IOUSA 30 Minute Version

United States makes mistakes of Soviet Union

"The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the "deficit spending" policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.

Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They are and work and take care of themselves. Notwithstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the "orthodox" economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the "miracle ... of turning a stone into bread," but the not at all miraculous procedure of eating the seed corn"

Ludwig von Mises 1950

Learn the truth of economics at www.mises.org

$SPX Bear Wedge - Managing another bear leg

Last I wrote I was looking for a counter trend rally up to the declining 30 Week Moving Average and/or the 200 day Moving Average. As you can see from the Weekly chart posted above, this has happened. The bounce today keeps the uptrend in tact so all is bullish but the structure is now coming into focus to give us signals IF the bear market wants to return. This is not a call for a bearish move, just pointing out the structure I am watching if the transition back into a bearish market comes to pass.

Chart above is a 2 year daily chart. This uptrend appears to be forming a bearish wedge, slightly cone shaped support and resistance running counter to the longer term trend. A break below the bottom support line would signal a resumption of the longer term trend. You can see there is room in there for the SPX to make it up to the 200 day. With the bounce today it looks like a battle for that area may be forthcoming. I made a prediction at the meeting last Thursday we would bounce off the support line of the wedge, move back close to or above the last high, just enough to get everyone bullish, and that would be the peak before the next harrowing leg of the bear market started. We'll see about that, but now it is in print.

This is a closer view of the wedge. Ooooo... ahhhh. Thought I had something to say here when I put this picture in there. Guess not.

Here is the chart without the lines of the wedge and only with the 30/50/200 SMA's. If this uptrend breaks, the structure aside from the wedge for managing the downturn will be the C pattern short play. The bounce today set up another higher low that will match up roughly with the 30 day MA.

Entries on the C pattern short according to my rules
1. Break of the last higher low
2. Break of the 30 day
3. Break of the 50 day

As each of these break I would be getting more short. There is enough room between the 30 day and the 50 day that a play can be had between them. We could still just break down to the 50 day and hang there for a while or find support and put in a real long term bottom. We would probably see more successful C pattern shorts in the market before this actually happened in the SPX. Still some development left to go but it is there if it wants it.

So... the bull rally is still moving on, but the market has been kind enough to provide us with structure to watch in the event that this rally exhausts itself. Another bullish development today was the $NDX bouncing off the 200 day rather strongly. That will be a good marker to watch as well if it ends up breaking in the future and that break corresponds to a C pattern trigger in the $SPX. But, to say again, until any of these things happen... DJIA 20k baby!! Wooohoo!! haha.

So Far So Good.... Now "Buy the Dips" ??

OK... the first phase of the Bear Market Rally theory has gone very well! Some excellent action out there that makes me think it may actually continue.... but of course pullbacks should be expected. In the chart above you can see we cleared the first benchmark of the 50 day MA. We went back and touched it today and it acted as support. But we are right at the resistance of the downtrend line forming the descending triangle. At this point, the resistance is clear. It would be natural to see some tests of support which, the higher it holds, the more bullish it would be. Futures are down a touch as I write this. I will be watching the 50 day, that rising 8 EMA and the price support around 1325-1330 on a pullback to see if the bullishness emerges again. Remember that 5 minute pattern... the inverse head and shoulders? On any pullback, seeing that again on the would be exciting. With even more bullish confirmations coming along this week, I want to maintain this posture shift and slowly build out a "buy the dips" mentaility as opposed to the "sell the rallies" mentality of the past few months. We are still very close to where this can be proven wrong and the risk is lowest and hopefully for everyone some nice profits already in the bank. If we can get through a pullback and to a higher high, there will be less wishy washyness in the outlook.

We are at resistance and still in an intermediate and long term downtrend even though the intermediate term trend may be changing. For this reason I peeled back some profits today and bought a few puts on SPY just in case. The next few days are going to be very exciting!! If things hold up generally well, look for those bull flags and pullbacks to support for buying in the next leg up above this resistance. If resistances broken this week fail to hold as new support... well see you on the other side. I will try to post some bearish plays on the message board before the open. Things might get scary on a pullback here but as long as supports are holding, it is OK. There is much evidence that accumulation is taking place.... such as the chart below....


Here is the $IRX... 3 month treasury bill... where everyone goes to hide their money from the big bad bears. Finally the relief rally in yield on Monday as we rallied in stocks. This is people putting their money back to work, fear lifting at least in the near term of the credit crunch. Thus it is further confirmation that we may have something here that will last a while. Note that no other rally attempt in stocks recently has seen this.

