Some long term charts

Taking a longer term perspective reminds us of the bigger picture in the market, and helps to prevent the general sentiment from clouding analysis. Right now, I would say the market sentiment is quite bullish, with many company releasing better-than-expected earnings. However, on the back of 7 straight weeks of gains, I think it's time to remember to "sell the rallies" in a bear market.

The 20y DJIA chart above shows that price broke through two very long-term trendlines that had been supporting the market for decades. The market has now retraced to the intersection point of these lines, implying the selloff should resume in the coming weeks/months.

The 10y QQQQ chart above shows that price has been controlled by a descending channel. Notice that we're currently at the upper boundary of this channel, and we've been rallying on decreasing volume. Previous support has also become resistance in the 33.50 zone. I think this implies a drop to new lows at the channel bottom.

The chart above shows the Advance-decline volume trends. This indicator shows whether the underlying market-breadth exists to support futher upside. Notice that adv/dec volume has been trending down as the market is making marginal new highs. In the past, this sort of divergence led to declines.

The 10y AAPL chart shows a very nice controlling trendline that was breached to the downside in Fall 2008. Price has since recovered to the bottom of the trendline and dropping volume, telling me that there won't be enough strength to break back above this line. If the market believed AAPL's medium-term potential was as strong as the earnings release would have you believe, I think we would have seen higher volume on this rally.

GS is bumping up against its 2000 highs after rallying 160% from its lows. Are the banks really doing that well?

AAPL trends

Apple released stellar earnings yesterday, shooting it to new highs since it started uptrending a few months ago. I think this pop won't last, and we will start seeing a new downtrend soon.

The above 10-year weekly chart of AAPL shows that price is hitting very long-term resistance. The trendline has been controlling price action for the past couple years. The fact that we've seen 7 weekly gains on drastically decreasing volume tells me that we're due for a strong pullback, especially in the proximity of this trendline.

Distribution is back

The market is carving out a nice looking topping formation. I think the stage is set for a quick decline to 780, followed by much lower prices (bear market low). You can see my last post about the overall market here.

Notice in the above daily chart of /ES that price has finished Wave-iv of a long-term ending diagonal. Furthermore, Wave-c of Wave-iv was an ending diagonal, which implies an abrupt drop. Finally, notice that there have been 5 distribution days in the past month. This signal has worked perfectly over the past year for indicating a topping formation, and implies lower lows to come. (Check out these links for past examples of 5 distribution days in a month: Distribution is back in the Dow, The Q's are Making Me Flip-flop, More Distribution taking Place in the Dow 30, Distribution Days in the Dow.)

Buying some FAZ

As you can see here, I am bearish on the overall stock market. Today, financials rallied almost 15%, culminating in a buying panic near the end of the day. Subsequently, 2x- and 3x- financial inverse ETF's got killed. I think, however, that the waterfall action we saw today is indicative of a bottom, so I bought some FAZ under $11. I think FAZ could easily double or triple in the next few weeks as the market starts to decline.

The 5m chart above is very telling. After dropping steadily for a month, the downtrend has culminated in an intense waterfall decline, brusing stockholders with a 91% decline. However, there are several signs that this stock is ready to bounce hard. First, notice that the waterfall occured significatly after it had broken support around $20. Notice that the decline ended with huge down bars, dropping 3-5% every 5m! This is the exact kind of action that I like to fade, because it indicates total disgust, capitulation, and dispair. We should start rebounding very strongly very soon, as panic selling like this indicates that we're running out of sellers ;).

A broken record

I've been claiming that we're "near the top" for almost a month now. Yet, every time we have another bullish day, I feel more confident that my analysis is correct. I last posted about the overall market here. I feel that the market will print a long lasting top in the next few days (perhaps even today), and that we should soon start a sharp decline.

The above daily chart of SPY highlights my elliot wave count. As I mentioned in earlier posts, I think we are in an ending diagonal since early Nov. 2008. We are currently near the peak of Wave-iv. You can see that since the Mar. 2009 low, price action has unfolded in 3-waves. Wave-a was a standard 5-wave rally, whereas Wave-c appears to be an ending diagonal. You can see that there is substantial resistance in this zone:

• the upper trendline of the 5-month ending diagonal
• the upper trendline of the Wave-c ending diagonal
• the 61.8% fib extension of Wave-a

In addition, volume has been contracting as the ending diagonal has worked higher, a very bearish sign, and price is diverging with the MACD histogram. I think it's worth mentioning that WFC's magic earnings today have convinced everyone that the worst is over. However, I would think this is bullish near a low, not after a 30% rally.

As usual, time will tell if I'm right, but many signs point in the direction of lower prices in the coming days.

Looks like this stock could explode soon

I last posted about CNEH here. The downtrend continues, but the bullish picture hasn't changed. I think the ending diagonal could have one final down leg to $1.20 or so, but when this stock breaks out to the upside, it could be sharp! My first upside target is $2.50, but we could bounce much higher given it's 1.5 P/E ratio! It just reported excellent earnings, and there appears to be some strong accumulation going on at these levels (volume is expanding but price is holding steady).

Lest we forget....

