The biggest rallies happen in bear markets!

Do you think AAPL’s bubble has popped? I think so and here’s why: the biggest one-day rallies in a stock normally happen in a bear market as short covering rallies draw in lots of followers who believe that the stock is back on it’s path to new highs. Well, last week we had the biggest one day gain ever, much larger than any normal day and larger than the gap up after Q1-2012 earnings! This tells me that the market has peaked at 644 and we’re on our way to a downtrend!

Final thrust?

AAPL appears to be tracing out a final ending diagonal to end it’s rally from $580. Look for a very sharp decline in the next week, leading to a test of at least $570 in the next couple weeks.

And the bullish drum beat continues…

AAPL has truly gone parabolic in the past few days. If the stock touches $590-$600 today, I would be willing to predict that its run ends this week, and subsequently AAPL starts a 2-4 year downtrend. I predicted a similar outcome with NEP in the face of massive criticism. The pattern on AAPL is almost identical, so I am as confident now as I was back then.

Volume divergence on SPY

It’s been a while since the last bearish post on the stock market. Clearly it has been wrong to be bearish, and I’ve paid for it. The market marches steadily higher, but it is currently displaying some signs of internal weakness that tell me it may initiate a choppy, medium-term downtrend soon.

First notice in the chart above that the market has carved out a nice 3-wave rally since the March 2009 low. Each subwave (A and C) has formed in 5-waves. Wave-5 of Wave-C appears to be some sort of ending diagonal. What is more interesting, however, is that on-balance volume has been trending lower even as price rallies, which indicates that this market is living on borrowed time. Look out below!

AAPL’s Triangle

AAPL just completed a very nice triangle formation. I think this indicates that AAPL is about to start an extended downtrend. The upside target is 360-361, and could drop to $300 or lower.

Notice in the chart above the clean triangle pattern that formed in the past few weeks. According to Robert Prechter’s Elliot Wave Theory:

A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse…

On the basis of our experience with triangles…we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market.

Check out the examples below to see how triangles led to nice reversals.

EUR/USD Before and After:

NEP Before and After:

  

I believe it is time to become cautious with AAPL.

Out of SLV put

I was short SLV via a Jan put, and today I closed it out for a profit. Because it’s expiring in 7 days, I didn’t want to hold and risk a rally in Silver prices. However, it was a hard decision because of the fact that gold just broke down from an ending diagonal, and when that happens, prices can drop very quickly. Either way, it was a nice trade!

Silver Breaks Down

As I pointed out a week ago, metals were on the razor’s edge. I projected a target of $31.66 for silver, and we got within 1% of that target. I’m not sure what will unfold going forward, but I think the $31.28 top will be significant, and I would not be surprised to see silver hit $25-$27 soon.

Notice in this chart that, as expected, prices reversed fast after breaking out of the triangle. Also, price broke an uptrend line on high volume, so conditions for further decline remain ripe.

SPX 1290 is the level to watch

If SPX does reverse soon, as I’m expecting, 1290 looks like a good level for the market to peak at.

Notice in the chart above that not only is 1290 the level where Wave-C = .5*Wave-A, it is also the exact level where Wave-v of Wave-C = Wave-i of Wave-C. These tight Fibonacci correlations lend support to the idea that the market will top out around 1290.

On the Razor’s Edge

As you may know, I’ve been bearish precious metals for some time. Recently, I shorted silver as it spiked to $29/oz, and took a quick profit. I mentioned that silver could make further new highs, but any additional upside was to be shorted. I maintain that stance, and believe that metals are hanging on the edge.

First take a look at the Gold chart above. For the past 2 years, gold has been a perfect, no-lose investment, capping a 10-year streak of straight gains. However, if you look carefully at the wave structure, it’s apparent that the uptrend is nearly complete, and signs of exhaustion are showing. Gold is still making new highs, but recently it has been carving out an Ending Diagonal, which will reverse violently. I expect one more test to 1430-1445 before a trend change.