And here are the timeframes of the SPX... 5 min, hourly, daily and weekly. This clearly shows how this rally is countertrend. Short term timeframes are rising, longer term falling. The short term timeframes build out into the longer term timeframes so as long as the hourly keeps trending up, eventually and uptrend will appear on the daily. The hourly is now trending up nicely and can support a decline of 30 points or so while maintaining an uptrend. Now that the hourly is trending it is the dominant near term structure. The 5 minute takes a bit of a back seat.... it is now more important when the 5 minute turns back up to move with the hourly than down against it unless we get major extension in the hourly. The turns down in the 5 minute are more likely to be supported close by until weakness in the hourly emerges. Hope that makes sense. I will expand on it at some point.

Perhaps soon I can get this blog to its original intent. To find the big opportunities in the market and manage them as they progress. I can't help but think if I just could have maintained it last summer everyone reading it would have gotten rich, rich, rich, on that gold run. But alas... trying to start the blog exposed my main problem... professionalism, or the lack thereof. Maybe soon.

Good luck

Bear Market Rally vs. Bull Market Breakout

Here we have the last three bear markets. These are weekly charts with....
10 week EMA - Blue
30 week SMA - Red
40 week EMA - Green

Easy point here is that any bounce off the low here can not be assumed to be the end of the bear market. We are below the declining 30 and 40 week MA's which is to many the definition of a bear market. Investools coach Jonathan Thatcher puts it in the easiest words....

10 week above the 40 week.... bullish
10 week below the 40 week.... bearish

I am a fan of Stan Weinstein's stage analysis and use of the 30 week MA.

1998 Bear Market was wickedly quick and made a big double bottom on the daily. The strength of the 1990's bull market did not even allow the bear market to trend below the MA's. Notice as the double bottom was confirmed, the 10 week was above the 40 week and they were both rising.... bear market over. Of course the bear market had "bottomed" weeks earlier with a gigantic hammer at daily support. But until that confirmation it could not be seen as anything but a bear market rally.

2000-2003 Bear Market was long and tough. Trended nicely below the MA's for years. The current 2008 position of price and the MA's clearly looks similar to this action as we are trending below the declining MA's. Notice in the 2000-03 Bear the counter trend, bear market rallies were common up to the 30/40 week MA's. This is the type of action that I would anticipate as "best case" for us now. Just a bear market rally.

As tempting as it may be if we do progress into a nice rally to call the bear market over, these charts should be enough to show the futility of the task. There is no way to know so there is no reason to waste brain space thinking about it. Until the "10 week is above the 40 week" it is just a bear market rally. Even then, as with my 5 minute trading, I'd want to see a higher low and higher high above the MA's lest it just get above and roll back down into another bear leg.

Given the current position, I would assume that the eventual breakout into a new bull market will look more like the 2003 breakout than the 1998 continuation of the mega rally of the 1990's. We will see what happens but the birth of a new bull market is just that.... its birth. Even though it is off the low, things are just then getting started. We should also see entire sectors make this weekly turn into a bull market BEFORE the market does. This is not yet present and we are in fact still seeing long term break downs.

So if we do rally the name of the game is Bear Market Rally which keeps the posture situated with the long term trend; There is no shock when the bear market reasserts itself. When a new bull market is born, this too can be recognized so when the "we've come too far too fast" crowd comes out, they can be laughed at as the charts will show us back in bull market bliss. These jokers were out in force in 2003. I was not trading in 1998 but from the looks of that chart I'd have to assume they were going wild! lol.

Letting the weekly chart do the thinking for me has served me well.

Jim

Bulls - Time To Rise and Shine! and Thursday Intraday

Greetings,

This is a continuation of Wednesday's post "Timeframes Today"
http://finance.groups.yahoo.com/group/NJ_INVESTools_Support_Group/message/2160
with trades from Thursday and further evidence of an impending posture shift in the market. Something happened on Thursday that caused me a losing trade because I have not seen it since the bear market started. A classic bull market fakeout pattern that I was not looking for since we are in a bear market.

Posture coming into Thursday
5 Min: Bearish
Hourly: Neutral
Daily: Intermediate Bearish/ Short Term Neutral
Weekly: Bearish

Click the Charts to see them larger

-Chart Above: This is the futures contract showing from Noon on Tuesday to about Noon on Thursday on the 5 minute chart. Coming into Thursday the hourly had gone Neutral as the price was not reacting to the MA's (trending indicators) and the price range was clearly choppy sideways.

Point A: Thursday opens lower and price retreats back to the low of the Fed volatility, finds support and bounces. This bounce turns rather strong.

