Saturday, December 24, 2011

Toying with Christmas crest and projecting KI$$ Year 2012 Overview

Happy Holidays, friends! This post is by me, Ariel, starting to project our ChartLines viewpoint for what 2012 will bring and how to approach it. As we are approaching a crest around Christmas. The current view is for trading, and the Year 2012 Overview is especially for KI$$ investors, swing and position traders.

But first I'll indulge in a personal note. This Christmas Eve afternoon, in my front yard, I noticed something exceedingly unusual. We have hibiscus bushes flowering which always produce red blossoms. Absolutely beautiful. But literally overnight, one blossom appeared that's almost fully white - only traces of blush. I don't know how this one could have produced a sort of albino hibiscus flower, just this sacred day. I'll just accept it as something special. And I'm sharing this picture of it here.

As for a Christmas crest - readers know that Raymond Merriman identified December 25 as a special day in financial astrology, relating to a potential market top. It can be a time window (meaning it can take a few more days to play out), and it may be only an intermediate high before another higher high. Maybe it has been A Fed Christmas (YouTube) too! But to examine whether the market may roll over, here are charts, starting with the Baltic Dry Index ($BDI) - faltering, so it's concerning. We can't call it immediate negative divergence but it's a warning flag regarding the amount of economic activity. Well, maybe it just reflects a slowing for the post-holiday season. But I'll discuss the other charts further below; followed by an outline for a Year 2012 Overview for trading the markets.

The volatility index is very extended to the downside, as seen in the $VIX daily chart below. Friday, although the VXX (an ETF which basically tracks the VIX) moved over Thursday's high, the VIX did not. Normally under this condition of being overextended, once the VIX triggers by a move over the prior day's high, it's a signal to buy the VIX (and/or short the stock market), then take profits by closing the trade two days later. It could also be a longer-term signal. I'd feel more strongly it's a long-term signal, however, if (1) it dug a bit lower, to the main channel line I've marked; and (2) if/when we see the VIX make a higher low with stock indices making a higher high (a form of negative divergence). We'll just have to watch this.

Next is the McClellan Oscillator, below. You can see it moved above my provisional downtrend line. So once it completes its own crest, it'll form the basis for a new set of trendlines. Meanwhile it's entered overbought levels and ripe to roll over anytime. This fits with the idea that we're forming a stock market high, but the next high can still be a higher high. It'll be bearish if/when we see negative divergence in NYMO (like the opposite of the positive divergence we pointed out Monday evening this past week.

The short-term Arms index known as TRIN is at a short/term buy level, but its longer-term moving averages remain high, i.e., signaling oversold. Frankly that's odd - I'm guessing it has something to do with a level of selling that isn't actually very bullish. Again, it raises potential concern, but not enough evidence by itself to constitute a true swing-trade sell signal for stocks.

Assuming we do see stock market weakness soon, what'll it mean in context of entering the new year, 2012? My general view for KI$$ traders is to remain in cash or defensive, waiting for a good low spot in January, possibly into that options expiration. There are several reasons for identifying January. My own contribution to this is, it'll be the Fibonacci 2.0 time extension from the 2007-2009 drop, fitting for a low after the highs that occurred at the 1.382, 1.618 and 1.786 time extensions earlier this year. Then we'll want to see a good rise into another high point in March. I like March because it's toward the end of Merriman's timing for a crest (whether or not it's a higher high); and because since the March 2009 low, we've seen a high point in March 2010, and a high/low in March 2011. Then another decline into approximately June - contrasting with the high we saw in June/July 2011. It's possible that could be another prelude to a good move up into autumn or late 2012, but I think it's really too soon to say.

In gold, we want to see a continued drop to approximately $1400-1440, in order to re-initiate longs. We'll watch for a good reversal pattern to trigger for that. Maybe it'll be in January too. So just remain prepared for that.

In oil, world events have given it strength, but I'm still tilting to the view it'll test toward $62-$65 before the next good buying opportunity. Keeping a close eye here too.

Finally, it's possible that Treasury bonds and TLT have topped. They may put in a lower high when stocks drop next. We're inclined to sell rallies unless and until that doesn't work. They'll probably remain mostly inverse to equities, so we'll consider that during 2012 too. But there may come a point this year when Treasury bonds deteriorating may contribute to stock declines, just because of a disappointment. Something else to consider for 2012.

We don't want to get "married" to this map. But we'll want to keep it in mind. We'll develop this more as the weeks progress. Meanwhile, happy holidays all!

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