I don't think anything has changed in the bigger picture. Sentiment is too bullish and there are negative divergences emerging. According to expert analyst Willl Rahal, the NASDAQ should underperform in this last bear leg, so I'm adding to my short position via QQQQ Sep 09 31 puts. 

Above is the 5y, weekly chart of QQQQ. It appears that we're nearly done with a Wave-4 flat correction from the November lows. Using a 1:1 Wave5:Wave1 projection, we should bottom around $18, posting MACD-divergence to set up a nice rally.

We're nearing the upper trendline in what I believe is an ending diagonal on SPX. We should have one final downtrend to complete the diagonal. This is congruent with the analysis on QQQQ above.

The chart above shows the ADV/DEC count with a 5- and 10-dma. Notice that while SPX is making a new high today, the 5/10dma's are making lower highs. This divergence indicates that the past 2-day rally has had lower participation and indicates an impending selloff.

Finally, take a look at the 3-year Put/Call chart ($CPC). Somehow, while we're still down 46% from our 2007 high, market participants are as bullish as they were at the beginning of 2007 (when we were still in a bull-market). This optimism tells me that we have further down to go. A market bottom should have a high Put/Call ratio, not the opposite.

All according to plan:

I last posted about the RUT here. Price is performing as I would expect, forming a topping pattern. I think the RUT will now drop precipitously to at least the 380 zone.

Notice in the 1h chart above that price broke out of the diagonal triangle very strongly, and has since been retracing up to the lower trendline. Once it hit the lower trendline, it reversed on strong volume, which makes me think that we're headed down to break through the beautiful Head & Shoulders pattern. Hopefully everything continues as planned in the future!

Shorting CHF/JPY around 85 to 90

I am going short CHF/JPY in the 85-90 range. I think this currency pair is about to start downtrending toward new lows.

Notice in the daily chart above that CHF/JPY has been consolidating the massive drop from July thru December of 2008. After 5-waves down, we now see a 3-wave flat formation. Notice that the 38.2% and 61.8% fibs of the entire uptrend from 2000-2008 have been containing price action over the past 4 months. Price has run into strong resistance in the 87 zone, and it should stay below this level.

Zooming into the daily chart, you can see that the 4-month correction has unfolded in the distinct Flat correction formation, where wave-a is 3-waves, wave-b is 3-waves, and wave-c is 5-waves. Wave-c = Wave-a, and price has formed MACD divergence at the recent high. The bearish engulfing candle from Friday is a good indicator that the trend has reversed.

So far so good

So far the market seems to be trading as I expected. Once the RUT breaks below 420, I believe we will have a sharp correction to at least 380, but if my longer term analysis is correct, we should break to new bear market lows (perhaps very quickly to flip sentiment back to super-bearish).

Notice that price perfectly touched the top of the ending diagonal and is starting to pullback. Normally, once the lower trendline is breached, price will start to fall rapidly. I will look to close part of my short positions around 380, but I think we could head to new lows.

Go short RUT around 435-445

I think the RUT will make one new marginal high around 435-445 before starting a precipitous final drop to new bear market lows.

Notice my elliot wave interpretation above. The market appears to be finishing a 3-wave corrective  pattern from 342. Wave-C is clearly unfolding as an ending diagonal. Each subwave is an abc and overlaps the previous wave. To complete this diagonal, I think the market will rally to 440 or so (which is where Wave-C = Wave-A), as well as the trendline resistance of the ending diagonal. Once this diagonal breaks, watch out below. These patterns are reversed extremely quickly. I think this will start the final leg of this bear market, and prices will quickly return to 340 and lower.

I'm getting smoked, but we should soon fall back to near 600

You can see here that I underestimated the strength of this rally. However, I now see an alternate scenario that should see prices nearing a peak below 840, then head back to near 600 or so in the coming weeks.

You can see that price appears to be forming an ending diagonal since the Nov. 2008 rally. This structure makes the most sense because all of the waves in the diagonal have taken form as abc's, which is typical of the ending diagonal. I revised my wave count slightly to assume that we are finishing wave-c from 1576. Wave-c would equal Wave-a*2.618 @ 564. In addition, the diagonal trendline shows support around 625. I think the market will penetrate past this line in a final capitulation to make sentiment really bearish, thus my target of around 600. But once we reach this point, the market will begin an extremely strong rally (counter-trend moves after ending diagonals are extremely fierce). This will also finalize the MACD divergence that has been forming since the Nov. 2008 low.

What really makes me disbelieve that we've seen the bottom is the fact that investors are too bullish! Notice that the put/call ratio 10dma is at record lows. Over the past 10-days, investors have bought roughly 1.3 times as many calls as puts. That's a lot of accumulation of calls, and the market never satisfies the majority. I've been wrong about the strength of this rally short term, but I believe my analysis will be correct in the coming few weeks.

GS seems like a good short

I'm shorting GS $97, looking for a drop to below $47.

Notice in the chart above that the rally from the '08 lows has been choppy and overlapping, unfolding in 7 distinct waves. This means the past few months has just been a correction of the previous drop, so I think we're about to start Wave5 down to new trend lows. Notice also that there is bearish MACD divergence. Looks good!

Just a prediction, for the record

I think this market will mark a short-term bottom when a massive company (commercial bank, auto-maker, etc.) fails. Till then, sentiment hasn't turned bearish enough to mark a real bottom.