Point B: I won't go too much into this (Frank, this is what caused me to want to break out some intraday Webex communications). As my position sizes have grown, waiting around for the turns is less acceptable. So coming off support or resistance or if bounces or declines feel strong... I hate to use the word "feel" but you can see how the bounce produced a large white stick, the speed of the market also communicates the "feel".... I have taken to watching the 8 ema for support on a retrace. See how it is rising at point B? There has to be at least one full 5 minute candle that does not make a higher high to qualify as a minimal "pullback" to the 8 ema, support there causes me to hedge remaining puts as long as price is captured by the rising 8 EMA. Similar to price being below the declining 8 ema, if price here does not fall below the rising 8 ema, what is price going to do? It is going to rise! So I want to recognize the strength of the move, see the support and hedge as long as the 8 ema is dragging price up through the other MA's while maintaing my position with the overall trend. Don't try this until you have experience at recognizing a fast market or you may be chopped to bits. I don't have a sure thing exit on the hedge, having used the 8 ema on a 5 minute close, the 8 ema intra candle, and certainly if it leads price all the way to a blasting move above all the MA's it comes off as the retest of the MA's is anticipated which will decide the fate of the actual position. Basically rolling with the punches by "feel," the distance we have moved, and expectations on the day. Sometimes the market is nice to me, sometimes not. So just wanted to mention this little game and use of the MA's.

Point C: OK, so here is the 5 minute "turn" trade on the day. There were oh so many reasons NOT to take this trade, but I did since the volatility has been so nice lately. A "turn" is a higher low and higher high above the rising MA's. At Point C we are above the MA's which are trying to rise, the 50 SMA is still declining however, some sloppiness here as the order of the MA's is all chopped up (hint). Price had made a high, had a light pullback and hit a new high clearing 1315.50. I bought at 1316. I was shooting off trades like a mad man Thursday morning so I just took it despite the little man on my shoulder laughing at me, I'll tell you what he was saying in a minute.

Point D: Trade goes sour basically right away. Choices of stops... a decline back below 1315, low of the breakout candle at 1313.25, MA's if they are reasonable, market action. In this case I was letting it go more than just 1315 so market action would give it to me. At Point D you can see the little doji form trying to show balance/support. Notice again the declining 8 period EMA. It is decision time. This candle can now dictate the exit on a move below or, if conditions are right, additional entry. Don't want to mess with it if it fails to rise off this doji for the same reason... the 8 ema is declining, it price can't get above, what is price going to do? Decline! So I am taken out at 1312 for a nice 4 point drubbing. The man on my shoulder now rolling around laughing hysterically.

Reasons NOT to take this trade:
1. The hourly was neutral and not at an extreme in the neutral range. Using MA's a sideways market will tear you to shreds. Not to mention price was in the middle of the range not near any daily supports.
2. The bounce off the low was pretty large and had not experienced a decent shakeout for any kind of solid higher low after the small one at Point B.
3. It was going into lunch time. You should go to lunch, not enter daytrades says the man on my shoulder. Volatility generally contracts in the middle of the day, lack of volatility is bad for business on the 5 minute chart! - This goes for days and weeks where the action gets very small! Watch the hourly for a return of volatility when this happens. The 5 minute does not work every day. We have just been in a great atmosphere lately.

Moving on....

Chart Above:

This is still the 5 minute chart and shows the rest of the day on Thursday. I layed down for a nap shortly after that last trade and the nap turned into a 7 hour sleep so I did not trade this but this entire pattern is a classic and one I have not seen in a long time. Had I been awake I would have recouped that 4 point loss and added on another 20 or so in profits. This market is incredible!

OK... you know that since the big rise the day of the Fed meeting I have been saying may have been a game changer, a shift into a bear market rally, if we can get some confirmation. The last decline on the BSC news saw isolated declines with many stocks holding up, many stocks broke out on the Fed day rally. Our paper trading of the green arrow system now throwing off trades for the first time in months is also a hint at this change. So this thought is still with me as I'm trading intraday, looking for more hints as we ping pong around, especially in the viscinity of the mid poiont of the Fed rally day.

My trade at Ponits C and D failed and the market went into a little lunch time consolidation. Clearly sideways on the 5 minute which is still downtrending on the intermediate term with the failue of the "turn". (Note that I see short term and intermediate term trends on a 5 minute chart as well... all timeframes can be broken down like that). At this point the hourly is still neutral but the price is hanging around above the MA's which are properly positioned (8 over the 20 over the 30 over the 50 ema's over the 50 sma) for advance. What happens here is something I have not see in months.

