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Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Saturday, September 15, 2012 - Short Term Update 8 comments
    Sep 16, 2012 12:50 AM | about stocks: SPY, DIA, QQQ, TLT, FXE, UUP, IEF

    Bottom Line:

    Obviously I've been wrong in my thinking that the rally off the June 4th lows was a retracement rally within a larger topping pattern. That said, the Fed/ECB liquidity fueled rally has pushed nearly everything I look at to overbought or near overbought levels.

    Indicator Score:

    • Bullish: 5%
    • Neutral: 10%
    • Bearish: 85%
    • Aggregate Interpretation: Nearly every short/medium/long term technical indicator I watch is now overbought or nearly so, with a few stragglers that have to do with volume (see Thursday's update). The only indicator that is currently positive is price momentum.

    Indicator Snap-Shot:

    Percentage of Stocks Above Their 20 DMA:

    (click to enlarge)

    Notes: One of the most overbought readings since the early July.

    NYSE McClellan Oscillator:

    (click to enlarge)

    Notes: Reaching overbought today (> 1 standard deviation).

    NYSE New Highs - New Lows:

    (click to enlarge)

    Notes: New Highs - New Lows has exploded past the 1 standard deviation mark, which has in the past has served as an "overbought" reading mark.

    NYSE Advancers-Decliners:
    (click to enlarge)

    Notes: The 5 DMA is just under the overbought level. This level is likely to be exceeded Monday as drop off effect removes the low reading from September 10th.

    NYSE Up-Down Volume:

    (click to enlarge)

    Notes: Similarly, up-down volume is right at overbought levels.


    (click to enlarge)

    Notes: The same can be said for the NYSE TICK.


    (click to enlarge)

    Notes: The TRIN is also flirting with overbought levels. The last time it was at such levels was August 9th, and before that, late March, where the S&P was about to enter a multi month correction that took the S&P from 1420 to 1280 over the next 2 months.

    NASDAQ McClellan Oscillator:

    (click to enlarge)

    Notes: Like its NYSE counterpart, the NASDAQ McClellan is now overbought.


    (click to enlarge)

    Notes: The indicators that are straggling have been volume related, such as the NASDAQ TRIN, meaning while more stocks are making new highs compared to lows, the stocks that are declining are doing so in a disproportionately large amount of volume.

    Put/Call Ratio:

    (click to enlarge)

    Notes: The 5 DMA for the put/call ratio has once again dropped to levels indicating an abundance of optimism among option speculators. Meanwhile, looking at this week's COT report, commercial hedgers have built a huge net long position in VIX futures, indicating they expect the VIX to rise. Generally that's a negative for equities.

    Price Action:

    Dow Jones Industrial Average:

    (click to enlarge)

    Notes: The DJIA is at new highs but is coming close the top of the upward sloping trend channel. So far the other Dow indexes are not confirming. Dow theorists would note this as a bearish non-confirmation though this condition has been going on for months now. So while it may be foreshadowing something, for now, Charles Dow isn't saying much about immediacy.

    Dow Jones Transport Index:

    (click to enlarge)

    Notes: The transport index has risen back into it's zone of resistance. Intra-day RSI is at overbought levels. This area has turned back prices several times since the index peaked several months ago (February closing high, or in March on an intra-day basis).

    Dow Jones Utilities Index:

    (click to enlarge)

    Notes: The Utilities index has been leading most of the year, but has in the last few weeks broken down out of its upward sloping trend channel. Furthermore, Friday, the index retraced about half of it's post Fed pop. Whether this index will continue to lead, or this is the safety trade unwinding, we can say that both indexes are not confirming the industrial's move, which I grade as a negative.

    Others Notable Notables:

    • According to both and insiders are selling into the rally, this week selling outpaced buying by about 2to1 in terms of dollar amount.
    • Looking at this week's COT report, Commercial hedgers (generally considered the smart money) added to their net short position. Looking at the full and mini sized contract for the Dow, NASDAQ, Russell and S&P, they've built of the largest short position in over 4 years, approximately $30,000,000,000 worth of contracts...
    • According to and their Daily Sentiment indexes, public sentiment for the US Dollar has dropped to extreme levels. Since the bottom for equities in 2009, this has almost always coincided with a bottom for a dollar and a top for equities.


