02/05/2010 Market Recap: One More Drop?

TREND INDICATOR MOMENTUM INDICATOR COMMENT (Click link to see chart) Long-term 3 of 3 are BUY     Intermediate 3 of 3 are SELL 5 of 6 are NEUTRAL SPY ST Model is in SELL mode Short-term 1 of 1 are SELL 9 of 9 are NEUTRAL

BULLISH 6.3.2c Major Distribution Day Watch: Bottom is close? BEARISH 6.3.0 Major Accumulation/Distribution Days: *Another Major Distribution Day ahead? 6.4.1 Extreme NYADV Readings Watch: *Another close low ahead? CONCLUSION

SPY SETUP ENTRY DATE STOP LOSS INSTRUCTION: Mechanic signals, back test is HERE, signals are HERE. TRADING VEHICLE: SSO/SDS, UPRO/SPXU ST Model 02/04 S 1.9 x ATR(10) Reversal Bar 02/04 S *breakeven *Adjust stop loss. NYMO Sell       VIX MA ENV

OTHER ETFs TREND COMMENT – *New update. Click BLUE to see chart if link is not provided. QQQQ   0.0.5 QQQQ Short-term Trading Signals: Falling Three Methods, bearish continuation 71% time. IWM     CHINA Down Double Top or Bearish 1-2-3 Formation? EMERGING   Bearish 1-2-3 Formation, target $36.34. CANADA Double Top, target $15.77. FINANCIALS   Bearish 1-2-3 Formation, target $13.40. *Could be a Head and Shoulders Top in the forming. REITS   Measured Move, target $41.54. MATERIALS     ENERGY   Could be a Double Top in the forming. OIL   *Could be a Double Top in the forming. GOLD Down Descending Triangle, target $91.08. DOLLAR UP Head and Shoulders Bottom, target $24.28. BOND   3.0.0 10Y T-Bill Yield: *Bearish 1-2-3 formation, target 34.43.

INTERMEDIATE-TERM: INITIAL PULLBACK TARGET MET BUT COULD BE MORE

4.1.0 S&P 500 Large Cap Index (Weekly), the Friday low hit right at Fib 38.2%, fulfilled the minimum pullback requirement. Now the question is, whether the pullback is over? Since the magnitude of the pullback is similar to that of June 2009, therefore I’ll simply use the June 2009 pullback as the reference point (no egg or tomato please, if you think this is to compare apple to orange. I don’t mind you throwing money on my face though). For 3 reasons, I think the pullback might not be over yet:

1. June 2009 pullback lasted 17 to 20 trading days while now only 13 trading day so far. Since the pullback magnitude is almost equal, so apparently the strength of the pullback this time is greater than that of June 2009.
2. MACD at bottom proves the above assumption, during the June 2009 pullback, the MACD was a strong buy, while now MACD is yelling for sell.
3. From the NYSI STO, usually a pullback should last until STO below 20, June 2009, for example, did so, while now, the STO is still above 20.

 

Besides all the 3 reasons mentioned above, here’s another, perhaps, the most important reason. The chart below is from www.stocktiming.com. We can see that the inflow liquidity is much worse than that of June 2009. As we all know the free liquidity was the major force fueling the 2009 huge rally, apparently we don’t have it now.

 

So to summarize above, the chances are high that pullback is not over yet. There’s another alternative though, as shown in the most recent II survey, most people are now in “correction camp”, see red vertical lines, if past patterns repeat, we should now very close to a bottom, thereafter the market will make a new high and after that the real correction shall begin. I’m more inclined to believe this scenario, not sure about the new high thing though, but according to the past experiences, huge rebound should be very likely. Well, that huge rebound, has it started already? Hmm, I don’t think so, please read the short-term analysis below.

SHORT-TERM: COULD BE AT LEAST ONE MORE DROP AHEAD  

Firstly, let me correct one error in the Friday’s After Bell Quick Summary. I said “no capitulation volume”, that’s not very true. My back test should apply to SPY only, there’re 3 conditions for calling a bottom day, apparently the volume condition was met.

1. Volume is at least 2 times larger than its 100 day moving averages. (Check)
2. The day’s trading range > ATR(10) x 1.1. (Check)
3. Open below BB bottom. (Sorry, no, actually, it’s a gap up open last Friday)

The condition 3 may be not very important especially a hammer was formed on Friday which statistically has 60% times leading to a bullish reversal. So I cannot deny the possibility that the market was bottomed last Friday. Besides, there’re 2 additional evidences arguing for a bottom:

6.3.2c Major Distribution Day Watch, as mentioned in Thursday report, NYDNV:NYUPV > 35 means very close to a bottom. By the way, as illustrated on the chart, please don’t simple calling a bottom based on one hammer, a follow through is for sure needed.

6.3.1 Major Accumulation Day Watch, see NYMO below. The NYMO positive divergence is, perhaps the most reliable bottom signals.

So to summarize, it could be that the market reached a short-term bottom last Friday, but I have 4 other evidences arguing that within a short period of time, SPX will at least close below 1063 which is the last Thursday low.

6.4.1 Extreme NYADV Readings Watch, see vertical dashed lines, when NYADV dropped too much in a single day, normally there should be one more drop leading to a SPX lower close than that of the trigger day.

6.4.A SPY Bottom Shape, take a look at the SPY bottom shape when the market was in its most bullish period, even then, there’s no V shape bottom as technically nobody can stand on just one leg.

6.3.0 Major Accumulation/Distribution Days, I think most of people have forgotten my Major Distribution Day rules. The first one has been fulfilled, which is the chart 6.3.2a Major Distribution Day Watch，most likely a green close the next day. Now comes the 2nd one, Major Distribution Day seldom comes alone, usually there’s another one.

The last reason, take a look at HERE, statistics seem not support an immediate rebound. Also Mr. Majeasy has a similar statistics posted in my After Bell Quick Summary comment area, not supporting an immediate rebound either. (For completeness of this report, I screenshot-ed the statistics below, but the credit should be given to http://www.tradingtheodds.com, please visit for more details.)

So to summarize again, there’s a chance that we may have seen a bottom the last Friday, but very likely the last Friday’s low will be tested and SPX will close below 1063. One more word, there’s no sure thing in the trading world, such as very very bullish Monday, I simply sense that in my forum, people are too optimistic about the Friday’s bottom.

STOCK SCREENER:  For fun only, I may not actually trade the screeners. Since SPY ST Model is in SELL mode, only SHORT candidates are listed. For back test details as well as how to confirm the entry and set stop loss please read HERE. Please make sure you understand the basic risk management HERE.

Today’s screener has 0 stock found.

According to the entry rule, JCP found on Thursday was  confirmed.