The Wizetrade Stocks Blog

A couple of stocks that are on the move today are AMZN and PCLN. AMZN made a new high today topping out at $135.25 before pulling back to $132.54 on some inter day profit taking. AMZN is making another run towards the morning high, trading at $134.63 solid green across the board. I am going to keep an eye on AMZN into the close for a possible swing entry on a short term break out. PCLN is also having a really good day in this choppy market. PCLN is up $3.98 to $212.19 testing some resistance up around the $214.00 level.

Keeping Things in Perspective, Part II

By Scott McCormick, CMT

            In part one of “Keeping Things in Perspective” I focused on the actual returns of the SPX, Gold, and the U.S. Dollar Index.  I also alluded to the fact that I have been noticing changes in short term market behavior, the same thing that lead me to conduct a long-term analysis of the SPX this time 2008.  Another reason why I feel compelled to look at things from a longer term perspective is because of the type of commentary that I have been hearing regarding Gold and the DX in particular.  What I found is important, and could possibly impact all markets over the next three months. 

            The Standard and Poor’s 500 Large Cap Index, has risen 63.4% in the last 8 months (6 times the current average annual expectation for the SPX) from it’s March 2009 low of 666.79 recovering roughly 50% of it’s overall decline from the October 2007 high of 1576.09.  Obviously the trend since March has been up, but relative to the October 2007 high the trend is still down, and we have approached an area that represents relatively little reward for the Bulls, unless it breaks out beyond the resistance levels that we have approached. As trend analysis goes, the SPX has been bumping up against a downtrend line which is connecting the October 2007 high to the May 2008 high.  In addition to testing this trendline the SPX is also trading at or near three different Fibonacci levels ranging from 1115.07 to 1135.87 (a closing above 1135 should be significant).  The rally since the March low has been accomplished in two swings on the weekly chart.  The first swing was from the March low of 666.79 to the May high of 956.23 (roughly 289 points) and the second swing from the July low of 869.32 to the most recent high last week of 1113.69 (roughly 244.37 points).  As swing analysis goes, typically you will find that the market will move in swings of three to five waves, and swings one and three tend to be approximately equal in length.  If this holds true again the difference between swing one and swing two is now 44 points, or roughly 4% of the SPX’s closing price from November 25, 2009 which would be a target of roughly 1158-1160.

            As I pointed out in the performance numbers since October 2007 Gold has been the better performer on a relative basis to the SPX. What is concerning though is that not only is it reaching all time highs, but the trend has been accelerating, which creates a parabolic appearance.  When one thinks about markets going parabolic thoughts of Crude Oil in 2008 and the Nasdaq in 2000 come to mind.  In comparing the angles of those other parabolic markets to Gold I found that from the Nasdaq lows in 1987 to the highs in 2000 the angle of ascent was 38 degrees (a normal market is closer to 45 degrees).  Crude Oil’s angle of ascent from it’s lows in 1998 to its high in 2008 was approximately 31.5 degrees.  Currently the angle of ascent of Gold is 33 degrees from it’s 1999 low of 253 to it’s current high of 1187.  Now just because the angle is this steep does not mean that Gold is going to stop tomorrow, but since it is trading at an angle greater than 45 degrees it is showing a rather irrational market.  In percentage terms comparing the three moves, the Nasdaq rallied 1700% from its 1987 lows, Crude Oil rallied 1300%, and so far Gold has rallied 469% since it’s lows.  In comparison to the other parabolic markets Gold looks like it has more to run, which it may, but not without increased risk.  One of the tools that I prefer to use to get specific technical levels at which Gold may encounter resistance, in this case, is a Fibonacci extension.  Based on swings on the monthly chart going all the way back to 1970, Gold may encounter short term resistance near $1229 to $1256, should the commodity rally through these levels the next cluster of Fibonacci levels comes in at $1458-$1495. 

