SPY Trends and Influencers December 17, 2011

Written By: DragonFly Capital

Last week’s review of the macro market indicators looked heading into Options Expiration week to be a bit more settled. Gold ($ GLD) looked to consolidate in a range while Crude Oil ($ USO) was biased higher. The US Dollar Index ($ UUP) and Treasuries ($ TLT) were better to the upside but the trend in Treasuries was getting weaker so it could consolidate or pullback. The Shanghai Composite ($ SSEC) was on its death bed while Emerging Markets ($ EEM) looked to continue lower. Volatility ($ VIX) looked to continue its drift lower. This mix set up for the Equity Index ETF’s $ SPY, $ IWM and $ QQQ to be biased to the upside slightly and their charts concurred. The US Dollar Index strength would be the biggest risk to Equity upside in the coming week with Treasuries looking more peaked. If Treasuries gain strength then the slight Equity upside bias will be negated.

The week began with Gold falling and Oil stable but falling later in the week. The US Dollar moved higher and then consolidated while Treasuries ran higher. The Shanghai Composite accelerated lower and Emerging Markets fell before consolidating at the lows of the week. Volatility fell slightly but in a tighter range, maybe a sign of bottoming. The Equity Index ETF’s moved lower off of this combination of influences. the slight upside bias overwhelmed by the Treasury and US Dollar moves. What does this mean for the coming week? Lets look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

SPY Daily, $ SPY

SPY Weekly, $ SPY

The SPY moved lower early in the week and consolidated through Friday, building a bear flag. The Relative Strength Index (RSI) on the daily chart has held just below the mid line and over 40 while the Moving Average Convergence Divergence ( MACD) indicator has crossed negative and is growing more so. These support a move lower unless the RSI turns up. The weekly chart shows movement in a continued broad range. The RSI on this timeframe has not been able to move into bullish territory while the MACD that has been positive, is moving back toward the zero line. These also support downside or perhaps further consolidation in this flag. All of the Simple Moving Averages (SMA) are basically moving sideways showing longer term directionless action. The short term will drive the direction. Support lower comes at 120 and then 118.50 and 116 below that. Resistance is higher at 124.55 and followed by 125.90 and 131.10. Look for more downside in the coming week with a chance of a continued consolidation.

The last two weeks of the year are upon us and with the Holidays lighter volume and less interest. Moves can get exaggerated in this environment. Gold still looks broken from its move and poised for more downside while Crude Oil is also broken and biased lower. US Treasuries and the US Dollar look to continue to drive the direction of the markets crushing Equities as they move higher. The Shanghai Composite, which has been playing a supporting role in moving Equities lower, looks to continue to do so long term but might consolidate the last leg down in the short run first. Emerging Markets look to pay the price lower as well. Volatility is poised to continue to drift lower supporting an orderly move. All this sets up for the Equity Index ETF’s, SPY, IWM and QQQ, to move lower in the coming week, and the short term charts agree. Use this information as you prepare for the coming week and trade’m well.

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Dragonfly Capital

Congress’s New Year’s Resolutions

Newspapers are excited because Congress has voted to continue a feel-good payroll tax rate for another couple of months and then start sort of paying for Social Security just after New Year’s. The failed Super Committee’s goal was to figure out a way to cut federal spending… starting in the year 2013.

I wonder if this shows Congress’s all-too-human side. I might have three slices of pecan pie every day between Thanksgiving and Christmas, promising myself that I would start dieting just after the New Year. Actually that sounds like a good idea that I think I will get up from my computer and walk into the kitchen…

Philip Greenspun’s Weblog

Updating the Triangle Breakdown in Gold Dec 15

Gold prices ejected downward from their Symmetrical Triangle bigger price pattern this week, resulting in a continuation breakdown move towards expected lower targets.

Let’s take a look at the original “Symmetrical Triangle” prior update (ahead of the break) and now update what’s happened and where we are now, starting with the “Pure Price” pattern itself:

Reviewing last week’s Symmetrical Triangle Pattern description, we observed the “Midpoint Value” area at $ 1,735 with converging ‘triangle’ trendlines narrowing from $ 1,750 to $ 1,700.

