Trader's Tips Stock Market Newsletter
Published May 01, 2011 ...by oextradingresources.com
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Long term, the market is still viewed being in a countertrend advance from the March 2009 low. As mentioned before, any break of the October 2007 high will move me from this stance, as it will exclude the Primary wave 2 scenario from the list of valid wave counts then. See the updated Debt section below for additional reasons why i doubt the market will manage to go beyond the 2007 high.
The price structure from the March 2009 low, clearly has the look of a three wave phase, in line with how wave 2's often tend to develope. See the OEX Monthly chart for an overview.
Found on the same chart, long term Volume readings also gives support to this current preferred count, which continues to deteriorate in the face of the overall market advance. This is in the nature of a wave 2 pattern, according to the Elliott Wave Principle.
As written in the Outlook 2011 Report, the simplified strategy for when to make a long term market exit within 2011, was by letting the market itself give a clue as to when a long term wave 2 top is confirmed in place.
So given the technical shape of the market, which at this point looks like its working on a large Rising Wedge pattern from 2009, an exit on a clear monthly close below the lower part of this wedge and wait for a Monthly MACD bearish crossover, could be one way to go. A fairly conservative strategy for getting out of long term stock investments on the Long side.
Completed Rising Wedge patterns usually breaks to the downside and often sharply, when correctly identified. A slightly more aggressive and risky strategy, would be to exit on the next sell signal in the now very overbought monthy momentum or on a weekly close below the trendline of weekly closing prices only.
The OEX closed for the April trading month up against the resistance area created by the upper part of the wedge pattern. This is also near a major 5/8th MML (Murrey Math Line) which will be met at 625 (marked in green on the chart), in case the market climbs even higher.
As for a brief update on the tech market, below represented by the QQQ Monthly chart, the Cycle10 has reached bearish reversal levels. But it would take a QQQ break below trendline support, to increase the chances of a larger top forming in this Nasdaq 100 index tracking stock.
Updated Dow 30 chart.
Volatility (fear level)
The VIX Monthly closed on an important trendline drawn through lows made in 2007, 2008 and 2010. So given the strength of this support area, any break of it (monthly closing basis) could lead to even lower volatility, possibly towards the 2006 low.
Mid & Short Term
A look on the OEX weekly chart, shows a possible test of trendline resistance (615 area) coming next week. In case it holds (weekly closing basis), lets see what candlestick type will be formed up against this zone, after the close of next week. If its of the reversal type, this could be the next top of minimum short term degree forming. Weekly RSI 25 is tracing out a bearish divergence vs the new high in prices, which reflect underlying weakness of this advance from the March low. Divergence tops in the market tend to be sharper, more significant. Weekly Cycle10 has just entered its sell zone.
On the daily chart, the OEX managed to overcome the trendline resistance discussed in the last STU issue, increasing the odds of the current preferred wave v of 5 being a correct one. When it has reached its termination point, the end of the wave C structure from the July 2010 low could also be a fact, if the finer wave interpretation turns out to be correct. Daily Cycle10 has reached levels where it normally would make a bearish reversal.
05/10, (+/- 1 day) is the upcoming daily based Gann Angle cycle, which marks 270 trading days from the important April 2010 high. As it is a weaker GA, (no convergence formation) only time will tell if it will have any impact.
The next weekly Gann Angle cycle convergence is due Sept. 19, 2011 (+/- 1 week). With past GA's as proof, significant market reversals are expected, when these weekly GA convergences occurs. In this case, it marks 90 trading weeks from the Jan. 2010 high, 135 TW from the March 2009 major low and 180 TW from the May 2008 rebound top, a strong GA convergence which has the power to cause a change in the market tide. The mid/long term directional trend going into it, would point to a reversal in the opposite direction, within that time frame.
Dynamic Gann Levels - DGL
The OEX is climbing higher along a key L3 DGL resistance line, projected from the March bottom. Daily RSI 25 is not supporting this advance, tracing out a strong bearish divergence vs the new high in prices, which indicate danger for the market soon.
