Laggards getting active means divergence

Following up on my last post, here is a bit more evidence that indicates a weakening market.

The image below shows three charts:

  1. Top frame: /ES (SPX futures contract). Note that there are 7 distribution days in the past trading month (higher volume down days).
  2. The green-line chart is a custom index made up of 50 stocks in the 90th percentile for relative strength.
  3. The red-line chart is the opposite of the green line in that it's 50 stocks in the 10th percentile for relative strength. 
Notice how the red line is trending up whereas the green line is trending down. Laggards often get active and rally as the overall market reaches an exhaustion point. 


SPY Bearish Options Play

I entered a bearish vertical option spread today (it's a DEC 2016 211/203 SPY put spread). I'm betting that the SPY will close below 203 by 12/16/2016. If it does, I gain a max profit of $630/contract with a risk of $170/contract, for a risk:reward ratio of 3.7.

So what makes me think this is likely? Let's start with the big picture.

The chart above shows the 10 year monthly chart for SPY. Note that the Elliot Wave pattern indicates that a 5th wave could be close to complete. MACD divergence is clear, and the biggest volume months in the past year or so have been down-volume. All these signs tell me that the market is reaching exhaustion point.

From another perspective we can see that Dow Jones Industrials have been out-performing Dow Jones Transports. The two indices haven't confirmed each other and this is a bearish sign according to Dow Theory.

Finally, zooming in to the SPY daily chart, you can see that price is tracing out a pretty clear ending diagonal pattern. I love this pattern because it usually resolves in sharp counter-trend moves that often retrace the entire height of the diagonal. A one or two month move down to 1800 would not be out of the question, hence my reasoning for buying a bearish Dec, 2016 SPY put spread.

I plan to hold until expiration but I would sell early if we got a drop to 1800 at any point before then.


Trimming back Gold long

A year ago I posted that gold was looking bullish. Since then price has rallied about 25-30%. I'm cutting back a large portion of my position because I think the market could see a pullback soon.

On the weekly chart above, note how price exploded higher after breaking out of the ending diagonal pattern. This is just the behavior I was looking for. However, price is reaching $1400 which is the top of the ending diagonal and I would expect there to be some significant resistance here.

The more concerning problem is that commercial traders clearly think that gold prices are reaching overbought levels and they're hedging themselves more than at any point in the past 16 years. 

However, I don't think the bull market is over. I think we'll see a lull or correction for some time as commercial traders unwind their hedges. Then, once COT levels are more normalized, we could see higher prices.


Exited USD/CAD

This is a late follow-up post to my previous trade entry. I exited USD/CAD around 1.3140 for 600 pips profit. I noticed price action stalling right below 1.32 and exited slightly earlier than expected. While the past two days of price action indicate that it could continue higher from here, I am happy to close my trade for a good profit and move on.

Notice how we got a strong blast off after breaking out of the ending diagonal -- one of my favorite patterns.


Trying USD/CAD long once again

I was stopped out of my last attempt at going long USD/CAD. Price has dropped another 700 pips since then, reaching another level of support so I'm giving it another shot.

Entry: 1.2550
Target: 1.32
Stop loss: two daily closes below 1.2450

On the daily chart below, note that price is sitting on another confluence of good support. I'll exit on two daily closes below the lowest trendline.
Zooming in to the chart above, you can see a clear 5-wave decline. This indicates that the larger trend is down, and after a brief rally, there could be continuation to the downside. However, note that wave 5 is an ending diagonal. This tells me we'll see an explosive rally soon.


USD/CAD long - Wave 5

USD/CAD has dropped to my target zone of 1.3250 so I'm going long. My ultimate target is 1.44 or higher. I will exit if I see two daily candles that close below 1.3190.

On the weekly chart below, you'll notice a clear Elliot wave count. I believe we are nearly complete with a long-term Wave 4. Note that the market has punished bulls after the massive parabolic spike. However, we are now in the eighth consecutive week of declines. This persistent decline has only occurred twice in the past 20 years: 1996 and 2007. In each of those cases, the market declined for 9 straight weeks, then initiated a sustained rally. Also of interest is that 1.3250 marks a roughly 11% decline from the top at 1.4680. The wave 2 correction back 2012 was also ~11%.

On the daily chart, notice that price dropped from 1.4680 nearly non-stop, but it did carve out a triangle in the middle. Triangles often precede the final thrust before price reverses and continues the main trend (up). You can see a confluence of trendlines that are acting as support. If price closes below these for two days in a row, I will exit my trade at a loss.


Our first tiny house investment!

Tiny houses are all the rage these days. In February, I completed my first one and am listing it on Airbnb. Check it out below!


If anyone wants to stay, the first few guests are free!


USD/CAD Short Update

This is an update to my original post about shorting USD/CAD from January.

As you can see in the chart below, price stayed withing it's long-term channel lines, completing the 5th wave rally. I was a few days early, but ultimately, price has dropped down to nearly 1.3500, providing a profit of 700+ pips!

If price reaches 1.3250, I will look to go long in preparation for a 5th wave targeting 1.50!


USD/CAD Short – 700 pips profit potential

I'm going short USD/CAD around 1.4060-1.4250. Will exit on 2 daily closes above 4250. Target is 1.3500.

On the monthly chart above, note the confluence of several trend lines. Also note the Elliot Wave count which is pretty clearly indicating a completion of a 5-wave cycle within the larger wave 3.

On the daily chart, you can see that price is hitting the confluence of two different-degree channel trendlines. Also, you can see the fractal breakdown of wave-v from the Monthly chart.

If price manages to close above 1.4250 2-3 times (i.e. daily closes above the channel trendlines), I will exit. There could be a strong intraday rally above this level as price overthrows the channel in a final burst, but it should quickly reverse and close within the bounds of the lines. The target is demarked in red, around 1.3500.