Point E: Looks like the 5 minute is going to roll back down. Must be those hedgy margin calls again. hehe. Look at this though.... it finds support at a low put in late in the day on Wednesday, which is also roughly the mid point of the big candle from the surge I was "feeling" earlier in the day. From here it begins to rise. This is a "stop the presses" moment for me (not that I was awake). Think back to eons ago when the market was uptrending and we were in bull market bliss. This structure here is exactly what I would look to play on the 5 minute on pullbacks to support. Say the market had pulled in for a couple of days and we were looking for the turn back up to continue the uptrend. This structure is how it looked much of the time so I would anticipate it. For all the reasons my trade at Points C/D failed, I would NOT take that trade in the bull market but wait for this test of supports. That area at C/D is a known fakeout area that is easy to avoid as long as the mind is properly situated to the current market posture. Strong bounce off the lows, fakeout play, retrace to shake people out, find support, hard rally. That is how it went again and again and again. I have not seen this in months!! So, in a bull market, I'd be looking to BUY off of the candle at Point E as the aggressive entry with a stop just below. Remember there are uptrending supports in a bull market so I would also know where we were in relation to daily supports. If not in the mood for the aggressive entry, wait for further entries if an uptrend comes.

Point F: This is a little different than I have been sharing but it is a different environment in a bull market. We have seen the support at Point E. now we just need higher highs to get buying. Notice at Point F it is kind enough to bounce off the now RISING 50 sma? Oh baby! Juices are flowing now! hehe. Now you have a sequence of highs and they are ALL available for entry as the market moves up through them all. Obviously the earlier ones you take the more you make and the less risk there is. But there is an entery as late as 2:30pm when the price moves over my failed trade at Point C, retests and moves to another higher high. Got a late day bull flag there as well. Clearly once price moved off the 50 SMA and started moving through price resistance the 5 minute is turned and remember the hourly MA's are in uptrending form at this point even if the overall situation there is sideways. What creatres the overall bullish tilt to the 5 minute is the large rally early on into a fakeout move, the shakeout to test support and the continued uptrend. Once the support is successfully tested it is assumed the uptrend will come until it proves it won't. Wow! It has been a long friggin time!

A reason this is exciting is that this is more evidence to me that the character of this market is changing. This is an ACCUMULATION pattern. Yes, you could say "it was going into a holiday, blah blah blah" but I really don't care. This is just once piece of evidence in a bulding body of evidence and it is in the charts, not in my head. The bottoming patterns I have talked about before this, especially when looking for a huge reversal during a cascading capitulation low, are really short coving rallies which is why they are so quick to develop. This is a common structure at important points in UP trends as opposed to the slingshot turns from downtrends. This is taking its time with the smoothness of an orderly bullish phase, it is accumulation. Mmmmm. Could this be the first of many?

More on the bullish developments later. First a pop quiz. Look at this chart above again. Remove with your eyes the lines and the MA's. What is the pattern?

Chart Below: Hopefully you can not see it yet as it gives away the answer to the quiz....

This is again the 5 minute chart from Wednesday into Thursday. This time without anything on the chart except price. This is the answer to the quiz. Oooooo... pretty. See it and turn off the TV. Play this and by the time you hear Maria Bartoromo saying "Hey there is a rally going on" you will be laughing at her and saying "I know Maria, I'm up 15 points in the e-mini's Weeehahaha" (If you had the TV on for some reason that is... hehehe).

The bullish structure I was talking about above does not ALWAYS take the form of an inverse head and shoulders bottom. In this case it just so happens to be a beauty. Many times the left side of the pattern is not a shoulder but just random action and the rest of the pattern may be more sloppy. The support can come from a low the same day or the MA's. In essence it is an "intermedaite term" higher low on the 5 minute chart but in order to see it in real time I have to see it as described above... mostly to keep the risk within reason and because I can't see what is going to happen, only what IS happening then in real time. But when it is an inverse head and shoulders, it is all the better to be aware of its formation even before it is on the chart. In fact, I had traded this pattern for moths before one night after a meeting I was at the Edison diner with Matthew trying to describe this structure. I was writing it out on the back of a placemat while talking about it. It was not until I wrote it out and Matthew said "its an inverse head and shoulders" that I even realized thats what it was. So it is not always so obvious but it does go to show that price patterns are nothing more than "visual representations of support and resistance" and not whatever we call them. Those are only names we give them after we can see them. On a 5 minute chart real time actions are key and things morph quickly.

The bullish arguement for a bear market rally continued....