            While the focus has been to the upside for the SPX and Gold, it’s is just the opposite for the DX.  The DX has been in decline since July 2001, with some interruptions along the way, most notably the rally from December 2004 through November 2005, and more recently the rally from March 2008 through November 2008 and March 2009.  Although my focus is on the actual continuous futures contracts of the DX, please remember that it is an index of 6 currencies so when analyzing the DX you have to consider all other components as well.  Although it is beyond the scope of this blog the weighting of the Dollar Index is as follows: Euro Dollar 57.6%, Yen 13.6%, Pound (Cable) 11.9%, Cad (Loonie) 9.1%, Kronas (SEK) 4.2%, and Swiss Francs 3.6%.   The largest weighted currency is the Euro, and second largest is the Yen.  Should the Euro and Yen both encounter resistance it would provide a great deal of support to the DX.  As support levels go for the DX the big one is it’s March 2008 low of 71.05, but it may also find support before reaching that level.  The first breakout for the DX occurred at 72.64, the second breakout at 74.06 as it worked out of the lows in early 2008.  In addition to these price levels a Fibonacci level of 74.95 and 73.12 may provide support.  As of this writing the DX is trading below 74.95, but what needs to be watched is whether or not the index recaptures this level without moving to the support levels below it, this would be a sign of DX strength. 

            So what is all of this saying?  I am stating that the current up-trends in the SPX and Gold remain in tack, and the down-trend in the dollar also remains in tack.  However all three markets have approached levels that represent higher risk for staying in the trade, than getting out, and as the markets approach resistance levels and support levels it increases the possibility of profit taking in the equity and gold market, and short covering in the dollar.  What I mean by increased risk to stay in the trade is this; if you consider your reward to risk ratio in your trade as your trade risk the closer the trade gets to the reward target to more risk is present in a trade.  This will cause market participants to seek profit taking opportunities or look for breakouts above resistance or below support levels which changes the dynamic of the reward to risk ratio back into the favor of reward. Having provided the resistance for the SPX and Gold, and the support levels for the DX it is also necessary to know the opposite side of the trend that would indicate a possible reversal, and therefore confirmation of the levels provided.  Currently the short to intermediate support level for the SPX is 1019-1029, Gold is 1026.90, and a breakout above the resistance of 76.50 for the DX could indicate again that the markets may be reversing.  Keep in mind that in order to reverse an up-trend the market needs to make a lower low and a lower high, and for a down-trend reversal a higher high and a higher low needs to be made.  So the levels mentioned should simply raise your awareness that something is happening, not that the trend has actually revered.

In a choppy market, many traders feel that they have only one option – Day Trading.  A trending market will always be easier to trade, but there are fantastic money making opportunities in all market conditions.  All traders know this to be true but most are unable to conquer their own fear in order to capitalize on the opportunities.  When the trader is able to define, accept and manage the risk in a position, he or she will be able to trade all market conditions without fear.

Defining Trade Risk

“A known evil is always better than an unknown evil.”  This means that knowing the worst case scenario is always better than not knowing how bad the situation could get.  In trading terms, if a trader takes the time determine where the stop loss will be positioned, prior to entering the trade, he or she will be able to determine the trade risk.  Simply subtract the stop loss price from the current price. 

Example:

                                Current price:  $43.00

        -         Stop Loss:  $41.50

                                Trade Risk         $1.50

Accepting Risk

Prior to entering into any position, the trader needs to think through their own money management plan of attack.  Success in trading is a result of protecting your capital not trading potential.  There are obviously many opportunities that present themselves in the market every day, but the trader must temper enthusiasm with money management otherwise the market will take away your enthusiasm, not to mention your money. 

How does the trader learn to accept risk?  The answer is a combination of stop losses and position sizing.   The first step in accepting risk is determining you MAL or Maximum Acceptable Loss.  The MAL is the most that the trader is willing to lose in any one trade.  This number is always fixed.  It should be some percentage of the trader’s total account.  As an example, a trader with a $20,000 trading account might choose to follow the 10%/10% rule.  This rule states that if a trader has a $20,000 trading account, he or she will not put more than 10% of the total into any single trade.  This means that no position should be greater than $2,000.00.   Of that single $2,000.00 position, the trader will not have more than 10% at risk.  This hypothetical trader’s MAL would be $200.00.  The MAL is not determined by the trade, it is determined by account size.

The acceptance of risk comes from the ability to integrate Trade Risk, with Account Risk.  The trade risk is the separation between entry price and stop loss. Account risk is the MAL.  The integration of the two is accomplished by dividing trade risk into account risk.  The quotient of this calculation will determine the number of shares to be purchase for the trade. 

