Where Is This Listless Market Going?

I can't make head or tail out of it. The best position still seems to be in cash, until we see more definite trend. I am being caught holding long positions (gold, silver, miners, oil) but I am sitting on them because my costs are low (except for oil).

I looked at the 3-year weekly chart of Dow that captures the market top in October 2007. As one of the indicators I put "volume by price" as background, and noticed a very interesting thing.



Take a look at the volume by price when the market started to tank in late September 2008. A tiny volume for such a big drop. The volume didn't reach a panic size until Dow hit between 8,000 and 8,500. Many investors didn't unload their holdings until Dow hit that interim bottom. Not only that. It looks there was more buying than selling as Dow rapidly descended. It's nearly 30% drop in the index, but many individual stocks fared far worse.

For those who didn't sell at the bottom of that drop, a sudden, accelerated decline in February 2009 must have been just too much. They dumped this time, probably, as soon as the index started to go down in earnest.

So, where are we at now? We are back to that very thin volume by price zone, between 10,350 (about 50% Fibonacci retracement) and 11,000. It may be easy for the index to go through this thin area, as there shouldn't be much resistance. Volume by price bar near 61.8% retracement, around 11,260, shows more selling volume than buying volume, so there may not be many sellers left if and when the index hits the area again.

My feeling is that Dow (and the US stock market) may still have an upside at least to 61.8% Fibonacci retracement area. But there are too many uncertainties in the market and the world outside the market that could easily torpedo TA and render it worthless. Greece, for example. S&P is saying Greece may be downgraded yet again, and the stock futures drop. Last I checked, Dow futures were down 58, S&P 500 futures down 7, Nasdaq futures down 12

But then again, miraculous clutch save may appear in the premarket tomorrow, and turn the indices around in a flash.

As I said, I can't make head or tail out of it, and I am annoyed that my gold holdings are being hammered down...

S&P 500 in 2003-2004

March 2003 was when the U.S. stock market finally bottomed after the dot-com bust and started to make a year-long, sharp recovery.

Sounds familiar?

Guys at Break Point Trades had this log chart in their free newsletter: daily S&P 500 from February 2003 to December 2004. The similarities are almost spooky. Should the history repeats, then what we may have for most of the year looks like a choppy market that makes lower highs and lower lows within the falling wedge/flag.


That would actually be a bullish formation, as you can see in this chart; S&P finally broke to the upside in November.

Just watch out for non-financial events that could obliterate any TA. Greece, EMU, US domestic politics, Middle East... take your pick.

Junior Gold Miners Anyone?

Bloomberg News reports that "the value of mining mergers and acquisitions may more than double this year" to 2006 level of over $170 billion.

I've been looking at several junior gold miners as potential acquisition targets. Here's a comparison chart of these miners since November 2008. Barrick Gold (ABX), a major miner, was thrown in for comparison.



As you can see, Iamgold Corp (IAG) and Allied Nevada Gold (ANV) have already taken off. I'm particularly cross about missing ANV when it broke out of the 3-month base in September 2009. If I am to put money at this point, I would go for the bottom 3: Hecla Mining (HL), Nova Gold (NG), and Great Basin Gold (GBG).

I like NG here. It didn't correct as steeply as the others, and it may be clearing the heavy overhead area, as seen by "volume by price" overlay in the 18-month daily chart below. Also, it didn't break below the trend line support from early 2009. Technical indicators (RSI, MACD, stochastics) all show negative divergence. It has been in a channel, and right now it is right in the middle of that channel. I have no idea whether it goes back down to the lower channel support (around $5.20) or goes up to the upper channel resistance (around $7.20).



With the fate of Euro uncertain vis-a-vis US dollar, I'm not betting heavily on gold stocks. For that matter, the most prudent position right now seems to be "cash".

Scary Days Are Back Again? Or Not?

