Sentiment and technicals are combining to drive equities higher into a turn window

Sometimes you just gotta believe. Of course, there are some different ideas about the timing (and levels) for the turn we're expecting. One of the major ones is Terry Laundry's "T" date of Thursday, the 21st. While there are indications that this rally leg could persist after that (plus Andre Gratian is weighing some turn date alternatives), I'm planning to retire my last round of swing longs in a couple of days. If only to be on the safe side. But check out the charts below. Sure, sentiment is extended to the bullish side. But on the VIX "opex" today, it kept rolling down under that 20-day moving average (20-dma) resistance. I'll be just as glad if it spends Thursday underneath 17 - will see.

Then there's the advance/decline - using that for Nasdaq (since $NYAD includes so much fixed-income securities trading). The A/D ticked up again but maybe we're seeing a bit of negative divergence in its own RSI, which can help point to a turn soon. And the TRIN - its MA's are all above 1.2, except for its 10-dma (still over 1.1) and its actual closing value was under 0.80. That's a start. I don't see how its MA's can get under 0.80 by Thursday - this may be an early clue that a correction won't be too deep yet (or that the turn might come after 1/21).

Well it remains valid for position and swing traders to be in the mode of selling into strength. Once the turn is in, the game will become selling rallies. A lot of things did well today (even RTH and especially DDS, and M, did well; also USX, healthcare, etc.). But once a turn happens, we can't guarantee it doesn't sweep along many sectors. So traders can trade around all this, and we'll all keep getting or being ready once the market rings its bell (1160-something, it seems?) and the turn we're expecting starts to manifest.

Retail sector may look weak but don't discount all its stalwarts; here's a look

One of the sectors I've mentioned recently as looking relatively weak is retail (RTH). You can see below, it's poking a bit under its 50 DMA. And selling volume was high the past several trading days. But it could still bounce along with the broad indices if we get that last expected push up before a bigger decline into March. Then again, retail usually has good seasonality into the winter holidays and not so much afterward as it eases off or consolidates. Interestingly, Moody's upgraded the apparel subsector on Thursday (1/14). So I pulled charts of Macy's (M) and Dillards (DDS) - sure enough, their charts aren't as bleak. They slid off their highs sooner, but look ready to start testing their 200 DMA and 50 DMA, respectively. And there's been a pickup in volumes in RTH on its recent pullback (which is somewhat bearish), but not so much in these names.

One strategy may be to offset a bearish position in the sector (either soon on spec, or after confirmation from a lower low) with a bullish position in the apparel-specific subsector. Now I'll be candid, this isn't an area I follow regularly. But it may be something tradable near-term. I checked the short interest in M and in DDS. It looks a little high in M (which is over 90% owned by institutions), and very high in DDS (at least 8 days to cover if my memory is correct). From a technical standpoint, it's noteworthy that there hasn't been as much selling volume in these two apparel-related names, as there has been in the RTH. That coupled with their testing of their nearby MA's could make them attractive long plays, even if only for a near-term trade. Stops can logically be placed at the levels representing failure to get support from these MA's.

Timing could be mid-day on Tuesday assuming we get the morning followthrough implied by the ChartsEdge weekly and by opex hangover, for equities broadly. Swing traders should be careful to take some profits on a good bounce from the MA's and then stop out on the rest if these reverse back down and under. But if they continue to get MA support then they could even be worth maintaining longer. I don't plan to keep updating about them necessarily, so if managing a position in them, just keep an eye on the technicals including these MA's, the volumes, and the Bollinger Bands for good measure.

Equities rise from bad news each hour; but not exactly a lotus flower - time's running short

No wine before its time - and no turn before its time! As the afternoon wore on, I began to wonder where was the final 5th small wave expected for this leg of the move up, and remembered that the ChartsEdge maps sometimes seem to "give out" at end of day as traders position for the next day. Or in this case, maybe too many were short and had to cover - or whatever. Anyway, as the market wouldn't go down, it had to go up!