Example:

                                MAL ($200.00)/ Trade Risk ($1.50) = Position Size (133 shares)

Keeping Things in Perspective, Part I

By Scott McCormick, CMT

            At this time a year ago the equity market was looking into the abyss, and today I heard commentary that gold is going to the sky, that money should be put into equity markets around the globe, and that the dollar is never coming back.  The polarity between the news from last year and today is startling. The current commentary may be true, only time will tell, but it amazes me how quickly market participants forget where the markets have come from (which is why patterns repeat over and over again in the market).

A year ago after buying shares of the SSO (Proshares Ultra Long SPX ETF) on November 14^th and November 21^st, ironically, I thought that I should conduct a long term analysis of the SPX because I began to notice a change in the short term behavior (bold on purpose) of the market going into those two days.  On Monday November 24th I put together what turned out to be an internal research report for the local branch of my old firm.  I had concluded that the November 2008 low was a 5^th of a 3^rd wave, for you Ellioticians out there, and that the equity market should bounce form the November low of 741.02 for the SPX (market rallied 27% over the next 7 weeks).  We all now what happened from there, but I thought that it would be interesting to look at the last year’s percentage changes in the markets that seem to be getting all of the headlines, the SPX, Gold, and the U.S. Dollar Index and put things into perspective with the longer term picture.

                On a closing basis, the SPX from the closing high (1565.15) in October 2007 to the closing low (676.53) March 2009 fell some 888.62 points, or 56.78%, in 17 months. Since the March low the SPX has rallied 429.12 points, or 63.4%, in less than 8 months.  Over the course of the last 25 months the SPX is still negative by 29.3%.  During these same periods Gold was able to provide positive returns, but not without some volatility along the way.  From October 2007 through March 2009 Gold rallied 23%, from March 2009 through November 2009 it has rallied 28%, and overall for the last 25 months it has rallied 58.4%.  Even though gold performed well relative to the SPX during all three periods, please remember that Gold also declined from 1033 in October 2008 to its lows in March 2009 at 681 (a decline of 34%).  The U.S. Dollar Index (DX) showed relatively smaller swings during this same time frame.  From October 2007 to March 2009 the DX actually rallied 10.95%, not bad for an economy that looked like it was going to sink into the abyss. As the U.S. Government stepped in to keep the economy from sinking the dollar began its slide from March 2009 through November 2009 and so far has declined 15.7%.  During the scope of the last 25 months the DX is down 4.32%, again not bad considering where we have been, and what may come.

                So where does this put the markets now?  On a relative basis Gold continues to outperform equities in the long term (last 25 months), however in the short term (last 8 months) equities have been beating Gold hands down proving to be a better bet against the threat of inflation (the same lesson that was taught to the markets in the early 80’s).  Both the SPX and Gold continue to outperform the DX.  So this is what the trade has been, own more equities than gold, and own more of both than U.S. dollars.  How long this trade continues is anyone’s guess, but just like I began to see a change in behavior of the short term markets last year, I am again noticing changes in the short term behavior now for all three markets, not just equities.  In the following blogs I will provide a closer long term technical look at the three markets to keep things in perspective.

Forecasting the SPX

by Scott McCormick, CMT

Attention:  Go to the last paragraph to read the synopsis of the observations made to forecast current SPX action. If you are wondering how I got there, go back and read from the beginning.  

            Most market participants are attracted by the lore of being able to determine not only where in price but when in time the market may turn for the next profitable trade.  Following the theme of last weeks blog post I decided to look at the SPX from a different perspective, that of a cyclic perspective.  As I alluded to last week there are clues that can be garnered from analyzing price, but the other aspect of market analysis that does not get as much attention is time.  Now because this is a blog post, and not a chapter on cycle analysis I am going to keep it simple, but there are a few things that you should know. 

            For the purpose of this blog I am focusing on two aspects of cycle analysis including periodicity which is the difference between the troughs in a cycle, and the Principle of Summation which is the summation of all active cycles.  The time frame I decided to study is between March 12, 2003 and November 2, 2009, the date of the first trough coming out of the 2000-2003 bear market to the most recent trough.  I chose this time frame for no other reason other than is represents the two most recent bull and bear cycles (obviously a more statistically significant test would contain a larger number of samples or time frame).  To help me identify the troughs in the market I used a swing tool to identify intermediate swing highs and swing lows applied on a daily chart. 

