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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 The 13th, July, 2012 - Short Term Update  6 comments
    Jul 13, 2012 6:12 PM | about stocks: SPY, TLT, DIA, QQQ, FXE

    Bottom Line:

    The situation has reversed; yesterday I said that bulls needed to make a stand as prices approached support, next week bears need to defend key areas of resistance. My stop remains the same, the reason being I want to give the bearish thesis a little bit of leeway here since again, several other measures of risk (currencies and bonds) failed to confirm the a move.

    Update:

    Price Action:

    The market bounced hard from where I suspected there would be some channel support, and the rally ended today near the 61.8% retracement level. While I was expecting either a up to sideways move to relieve some of the short term oversold indicators, I definitely wasn't expecting a move as sharp as the one we received today.

    S&P 500

    (click to enlarge)

    Most of the major indexes have mirrored this move, but once again bond yields and currencies had nowhere near as impressive a move. When you see the S&P a rally over 30 points in two days, you expect to see bonds fall, yields rise, and "risk on" currencies such as the Euro rally. This did not happen.

    TLT

    (click to enlarge)

    Notes: the yellow line is yesterday's close.

    30 Year Treasury Yields

    (click to enlarge)

    10 Year Treasury Yields

    (click to enlarge)

    FXE

    (click to enlarge)

    Indicators:

    Right now there appears to be a battle going on between the intermediate term vs. the short term indicators, with the more intermediate term indicators arguing for market that is only started to roll over vs. the short term indicators arguing for a market that is oversold.

    Without going through the entire list…

    NYSE Mcclellan Oscillator: (Intermediate)

    (click to enlarge)

    VS.

    NYSE Advancers vs. Decliners: (Short Term)

    (click to enlarge)

    Summary:

    Yesterday I said that bulls needed to step up and today they did in a big way, next week the bears will need to stand their ground in order to keep the decline alive. I'm giving the bearish thesis a chance to play out because of the relatively muted response in Treasury yields as well as the Euro.

    The other possibility that I can see playing out is that the market rises above my stop, the short term indicators once again shown overbought market, and the Mcclellan oscillator peaks but with a very obvious bearish divergence. This setup often produces a much steeper decline. The difficulty here being mostly a mental one, it is very difficult to get stopped out at a loss, only to get back in the same trade at nearly the same price as you initially entered the previous trade. But that is simply a reality of trading, and a situation that will occur many many times in one's career. While I can easily see this as a possibility, it is important to still respect the initial stop that was set since it is impossible to know the outcome for sure. The market could always continue higher. Trading is about operating smartly in a very random and ambiguous environment.

    We'll talk again Monday,

    Bill L.

    PS - I've been working on a new indicator, a moving average crossover system that looks at net block trades on upticks less downticks. The idea being that if many more block trades are occurring on an uptick (or downtick) institutions are anxious to buy (or sell if more block trades are being executed on downticks). Furthermore I've noticed that on days that tend to be fake outs, there tends to be a non confirmation in the block trade data. It will be interesting to see whether or not there were a lot of block trades on upticks for Friday. This data is only updated once a week on Sunday (sometimes Monday), once it is updated I'll post it here with my analysis. Enjoy the weekend!

    Stocks: SPY, TLT, DIA, QQQ, FXE
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  •  
    Thanks for the update, Bill. It felt like a rerun of the last time when you called for an intermediate top and then the whole decline got wiped out in a day or two (the 4th of July rally). Last time it was short-covering on the euro trade (supposedly) and there were reports in the press afterwards that there are still lots of short euro positions to cover. Very difficult and frustrating market but it seems to work like clockwork when all your indicators align in the highly overbought territory.
    13 Jul 2012, 06:42 PM Reply Like
  •  
    Always a good read. I'm glad you're posting regularly again!
    13 Jul 2012, 08:15 PM Reply Like
  •  
    Interestng post - thank you. I reviewed about 80 charts last night (I mostly swing trade with a bit of day trading) and only 4 of them had what looked like bullish patterns to me. Very few uptrends in the daily charts. I'm watching 780-800 on the RUT as an important support area.

    Always interesting to watch the bots. Friday felt especially bot driven.
    14 Jul 2012, 09:24 PM Reply Like
  •  
    "Friday felt especially bot driven."

    Perhaps... for such an explosive rally on Friday....

    NYSE Volume = second lowest of the week
    Block Trades = lowest of the week
    Block Trades on Up Ticks = lowest of the week
    Odd Lot Purchases = highest of the week

    Translation: institutions not excited, retail investors excited?

    hmmm

    -Bill L.
    15 Jul 2012, 05:12 PM Reply Like
  •  
    Very interesting, Bill. I had another thought about the rally. It seems to me that your favored scenario for the set up was that we are on a somewhat prolonged downward trend and the McClellan oscillator should continue into the oversold territory. What if there's another possibility that could be supported by Friday's rally -- that the market is on some sort of an 'exhaustion rally' with a tendency towards short-covering/rallies whenever the initial overbought/exhaustion condition is even moderately resolved? It would also explain why your 'sell signal' works so well. I guess we'll find out next week, won't we? The good news is that it probably won't be too long before another exhaustion set-up shows up! Needless to say my FAZ position is underwater and I'm back to square one on TZA. Very frustrating, but I'm reluctant to go long in this market.
    15 Jul 2012, 05:30 PM Reply Like
  •  
    Bill -- it seems like the short thesis is working! I closed my TZA position at a small profit yesterday and reentered it today after the S&P barely touched 1361 - your cut-off point. Amazing! I'm back into the black on my FAZ. And just yesterday I thought about entering a short position on US treasuries (crazy!) -- I'm glad I didn't.
    17 Jul 2012, 10:43 AM Reply Like
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