For our part, I'm counting this as a wave 3 within the EDT expected to finish the rally crest. Maybe the move up lasts into Monday morning. Anyway if my count is right, we still have another pullback coming, and maybe it will only test 1140 or 1137 before going for the brass ring at 1150-1160. Like today, the move may seem neat when it's on, but we are starting to position for the turn. Trade it your own way - currently, our approach is to start more TMAR, free up cash, be ready to play with a combination of ETFs and options, maybe some short sales.

This morning's jobs numbers were mostly bad, so the silver lining is rates might hold down for a while ... Or just steepen the yield curve. Gold is trying to decide! Meanwhile, more news that cautions we have reasons to expect the kind of correction soon ahead we expect for technical reasons - reported at http://mobile.bloomberg.com/apps/news?pid=2065100&sid=axUfVp0dw8wA:

Consumer Credit in U.S. Drops Record $17.5 Billion (Update2)

By Vincent Del Giudice

Jan. 8 (Bloomberg) -- Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The series of 10 straight declines was the longest since record-keeping began in 1943.

One sector I'm eyeing is retail. As you can see, it's lagging. What looks like a triangle is something that could break down bearishly. Today's weakness was on high volume - not helpful:

Juxtaposition of events places equities markets under a cloud again

Today we've seen the VIX once again testing the 24.78 level as VIX futures expire, and the VIX doesn't look convincing that it wants to remain under 24.78. At the same time, the Nasdaq Composite index ($COMPQ) moved just above the 1912 Fibonacci level I've spoken of here before, and quickly moved under it again today in a possible intraday bull trap door (i.e., a bearish pattern (it "traps the bulls"). Now it's even possible that the Nasdaq Composite is working on a bearish engulfing bar on the daily candlesticks. These alone are bearish indications for the equities markets, as the Nasdaq Composite may drag down the other indices, but there are also some other factors that add to the mix. These include the dollar having poked a slight new low, but rising intraday; the euro doing the opposite; and even the yen moving up from a possible swing low. Gold is looking weak, and even Goldman Sachs and other financials are looking shaky as Blackrock is down after a disappointing earnings report and a discussion about the weak real estate market. Not surprisingly, the real estate index is also off. The retail sector holder (RTH) is looking like a possible bearish engulfing, and have you noticed the banking index ($BKX) down today too?

Some of these items are definite bearish indicators, and others are just items I've posted about here recently with the indication that turning points from here can be concerning. Does this mean that the bear market rally is definitely over, without the S&P 500 having tagged the $961 area we and others have mentioned? Of course it's a bit early to say, but the clouds have formed with the juxtaposition of these events. For that matter, it remains possible for the VIX to close relatively low, and for the S&P 500 index still to tag about $961 before a possible turn with the VIX doing the same from 24.78.

Obviously the SPX would have to move back above the intraday swing high of 954 to retain the potential of tagging the 961 area, so that's a level to consider for the time being.

My SWHC is also down which is disappointing of course, and will have to see if it can separate from the broader markets the way that the biotech sector (ya-a-ay!) seems to be doing so far.

TLT, the US Treasuries bond ETF, is moving up above yesterday's candlebody, so if taking a KI$$ approach long with this ETF, then a stop just under yesterday's low seems reasonable. If the juxtaposition of events does lead to further weakness in equities then maybe at least some will "get their wish" with higher bond prices and lower bond rates.

As I've cautioned in a tweet today, don't get "wedded" to any particular Elliott Wave count or head-and-shoulders pattern now (whether "bullish" or "bearish") - these cautionary flags are based on long-term Fibonacci levels at least for equities, the dollar, and the VIX. As such, these do have good potential to produce turning points. The near-term ambiguity of the Elliott Wave count (which by the way, is definitely a clue that we ARE in a correct pattern of some sort, and not a new bullish impulse!) can lend itself to different interpretations, which is exactly why these Fibonacci levels are like guiding stars. The fact that they are coming together today also lends this message more significance.