Murrey Math Lines
In the last STU issue i wrote that if the OEX was not able to break through the weak (yellow) 7/8th MML (Murrey Math Line), a sharp market reversal could be the result. Friday's close came up against this MML, while momentum is getting very overbought but still holds on to its bullish mode.
Neural Nets (Artificial Intelligence)
As for what Neural Nets (artificial intelligence) thinks the next 3 trading months may contain, below are S&P 500 and Gold forecasts to July 22, courtesy of chartsedge.com Nb. Be aware of possible inversions in these NN forecasts, should be used with other indicators only.
My own Neural Nets system turned Long on the OEX weekly in early April. It also turned positive on GLD (Gold etf) Weekly on April 08. These weekly Neural Nets signal charts, are more frequently available via the Trader's Tips STU newsletter.
After it met trendline resistance early in the year, the Google stock has since then pulled back, as seen on the Google Monthly chart. April's low was caused by trendline support coming in from 2008. The long term positive trend is viewed as intact, as long as this support holds on a monthly closing basis. So lets see what the May trading month will bring for this popular stock.
Video about The Long T Theory 40 Year Cycle
The 4 Seasons of the Kondratieff Cycle.
54 Month Cycle
The 54 Month Cycle is projected to bottom out in Spring 2012.
Statistics based Cycles
For those new to Bradley, here is an excerpt from an earlier Outlook Report:
..."The Bradley Siderograph is a popular indicator many traders rely on, to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when major highs and lows can be expected. So using other indicators in combination with the Bradley, could give useful clues about future larger tops and bottoms."...
Bradley dates indicating market turning points in 2011, dates in bold marks more important turning points:
"Smart Money" (Commercial Futures Traders) has increased positions on the Short side, during the market advance from the March low. As of 04/26, 2011 the COT Report (Commitment of Traders) shows they are net Short with - 64,247 contracts. Chart courtesy of timingcharts.com
This survey report is used to determine the percent number of Bulls to Bears, to find sentiment extremes that can lead to market reversals. I.e. readings above 55% - 60% Bulls reflect extreme optimism, which can be seen with indexes at record highs. This usually means a bearish market reversal is due. Readings below 20% reflect extreme pessimism and a positive reversal is likely.
As of 04/26, 2011 II shows:
54.3 % Bulls
18.5 % Bears
Bullish Percent Index
04/29, 2011 - BPI Daily closed at 83, an overbought extreme reading.
See the description for this sentiment indicator.
Forex - Currency Market
Fixed feed error should now give correct chart outputs. This new EUR/USD chart version actually shows channel resistance has been overcome, which would now act as support in the 1.4050 area instead. Any monthly close below it, would likely result in a momentum sell signal, from overbought levels.
U.S. Economic & Fundamental Condition
U.S. Jobless rate fell to 8.8%, Payrolls increased by 216K in March.
Jan. 09, 2011
The official U.S. labor market report Friday, showed that 103,000 jobs outside agriculture were created in December, against the consensus of a 150,000 jobs growth. However, the unemployment rate fell from 9.8% to 9.4%, a lot better than the expectation of a 9.7% rate.
The U.S. needs faster job growth if the country is going to increase consumption, which is the fuel for the economic recovery. To reduce the number of new searchers for unemployment, the job growth has to be double the speed it has now, according to Bloomberg.
Bernanke states it could take 4-5 years to normalize the job market:
..."Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve’s statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully."...
Here is also an eye opening article about non-government unemployment numbers.
April 26, 2011 - CC is at 65.4 + 1.6
After falling in March from its highest point (72.0 in February) in three years, a rebound in CC was the outcome in April.
Consumers represent two-thirds of all domestic spending in the United States. So measuring consumer opinions is an important part in gauging future consumer spending and in turn the economic condition. High Consumer Confidence holds up the economy.
..."Consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy.
In essence, if consumer confidence is higher, consumers are making more purchases, boosting the economic expansion. On the other hand, if confidence is lower, consumers tend to save more than they spend, prompting the contraction of the economy. A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs."...
