Saturday, August 28, 2010

S&P 950...NOT SO FAST

The better than expected GDP numbers threw a slight monkey wrench in the trading plan (for you traders out there). I was expecting a gap down open that would break through the 1040 pivot. The plan was to buy into that gap with a stop under the morning intraday low. The market did break slightly below 1040 (1039.70) so in theory if one was quick they could have jumped in right there. I doubt anyone was that quick, so I suspect almost no one caught the exact low. Perfect timing isn’t critical though if this is a daily cycle bottom, as we should have at least 2 to 3 weeks of upside ahead of us. I’m assuming the market doesn’t drop back down to test the lows on next Fridays jobs report.

I really doubt it will. I think the jobs report has probably lost its ability to move the market at this point. Until we start to roll over into the next recession we are probably going to continue to see mildly positive jobs numbers for now. When we start seeing 200,000 and 300,000 jobs being lost again then we can look for the monthly jobs report to start affecting the stock market. Until then I think it’s not going to have much effect on stocks. With that in mind I really doubt the market will be coming back down next week in order to bottom on the employment data.

Now before everyone gets all excited let me point out that today was in fact an outside day and as such we don’t officially have a swing low yet. We can’t have a daily cycle bottom until the market forms a swing low. That being said, today was a 90% up volume day. That is a panic buying day and this late in a daily cycle that usually means smart money has recognized a bottom and is rushing to get back in the market.


I realize almost everyone is now convinced the bull is dead and we’ve started back down in the next leg of the secular bear market. Now maybe we have and maybe we haven’t. I’m reserving judgment until I see the last two of my bear market signs come to pass. Namely the 200 day moving average has to turn down and we must get a Dow theory sell signal (BOTH the industrials and transports must close below the July lows). Neither one of those things has happened yet. Until they do we are in no man’s land. As a matter of fact, according to strict Dow Theory the primary trend is assumed to still be in force until a sell signal is given. Since we obviously don’t have that, and aren’t really even very close to it yet, I’m going to abide by the rules and assume the cyclical bull is still alive.

Next I’m going to point out we don’t even have a confirmed down trend yet. So far the market is still making higher highs and higher lows. That is the definition of an uptrend. In order to reverse that the market would have to break below the July low or it will have to bounce out of this daily cycle bottom, stall out, and then move back below Friday’s low (I’m taking some liberties here and assuming Friday did in fact mark the cycle bottom.)


Now let me show you what no one is seeing. And when no one sees it that makes it all the more likely to play out. Of course we do still have the inverse head and shoulders pattern in play. That one actually has been spotted by a few hopeful bulls, but it’s certainly not mainstream yet like the regular head and shoulders top was and still is.

The real pattern, and one I put a lot more faith in than a head and shoulders top or bottom is the 1-2-3 reversal that is in play.



Notice how the initial rally into the August top broke the down trend line. That was #1. Now we are in the process of #2 testing the lows. As long as today’s bottom holds that test is going to be successful. The final piece in the puzzle is a move above the August highs. If that occurs we will have a confirmed trend reversal and the April highs will then be in jeopardy of being surpassed. I know that seems impossible at this point but I would point out that everyone assumed we were back in a bear market in mid `04 also. The market had been making lower highs and lower lows since March. Needless to say everyone was a bit surprised when the Fed cranked up the printing presses into the elections and the market broke out to new highs. I forget, what is happening this year? Oh that’s right, mid-term elections. Hmm…

There is also a yearly and 3 year cycle low coming due in the dollar (more on that in the dollar section of the report). Suffice it to say there will be plenty of liquidity the next several months.More in the weekend report for subscribers...

23 comments:

  1. Hi,

    I really enjoy reading your blog. If you dont mind I'd like to put your link into mine. Please make a read

    http://smartmoneyvolume.blogspot.com/

    and let me know if you agree.

    Thanks a lot!

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  2. Hey toby..... U da man!

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  3. Toby , this was a GREAT report for subscribers (only about 1/3 is shown here). Details on Gold, Hui , Gdx , and Dollar were excellent.
    Any opinion on your GDX chart wkly...showing volumes...did you notice that the Aug 2010 part of that chart actually shows it climbing with less than 1/2 the volume it had a previous time it climbed up to this point in april/may 2010 and Nov 2009. See a 1yr wkly chart. Thx Robert

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  4. The market is waiting to see if the brekaout is going to occur this time.

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  5. Thanks...That sounds reasonable, but my trading is affected by volume analysis...break outs on lighter volume fail almost always , and DO retest all of the time. Maybe after Labor day the volumes will pick up, summer vacation will be over... Your report was great , convincing..thx again, Robert

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  6. One thing missing on the bullish take is the remarkable collapse of sentiment as shown in almost all of the surveys. We are set up for not just an up market but a commodity mania.