The yen might have made an important low. If so, then it needs to remain above yesterday's low, and I'm going to treat it as such unless and until it says something different. Meaning, if it goes under yesterday's low, I'm going to view it as being in jeopardy of losing support and going to much lower levels. It really can only re-establish that the yen is bullish by moving above the recent swing highs around 107-108 ($XJY chart).

As for the euro, I would believe it's rather clear that if the dollar strengthens from here, that's bearish for the euro. It seems strange if the dollar AND the yen strengthen from here. But, if for some reason that happens, then perhaps that's even more bearish for the euro.

Where does gold fall out with these possibilities? I'm stepping as carefully as I can with gold ... if it can strengthen above $958/960, that places $990 back in sight. Conversely, if gold drops, I'm thinking that will make itself obvious.

Stay vigilant according to Dow Industrials' relative weakness and Elliott Wave counts

Although there may be reasons to look for higher levels tomorrow and/or Friday based on cycles and seeing the Nasdaq relative strength, the relative weakness of the Dow Industrials plus the probable Elliott Wave count signal traders to remain vigilant for the downside. If we are facing a third wave down as the next move, as we are thinking is the right count, then the odds of a gap down tomorrow morning are greater now. The P&F (Stockcharts.com's default settings) show Dow 8000 and SPX 850 as targets. Both look just slightly under the levels that would be symmetry targets if this would instead count out as an "abc" pullback. But those levels would also remain above the P&F chart support levels. If and when we get there, we'll be considering whether those are completing the pullback move, or merely a third wave, etc., with implications for a deeper test of the March lows.

Besides, there's the Bradley model that suggests an important low on Friday. The Bradley model may be working well this summer.

As the dollar strengthened this afternoon while the euro weakened, this can also be consistent with a near-term bearish outlook for equities.
Today the Fibonacci levels worked well - the calculations I'd provided were from the Friday afternoon swing high rather than intraday high, but as conservative levels worked out well for intraday longs with the map into the morning high in SPX. Others had also been mentioning the 912 level based on chart resistance, moving-average or other technical analysis methods. This also looks consistent with being small first and second waves within wave 3 down based on Tony Caldaro's SPC count, which looks good to me. It's because of this count that prospects for a gap down in the morning are increased. Gaps are most likely to occur during third waves (and C waves, which have much in common with third waves).

In sectors, retail and real estate still look heavy, and biotech still is maintaining above its 20-day moving average. Swimming against the tide is difficult but I like the biotechs' relative strength.

More buyers must turn out to support a second rally leg higher

I'm posting up some additional charts this evening to illustrate a few points about a few sectors, and then show how a range of equity market indices are faring with respect to their moving averages and volume support. The three sectors I'm showing here are the semiconductors, retail, and banks. Interestingly, retail is one of the heaviest looking sectors, as it already fell under the 50 day moving average and is threatening to move under its May lows - which would also place it under its 200-day moving average (which it actually had moved above). The semiconductors (shown at right with SMH) are a little better off, also above their 200-day moving average and only poked the 50-day moving average intraday. In both, however, the buying volumes really dropped off, and have moved under their 30-day moving average (the red line in the "OBV" indicator window). Using the 30-day moving average with the On Balance Volume (OBV) helps us see how relatively bullish or bearish the volumes are, and is a useful adjunct to other indicators.


Just looking at the raw volume bars, you can see that there's been more selling in the retail sector (RTH). This is not an encouraging sign for the rest of the economy.

The same charts constructed for the banking sector tell a generally concerning tale, as I've been showing. This time I'm showing the ETF's for both a primary bank index (KBE) as well as for the regional banks (IAT). The regional banks are definitely in weaker position, having dipped relatively lower on the move down since early May. Those two charts are below.