Debt - Last updated, May 2011
For the first time in more than 70 years, the S&P has turned negative on the outlook for its long term stable AAA U.S. credit rating, giving it a one in three chance that it may have to lower it by the year 2013. Currently the nation has roughly a $14.3 trillion dollar debt, which is growing by $3.9 billion daily. In February alone, a record $221 billion deficit, the largest monthly budget shortfall in U.S. history became a fact.
The current most heared about debate in Washington, is not how much cut is needed, but whether or not to increase the debt ceiling. The $14.3 trillion limit is estimated by the Treasury to be breached by May 16. If the debt ceiling is not raised by then, what may happen next is the Treasury turning to emergency measures to make more borrowing room til around July 08. Their creditors seem willing to lend them more money.
To put the debt problem in a clear perspective, its like an average family of four who spends about $100,000 a year, with about $50,000 a year in income. They have about $200,000 in credit card debt, but still need to borrow about $4,000 a month just to get by. Source Investment U.
Jan. 09, 2011
As of October 2010, the U.S. Total Debt (public, corporate and personal) is over $60 trillion, which is $186,000 per person or $750,000 per family. The total debt increased by $3 trillion, about eight times faster than GDP.
..."Normally in a recession, you'd expect to see total debts fall. But not here. Our government believes it can borrow an unlimited amount of money and then print more to pay it. That's like lighting matches next to gas tanks.
We can't solve our country's problems with more debt. Why not? Diminishing returns –s one of the core ideas of economics our leaders have never considered. As the debt load grows, it takes more debt each year to produce growth. In 1960, it took roughly $2 in new debt for each $1 in growth. By 1980, it took $2.25. By 1990, it took $3. By 2000, it took $3.50 in additional debt to finance $1 in additional economic growth. It now takes $5 in new debt for each $1 in economic growth.
As you will hopefully understand intuitively, we can't sustain this trend. But that won't stop our politicians from adding, massively, to our country's debts. And eventually, people will figure out we can't ever repay these debts. At that moment, the value of the dollar will simply disappear.
Once a country has used up all its credit, its Treasury Secretary begins to say things like, "We will never devalue..." That's a sure sign devaluation is right around the corner. And even though I knew it would happen here... I'm not happy to see it. It means terrible things for our country. I hope you've already acted to protect yourself."... writes The Daily Crux
The U.S. National Debt has for the first time passed $14 trillion, getting close to the roof (14,29) the Congress has set. In February 2010 president Obama signed the law that put a roof to this debt and the federal government in Washington now has to stop lending more money, if the Congress doesn't raise this level. Some republicans in the Congress have made it clear they will vote against any suggestions to open up for even higher national debt, if they are not followed by a plan for significant cost cuts. For only 7 months ago this debt passed the $13 trillion mark, while it was around 10.5 trillion when president Obama took over in January 2009.
Finance minister Timothy Geithner has warned the Congress of catastrophic economical consequences if this debt roof is not raised, fearing loss of millions of jobs. In a letter to central Congress members Geithner is warning that this roof can be reached already in March, if its not raised from today's level. Never before in our history has the Congress decided not to raise this level when needed. If it now fails, it could lead to several million job losses, writes Geithner.
He is also warning about increased loan costs for US sitizens, which he thinks could have a worse impact on the US economy than the finance crisis. The finance minister means the dollar's status as the world dominating currency is threatened and that the consequences in general would be catastrophic for the US economy if not the debt roof is raised.
01.07.11 Update - Debt roof raised after pressure
The Republicans gives in after pressure from finance minister Timothy Geithner and opens up for administration to take on more loans.
SocGen's presentation on debt: "Prepare Yourself For The Worst Case Scenario"
The chart below (courtesy of Deutche Bank) shows a US Debt to GDP comparison between 1929 and now.