Another factor that makes me believe metals will soon drop substantially is the fact that silver recently consolidated in a triangle (see chart above), and has now broken out to the upside. Triangles often precede the final thrust in an uptrend before the trend reverses (you can see many examples of this phenomenon that I have highlighted on this blog). Furthermore, volume has been down-trending as silver makes new highs, and MACD divergence is ominous. If silver reaches $31.66, I will be buying a Put for a sharp decline.

If you believe that metals are a one-way train because they are  “real money”, and because the Fed is printing trillions of dollars, consider this: money is backed by debt, so the money supply can only multiply and expand if people borrow the money that the fed is supplying to the system. Out of the three major sources of borrowing (government, consumers, businesses), two are slowing down, or will be forced to slow down in the near future. No new debt = slow money supply growth = slow inflation. Food for thought.

BIDU Cracks

This fall, I’ve been monitoring BIDU as it entered a parabolic thrust. Since my last post, it has not made much additional upside progress; rather, it has formed a very nice distribution base. This week, it finally succumbed to the overhead pressure, and looks to be in great shape to continue holding as a medium-term short trade.

Notice that for the first time in the entire 2-year uptrend, the stock never made a lower high and lower low. The fact that this has happened this week indicates that the stock is now technically in a downtrend. Also, note that it broke back into a rising channel. I see support @ $95 as it tests the lower part of the channel. I’d like to see it consolidate at this level for a few weeks, and then break down in the next portion of it’s decline.

SPX Update

SPX may be near completing a 2-year uptrend. I remain bearish, especially as the market nears the 1250-1300 zone.

Notice in the daily chart above that the market made a strong 5-wave move from Oct 2007 to Mar 2009. Following this, we’ve seen an equally impressive 21-month rally that has taken SPX from 666 to 1245, an 86% rally. However, this rally appears to have subdivided into zig-zag 5-3-5 formation, and it is nearing strong trendline resistance.

Note that Wave-C is relatively muted compared to Wave-A. This makes sense to me given the fact that the looming trendlines are providing good selling pressure. Also, given the strength of Wave-A, one would expect Wave-C to be slightly more modest.

The daily chart above shows Wave-C of the rally from the Mar 2009 low. Notice that it unfolded in in a clear 5-wave pattern. Each corrective wave lasted about 3-4 weeks, similar to the corrective waves in Wave-A. The fifth wave coupled with MACD divergence tells me that the market is about to turn over.

I have been proven wrong so many times over the past 21 months. At this point, I see no reason for the market to form a major top near this level, but on the other hand, this kind of sentiment seems prevalent right now. The top occurs when no one is expecting it as a possibility.

Out of Nov SLV puts, still bearish

As you know, I went short SLV via some Nov puts yesterday. This proved to be very timely, as silver did collapse from being up 4-5% to being down 3-4%! I took a very nice profit this morning, since I don’t want to risk SLV forming a base up here, leaving my Nov puts high and dry. However, longer term, SLV could be near a top.

Notice on the daily chart above that SLV had a MASSIVE reversal bar on record volume (by far)! However, given how obvious this reversal is, it may have one more rally to go (see wave count). This would once again squeeze the early bears, and reset bullish sentiment.

If we did get one more high, I would short it again. And even now I remain bearish silver medium-term. But because I had short term Nov puts, I decided to take my nice profits. I am still short via less-leveraged instruments.

Today is the day to short SLV

I’ve been waiting and watching for SLV’s typical blowoff move unfold. Today I took a short bet with it, buying Nov 27 Puts. This is obviously a short term play, but when parabolas reverse, the counter-move is usually very fast.

During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

Notice in the SLV weekly chart above that after rally for months on end, SLV has now blasted higher in a parabolic fashion. It is making it’s fastest gains of the entire move in the past two weeks.

On the daily chart, notice a few interesting features. First, about 5 days ago, SLV gapped way up and then rallied hard for three days. Then today, it gapped up once again. In O’neil’s book, chart after chart from the Nasdaq bubble shows this exact pattern, which indicates extreme bullishness that should reverse very soon.