I've also included smaller versions of charts with the same indicators, across a variety of the equity market indices. In some cases they are trying to stay above their 200-day moving averages, in others they remain below. The OBV indicators for some look relatively stronger or weaker than in others. Many are showing negative divergence, such as with the MACD and CCI indicators. Looking across the charts, it's evident that buyers will have to show up in force in order to support the idea that we're just seeing a moderate pullback that will lay the groundwork for another rally leg up. Meaning - we need to remain alert to the possibility that the March lows will be retested.

How the markets are turning and churning

The equities markets appear to be confirming that they're turning over, while testing - or churning with - moving averages. Retail (RTH) in particular looks to be testing its 50 day moving average (dma) from below(while most sectors are above 50 or 20 dma support), just as its own 20 dma is threatening a bearish cross under that 50 dma. VIX popped above the channel it's been in for weeks, but found resistance at its 50 day moving average (dma), just as the XLF (financials) reached for support at their 50 dma. Gold poked to its lower Bollinger Band with GLD also getting 50 dma support, then put in a good bounce. Biotech was a strong sector, followed by technology generally, while retail and consumer discretionary lagged. Real estate and the transports struggled to participate in today's bounce, but look underperforming the broad markets' tepid performance. In currencies, the dollar held back while the yen popped strongly. Treasuries did okay, though not moving up with conviction at this point.

In the S&P 500, the market can have put in some (likely) or all (less likely) of a small wave 2 pullback up. That would fit with the idea of another effort up tomorrow to give nimble players one more chance to buy puts or sell calls into opex this Friday.* Granted, looking for a good bounce this week hasn't been well rewarded, which is a clue that the market may be weaker than many assume. If we see the early part of a "small" wave 3 down late Thursday and/or Friday, then Monday could be very interesting!

*Actually, most options traders avoid options that are so close to expiry because of the disappearing premium value, though if you can sell to open then you benefit from that inherent erosion of course. I don't give options advice but just making observations!

Assuming that the equities markets drop into the generally expected, and somewhat feared pullback, it will be interesting to see how a sector like biotech can really pull away bullishly. I'm pulling for that to happen - I just wonder how well it can swim against the tide.

Inclined to see channels and wedges in equities indices? It isn't your imagination

Since I noticed a number of narrow price channels and similar formations appearing in various indices, including small wedges that might (stress: might) be diagonal triangles, plus a few small standard triangles that have led to corresponding moves up, I decided to pull and mark these on a number of charts. Here's the result, below. So if you also have been inclined to see these, it isn't your imagination. Some of these are "inclining" more than others, but in each case the big question is whether these are ending formations signaling the type of trend reversal that we and many others have been watching for. Without dissecting the internal subwaves on hourly charts, or even cross-referencing to other technical indicators, one easy way to see if trend reversal sets in will be whether and when these index prices break below the lower trendlines I've marked on these charts.

As an aside, I do like the relative strength appearing in the biotech index ($BTK, shown as a standard full-size daily chart below). So I am staying in, but have decided to move my stop to yesterday's low just to give me some more peace of mind about staying in at this point. And then there's TLT ... a lot of volume yesterday and today. Today can be interpreted as a bullish engulfing candlestick. So just maybe, finally, it's time for TLT? Once again, most investors and swing traders should allow it a bit of room to confirm a trend reversal pattern before just moving in. Those interesting in trying it a bit early can wait and see if it moves - and especially looks set to close - tomorrow above today's high. If so, tomorrow could be used as an entry day, with a stop at today's lows (and then moved to tomorrow's lows).

Something I don't like the looks of - RTH, which looks bearish to me; see its standard daily chart at bottom. Not in a channel or wedge, but just looks like it is breaking down. I may initiate a short in that sector, and the easy way to set the stop for that is at yesterday's high ($81.94 in RTH).

**UPDATE 6:38 pm - Check out Tony Caldaro's update this evening at his Elliott Wave Lives On site (link is in the "other sites of interest" at the right side of the page, plus his site feed is underneat that list. Andre's subscribers also have some interesting updates (as always) too.
And yes, SPX did reach the 953 number I was interested in. There does remain another at 963, so we'll see whether or not it wants that one too, or does it decide to break trendline support instead.