I can't decide. But ever since the Presidential temper tantrum in mid January, the market increasingly feels like it is a replay of February-March 2009, if not September-October 2008. It was downright scary sometimes, like the day Dow went down more than 200 points.

But I just want to point out one repeating pattern in the weekly charts of Dow and S&P 500. We will find out soon enough, whether the scary days are back again or not.

This is a Dow weekly chart from December 2009. The final plunge (for now) in February-March 2009 took 4 consecutive down-weeks. Then a sharp reversal took place. In June-July, 4 consecutive down-weeks happened again, again followed by a reversal that took the index higher without much of a correction (on a weekly basis) until January this year.

It is a log chart, so you can compare the magnitude of each correction. The correction this time is about the same percentage as the correction in June-July 2009.


I noticed this pattern in July last year, after the reversal happened. "Hmmm, it's fractal... the pattern repeated on a different scale..." Maybe I mentioned it in a post here, maybe not.

This week was the 4th down-week. Will the pattern repeat itself?

Today Dow went as low as 9835, only to reverse all of a sudden out of nowhere to end above 10,012. I was planning on buying gold and gold miners EOD, thinking this was a solid, no-recovery down-day.

According to Jim Cramer of CNBC's Mad Money, it was the job of one hedge fund, who wanted some action in a thin market. The fund used 100 to 1 leverage (I think that means either options or futures), according to Cramer.

That reversal was reminiscent of March 09 reversal, when out of nowhere buy orders flooded the market. Rumor at that time was J.P. Morgan, buying a large quantity of S&P futures that cascaded throughout the financial markets that were open at that time. Who could that hedge fund be this time?

If this is their game plan - 4 consecutive down-days in a volatile fashion so that retails are scared away (again), and pros (hedge funds, market makers, banks) will jack up the market higher on a thin volume. It would be easy to jack it up, precisely because the volume is thin.

In the chart, I put in a target number just in case this pattern repeats itself and the market miraculously reverses from next week on. The target is 12,664. I know it's ridiculous, but I'm just calculating, based on a simplistic assumption that the pattern may repeat.

Now let's laugh at it and be merry. Doesn't feel like it's going to happen, and analysts and pundits are predicting 20% correction from here. But then it felt like the market would never go up again back in March 2009.

Low Risk Trade Ideas

Stocks I've been watching/trading that have been in a channel. Until it breaks, it works. Right now, they are at or near their low end of the channel.

Needless to say, it depends on the direction of the general market, which is increasingly dictated by the political development.


UCO (double-long crude oil ETF)

GBG (gold exploration)

AGU (fertilizer)

JASO (solar)


Do your own due dilligence.

Can Toyota Bounce Back?

Not just as the leading auto maker known for quality but also as a stock?

The sticking pedal recalls and production suspension (which was ordered by the Obama administration, by the way) clobbered Toyota (TM), from the 52-week high of $91.97 on January 19 to $76.51 on January 29, a 17% haircut.

But if you look at the chart, despite the sudden, violent drop, the move was still within the channel that the stock has been in since July last year.


The drop was arrested at the trend line from May last year, and today's bounce stopped at 200-DMA. You would think a news-driven drop like this would defy any TA.

So, ignoring the political chatter (Toyota is being hauled in front of the House Energy and Commerce Committee), can TM recover?

If I draw Fibonacci retracement lines from the recent top to the bottom of last Friday, there is a congested area between 38.2% retracement and 61.8% retracement. It may be able to go back to that area at least, and that would be between $84 and $86.

Since the damage was severe on an extremely high volume for the stock, it may bounce around between $76 and $80 for a while before it makes the next move. Today (Monday)'s move was still a DCB (dead cat bounce) after a huge plunge. Let's see how the stock behaves from here.

(By the way, there are people who say Toyota was politically targeted by Obama for the benefit of Government Motors.)

Will SKF Break Out?

With President Obama's war (fight, bickering, posturing, whatever you call it) against nation's big banks on several fronts, the U.S. stock market swooned last week. This week, both Monday and Tuesday saw the market try to shake off last week's big sell-offs and go up, only to get deflated back under a mountain of uncertainty about the future government actions.

