HAPPY NEW YEAR!

First of all, business. Check this out:

As you can see, today’s tape changed quite a bit the scenario, enough to put me on alert and cover my positions. I just don’t feel comfortable with my short positions and when this happens I just close them – since I usually have only a couple of opened positions (just my style). The close above DMA 7×5 (the green line) is quite threatening to a sell-off outlook in the next days and the spike above 90 (SPY) gave the action in the last days a consolidation look. As I said before, we should have our attention switched to Stochastics – a faster indicator than MACD, especially in sideways markets – and today it gave a buy signal. As I’m not confident keeping my position through Friday or Monday, I closed it and will be looking for a better entry point. Also, it seems that the spiral of the correction from 2007 top to 2008 bottom (on Nov 21st) is getting weaker, which might mean that the first part of the correction is over. Plus, I didn’t want to start the new year with a position I’m not happy with, I want to kick it off with a fresh mind. That was the whole rationale behind my decision.

New year, new opportunities. This market is full of them.

One last word.

It’s been an incredible year in so many ways for me and – I believe – for all of you. The world we live now is different from the world we lived in the last minutes of 2007 and I think it’s going to be a completely new world at this time one year from now. It was just great to witness historic events not only in financial markets but in politics as well, as it was amazing to interact with all of the readers in this blog and the other blogs I usually read.

Thank you all and happy new year!

Inside Time Window

First of all, I’m terribly sorry I couldn’t post an update in the last two days. End of the year is one of those periods that I hate, because people go insanely anxious to be in a special place for New Year’s Eve. I was in Rio, where my girlfriend (oooops, I mean, my wife! – I still have to get used to it, as I still have to get used to the wedding ring – I fidget with it so much that it looks more like a “finger hoola-hoop”) lives and we wanted to see the fireworks in Copacabana, one of the most famous New Year’s in the world. People say it’s amazing, and I believe it is, but Rio gets crazily crowded and more than two million people flock the beach of Copacabana to see the show on the 31st. Call me what you want, but that’s not the kind of thing I most love to do. Plus, a couple of days ago my wife (now I got it right) decided to leave her apartment for some friends so we had to go to my mother-in-law’s place. My mother-in-law is just lovely and she makes the most delicious waffle in the world. But, she had just cancelled her broadband connection. In the first day I went to her shop in Leblon to update this blog, but it was a weird situation. In the second day I suggested to my wife to leave Rio and spend New Year’s Eve in Sao Paulo, which is one of the largest cities in the world, but since there’s nothing so much attractive about it there’s no tourism in this period of the year. Yesterday we hit the road during the day and, after around 6 hours, we arrived and now I feel I’m in paradise. All that usual End of the Year anxiety is gone, I’m fully back to the market, to the analysis and to my dear readers. So, let’s talk business:

For those of you that asked if the outlook of a sell-off into the New Year is still valid, the answer is in the chart above. Two things to notice. First: although this is the end of the year and it’s normal that volume shrinks, there’s a clear downtrend line in volume originated early December. Second, we had some sort of a rally yesterday – associated with the extra bailout given to GM – but the indicators didn’t change much. Two consecutive closes above DMA 25×5 weren’t enough to turn MACD and Stochastics positive. However, market has been trading sideways for almost a full month so MACD gets a little funky and less reliable (it’s getting flat and close to zero). In this cases, it’s better to switch our attention to Stochastics, which is better to anticipate movements in sideways markets. And Stochastics is still pointing down. Therefore, outlook hasn’t changed.

On the other hand, since Dec. 17th, VIX has dropped around 20% and my puts got beaten down to hell (losing also time value). Yesterday, at the end of the day, I decided to get rid of them with a 40% loss, but I’m taking this opportunity to load my basket with some ultrashorts (basically TZA, SKF, QLD), which leave me less anxious.

Remember that, as far as 92.43 is not breached, the bottom scenario is valid until the 5th.

Last Day Before Time Window

Sorry for the late post, but last days have been very busy. Last Friday was a positive day for the markets in general, although volume was extremely low, as expected. Today is the last day before the time window shown in this chart, and therefore an important day. Wednesday, December 17th, was indeed a short-term top and, if the time projection turns out to be correct, we should have a short-term bottom between the 30th and the 5th (only 4 business days in this period).