Starting with the things we noted at the Omega meeting a week and a half ago, some bullish indications have been appearing. Since then we got the BSC collapse that failed to send the $VIX to higher highs and made a hammer on the daily at support. Some stocks are breaking out and others are not falling when the market falls but are instead holding support. Momentum stocks are emerging. Supposedly the world is falling apart yet the market is not at new lows. Divergences are in the indicators and are leading to bullish breakouts not failing into new breakdowns. Our paper trading is triggering long plays. I'm getting faked out intraday by bull market patterns. Even retail stocks and real estate stocks are making higher lows and trying for higher highs. Things are changing internally. The market is set up for that day to come soon where everyone is "shocked" that "all of a sudden" the market is moving higher. Recognizing these bullish hints is the first step in not being shocked... at least not shocked at market action if still shocked that supposed professionals are shocked. This way if the bullishness confirms, you are ready to make $$ from the start instead of trying to capture gains later on. This would be a BEAR MARKET RALLY meaning if you get bullish too late you run the risk of getting bullish just as the market rolls over into the next leg of the bear market and then you will be "shocked" again. lol. If you are also seeing the bullish things I am seeing, don't try to guess if it will resolve bullish or not. Set benchmarks and as each are achieved go with them and increase the exposure.... meaning when you see a long trade, take it until the market says you are wrong.

That is the essence of where my posture has changed. For the past 5 months I have looked at the market as needing to prove to me that it is bullish. It never does because it isn't no matter how hard I look for bullish things. There remains PLENTY of bearish evidence, don't get me wrong. Our group posture is neutral-bearish. I'm still excited that copper stocks may be about to plunge into the crapper. But there is now all this bullish evidence out there as well and bear market rallies are hard and strong. It would just be a relief rally and gigantic short squeeze. Once it gets going it has nothing to do with fundamentals and everything to do with market dynamics. When everyone is short and all the hedge funds have taken it up the (***), there will be a rally even if in 3 months the world will end in a hideous financial catastrophe.

So over the past few weeks the market has proven to me it MIGHT be bullish and we now sit on the cusp. If we erupt up through the 50 day the entire atmosphere in the market will change in about 10 seconds but it has been building up for a while. Suddenly everyone on TV will be saying "The stimulous checks are coming" "The second half is going to be great" "The Fed won!" "Housing has bottomed" "Haha, I told you to buy at the bottom" "I bought the bottom, I'm so smart" "Life is great" "Geoge Bush saved us" "Never bet against America" "The Bear Market is over"

For now we are in a clear range, actually two ranges on SPX. One is 1275-1325ish and the other is 1325ish to 1400ish. We are right in the middle. The cusp. At this point the market has to prove to me it is going to go down. I take this position because the bullish signals are incresing in frequency and the support to prove the bullish thesis wrong or at least delayed again... the low of the past 2 days... is very close by. The cost of inaction is now more on the upside than the downside. My goodness, I feel like I'm making the same arguement as the guy I said has brian damage for saying figure the valuation on the brokers and wait to buy there as they fall because upside is limited. In any case, if the bullish thing does not play out it will be quick to die. Waiting too long to get bullish will make it difficult to participate without increasing risk too much so I want to at least be ready to accept the bullish turn.

How big the Bear Market rally? A good size rally will take up up to meet the 150 or 200 day MA's over the next month or two or more. If we do get above the 50 day MA on the SPX, there is one developing bearish continuation pattern which could chop the rally off early. This is a descending triangle pattern that would form if it quickly finds resistance and bounces back down. See attached chart "$SPX Daily March 20." This is something to watch and if we get above the benchmark of the cusp upon which we currently sit, this is the next benchmark as well as the 50 day. A support benchmark if we decline on Monday would be S-1 at the mid point of Thursdays candle. S-3 on that candle holds up this whole counter trend theory in the short term.

The $VIX in all this... it failed to hit a new high the day BSC sent us to a new intraday low. On Thursday it found resistance at that big 30 level and closed at 26.62. The long term uptrending line that has supported this bear market again and again is around 22.50 and rising. You may see the $VIX as in a gigantic ascending triangle which goes nicely with the descending triangle potenital on the $SPX. Both coming to a head and they will both break out of these lines whether they like it or not. So if the $SPX breaks above the downtrending line of the triangle and $VIX breaks its uptrend that would be the final confirmation of the bear market rally in my eyes. But, by the time that happens we would be well under way. Obviously the opposite is also true on a breakdown to new lows. $VIX chart attached.

So, maybe I am wrong to see these bullish things but there is no doubt bullish action IS occuring as can be seen in my portfolio which remains more diverified between longs and shorts than ever before. Maybe a little less long ironically due to the gold drubbing but plenty of candidates out there. The risk of taking this bullish position is clearly defined and very small so I feel good taking it now that the bullish confirmations are coming more frequently than the bearish.

I will end this post here. Perhaps later I will summarize the bullish things without the rambling :-) Hope you enjoyed.

Jim