    Like I said in Thursday's update, the big picture in my opinion is far from being bullish. That said, I have to wonder if the Fed has completely changed the playbook. Do valuations matter? Revenues? Income Statements? Technicals? It seems right now the market only cares about "when is the next bailout?"

    In my opinion it's a tactical mistake on the Fed's part to announce an easing when the market is at a peak. In the past they've always made such announcements when the market was threatening to break down. Should the market drop now, when they've effectively announced the Bernake put will never expire, it could shatter the illusion the Fed has control of the market. Imagine if we have a 20% correction right after they've announced QE3, it could shatter confidence and lead to something much more prolonged.

    In my experience moves like this tend not to end on a spike, but rather a lower powered move higher that produces many visible divergences. I'll be on the lookout for such a move, and I'll of course update the blog should this happen.

    Talk again soon,

    -Bill L.

    PS - I'll officially be an uncle, most likely tonight, and I'm driving back home for the occasion, the next blog entry may be delayed a few days. Have a good weekend, and good luck trading next week.

    Stocks: SPY, DIA, QQQ, TLT, FXE, UUP, IEF
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Comments (8)
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  • Bill L.
    , contributor
    Comments (682) | Send Message
    Author’s reply » For more on sentiment:


    Measures of sentiment haven't changed much from my last update, though Commercial hedgers have increase their net short positions in equity indexes, and increased their net long position VIX futures. Short Interest was also updated this week and has unsurprisingly fallen across the board. The put/call ratio is back at optimistic extremes.


    -Bill L.
    15 Sep 2012, 05:13 PM Reply Like
  • basehitz
    , contributor
    Comments (1551) | Send Message
    I also got caught wrong footed based on historical precedent of intervention. But instead of chasing this, I sold covered calls on stocks that were already ridiculously cheap when I bought them (SPLS HPQ DELL), and all support a strong dividend.


    Though I shifted trading strategy this year with good result, I have again underestimated how reckless the Chairsatan would be. So how long can the “bad is good” last in the face of landmines globally? My guess is not far. So I will be watching for the divergences also given high RSI on many major indices already.
    16 Sep 2012, 08:21 AM Reply Like
  • sundate36
    , contributor
    Comments (291) | Send Message
    Thanks for the update, Bill. One hell of a market, isn't it? Still, in this liquidity saturated cycle, you managed to nail every single interim top!
    16 Sep 2012, 10:41 AM Reply Like
  • Bill L.
    , contributor
    Comments (682) | Send Message
    Author’s reply » It's one of the reasons I think we're in trouble when the house of cards collapses again. The Fed has really turned everyone into a "risk on - risk off" trader. Extremes that I would generally expect to see a few times I year I've seen several times a month. Ever since the mid 90's the market has looked like just liquidity gushes, and collapses.


    If the 17 year cycle peaked in 2000... well... we still have several more years before the market normalizes.


    -Bill L.
    16 Sep 2012, 11:56 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
    Good article and comments. The possibility of an ongoing down move seems to be growing and remains of considerable concern.
    17 Sep 2012, 05:50 PM Reply Like
  • Bill L.
    , contributor
    Comments (682) | Send Message
    Author’s reply » Hello Everyone,


    I'm still away from the desk this week visiting my sister and my new niece. I'll be back most likely early next week.


    A quick update: thus far the "decline" has more or less just been a sideways move that is relieving the overbought pressure that has built up in the technical indicators I watch. It could possibly accelerate... but what I think is more likely is the scenario I mentioned in Saturday's update. I think the market is pulling back setting up the stage for a lower powered final push higher that produces many visible divergence. It may not even break the previous highs. We'll see what happens.


    Some other notable notables: Sentimentraders proprietary "smart money-dumb money" spread is the widest it's been since April as the market was about to correct from 1420 to 1275 over the next two months.


    -Bill L.
    21 Sep 2012, 11:54 AM Reply Like
  • Bill L.
    , contributor
    Comments (682) | Send Message
    Author’s reply » Another note,


    The Transport Index has fallen from the zone of resistance to the zone of support, if it falls through this level, this will most likely foreshadow the cracking of the main indexes.


    -Bill L.
    21 Sep 2012, 11:57 AM Reply Like
  • sundate36
    , contributor
    Comments (291) | Send Message
    Thanks, Bill. BTW, congratulations!
    21 Sep 2012, 12:53 PM Reply Like
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