As you can see in the chart above, all the indicators point down except the last close, which was slightly above DMA 25×5, which is absolutely not worrying for the scenario. However, if we have another positive day today, I will start to be a little concerned about the projection and a short-term downtrend. On the other hand, if today we have a fall, then we’ll have a better idea of the significance of this short-term bottom projected in this chart. I expect at least a close today back below DMA 25×5, which is at 86.76 (SPY).

Happy trading to all of you.

Thin but Below

Although Wednesday the market traded on a low – and slightly positive – volume, SPY remained below DMA 25×5, which increases the odds of a short-term downtrend and probably a nearing sell-off. Check out the chart and notice how indicators continue to turn negative:

In my view we should have some sort of a sell-off in the next couple of days, so the scenario of a short-term bottom between the 30th and the 5th remains intact. Otherwise, I’ll start covering my shorts. Volatility decreasing is the only disappointing element in the whole scenario, which is delaying the profits in my positions (after catching the tip of the top on 12/17 to go short, I’m still even!). But I believe that, with a little increase in volume, stocks will go down in a more significant movement and volatility will go back above 50.

5th Down and Counting

Today was the 5th consecutive down day for the Dow Jones, and SPY finally closed below DMA 25×5, which dragged MACD into negative territory.

As you can see, now we have a full downtrend scenario: everything in the chart above points down, no mixed signals. In the next days we might even have a little movement to the upside, but it shouldn’t be significant. Volume is still down, but that’s because of the holidays, so we can’t draw much conclusions from it. VIX disappointed a little bit, going down in the last days, but today it went a little bit up. My puts are now doing ok (not great), but my etf shorts (SDS and SRS) are still slow.

Anything can happen now, but in my view we’re going to have a sell-off sooner than later, regardless the volume. I’m not saying we’re gonna have a crash, but we are near to one of those emotionally intense drops.

Remember that my spiral calendar projections point to a short-term bottom between the 30th and the 5th. Let’s see what’s cooking for this year’s end.

Turning Negative

Yesterday was an important day, as we got more signs that last Wednesday’s high is a short-term top. Remember that the Spiral Calendar projections shown in this chart pointed to a top between the 16th and the 19th and indeed we had some sort of top on the 17th. Now the indicators used in my set of studies are turning negative, which adds up to the significance of last Wednesday’s top. This is the updated SPY chart with my set of studies:

Notice how the whole scenario is quickly turning negative. Ideally, in the next couple of trading sessions SPY will close below DMA 25×5 followed by MACD going under zero.

On the other hand, what worries me is that volume tends to shrink in the last trading days of the year, and VIX, clearly in a downtrend, is not collaborating:

The puts that I got last Wednesday – btw, when SPY was @91.97 (top was 92.43) – are more or less at the same price, which is very frustrating. They are OTM (80 and 75), and they have been losing time value and volatility.

Remember that the edge is valid unless SPY (or SPX) goes above Wednesday’s top, 92.43.

Watching the Basket

This is pretty much a follow up on the two previous posts.

Last week’s top happened on Wednesday, 17th, when SPY reached 92.43, so we have now a pretty clear stoploss: if SPY goes above 92.43 during this week or the week after we should cover our short positions.

That said, the scenario seems to be turning favorable (not confirmed yet) to the bears. In the above chart you can see that Stochastics are pointing to a short-term down movement, while MACD is very close to giving a sell signal. Plus, SPY closed below DMA’s 3×3 and 7×5, but still above DMA 25×5 (near it, though). Tomorrow, Monday, should be very important to our scenario of a sell-off through the end of the year: a close below DMA 25×5 will probably turn MACD negative and pave the way for a more significant fall.

However, remember that we are at the end of the year and volume tends to shrink. But who knows, we might have a surprise, since we had so many throughout the whole year.

Put Your Eggs in a Basket…

And watch the basket. This is a quote by Warren Buffett.