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  7. Guys... Just buy gold and silver. Don't worry about all the tecnicals. Think gold and hold. Be asleep at the switch and let's ride this thing not only for profits, but mainly for our survival! Physical metals for the base position and the mining stocks for profit. Think 2000 on the HUI.

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  8. in reviewing your terminology , t4 'crawling'...could that be whats occuring with the dollar for the past few days? Does it imply anything to you if it is with regards to gold? The assumption would be that it would break upward and resume its climb. thanks

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  9. It is possible although I've found the downside break to be a lot more reliable than an upside.

    The fact that the dollar is now entering the timing band for a cycle low doesn't bode well for a sustained rally at this point.

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  10. Toby,

    The arguements sound great, but there are just as many that point to a bigger move down first. So it is good to understand both camps and have tight stops whichever direction you are trading. I think above 1080 is all clear, but below 1050 is looking 900 to 950 straight in the face.

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  11. Luckily for me I don't waste time or capital trading the stock market :)

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  12. That says quite a bit...like a broker that doesn't invest in stocks, but other asset classes.

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  13. I like the safety net of a secualr bull market. The only place that exists in in the precious metals market. So I'll stick to that for the time being.

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  14. Totally agree, that is the only real safe place. If you think 1040 will hold, right here is the place to buy the S&P.

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  15. Shouldn't there be follow through to the upside if we were going up, after the big "breakout" on Friday.

    Thanks

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  16. Actually the very short term calls for some minor weakness after the Friday reversal but the next three weeks should be positive.

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  17. You had thought liquidity from FED (if any) would help the equity market, so far, it's helped the bond market

    It's good you do not play stocks, being wrong (So far) on intermediate term money flow

    It's good you play goldies, because you are right on longer term tred of money flow

    It's perhaps a miss you do not play bonds, because that was the very obvious intended target of the shorter trend of money flow -- that was the free money Bernanke almost promised in August

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  18. Stocks have gone from 666 to 1049. I would have to think the liquidity has helped stocks. Now whether or not stocks have begun another leg down in a bear market hasn't been decided yet. I would need to see a Dow Theory sell signal before I could definitively say yes they have. Until that happens stocks are just in no man's land.

    But stocks are due to move out of a daily cycle bottom. I tend to belive that bottom came on Friday but there's nothing that says it couldn't drag out till the jobs report this Friday. Either way I just have no desire to get tangled up in the stock market.

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  19. the move from 666 up was QE1 and it ended in April

    That move is finito.

    Now, since April

    many expected liquidity from the FED to bid stocks up, so far, they have been wrong, money has ignored equity and has gone to bonds (big chunk), and gold (smaller chunk)

    Bernanke told the world what he wanted to do, and smart money went to bond, as simple as that, short term maybe, but we'll know only later

    Gold, of course is a beneficiary of all the items on Bernanke's manifesto of hi battle plan against price depreciation

    The fact that a stock cycle may or may not be due matters little, where money goes matters more, a cycle low may produce only a left translated limp bounce of 30-40 points and fizzle

    Some other catalyst than just the expectation for a cycle low is needed to power equities higher

    Hey, it may happen tomorrow and coincide with your cycle and Boom!

    But just the cycle low being expected is not enough

    You always say, stocks just don't move because of some line on the chart, and right you are

    I am saying, stocks just don't move because of some cycle being due

    More is needed, money is needed

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  20. Well of course stocks can rally 30 points and fizzle I just have no way of knowing before hand. If they do and then drop below the July lows I'm going to call the bear market.

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  21. Toby,

    Did you see where the Sept contract for gold spiked to 3401.50 before closing at 1237.10?

    Do you think is was a signal opposite the DOW flash crash of a few months ago, or just a some glitch?

    http://finance.yahoo.com/q;_ylt=Aj3ahJxBU_ACahwJ6fRGsE27YWsA;_ylu=X3oDMTE4MnJrOW9mBHBvcwMxMQRzZWMDbWFya2V0U3VtbWFyeUluZGljZXMEc2xrA2dvbGQ-?s=GCU10.CMX


    direct link: http://i38.tinypic.com/2nw0h9y.png

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  22. Just a bad print.

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  23. What happened to my post? What if ben drops money in peoples' back yards and they use it to pay down debt and then hide the rest for later on? Social mood is the issue, and Ben's PhD will be revoked when we realize that Japan printed Yen 'til the cows came home and still got deflation. Liquidation of malinvestment must occur as all of the bad decisions were bad and cannot be made good through hyperinflation. Keynes was wrong and Von Mises was right. I've owned gold from '03, and those of us from then can withstand a drop back to $900 or so. Can you?

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