Michael Filighera's  Instablog

Correction Begins - Ultimately the First of Several Over The Next 2 Quarters

It was a sight to behold on Wednesday morning. The futures were poised to race higher; the markets were on edge waiting for the Housing Starts and then Bernanke's testimony before Congress. The Housing starts gave a jump-start to what I will call the initial round of capitulation. Shorts needed to stop the bloodletting and were now willing to do it at any cost. Then Bernanke began speaking. Again, the second and final round of capitulation began bringing the broader indexes (DJIA, S&P 500 and Russell 2000) to fresh all time highs. The NASDAQ 100 and Composite moved to new recovery highs. The 30-yr bond reversed course and moved lower along with the precious metals. Then it stopped as the buyers evaporated and the patient bulls began to take their profits. The broader indexes slide lower caught their breath resumed the rally (just to make sure nobody was left behind) and then came in for the "slam dunk".

I stopped counting after the tenth email, IM, or phone call this morning as trader friends were calling to ask what I was doing as the markets screamed higher. While I will always carry some "core" positions the bulk of my funds have been earmarked for day trading. So, unfortunately, the answer I gave was not what they wanted to hear, but when you must defend a position against the backdrop of what is seemingly nonstop bloodletting your focus is not on the multitude of opportunities being presented across the wide spectrum of trading vehicles offered. Everything participated today. The last signal that the rally, (at least this portion of it) was complete - total market capitulation was the missing piece to the correction puzzle and that was received today.

It is vital and important in maintaining a healthy and efficient market for the process to 'normalize'; for the markets to move back towards their mean centers or comfort zones- so to speak. The place where two-way trade takes place and not the one-way ride witnessed the past couple of months and please don't misunderstand this applies to a one-way up or down market.

This remains the reason I continue to extol the benefits of day trading versus position trading during these finishing moves of the much longer-term bull market. It may well take another year or another 5 years before all is said and done. Missing opportunities in either direction should not be a part of your trading strategy. There are numerous opportunities in a myriad of indexes, ETFs, and futures to choose from within the equities, treasury, commodity, and precious metals markets.

Day trading has increasingly become my first choice as the markets become more stubborn and push to extremes.

I use the stochastic overbought/oversold indicator and RSI momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a "bull trap" or "bear trap" forms. Both oscillators are very useful whether on a tick chart or a monthly chart. Keep in mind that there are many indicators available and when used properly do produce solid tradable signals. Unfortunately, many fall prey to the inexperienced that don't take the time to learn how to use them and therefore get "tossed" into the garbage pile.

I believe that it only gets more confusing going forward as the market ignores "the writing on the wall" and continues higher with a false sense of security built on negative input. Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday. Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower.

This type of action is the primary motivation behind my suggesting switching strategies if necessary and focusing on day trading and less on position trading. I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk.

Diversified Trading System

I continue to recommend as the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the "chaos" and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

Let's Review where we are:

While I remain firmly in the bullish camp over the mid to long-term I have been expecting and anticipating a correction to begin for the past couple of weeks. The patterns to the intraday highs on Tuesday again show completed 5 wave patterns which in turn complete larger 5 wave patterns which again in turn complete yet a larger 5 wave pattern.

The Big Picture:

Staying in touch with what your "big picture" is critical. I spent some time recently updating all my long-term charts. This was important as it gave me a very clear perspective on how large of a correction should be coming. While my expectations is for a decent "slap-down" to occur it is not the "mother" of all corrections as some have forecasted. For example:

All of the broader indexes (DJIA, S&P 500, Russell 2000, and NASDAQ) began their perspective rallies off of the March 2009 lows. I fully expect additional new highs (several) for the DJIA, S&P 500 and Russell 2000. The NASDAQ may have reached its peak(s) in 2000, however I don't think it would be wise to exclude them just yet. All the patterns are very similar in size and breadth with smaller differences likely within the internal counts. Therefore based on this it appears that an across the board correction is due - but again not the collapse that many are forecasting. That is at least a year or more away.