Not surprisingly, the sector that has led the downward movement is financials. If this is a definite trend change, whatever the cause or trigger is, I'd better take a look at SKF (double-short financial ETF) again quickly so I don't miss the entry too badly.

One-year daily chart of SKF doesn't show much movement other than flat-lining. But if you look at a shorter-term daily chart, say 6 months, you see some tradable patterns.


On Tuesday, SKF hit the trend line connecting the tops from August 09 and November 09. Also it hit the upper bollinger band. In the past 6 months that's where the stock turned back down. Also, notice the bottom trend line connecting the October bottom and December bottom. These two trend lines seem to form a symmetrical triangle pattern. SKF broke down from that triangle in early January, and now it is hitting the trend lines from under.

So far, there is no negative divergence. RSI shows positive divergence, albeit slight.

If it were to break back down, it is at least short-term bearish; a short-term target would be to the lower bollinger band. If it were to break upward, this is about the right time and place to do it. If it breaks out, backtests the trend line and holds at the trend line, that will be bullish for this stock, and bearish for the general market.

Will Three Black Crows End the Rally?

What often kills a market rally is not financial in nature. It's political.

There lies the limit of TA (technical analysis), I think. Many TA enthusiasts say "It is all in the charts", but how could a chart predict, for example, the president's (seemingly) sudden declaration of war against "evil bankers", targeting proprietary trading and investment strategy? The news was leaked on Wednesday, with his press conference on Thursday, and was followed up by his townhall meeting speech (does he think he is still a candidate running for presidency?). For all these three days, the stock market in the U.S. tanked, taking the global markets along with it.

Obama's newly-found populist stance has cost the investors around the world billions of dollars in a very short time.

What comes to my mind, though, is a chatter on financial TV programs on Friday last week that Tuesday (Jan 19) would be a bloodbath. It seems, in retrospect, some traders had had some information beforehand. To the extend that these traders may have acted accordingly and thus altered the patterns of squiggles or candlesticks on the stock charts, then you could say "it's all in the chart". But that's nothing but traders trading on insider information.

Three heavy down days created an extremely bearish candlestick pattern called "Three Black Crows", which is best formed on Dow Jones Industrial Average daily. The daily chart also shows negative divergence that has been developing on RSI and CCI (at 133 for longer term trend). CCI dipped sharply below 100, almost for the first time since July 2009.

If the fourth day, Monday, is another down day, the likelihood of the market going even lower is high.

To me, the market has started to feel like a repeat of October 2008. Back then, the heavy sell-off was triggered by the passage of bank bailout bill (a political event). It was ironic, because up to that point the sales pitch for the bill to the masses had been "If we don't pass it, the market will tank, the credit will be frozen, it will be a disaster!" That disaster happened after the bill was passed.

The market was sold off for 7 trading days, shedding over 20%.

Back then, the first three trading days resulted in over 8% loss. This week, from Wednesday to Friday, the market lost 4.6%. The loss is milder this time, but September 2008 was not an uneventful month - Lehman Brothers' bankruptcy, Fannie and Freddie and AIG practically nationalized, run on the money market funds.

This is a Dow weekly chart with Fibonacci retracement lines between several tops and bottoms. Where it is at, Dow doesn't have much support until it comes down to 9,700 area. 10,000 is a support in a psychological sense, and if that breaks, it could go down very rapidly. More solid support is around 9,100, and that's July 2009 level. To be sure, negative divergence has been developing on technical indicators, as clearly seen in MACD Histogram.

For now, Dow futures are up 44 points.

Where We Stand in the Stock Market

Well, a near-impossible has happened in the past 10 months. Dow Jones Industrial Average went from March 09 low of 6,469 to today's close at 10,680, a 65% gain.

