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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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  • Friday, October 14, 2011 - Short Term Update  12 comments
    Oct 14, 2011 10:37 AM | about stocks: SPY, DIA, QQQ
    Indicators are extreme and possibly starting to show divergences while cycle studies are peaking; the market appears to be topping.

    The market moved back up to resistance lead by tech after Google's beat. What was a major drag on equities was the entire financial sector. Frankly, my opinion is that the financial sector is more important than Google's impressive earnings. Essentially, Google is a media company. The financials are the circulatory system of the entire economy. In fact, even though the market closed at the highs of the day, the $BKX could not even reclaim the highs it set in the opening hour of trading.

    Little has changed since Wednesday's read; trading indicators are near +1stdev extremes and cycle studies appear to be peaking. Greater than one standard deviation means that 85%-95% of the time, these indicators will close below where they are now. This does not guarantee the market will go down, but it does mean that buying stocks here for a trade is very risky, and unlikely to be profitable. This also means that shorting stocks, once we get a breakdown, is the statistically smart trade. With a risk management method in place, we are playing the high probability trade, and limiting our losses should we be incorrect.

    What has changed in my view is the short term sentiment. CNCB has been throwing a daily party at the close for a few days now, enticing viewers with the "news" that the market's performance has been the best in months. Just like the false breakdown last week immediately started chatter of $SPX 1000, prices near the highs of the range have started chatter about going long to catch the impending breakout. Not that it isn't possible, from my view, it just doesn't seem probable.

    Trading Indicators:

    Notes: The one day close lies at 1.5 standard deviations from the mean: that means that 93.32% of the time, the advance decline line closes lower than current levels, and only closes higher 6.681% of the time.


    Notes: The 3 DMA appears to be producing a bearish divergence. The one day close is 1 standard deviation from the mean. This means that 84.13% of the time the $NYUD closes lower than where is closed today, and only closes higher 15.87% of the time.

    SPY / 3 DMA TICK

    Notes: The 3 DMA appears to be producing a bearish divergence. The today's close was 1.25 standard deviation above the mean. That means that on average, the $TICK closes lower 89.44% of the time, and only closes higher 10.56% of the time.

    SPY / 3 DMA TRIN

    Notes: The short term trading ARMS index again is showing an extreme reading, as well as a bearish divergence.

    Swing Indicators:

    Notes: The 3 & 5 DMA are both above 1 standard deviation from the mean, indicating that the next big swing will most likely be to the downside. The McClellan Oscillator closed at 2 standard deviations from the mean. That means that 97.72% of the time, the McClellan Oscillator closes lower than where it ended today, and only close higher 2.275% of the time.

    The trading indicators I follow remain very elevated. While it can be slightly frustrating to "miss out" on a good rally, playing the long side here is simply not the smart trade as far as my methodology is concerned. I know from experience that while this trend feels unstoppable, it is only a matter of time before it ends. According to the indicators I watch, that time is sooner rather than later.

    The sell setup is here, I am just waiting for a convincing reversal in price. Owning stocks while everyone is celebrating may feel good, but probability dictates that this is actually the very high risk play. Ironically, the low risk time to buy was the buy setup I pointed out last week, when everyone thought the world was ending. 

    Rallying did not surprise me, but the size and speed of the rally certainly has. That said, my Long Term Trend Model is indicating we are in a bear market. We are simply seeing far to much volatility and huge price swings to be in a bull market. Use this fantastic rally to lighten up on remaining equity positions. In the next few months, long term investors will most likely be very glad they are sitting in cash.

    We will tak again Monday,
    Have a great weekend!
    -Bill L.
    Stocks: SPY, DIA, QQQ
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Comments (12)
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  • Good analysis, Bill, thanks! I concur with your comments about the sentiment swings and it's nice to see the technical analysis to back it up.
    14 Oct 2011, 05:07 PM Reply Like
  • Author’s reply » FYI, I am currently flat, though I am expecting a turn lower. The technicals are the "setup", but a reversal in price is my "trigger." I do not buy/sell in anticipation. If we open or hold below 121 SPY Monday, I will enter short.