A breakdown under the $ 1,700 level would trigger a ‘range expansion’ or “feedback loop” sell-off towards the $ 1,600 target … which is exactly what occurred, giving us a good example of a bigger-picture pattern set-up and follow-through.

This is a big lesson in planning for any outcome, and not being biased that gold “must” break higher from the triangle pattern.

Yes, the bigger picture trend structure suggested an upside continuation, but this gives us a good opportunity to review one of my favorite bits of trading wisdom:

“IF something should happen but does not, THEN it often leads to a larger than expected move in the opposite direction.”

The simple logic behind the statement refers to “Crowd Behavior,” especially with a majority expectation that is not fulfilled.  What happens instead is a series of stop-losses that trigger a “feedback loop” I like to call “Popped Stops.”

The Feedback Loop – which occurs in virtually any breakout from a consolidation pattern – occurs in part because BOTH sides of the market are engaging in the same activity for different reasons.

In this downward break from the triangle consolidation pattern, buyers were forced to sell-to-liquidate unhappily which was joined by traders (bears) who short-sold happily.  This type of logic helps understand impulse moves in price.

Let’s pull the perspective up to the Daily Chart and see where we are in the broader scope:

The triangle developed cleanly, and price broke out ahead of the apex (point where the trendlines meet), which is the classical expectation.

In any consolidation pattern, traders often do best to wait for a breakout to occur, instead of trying to predict in which direction price will break – that sort of behavior is what helps propel feedback loops or “Popped Stops” of the side that loses the price battle.

Anyway, after breaking and closing under the $ 1,700 key level, price impulsively traveled towards the first downside target at $ 1,600 … and exceeded it yesterday.

It’s very interesting that price closed firmly – for the first time since January 2009 – under the rising 200d SMA (that’s another story).

In the meantime, let’s keep focused on the $ 1,600 pivot and the 200d SMA which was also the swing low from the recent October sell-off.

It’s not going to look good for gold if it continues closing under $ 1,600, so let’s watch price structure day-by-day relative to that reference level and these recent bearish breakdowns.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!


Afraid to Trade.com Blog

Digging to China

Written By: DragonFly Capital

When I was a kid growing up in what was then the cow pasture of Basking Ridge, New Jersey we had a mostly dry creek bed at the edge of the property that was lined with sandy clay like soil along the bank. We would play with toy soldiers there a lot and occasionally get a shovel out and start digging a hole. Whenever the little kids in the neighborhood came by to ask what we were doing we would tell them that we were digging a hole to China. With some geography lessons I now know it would be somewhere in the Indian Ocean, and if I managed to get through the Magma core alive I would likely drown as it poured in to my hole.

Now many years older and a couple of degrees wiser (I hope) I have discovered another problem with China. I continue to hear that China is an opaque marketplace with a planned economy and if they want to want to prop up the world economy they can at their own pleasing. I am not so comfortable with that assessment. My tool of choice for this assessment, price action in their domestic stock market, shows them digging a deeper hole, perhaps trying to get to the United States. Let’s take a look at the Shanghai Composite, $ SSEC, starting with the monthly chart.

Shanghai Composite, $ SSEC, Monthly

The monthly chart of the Shanghai Composite, $ SSEC, above shows a large run higher from mid 2005 to mid 2007. It retraced most of that move finding support just below the 1750 level that provided great importance early in the decade. After retracing only 38.2% of the down move through the course of 2009 it has been falling back and after stalling at the 61.8% level of 2320 twice, is now heading lower again. As it heads lower the Relative Strength Index (RSI) continues to trend lower with the Moving Average Convergence Divergence (MACD) indicator holding slightly negative near zero. This market is set up lower on a long term basis with the next support coming at the 1661-1750 area and then 1500 and 1350 below that. that is a big hole they are digging.