(Updated 5/22/2013)

So, what can be expected? Smaller 4th wave corrections within the context of larger (Cycle degree) 3rd wave advances. Here then are the updated levels for the:

DJIA - Support begins at 14865 to 14424 - additional support zones are below at 14369, 14006 to 13644. I would not be looking for a drop into the second or third zone, but rather for the top end to the middle of the first support zone to contain the move and set the stage for the rally to pick up again and take the DJIA to additional new highs.

S&P 500 - Support begins at 1600 to 1535.55 - additional support zones are below at 1526 to 1508 and 1479 to 1427. Again, I am not looking for a more serious drop, which would take prices into the second or third zone, but the top to middle of the first zone to contain the move. Here as well expectations would be for the rally to pick up again and move the S&P to new all time highs.

Russell 2000 - Support begins at 953 to 896 - additional support zones are below at 868 and then 836. While a stronger drop can not be ruled out as the Russell has tended to be the weak link previously - but the Russell along with the QQQ's are more tech laden and that has added stronger upside momentum with the Russell 2000 breaking above the all important 1000 level on Monday.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

1. DJIA future (e-mini available) - Highly recommended
2. S&P-500 future (e-mini available) - highly recommended
3. US$/Euro futures (e-mini available) - very highly recommended
4. GS (Goldman Sachs) - good two way volume -
5. AAPL (Apple Computer) - very highly recommended
6. GOOG (Google) - very highly recommended
7. LNKD (LinkedIn) - solid intraday range
8. NFLX (Netflix) - solid intraday range
9. TSLA (Tesla Motors) - highly recommended
10. 30-yr Treasury Bond future - may get quiet
11. 10-yr Treasury Note future
12. TLT (Treasury Bond Long ETF)
13. TBT (Treasury Bond Short ETF)
14. Gold (futures and ETF - GLD)
15. Silver (futures and ETF - SLV)

Disclosure: I am long FAZ, AAPL, MSFT, EWI.

Additional disclosure: I am Short - FAS, IWM, SPY, DJX,

Just When You Think You Heard It All - "The Tuesday Streak!"

"What does Tuesday mean?" you might ask - "Why, this means the market goes up. The last 18 Tuesdays have proved that." The Tuesday Streak in my opinion is right up there with "The market won't go down" and witnessing a companies stock rally $100+ based on adding ".com" to their corporate name. Yes, it really did happen. This morning I read what Tuesday means to market traders. The gist of it would have you believe that traders actually moved in as buyers today because it was Tuesday and for the last 18 Tuesdays the market has been higher, well I suppose it is now officially 19. Just when I thought it couldn't get any better.

Despite additional new highs on Tuesday the overall picture for the markets has not changed. The pattern in progress extended yet again, and I will add so long as the market continues to rise in 5 wave patterns and fall in 3 way patterns the trend remains "up". The necessity for a pull back, however continues, but as previously discussed 3rd waves are usually the longest and strongest within a 5-wave pattern and even against the backdrop of overbought and waning momentum the path of least resistance is up. The waiting game for the shorts is painful as volumes drop off substantially and volatility or the lack thereof eats P&L for breakfast, lunch and dinner.

This remains the reason I continue to advocate day trading versus position trading. There are numerous opportunities in a myriad of indexes, ETFs, and futures to choose from within the equities, treasury, commodity, and precious metals markets.

Day trading has increasingly become my first choice as the markets become more difficult to "read" and trade.

I use the stochastic overbought/oversold indicator and RSI momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a "bull trap" or "bear trap" forms.

I believe that it only gets more confusing going forward as the market ignores "the writing on the wall" and continues higher with a false sense of security built on negative input. Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday. Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower.

This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading. I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk.