(click on any chart to see it larger)

Followup about the RTH and retail sector

As a followup to my post on Monday about the RTH having overly bullish sentiment - Bespoke Investment Group wrote about this same day (2/2) with an article at Seeking Alpha, "Retail Group Breaks Support". The important support they refer to is a combination of the 50-day moving average, and the January lows.

And here's the current chart - RTH lost 3.53% today:

So you want to be a contrarian investor? see the extreme sentiment on retail sector and these stocks

Here are put/call options data showing extreme sentiment on STT, AMGN, RTH, and HL, MO and KO. These are the "top bullish" and "top bearish" extremes shown at the ISE's website this afternoon (included in "other sites of interest" in the list at the right side of this page). You can see the extremes in the numbers of calls and puts as of 4:15 pm this afternon. Notice that one implicates the retail industry - the RTH is an ETF for the retail sector. Given recent analysis floating about the financial community about dour outlooks for retail companies, one must wonder why the crowd is reaching such a bullish extreme on RTH. (The ISE's put/call data reflect opening purchases, so more representative of crowd positioning than position hedging - check their site for more information on this.) For example, just today the stalwart retailer Macy's (M) joined many other companies announcing layoffs (about 7,000) and cutting its dividend (in half). Macy's dropped 4% today, by the way, to end at $8.59. You'd have to think that retail stories like this must signify a huge turnaround, to justify such extreme bullishness in this sector. Especially at the same time that the crowd is very bearish on MO and KO - two companies that one might expect to fare better than other companies during difficult economic times.

Here's a comparison chart showing the RTH retail sector ETF against the S&P 500 since late 2001. This doesn't show the retail sector being very out-of-synch with the broader equity markets during most times. So the chart doesn't justify an idea that the retail sector should out-perform:


As for State Street, Amgen and Hecla Mining - well, no special insight here into these companies. For that matter, if you consider making any investing or trading decisions using these extreme put/call data, you should do some additional diligence (fundamental and/or technical analysis) before wading in. But it may be very worth your while to check these out.

New to the principle of contrarian investing? Extremely "bullish" readings shown by the number of calls heavily outweighing puts can often clue you in that it's time to sell that stock. Conversely, extremely "bearish" readings shown by the number of puts being extreme compared to the number of calls, often tells you that the stock is due for a rally.

My comment at the end of my prior post here, about the TickerSense poll, was based on some sentiment polls being more predictive of market action, such as TickerSense tries to be. Classic contrarians seek to fade the crowd, by determining when mass sentiment on a stock has reached an extreme. Meaning that everyone's feeling optimistic about the stock and has probably gotten to the point of buying all of it they were going to buy, so the tipping point is being reached where no one is remaining to be the next purchaser to support the price ... so the price falls. (The reverse is true when everyone's reached a pessimistic extreme.)

Remember the three "most bullish" we noticed at the ISE recently? - DAL, FXI and GM. And with that post, I showed that Delta Air Lines looked like it was forming a wedge and said "uh oh!"? Here's how all three look in the days since then. DAL performed worse than the others, but none of these three performed according to the "most bullish" expectations:

While we cannot typically follow individual stocks here, we do incorporate the general principle of contrarian investing as we follow the major indicies, currencies, gold and the dollar ... and some key sectors like banking. We do this by keeping an eye on the ISE data for all equities (which closed at about 125 today if my memory is still good - you can check that also, using the ISE link in the list at right), as posted here this weekend. It's an example of how we use a number of methods to keep a pulse on where these markets are heading.

If you are actively investing or trading in particular stocks and ETF's, then consider using put/call data like this as an input if you seek to be a contrarian investor. To be conservative, I would not recommend using only these data to the exclusion of any other diligence when making an investment or trade decision. But if nothing else, extreme readings like this can certainly clue you in that if you're on the side of the extreme crowd, you should double-check your position!

As always - be careful out there, and happy trading!