If you didn't believe in the rally in March and stayed out, you still had a chance in July to get in, as you can see in the 3-year weekly chart of Dow. That was really a last chance, as far as the index shows. But instead, many retail investors stayed out in fear, that July correction could be "it" and we were going down to test the March low. If you had dumped everything in DIA (ETF on Dow) in March, you would have gained 65%. If you had dumped everything in LVS (Las Vegas Sand), your gain would have been well over 1000%. What a game.

(If I had dumped what's left of the money in my account into MTL in March, the gain would have been 470%. Oh well.)

On the weekly chart RSI, there is no negative divergence yet. (On the daily Dow chart, RSI shows a negative divergence.) CCI set at 133 to see the macro movement is still below 100, a bull market territory. Slow stochastic set at 60 shows it has broken into a bull market territory in November 09.

Dow now poked above the 50% Fibonacci retracement line from the market top in October 07, and may be starting to climb further up the thin zone up to 61.8% retracement. There will be a resistance there.

Many retail traders/investors are actually angry that the market has ramped up (or has been made to ramp up) like this. All the bad economic news, mismanagement and deficit spending by the government, job loss, coldest winter in years, and the stock market keeps going up. I do not believe that the stock market is "forward-looking", as pumpers at CNBC would say. I think it is reactive, and it is not enough to simply look at the chart to figure out what is more likely to happen. (And that's why I have the other blog on macro issues.)

For now, the chart seems to say there is still room for upside, at least to the 61.8% line around 11,245. The Point & Figure chart shows the target at 12,050.

I am not going to call the top. The more-or-less normal stock market ceased to exist in September 2009, and that much is very clear if you look at the chart. Since that shock was so great and violent, all we have had may be nothing more than a big DCB (dead cat bounce).

Fat Finger on E-Mini, Or...?

This from Zero Hedge today.

Someone allegedly made a mistake, bought and sold 200,000 ESH0 (E-MINI S&P 500 March 2010 futures) right before the market opened today. That's supposed to be the biggest trade ever on e-minis.

Not all people considered this as an inadvertent mistake, of course.

Futures traders noted a huge buy order on S&P 500 futures on a day in March 2009, right when the market started to tank further in an accelerated pace. That spike in S&P futures totally turned around the market, and the rest is history: 10-month stock market rally. Along the way, as Zero Hedge has noted on their site, there have been some peculiar trades in futures, leveraged ETFs on various indices (their favorite has been Russell 2000), options on leveraged ETFs, which turned the market around, usually to the upside.

Rally No One Believes Enters 11th Month

The rally no one has really believed in all along since March 2009 has now entered the 11th month, and it is showing the sign of further upside. I said here, here, and here on this blog that the rally might last longer than most people were expecting, and it did.

I've been long pretty much all the way, though I've been shaken out here and there (I'm a chicken little). The only reason I would be selling some of the positions would be to raise money to buy stocks that would likely to move faster than what I have.

There are so many technical breakouts on individual stocks almost every day since late December that it is impossible to be in them all. My most recent purchase was today, call options on North American Palladium (PAL). JASO went lower than what I would have liked, but bounced right back, making 50% gain on my options. CENX that I bought almost on a whim on the breakout continues to go higher. All I do on this stock is to keep raising my stop limit every day. I've heard about a new industrial metal ETF, which should be good for both CENX and PAL, and probably MTL. UCO is up further since I sold my call options. I switched to more liquid options on USO, out of money April calls (strike at USO $50; currently USO is about $40) just as a crisis hedge (Middle East is volatile). Even those are making money.

I don't have enough funds to play, but just from TA, financials seems to be ready to break out. Individual names in financials have already started to break out. Among too-big-to-fail banks, I like Morgan Stanley (MS) setup.

Since I cannot be in all and I don't have enough funds, I might as well throw out some names that I've been watching. Many of them have already broken out to the upside, but you could wait for backtesting. Just for your entertainment, and none of them is recommendation. Please do your own due diligence.