I continue to recommend the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the "chaos" and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

While I remain firmly in the bullish camp over the mid to long-term I have been expecting and anticipating a correction to begin for the past couple of weeks. The patterns to the intraday highs on Tuesday again show completed 5 wave patterns which in turn complete larger 5 wave patterns which again in turn complete yet a larger 5 wave pattern.

The Big Picture:

Staying in touch with what your "big picture" is critical. I spent some time recently updating all my long-term charts. This was important as it gave me a very clear perspective on how large of a correction should be coming. While my expectations is for a decent "slap-down" to occur it is not the "mother" of all corrections as some have forecasted. For example:

All of the broader indexes (DJIA, S&P 500, Russell 2000, and NASDAQ) began their perspective rallies off of the March 2009 lows. I fully expect additional new highs (several) for the DJIA, S&P 500 and Russell 2000. The NASDAQ may have reached its peak(s) in 2000, however I don't think it would be wise to exclude them just yet. All the patterns are very similar in size and breadth with smaller differences likely within the internal counts. Therefore based on this it appears that an across the board correction is due - but again not the collapse that many are forecasting. That is at least a year or more away.

So, what can be expected? Smaller 4th wave corrections within the context of larger (Cycle degree) 3rd wave advances. Here then are the updated levels for the:

DJIA - Support begins at 14840 to 14420 - additional support zones are below at 13,931 and 13587. I would not be looking for a drop into the second or third zone, but rather for the top end to the middle of the first support zone to contain the move and set the stage for the rally to pick up again and take the DJIA to additional new highs.

S&P 500 - Support begins at 1600 to 1547 - additional support zones are below at 1508 and 1469. Again, I am not looking for a more serious drop which would take prices into the second or third zone, but the top to middle of the first zone to contain the move. Here as well expectations would be for the rally to pick up again and move the S&P to new all time highs.

Russell 2000 - Support begins at 957 to 900 - additional support zones are below at 882 and then 854. While a stronger drop can not be ruled out as the Russell has tended to be the weak link previously - but the Russell along with the QQQ's are more tech laden and that has added stronger upside momentum with the Russell 2000 breaking above the all important 1000 level on Monday.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

1. DJIA future (e-mini available)
2. S&P-500 future (e-mini available
3. US$/Euro futures (e-mini available) - very highly recommended
4. GS (Goldman Sachs)
5. AAPL (Apple Computer) - very highly recommended
6. GOOG (Google) - very highly recommended
7. LNKD (LinkedIn) - solid intraday range
8. NFLX (Netflix) - solid intraday range
9. TSLA (Tesla Motors) - highly recommended
10. 30-yr Treasury Bond future - may get quiet
11. 10-yr Treasury Note future
12. TLT (Treasury Bond Long ETF)
13. TBT (Treasury Bond Short ETF)

Disclosure: I am long TLT, AAPL, MSFT, EWI, FAZ.

Additional disclosure: I am short IWM, SPY, FAS

The Bears are getting Hoarse - Are the Bulls getting Tired? When Will the House of Cards Crumble?

To say patience is a virtue would be a huge understatement when it comes to waiting for the U.S. markets to put in more than an hour-long correction. As the broader indexes churn higher day after day under the guise of anything but the actual basis is now much more difficult that watching paint dry or being akin to an animal chewing off its own leg that has become ensnared in a trap (in this case a bear trap) as the shorts are forced to cover. It may be safe to say that the only buyers are the shorts covering and that is evident in both directions at the moment.

What is behind the eternal bull (market that is) - it's the government pure and simple. As long as the Federal Reserve and the U. S. Treasury continue to flood the system with fresh new dollars via " QE stimulus" and ultra low interest rates (clearly stated by the FED to be held low through 2014) the bull should continue to run rampant. What is happening and will likely continue to happen is that the smaller investor is now getting sucked into the "mill" in search of higher returns over what banks are willing to pay out. It is a trade that has netted the TBTF boys billions over the last 4 years. The uphill climb seen in the big banks has been breath taking with all the TBTF banks participating. Against all odds some would say - but it is a trend that has continued in spite of the "ducks quacking".