Well, the first part I did (notice that he doesn’t say “put all your eggs in a basket…”). I loaded my basket with SPY puts (January, 80 and 75), S&P Ultrashort (SDS) and I took one of the ideas from Tim, shorting Abercrombie (ANF) because the chart seemed as attractive as Mr. Knight’s rationale.

Now I have to watch the basket so it won’t fall and screw my eggs:

A couple of words on the above chart, which is not entirely self-explained. First of all, there’s no clear confirmation of a short-term reversal according to the criteria I use: today’s close was above the three DMA’s (3×3, 7×5 and 25×5), Stochastics is giving a sell signal but still in positive territory, and MACD is giving a buy signal and in full positive territory (indicator line and signal). So, why am I shorting? As I said in yesterday’s post, I would be anticipating my own indicators based on spiral dates projected shown in this chart, which makes the case of a top between the 16th and the 19th. Yesterday, 17th, I decided to open a little position. Today, watching the 5 min chart, I felt comfortable enough to increase my position and, as I did it, I soon saw some profits. The drop dragged SPX to the convergence between DMA 3×3 and 7×5 and close to DMA 25×5. This kind of movement, along with Stochastics and MACD positive, gives me the sense of weakness. It’s ok if tomorrow we go above yesterday’s high (918.5), but it won’t be ok if we go above that level anytime next week.

At this point my basket is loaded and doing fine. Next week will be more important than tomorrow for my outlook and edge.

Ready to Short?

In yesterday’s post I said that I was expecting SPX to reach the 1000 level and that I was going to look for relatively reliable new date projections. Today I could finally sit down and go through some charts and date projections, and what I came up with is a cluster pointing to a bottom (at least, some sort of) between the last days of this year and the first ones of January. Actually, many of the dates point exactly to 01/02/09, which is a Friday and the first business day of the year. Going further on this study, I took the previous significant top in the F3, F5 and F7 series and found out that they also produce a cluster which, to my surprise, starts exactly this week, between the 16th and the 19th.

[I draw this chart before the end of the day, and SPX hit a new short-term high at 918.85]

The faint dotted double arrows show the movements in the F3, F5 and F7 series converging to the period between this week and the first days of 2009. Notice how these movements get larger and sharper with time. The next chart places the focus of a spiral on the top of September 2nd, and this focus produced two other tops: a precise F3 on October 14th; and a F5 (3 days error) on November 4th. F7 is exactly today, December 17th, therefore a top happening tomorrow (Thursday) or Friday will be inside the 3 day tolerance.

The next chart shows that – according to the criteria I use (DMA’s, MACD and Stochastics) – there’s no sign yet of a reversal except for a divergence in volume.

For the more aggressive trader, those who like to anticipate indicators to catch the tip of a movement, I would say to check Retracement Levels for potential reversal levels to go short (with the corresponding odds) between tomorrow (Thursday) and Friday. For the moderate/conservative trader, I would suggest waiting for a more clear sign of a short-term reversal. That is, for instance, SPY closing below DMA 25×5 and/or Stochastics giving a sell sign followed by going into negative territory (below the zero line). Stoploss for this trade will be any high above the top formed between the 16th and the 19th.

I already got a small short position and will gradually and carefully increase it as I feel more comfortable and confident, but I’m particularly cautious in this trade. We are at the end of the year and volume tends to decrease, therefore, since the projected date for a bottom is around the first business day of the year, I don’t know how deep or significant it can be.

Full Bull Mode

It looks like SPX has more room to the upside. The rally I was expecting yesterday happened today with high volume, sharp enough to turn Stochastics positive:

Notice MACD entering full positive territory, while prices are above the three DMA’s and Stochastics gives a buy signal. According to the criteria I tend to use (DMA’s, Stochastics and MACD) Short/Medium term trend is definitely up and I expect prices to reach 1,000/1,050 level before a more significant drop occurs.

This is still a very complicated market environment, so I would remind you not to be too greedy, taking lower risks than usual and scaling down positions once you see some profits.

I’m still working on date projections, but I repeat what I posted a couple of days ago: the spiral dominating the correction that started in 2007 seems to be getting weaker, which could mean that this first big leg down is over.