Deutche Bank's view:
..."Figure 1 and Figure 2 help us understand why we are entering into unknown territory in terms of Developed market debt. These charts simply show the Debt to GDP ratio of the US and the UK. The Government part of the deficit is starting to rise sharply in both regions and although it looks within the range of historic observations we have to remember that Governments have implicitly and explicitly backed the debt of other parts of the economy. This makes Government liabilities potentially much larger. The hope is that growth rebounds strongly enough for the Debt/GDP ratio to fall naturally over time. Such a scenario would also require yields to stay low to facilitate such an adjustment. All we can say is that there are risks that the deficits of such indebted countries at some point appear unsustainable to the market. This is when far more difficult decisions than those made in 2009 would have to be made."...
From the April, 2009 update:
As pointed out in an earlier published article about the 60 year Kondratieff Cycle the purpose of the Winter part (from 2000 --- >) of that economic cycle, is to cleanse the economy of debt via payback, liquidation and usually bankruptcy. This process creates tremendous stresses to the economy and financial system. The next Spring should again bring growth and prosperity. As the below chart shows, for the first time in many decades, consumer debt has actually turned down, reflecting the ongoing cleansing process in this current Winter cycle.
From the May 2008 Update
- 2007 total debt increased $4.3 trillion (up 8.9%)
- Federal government debt (incl. added debt owed trust funds) increased $549 billion (6.3%)
- Household debt increased $877 billion (up 6.8%)
- Business debt increased $1.1 trillion (11.7%)
- state & local government debt increased $184 billion (up 9.2%)
- Domestic financial sector debt increased $1.6 trillion (11.1%).
Each sector reached a new, all-time high. As of 2006, 26% ($1 Trillion) of the total debt increase of $3.9 Trillion was owed to foreign interests, up 11%.
Source Michael Hodges
Bonds & Yields
The TYX is currently stuck between two important long term trendlines, closing for the month on top of the channel roof from the 80s, after earlier in the year testing another trendline found slightly higher, which is drawn through several important highs from the mid 90s. One more down close could mean even lower rates ahead, towards the next lower trendline support, around 4.20. On the upside, it would take a clear monthly close above both these trendlines, to indicate a change in the long term trend.
The Bond market, below represented by TLT - the 20Y T-Bond etf, is rebounding from important trendline support. So the long term positive trend for Bonds seems intact. A test of trendline resistance at around 102, is a possible event to look for in the coming months. Any monthly close below trendline support, would signal its time to exit long term Long positions in Bonds.
With the stock market overall pushing higher through key Fib. zones in recent months, the USD has taken the opposite route and deteriorated through important trendline support. It closed near the low in April and also below the 2009 low. So with some support levels out of the way, it may go for a test of the major 2008 low, within the next month or two.
The Dow Jones REIT index is oscillating higher within a Rising Wedge looking pattern. Any downside breakout from it (monthly closing basis) would signal a change in the long term trend, a resumption of the Bear market from 2007. If this market climbs beyond the upper part of the supposed wedge pattern, it would probably negate this special technical pattern. RSI 25 is getting close to its overbought zone.
Below is also an updated chart of the S&P/Case-Shiller Home Price Index.
The Light Crude (Continues Contract) closed near its high in April, suggesting more to come to the upside in May, at least on an intra-month basis. RSI 25 has yet to reach its overbought territory, giving room for a further advance towards the roof (129 - 130 area) of the slightly wedge looking pattern.
The XOI Monthly is consolidating, after it ran into trendline resistance a few months ago. Any monthly close below trendline support could mean a long term top is in place for oil prices. The three wave look of the rebound from 2009, could mean it will follow the stock market lower, once the next long term top is a fact.
Also this market continues to oscillate higher within what could still be a Wedge pattern developing, so i would look for a downside breakout from it in the coming months. RSI 25 is weak compared to the 2008 high, not backing up this advance, a technical condition often found before major tops
Mid term, the Neural Net system turned bullish on GLD Weekly (Gold etf) on April 08.
Charts courtesy of stockcharts.com
XAU - Gold & Silver Index
The XAU is also pushing higher within a long term channel so it would take a breakout from it, to indicate a change in the trend.
For new subscribers, download link (.zip file) to my RSI 25 Market Timing Article.
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