Divergence is defined as "a deviation from a course or standard." - source Merriam-Webster.com

Divergences occur when things that normally run together (in the same direction) begin to go in opposite directions. Technically, as a trader it is important to recognize when they appear and to adhere to the "warning sign." This does not appear to be the case lately, as many seem to think there isn't much need of divergences since the markets only move in one direction - up - right? Wrong - divergences are clear signals that an impending change is on the way. Denying their existence does not mean what is being signaled won't happen. The markets will correct on both a small and large scale. It is not a matter of "if" but of "when".

Here are a few market divergences that can be added to the growing list of "why the markets will correct":

• The S&P 500 is up over 7% in two months with the past few weeks producing a more parabolic vertical rise with the a few sparse down days here an there. Copper on the other hand is down over 7% in the same two-month period. The divergence is notable because historically, copper and stocks almost always move in the same direction.
• The Volatility Index (VIX) is also signaling divergence. The VIX has normally moved lower as stock prices move higher. Over the past two months, as stocks have rallied - the VIX has gained nearly 10%. With stocks and indexes trading a new all time highs, the expectation would be for the VIX to be hitting new 52-week lows. It's not.
• Baltic Dry Index is produced by the Baltic Exchange in London and reflects the cost of shipping dry goods overseas. Here is a divergence for those that seek economic reasons for the markets to move. Over the same two-month period the BDI is down 5%. If the markets are rallying because the economy is improving then the BDI should be moving up with the markets suggesting an increasing demand for shipping goods. It's not.

Extensions occur with frequency within the first, third or fifth wave of a five-wave sequence. Most often it is within the third as this sequence is usually the longest and the strongest with the larger "wave".

Last week I discussed how the broader indexes were moving through the process of completing extended five wave sequences. This remains the case today, however, it appears that one additional "new" high is needed before the sequence is complete and a larger correction begins.

The S&P 500 (SPX daily chart) below shows the details (click to enlarge):

(click to enlarge)

The markets remain extremely overbought and with declining volumes continue to point to the end of the current rally and not the launching point for another surge higher. Longer term I continue to expect additional new highs as the current larger advance that began off of the March 2009 lows continues. I continue to see signs of exhaustion within the current move. A time when buyers and sellers are not willing to step in leaving the daily grind to day traders and the algorithmic computers.

Remember, an efficient market will always trade to volume. At the moment the search for volume remains to the upside, even though so many remain suspicious that the volume will be found at lower levels. So it becomes a game of patience. The shorts are not budging and the longs aren't either - not yet anyway.

The sector rotation out of biotech and into technology continues to carry the bulk of responsibility for the rally. Should a pull back on a larger scale take place I would be looking to add MSFT, AAPL, and INTC to name a few of the titans.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

• DJIA future (e-mini available)
• S&P-500 future (e-mini available
• US$/Euro futures (e-mini available) - very highly recommended
• GS (Goldman Sachs)
• AAPL (Apple Computer) - very highly recommended
• GOOG (Google) - very highly recommended
• LNKD (LinkedIn) - solid intraday range
• NFLX (Netflix) - solid intraday range
• TSLA (Tesla Motors) - highly recommended
• 30-yr Treasury Bond future - may get quiet
• 10-yr Treasury Note future
• TLT (Treasury Bond Long ETF)
• TBT (Treasury Bond Short ETF)

Day Trading vs. Position Trading

The necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading remains important. Day trading has increasingly become my first choice as the markets become more difficult to "read" and trade.

I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a "bull trap" or "bear trap" forms.

I believe that it only gets more confusing going forward as the market ignores "the writing on the wall" and continues higher with a false sense of security built on negative input. Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday. Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower.

This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading. I do believe there are discernible longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk.

I continue to recommend the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the "chaos" and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

Disclosure: I am long FAZ, TLT, MSFT, EWI.

Additional disclosure: I am short IWM, FAS, QQQ, SPY