            When analyzing cycles it is important to measure the difference between the troughs, and not the peaks as the distance from peak to peak may not be as reliable as measuring from trough to trough. Beginning in March of 2003 I counted the number of trading days between swing lows and found that there were 40 cycles that lasted as little as 8 days and as long as 93 days.  The average cycle lasted 41 trading days, but the one that occurred most frequently was a 13 day cycle.  In addition to identifying the difference between the troughs (a.k.a. the swing lows) I measured the overall number of days it took the SPX to move from trough to peak back to trough again to identify what the translation was for that cycle.  It is this translation that can help the analyst determine if the market is bullish, bearish, or neutral.  For instance if the cycle lasted 20 days and it took 13 days to go up and only 7 days to go down, then the translation is bullish and vice versa for bearish.  If the number of days are roughly equal then it would be said that the market was fairly neutral.  The upward swings lasted anywhere from 3 days in bear markets to 90 days in a bull phase, with the down swings lasting as little as 3 trading days in bull markets to as long as 41 days in bear markets.  Overall the Average upswing lasted 26 days while the average downswing lasted 15 days.  The mode, or frequency, identified that most often the upswing would last about 7 days, and the mode for down swings was also 7.  For the most part, even through all of this market turmoil, on average the market had demonstrated that the market will swing up longer than it will swing lower.  This is not to say that the market will increase in value more than it will decline, it is simply saying that it takes less time to go down then it does to go up. 

            So you are probably wondering; where the forecasting comes into play with all of this?  Here is how, by looking at the most recent cycles we can see what that pattern is, and strategize appropriately.  Since the March 6^th low until the November 2^nd low there have been 4 full cycles lasting 85, 40, 21, and 21 trading days (principle of summation showing 40 day cycle plus 21 day cycle plus 21 day cycle equals larger 82 day cycle which is approximately equal to the first cycle from the March low of 85 trading days) respectively.  As you can see the periodicity of the cycles has contracted over the last 8 months and the number of up days in the cycle have gradually declined from 67 to the most recent upswing in early October of only 13 trading days. Over the last three cycles the number of down days has expanded from 3 to 8.  This is revealing that the cycle translation is shifting from a very bullish market to a less bullish market.  Another factor that I felt compelled to investigate was how often a trough occurred on a new or full moon over this same period to see if there are any other markers I can use to forecast possible turns in the market; yet another pattern.  Interestingly I found that of the 40 cycles since March 2003, 9 troughs occurred plus or minus 3 trading days on a new moon, and 20 troughs occurred plus or minus 3 trading days on a full moon.  The last three troughs on in September, October and November occurred 0 trading days from the full moon (Sunday October 4^th was 0 trading days from Friday October 2, 2009).

            As I am writing this the market closed November 17^th fairly flat and is 11 days into an upswing.  With the last two cycles lasting 21 trading days, and the upswings lasting 14 and 13 trading days for the months of September and October respectively, it is looking as though the market may be due for a correction.  Looking at a Lunar Phase Calendar as published by the U.S. Naval Observatory is appears that a new moon occurred just yesterday, and the next full moon is on December 2^nd, which is the first Wednesday.  This is only 10 trading days away from today’s close.  This analysis is simply based on simple observation, but right now I felt that it is a little too obvious to ignore what is going on in the cycles.  Also remember that these cycles can expand and contract, so there is no guarantee that the next cycle will last as long as the prior.  Final note, the support level that I am watching on the SPX is a close below 1100-1097.  I would like to see the market trade through 1084 to confirm that the reversal of the most recent rally.  As for further support levels besides 1100, 1097, and 1084 I will be watching 1075-1050.  Should the SPX makes its way to and closes below 1019, this will be a signal for a possible intermediate trend reversal.  If the market continues to rally the next ceiling is 1136.

After a 6 day rally and roughly a 500 point move, the Dow Jones Industrial Average finally took a break today along with crude oil and gold.  We saw the U.S. dollar gain some strength today as well.  Many market technicians are watching the 1100 level on the S&P 500 as a key resistance point.  Although we have broken that level twice in the past two days, the S&P 500 has failed to close above that level.  We could see another pullback from here if 1100 is not broken.  The Dow Jones Industrial Average ended the day down 93.79 points, to close at 10,197.47.  The S&P 500 lost 11.27 points, to close at 1087.24. The NASDAQ finished the day down 17.88 points to close at 2149.02.

