In the previous post Tom McClellan highlights Peter Eliades’ work on the cyclical top due in the S&P 500 this year. To add some color to it, here is the chart I produced for NFTRH subscribers several weeks ago after purchasing and reading an Eliades report myself. His work came to my attention by way of Robert Prechter.
Bear in mind that this big picture cycle is a blunt tool, much like market sentiment or other indicators that show risk, but for extended periods, little risk discovery. So as McClellan mentions, it takes much finer detail management to gauge a topping process. That is what makes market management interesting and sometimes even fun; adding details and color to big picture theses.
We should not look at one chart and its message without cross referencing other charts, data and indicators. The best risk vs. reward scenarios come about when multiple data points come to similar conclusions.
Anyway, staying on the big picture, here is another monthly chart of the S&P 500 we have been using in NFTRH that shows yes indeed, a top (of some kind) is indicated by the monthly MACD signal, but…
…that each of the last two major tops included a bearish MACD signal that preceded a drop to the monthly EMA 20, which turned out to be a pause to refresh prior to ultimate bull market highs in both cases.
Will it be different this time? Very possibly, but also very possibly not. The stock market cycle indicates that it will be different because the S&P is supposedly due for a major top. But the color and detail can only be painted in by doing the shorter-term work each week. Especially since this cycle has had a certain ‘rule breaker’ aspect to it, due in my opinion to historically aggressive policy maker inputs (and resulting distortions) from its birth in Q4 2008/Q1 2009 to today.
Per this chart created several months ago, the Semi index hit the first target of 750 on June 1. I had not even realized it. “Essentially in the books” is now IN the books. Way before the Semi’s recently started gaining the M&A hype in the media NFTRH highlighted the sector for a coming bullish phase (January 2013) for fundamental reasons, and then in early 2014 when the big breakout came we added technical oomph to the case.
Dutifully, SOX has been pulling back, which is a good thing since I did my selling and am without exposure. I have my eye on some buy targets for a few items, which were mentioned in NFTRH 346. They are stocks that have been mentioned here as well at various times. As for the sector, SOX is completely unbroken.
 courtesy of reader s.r., an explanation: “Charles Dow developed his famous theory to forecast the economy, not the stock market. Maybe you can explain this theory began to be used as a stock market forecasting indicator, and why this nonsense persists among supposedly educated financial professionals.” personally, i can’t explain it as i have never really paid much attention to it. but insofar as people are going to start making noise about it, i thought it was interesting.
It will be interesting to see what the Dow Transports do here. The breakdown in this supposedly key market was accompanied by little more than scattered weakness in certain markets. Some items, like the banks not at all surprisingly, have actually been strong.
But I have been wondering what is going to happen when the Trannies bounce and hit resistance. Further, what is going to happen if they hit resistance and fail? At the very least I guess we are going to find out if this old fashioned thing they call Dow Theory is worth paying attention to after all.
Last week it was Broadcom getting taken out and even more recently, Intel’s over payment for Altera. I hold INTC (for now) and got nicked on it. Today some mainstream financial media robots are speculating about 3 prime takeover candidates, Atmel, Lattice and Cavium. On a down day in the markets, all 3 sport similar pumps.
Well thank you media robot, for if not for you I’d have held on to LSCC (bought last week from the watch list, as advised in NFTRH 345) because I really do like the company and its segment. I hope to be able to buy it back. But usually hype does not stick, so playing odds here I’ll take the bird in hand, ever so reluctantly.
This does leave me very shy on Semiconductor stocks however, so I’ll keep several on watch, including Silicon Motion (SIMO, lower panel of the chart below), which tickled NFTRH+‘s target in the upper 30’s, on which I also took the profit.
In the previous post we tout a good call as we have done from time to time. There have been plenty of them. There have also been more bad trades than I’d care to mention, but will anyway.
I avoided taking a good profit in BCLI and instead took a loss. I tried to bottom feed FARO and it knifed me to a loss. I got smart with AMAT and took a loss on unexpectedly bad news. Luckily, none of these were NFTRH+ items; they were personal speculations. NFTRH+ is for setups, and low risk ones at that.
So this is the fair disclosure website that is not trying to sell you on anything other than that its (and NFTRH’s) owner is a hard working, honest market manager and that this is a genius free zone.
So on to DEPO. I have traded it very successfully over the last couple of years (hat tip to a subscriber who is very well up on it fundamentally). This time, I decided not to take profit prior to earnings and got hammered. It’s a modest position so now I am an investor and looking to add. The question the weekly chart asks is ‘will it bottom at the dotted channel or major support and the solid channel?’ Good question. Weekly log scale chart…
As previously noted, I have the potential to become distracted and busy elsewhere this week. So for that and market related reasons I am very lightly positioned (heavy cash).