JLL
MS
GBG
IVN
AFFX
SQM (just about to break the resistance at $40)
BLL (right at $51-52 resistance)
TUP (resistance $50)
URE
Canadian oil/gas trusts (I have PVX that I've had for long time for dividend, it spiked 6% today)

Good luck and good trade. For now, buying the breakout has been working, which I tend to take it as a sign of a bull market in stocks. Many people these days say that strategy is outdated, that it doesn't work when the market is this manipulated (whether by the Fed or Vampire Squid). I'm just saying it's been working, particularly these past 3 weeks or so. But remember, the stock market IS NOT the economy.

PAL: First One of the Year That Got Away

Actually it got away in front of my eyes (or I should say while I blinked) on December 30, 2009.

North American Palladium Ltd. (PAL) is a volatile small-cap stock that has been basing in the range since August 2009. The bottom trend line around $2.50, the top line at $3.30. On December 30, the last I saw the stock on my watch list was it was negative for the day. Then it reversed, took out the resistance at $3.30 while I was looking elsewhere. (I was looking at UCO to figure out the timing to sell my call options on it. UCO, by the way, did bounce where I thought it should bounce. :o)

Note to self: Is there a thing like "buy stop"?

The chart is 9-month daily chart of PAL. Since the last 3 trading days have left gaps, they may be filled (or so I hope). For now, all I can do is to watch and how it behaves - whether it breaks down right away like it has done before, whether it comes back to the breakout point ($3.30), or whether it keeps going.


Palladium (metal itself) has been acting very strong. In fact, palladium price broke out of a base at the same time PAL broke out, on December 30. With industrial demand (palladium's uses overlaps those of platinum) picking up and a new ETF (platinum and palladium) coming up, maybe this stock still has a plenty of upside.

Happy New Year!

TBT While I Wasn't Particularly Looking

It has broken out of a symmetrical triangle it's been forming since October. It has even already backtested the upper line of the triangle, and it's now off to the races.

TBT is a double-short ETF on Treasuries 20-years and longer. It is a double-inverse of TLT. As those longer-dated Treasuries prices fall (thus their yields go up), TBT goes up.

There are even more leveraged inverse ETFs like triple-short 10-year Treasury (TYO) and triple-short 30-year Treasury (TMV) but they are very thinly traded for my liking.


It looks like I've missed the boat on this, but I think there's still some upside left on this leg. It can run up to $55 or so (target price derived from the height of the symmetrical triangle), where it meets a horizontal line that marks the previous resistance/support.

What's interesting to me is that TBT broke out and continues to go up, DESPITE the dollar strength (take a look at the top of the chart - that's US dollar movement). So, as I mentioned in the post a few days ago, the U.S. dollar "strength" doesn't mean investors are flocking to the U.S. dollar denominated "safety" assets like Treasuries. It is rather other currencies' weakness.

Another Leg Up for JASO?

I played JA Solar (JASO) on December 14/15. I bought the breakout on a huge volume, sold one day later for a tidy profit. It may be forming a bull flag (a continuation pattern after a sharp movement), and getting ready for another move up.

JASO's chart is rather messy, but short-term, as you see, the resistance was around $4.90. That's where it turned back on December 8. Then for three days it declined on a very low volume. I was watching to see if it breaks out on a large volume, and sure it did on December 14.



I continued watching to see how it behaved after the breakout, and I decided I liked what I saw, a bull flag. So I bought it again, with initial target around $7.50. There is a very thin zone between $7 and $9, so it could run up to $9 in a relatively short time. The point and figure chart of JASO shows the target at $10.75. But it all depends, I think, on how the general market is going to act. (At the moment, I continue to think Dow and S&P will follow Nasdaq's lead and go up to 61.8% Fibonacci retracement.)

This is nothing fundamental, just technical. I don't even like solar stocks as a sector (I don't quite believe in a private sector that constantly needs public subsidies). But a trade is a trade, and it's a good one that makes money.