Kipp

The Dow, NASDQ and the S & P have been moving up for the last 6 days and the short term trend is overextended. The Dow has taken out its near term resistance but the S & P is testing its previous highs as I type this. So here is what I am thinking….The market wants to pull back from these levels for a couple of reasons. Number 1, the market has been running and people are looking to lock in some profit after this 6 day run. Number 2, the S & P is bumping up against a psychological level and that creates a need for a pull back before the break out. So keep your eyes on these levels on the S & P and look for more bullishness if we breakout. If we don’t get the breakout you might want to tighten up your stop losses.

It has been on my mind for a while now, but like everyone else I am wondering where the ceiling is in the equities market.  To get an idea of when and where the ceiling may be put in I like to look at a multitude of factors, including other markets, to come to a conclusion about what may happen in the equities market.  What I am observing as of the market close on November 10, 2009 is a possible floor being put in on the US Dollar Index (DX) continuous futures contracts, which concerns me due to the opposite relationship it has with and the SPX.  This opposite relationship has been around for a while now, but for the last 18 months it has been more pronounced due to the low Federal Funds Rate as compared to other developed and emerging nation's central bank rates.  You can read my post found on the Wizetrade Forex Page detailing my observations of the DX here at http://www.wizetrade.com/Community/blogs/4x_made_easy_blog/archive/2009/11/11/possible-dollar-bottoming-process-in-the-long-and-short-term-written-by-scott-mccormick-cmt.aspx, .

Because of the opposite relationship between the DX and SPX, it carries important implications for the equities markets.  To track the equities markets I primarily follow the SPX, and what I have observed is that as the DX is approaching a possible double bottom and the SPX is approaching a possible double top, so if the DX goes up the SPX could go down.  On October 21, 2009 the SPX topped out at 1101.36 and over the next two weeks it fell to a low of 1029.38 on November 2, 2009; at the same time the DX bottomed at 75.08, and rallied to 77.50.  As of today's close the SPX closed at 1093.01, which coincides with an 88.6% retracement of the decline from 1101.36 to 1029.38 at 1093.15 (1101.36-1029.38=71.97*.886=63.77 1029.38+63.77=1093.15).  The SPX did trade as high as 1096.42 today, but was not able to hold onto that level going into the close.  If the SPX gets back above 1096 I would expect a retest of 1100-1101, but this would also be predicated upon DX weakness.

On the downside, today's low was 1087.40, but a close below 1060.89 is where the SPX would have to go to reverse the rally that has been in place since November 2, 2009.  If the SPX closes below 1060 I expect that the SPX will retest the 1029, and possibly the 1019 level.  If this is a double top forming on the SPX then a close below 1029.38 would imply further market corrections which could carry the SPX as low as 957 (roughly a 13% correction from the current levels), which coincides with the highs from May 2008.  Since earnings season is coming to a close I would keep a close eye on the economic reports, as the markets may sell into any bad news. 

The Dow Jones Industrial Averaged closed at the highs of the day and at a 13-month high, breaking the 10,200 level with no problems today.  A strong move up of over 100 points in the first 30 minutes of trading this morning was followed by a nice steady continuation throughout the rest of the trading day with the major indices pressing to their highs of the day going into the close. I guess it’s safe to say “rally on” for now!  With the fresh crosses building on the mid term trends, we should see a continuation of this move for the coming weeks.  The Dow Jones Industrial Average ended the day up 203.52 points, to close at 10,226.94.  The S&P 500 gained 23.78 points, to close at 1093.08. The NASDAQ finished the day up 41.62 points to close at 2154.06.

Kipp

So we hit 9687 on Friday and then 9682 yesterday...We are really holding those lows with the Fed speaking tomorrow afternoon. If we break those lows then it could get a lot uglier from here on out. But if the market rallies then it could push us back up into that 9900 level and get back into that channel we have been in for the last couple of weeks. We broke that 9900 support last Monday and saw some big moves to the downside once that level was broken. Lets see what the Fed says tomorrow and then make our move from there. I like to sit on the sidelines during these times, just to be on the safe side.