will become resistance on any rotation back up. If it is exceeded, then the move lower is likely to have been complete.

If an intermediate or longer term trend lower is going to begin, you will want to see it build on itself. I would not want to see breadth get extremely negative in one day and for volume to explode. This could happen in a news driven event. However, just as the rally is not building on itself, a decline will need to draw in new sellers with each day. The market internals should build on themselves and not get to extremes quickly. This could signal a capitulation and a reversal back up.

Saturday, February 11, 2012

Market Forecast for next Week for the S&P500

Monday Feb 20,
New Swing Position Short: 1367.75

First Target : 1358

Analysis/Setup : Available upon request.

Tuesday , Feb 21,

First Target filled as expected and according to trade plan.
Second Target 1350.25 ( VPOC AND HVN )

Thursday, Feb 23 ,Second target filled as expected !

I believe that a move below the 1330 level is more likely than not, and here is some of my reasoning. First, the VIX action has been interesting, with the increasing VIX on the Wednesday and Thursday up days for the market.

 It is unusual to see the VIX rise 2% on two successive sessions in which the SPX is also rising and this usually leads to market weakness in the short term. The VIX action on Friday also seemed way out of proportion to the action of the SPX; the VIX jumped 12% while the SPX dropped a mere 0.7%. This seems to imply that traders had been overconfident and were rapidly trying to hedge their bets.

Looking at several market leaders is also interesting. Three leaders in particular grab my focus: The Russell 2000, the Financials, and the SOX. When these three leaders are all leading in the same direction the SPX usually follows. And it seems apparent that at the moment all three of these leaders are weakening quicker than the SPX, suggesting further weakness is in store for the SPX.

The Transports have been acting weak over the past several days and with the S&P futures and cash struggling to take out their July 2011 highs (futures-1354.50; cash-1356.48) we are now seeing the entire market start to pullback. Thursday thanks to $AAPL the Nasdaq futures (the market’s upside leader) took the market from its lows straight back up to its highs but unable to get the S&P cash and futures above their July high and unable to get the Transports back above their 10 day moving average (their 10 day moving average was the stone cold high of the day). This is another reason why I think the correcton is not over.Is the market correcting to the Transports or are the Transports going to correct to the market? I have been wondering which one of the two was going to happen and now it looks like the market is correcting to the Transports. I see the rally as only being as strong as its weakest link and right now the weakest link is the Transports. Friday they were poised to open below their 20 day moving average and their daily up trend. This is the first time this year that one of the major Indices is poised to do that.