    -Bill L.
    14 Oct 2011, 05:17 PM Reply Like
  • Bill, great work. I may have jumped the gun, but I went short at 1220 Thursday. We are lock step in thought. Google trumping banks is very odd to me. Why I don't buy into only 1 train of thought, I like to synthesize them all. One I've been paying particular attention to during this rally is Elliot wave. Please check out my upcoming article. All the symptoms of a nasty reverse are in the cards. And, the more we rally on poor volume and no leadership, the more my case is strengthened.


    Ps- rallying on growth stock 1b (aapl 1a) is precarious at best. I liken it to a kid in puberty. Would be more surprised if an adolescent didn't grow then to sprout up. Their margins are being called into question too. MMI was a reach IMO, against their organic biz model.


    Thanks again. I really enjoy your post. I do my blogs a little differently. I usually try to illuminate what will drive the market the next day, not summarize, (you do a very good job w TA). But yours help many people out digesting the casino.


    - mm
    14 Oct 2011, 06:09 PM Reply Like
  • Ps you look almost identical to a college bud. If he didn't work for espn I would ask I'd you were writing under an alias
    14 Oct 2011, 06:11 PM Reply Like
  • Author’s reply » I was an "Elliott Wave" trader for a few years, so I'll be interested to see what you come up with. I don't count much anymore though because I found that I used so many indicators to confirm my counts, that eventually 95% of what I was doing was looking and trading indicators anyway. That and "preferred" count can start to mean, "the count I'm married to." It was helpful though in designing my entry/exit methods, which are still derived off of various Fibonacci times series and ratios. There are also many price action tendencies I still pay attention to: wave 3/5 divergence, 3rd waves acceleration channel vs ABCs staying in parallel lines, alternation, etc. Looking forward to the new article.


    -Bill L.


    ps- and no I'm not writing under an alias lol.
    14 Oct 2011, 09:10 PM Reply Like
  • Author’s reply » 10:30 am


    The breakdown has already followed through on the Euro as well as the $BKX, which I point out on Friday, looked terrible compared to the rest of the market. Now the major Indexes need to follow through. Last time the SPY broke down (Thursday) the QQQs did not. So this time I would like to see the QQQs break down below 57. Full update tonight.


    120 SPY remains the level.


    Good hunting,
    -Bill L.
    17 Oct 2011, 10:30 AM Reply Like
  • Good call on Friday, Bill. QQQ 57 is about 22 cents away I as type this.
    17 Oct 2011, 12:56 PM Reply Like
  • Author’s reply » There has been enough follow through from the quarter-hour break down I highlighted this morning to the hourly charts, I'm now interested in adding to my test short position. Stop if SPY closes above 121.85 on an hourly basis.


    Good Hunting,
    -Bill L.
    17 Oct 2011, 01:36 PM Reply Like
  • Looking forward to your update based on today's action. Did you add to your short positions?
    17 Oct 2011, 04:22 PM Reply Like
  • Author’s reply » Yes I'm about half in. I'm waiting to see if we can get through 119 SPY, which stopped Thursday's attempt to break down. A break through that and things could get nasty.


    -Bill L.
    17 Oct 2011, 04:40 PM Reply Like
  • So how low do you think we would break if things get "nasty" as you say? It's already in the 119s in after hours trading today, I would think a break under 119 is likely at some point tomorrow.


    More wondering if you mean "1150 nasty" or "sub-1000 nasty".
    17 Oct 2011, 05:04 PM Reply Like
  • Author’s reply » JCH,


    I've watched the McClellan for years now... based on how high it's gotten I would be very surprised if we didn't give at least 50% of this rally back... There is also some SPY chart support near 115... so yes 1150 is a good a target as any. My feel is lower still than that still, but not quite the lows of the range because the range is so obvious now; I'm sure people will be buying in anticipation of a bounce there.


    That said, I find that you shouldn't look for firm downside targets until trading indicators start to get oversold. That can happen if the market is just flat for several days in a row, believe it or not. So for me I'm just short as long as price momentum is down, and indicators are high. Otherwise, in my experience, picking downside targets is very difficult. I like to let the market tell me when to get out; my downside target is all the indicators will be very low. My targets only look very accurate because I'm waiting until indicators get so overbought/oversold that the probability of any continuation would be a statistical anomaly.


    -Bill L.
    17 Oct 2011, 05:21 PM Reply Like
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