BIDU goes Parabolic

I think the stock market is topping out. Blogger sentiment is extremely bullish and stock market sentiment is relatively very bullish. In the midst of these sentiment extremes, BIDU is going parabolic. I think this stock is a good short bet, though it could have a bit more upward thrust before reversing.

You can see in the daily chart above that since consolidating after it’s split in May, 2010, BIDU has rallied in a parabolic trajectory. The fact that 5-waves can be traced out tells me that this rally is near an end. Furthermore, when sentiment is bullish and individual stocks are going parabolic, I believe it’s a safe bet to short.

Reshorted Gold via DZZ

Reshorted gold circa 1286 by purchasing DZZ. Mental stop @ 1291-92.

Stopped out of my Gold short… will consider trying again soon

IWM Leading Diagonal

Back in May, I mentioned that the stock market finally ended its uptrend. I am still bearish the stock market, and my hypothesis is that it will not make a new trend high before making a new trend low. Currently, I really like the bearish pattern on IWM.

Let’s review the Elliot waves. From the 2007 high, there was a fairly clear 5-wave decline into the March 2009 low. This was followed by a fairly clear 7-wave rally (abc-x-abc) into the April 2010 high, which is corrective. I first mentioned this count near the April high.

When I counted 7-waves up for the corrective rally from the March 2009 lows, I expected to see an impulsive selloff to confirm that the long-term downtrend would resume. I believe we have seen this, as the first leg down since April 2010 was a leading diagonal with 5 overlapping waves. You can see that the leading diagonal was halted at a long-term support line, and since then we’ve had a 3-wave rally. Also, notice that volume has been substantially above average on the declines, and below average on the rallies. This looks like distribution to me.

Thus, at the point, I would expect the market to turn over soon and start heading down. The next decline should be a brutal 3rd wave.

Gold shall tank soon.

I last discussed Gold a month ago, and thought that if price broke above $1,250, I’d be wrong about Gold reversing. However, gold has tried to break above $1,250 several times now, and failed. I think the next big surprise in gold will be to the downside.

Notice Gold’s daily chart above. First, there is a 5-wave progression from the 1040 low set on Feb 5, 2010. 5-waves are usually followed by reversal. Second, Wave-V from 1040 looks to be forming as an ending diagonal, which as you know, reverses strongly. Third, notice the MACD divergence with price. And forth, notice the declining volume as gold is “breaking out” to new highs with bullish sentiment. Volume should be increasing sharply if this breakout were real.

I think all these factors should lead to a sharp decline in the price of gold in the near future.

Another leg down coming up?

Last Wednesday, bloggers and readers were going nuts as the market was dropping sharply. Crash call after crash call was being published, and it seemed impossible for the market today rally. Of course that was the bottom, and here we are, 70 points higher! I am noticing a bearish pattern that I’d like to share. I consider it valid as long as SPX stays below 1120.

Notice that the drop from 1216 can be counted in a series of first and second waves. Wave1 ended with the ‘flash-crash’, Wave2 was the sharp reactionary rally. Wave-i of Wave3 retested 1040, and now Wave-ii of Wave3 appears to be unfolding as a flat (3-3-5). Notice that volume has been trending higher with the declines, and lower with the rallies. This tells me that we’re still prone to selling off. Today’s breakout above 1105 probably convinced a lot of bears to capitulate, as is apparent from today’s price action. We’ll see what happens!

Will Gold’s trap remain intact?

Gold is up from since I mentioned that it looked bearish after the false breakout. However, the gold market still looks bearish, as long as it continues to stay below $1200.

You’ll see on the GLD daily chart above that 120 (~$1200/oz) is a critical resistance. If there was a true bull trap last week, gold needs to stay below that level to prevent all those traders from breaking even. I think this might happen because volume shrunk during the rally this week. Nevertheless, I will exit my gold short if the highs from last week are broken.