Shanghai Composite, $ SSEC, Weekly

The weekly chart also continues to dig a big hole. After falling from the symmetrical triangle it has made a series of legs lower. The RSI on this timeframe is also slowly trending lower with a MACD that is negative but near zero. A slow grind. This view shows that there is a chance to catch the fall around the 2060 level and that there is a Measured Move on this leg lower at 2010. But all of the Simple Moving Averages (SMA) are rolling lower. No good news here yet and 2060 still leaves a lot of digging to do.

Shanghai Composite, $ SSEC, Daily

Finally on the daily chart, down at the bottom of the existing hole, it looks like more digging going on. The long red candle Monday closing near the low and at a new 2 year low, suggests more downside. Tuesday dropped even lower down to 2248 (not shown). The RSI on this timeframe also is trending lower and the MACD is negative but may be improving. The SMA’s however show the trend is down if there was any doubt.

Hitting lows not seen in over 2 years and with no indicators flashing oversold, in fact still with much room before that happens, is anything but a positive indicator for the future of the Chinese market. I suppose the pundits might suggest some scheme that the Chinese government is running that requires a lower market valuation, but in my experience the first thing you have to do to show the world that you are strong and in control when you are in a hole is to stop digging. Until that happens expect that the Chinese economy will continue to slow down, impacting the growth in the rest of the world.

If you like what you see and want to know how to trade these names sign up for more ideas and deeper analysis using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits feed and on chartly.

Dragonfly Capital

Monday Morning Check on Stock Market Internals Dec 12

How have market internals given us clues about the last two short-term stock market reversals, and what are they saying currently?

Let’s check out the 30-min intraday S&P 500 Chart of Breadth-based Market Internals:

What we’re seeing above (click for full image) is the S&P 500 with the NYSE Breadth and NYSE Volume Difference of Breadth (two of the “Big Three” Market Internals – the other is the NYSE TICK).

Breadth measures the number of advancing issues minus declining issues at a specific moment in time, while Volume Difference (VOLD) takes into account the difference in Volume Flow of Advancing and Declining issues.

The key is to look for internal confirmation with price or non-confirmation (in the form of visual divergences).

Let’s focus mainly on the non-confirming divergence of November 25th (a positive divergence at the lows) and the recent December negative divergences at the highs ahead of the current ‘retracement/sell’ phase.

Reference my November 29 Update on Market Internals to see how the picture looked in real-time then, and of course how the signals from internals successfully played out positively (as expected) for the market.

Use that as a clear educational example of how the concept is ’supposed’ to work (nothing is perfect though).

That brings us to our current decline in Market Internals (inner strength) while price rallied on “fumes” ahead of the recent ‘turn-around’ into the 1,260/1,270 target level.

Let’s take a closer look at the current picture:

A 5-min multi-day (intraday) chart allows us to see more detail that may be missed from the higher timeframes.

First, we see the November 25th positive divergence and resolution with two big “Confirmations” from Internals – November 28th and November 30th (when Central Banks intervened).

Strength in internals tends to PRECEDE strength (or follow-through/continuation) in price, as you can see from 1,230 (Nov. 30th) to 1,270 (Dec. 5).

Short-term price swings never last forever, and we often see deteriorating Internals (along with raw Volume and Momentum) ahead of short-term reversals (or retracements).

That’s what we saw last week and we’re seeing price follow-through in the retracement/downward direction after locking in negative Internal divergences.

We’re also seeing a type of “Rounded Reversal” or “Arc” Price Pattern, but that’s another story.

The key NOW is to watch for any sudden surge of bullish buy-ins or profit taking from short-sellers off the 1,220 important confluence support.

If buyers do not step in to stop the tide of selling at 1,220, we’re likely to see a continuation back to 1,200 as the next target and then if the market trades at 1,200, we’ll see if divergences exist at 1,200 in real-time.

Today’s sell-off puts the market focus on the 1,220 confluence, so keep your attention there as a short-term “make or break” level in the context of signals from Market Internals.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!