But one position I hold is an NFTRH+ trade idea on Gilead. The ‘+’ update was produced before GILD reported its good earnings. It was based solely on the chart. It’s got a theoretical target up higher if this pattern is any good. I may take the profit at any time (or limit the loss if that becomes the play). GILD held up during the recent hard hit in Biotech, weekly MACD is triggering up and RSI is above 50. So technically, this thing looks pretty decent when viewed in a vacuum.
The ‘Apples to Apples’ European equities ‘credit spread’ (daily) chart (Euro unhedged Spain vs. Euro unhedged Germany) continues to sport a bullish pattern and so, I continue to have interest in Europe for when the current correction ends. I would like to see one more upside burst in the Euro (which remains bearish on the big picture), which could drive down QE-stoked European stocks to a theoretical buying opportunity. If the chart below is still intact at such time, it would be a positive divergence indicating that risk is still ‘ON’ in Europe.
The China short (via the leveraged YANG) is now covered (ref. May 5 post) not because I think it is not going to go up more, but because I am a chicken. I have never claimed to be anything other than a cash valuing risk manager. The heroic shorting is for others until I can get new longer-term trends. China’s trend, along with the US and others, is still up. Not talking about secular trends, but rather intermediate ones, defined here as multi-month.
In reviewing the chart of FXI, I see something similar to the European Euro hedged ETF and several other items (incl. a favored Japanese machine tool and robotics manufacturer that NFTRH subscribers know about) that may make good cases for re-buying, not shorting, eventually. There is some of this going on in US stocks as well. Think healthcare/biotech.
I don’t think the corrections are over with, but I am not ready to become a bear because I don’t see an intermediate term reason to yet. So it’s swing trading and cash defaulting for this chicken until trends change.
Back on the China 25 ETF above, it is not over sold yet but down the road, pending the view on the broad global markets, I am watching the area from which we charted the breakout in NFTRH. That would be around 42-44.
Increasingly ugly pictures are showing up in market leaders and followers alike. Here are some leaders and/or items that are strategic to the followers.
Tranny has been diverging this mess for some time now.
SOX held below the 50 day averages and is making a messy pattern.
Bank index has been okay due to rising Treasury yields. It seems to be wondering right now whether the rising yields story might be over bought.
If the Small Caps keep this up they are going to break a very important (and heretofore bullish) support level best seen by weekly charts. Daily…
Once broken, the Biotech index set its sights for lower levels. It’s not there yet.
The Internets took leadership from the Bio’s last week… for about 10 minutes. It was not a good sign when they immediately flopped, now testing support.
I am by no means calling the market cooked. But I am hopeful that finally it can get its healthy correction. With the waning momentum, waning corporate earnings, waning economic data and waning supportive monetary policy (for now), such a correction, if it materializes, could be more than the small garden varieties we have had thus far.
For now, leaders are generally tipping bearish. We’ll just track day to day, week to week to see how it progresses.
In NFTRH, using the China 25 fund FXI and the FXT index, we successfully gauged the coming of the breakout and then attained upside targets. I personally did not take advantage of it but know some subscribers who did.
What I did do, as noted in NFTRH 341, is to take the ridiculous action of leverage shorting China via YANG. That is due to the ETF/index having gotten to target in an over bought condition and starting to hesitate.
Yesterday was not very pleasant for this position. Today is better, as YANG is working its leverage to an 8% gain. This will be a quick trade in all likelihood.
He takes us by the hand and guides us through the particulars of the different kinds of bear markets. This kind of stuff has gone hand in hand with the bull market, which just eats it for breakfast. Still, there is one bearish thing here and that is the comments from readers.
Here are the most recent. One component that needs to be in place for a bear market is for people to have long-since tuned out the perma-bears, and instead to be mocking them.
I found it interesting for several reasons. One is the use of log scale charts and their value in viewing percentage based prices over very long (a Century in this case) periods. I use mostly linear charts because I usually deal in 1 week to 10 year time frames. But Mr. Tobey’s assertion that long-term investors should be interested in percentage performance is a good one.
Secondly, adjustments are made to the market (in this case, the Dow) for ‘inflation’ and ‘deflation’ using the CPI as the denominator. CPI is noisy (e.g. faulty) on shorter time frames (it is not inflation, it is inflation’s effects), but over a century it is what it is after inflation and deflation have long since shaken out into the picture.
Here is his chart of the adjusted Dow. But read the article. It’s quick and to the point.