Afraid to Trade.com Blog

SPY Trends and Influencers December 10, 2011

Written By: DragonFly Capital

Last week’s review of the macro market indicators lead into the week with the market looking very strong, despite the pullback Friday. Gold ($ GLD) and Crude Oil ($ USO) both were poised to move higher with a chance that Gold consolidates its gains. The US Dollar ($ UUP) and US Treasuries ($ TLT) were still in uptrends but facing support levels nearby that could change the trend. The Shanghai Composite ($ SSEC) looked very broken while Emerging Markets ($ EEM) were ready to continue higher. Volatility ($ VIX) looked to remain in a trend lower but might consolidate. All this led to an environment for the Equity Index ETF’s $ SPY, $ IWM and $ QQQ to continue higher. News could again provide exogenous shocks that the charts did not read, with it showing up in the US Dollar and US Treasuries first. Keep watching them as the captains steering the ship.

The week saw Gold consolidate among the Simple Moving Averages (SMA) while Crude Oil bucked the charts and traded lower until rebounding Friday. The US Dollar consolidated while Treasuries traded higher before pulling back to end the week. The Shanghai Composite continued its move lower to new lows while Emerging Markets consolidated their gains, holding most of the gap up from last week. Volatility did continue to slide lower. The Equity Index ETF’s bounced around in some wide range days but finished the week marginally higher. What does this mean for the coming week? Lets look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

SPY Daily, $ SPY

SPY Weekly, $ SPY

The SPY consolidated early in the week but with foretelling topping candles that led to a strong move lower Thursday, only to have it reversed Friday. The Relative Strength Index (RSI) remained bullish during this action while the Moving Average Convergence Divergence (MACD) indicator held positive but is fading lower on the daily chart. The weekly chart printed a Hanging Man back at the top of the flag from the failed break down lower. The RSI is trying to move bullish, over the mid line and rising, to join the MACD growing more positive. It is back in a range between 118.50 and 128.80. Resistance comes higher over 128.80 at 131 and 135.80. Support below comes at 124.55 and 122.60 on the way to 118.5. In a Range with an upside bias.

As we head into Options Expiration week the markets look to be a bit more settled. Gold looks to consolidate in a range while Crude Oil is biased higher. The US Dollar Index and Treasuries are better to the upside but the trend in Treasuries is getting very weak so it could consolidate or pullback. The Shanghai Composite is on it s death bed while Emerging Markets look to continue lower. Volatility looks to continue its drift lower. This mix sets up for the Equity Index ETF’s SPY, IWM and QQQ to be biased to the upside slightly and their charts concur. The US Dollar Index strength will be the biggest risk to Equity upside in the coming week with Treasuries looking more peaked. If Treasuries gain strength then the slight Equity upside bias will be negated. Use this information as you prepare for the coming week and trade’m well.

If you like what you see sign up for more ideas and deeper analysis using the Get Premium button above. The you can view the Full Version with 20 detailed charts and analysis: Macro Week in Review/Preview December 10, 2011

Dragonfly Capital

Live reblogging the Republican Debate

Mike Kimel to the blue courtesy phone

6:05 PM PT: Newt Gingrich begins by taking credit for creating 36 million jobs, 25 under Reagan, he says, 11 under Clinton.

My problem isn’t Newt claiming credit for everything good which happened before he resigned in disgrace, it’s the numbers. Employment increased by less than 17 million jobs during the Reagan Presidency. I call that pants on fire.

The number for Clinton is net employment increase during the overlap of Clinton and Gingrich’s terms of office in Washington (so the Reagan number isn’t some fraction of the gross flow). My guess is that he calculated starting at the trough of the recession (Republicans do that when the President in question isn’t named Obama).


Angry Bear

Retail Winners and Losers

(Reprinted with permission from TheStreet.Com) I offered my list of top retail picks for the 2011 holiday season in October, predicting that big box super stores would be prime beneficiaries, at the expense of specialty shops. Today, I’ll add a selection of small and mid-cap regional players, with these lesser known companies also set to […]
On The EDGE