Money Flow for September Week 4 and Q3

Further to my last weekly market update, this week's update will look at:

• Weekly charts and graphs of the 6 Major Indices and 9 Major Sectors
• Quarterly charts of the 4 Major Indices
• Daily charts of the 4 E-mini Futures Indices
• 2 Daily Volatility Ratio charts of the S&P 500 and Russell 2000 Indices
• Daily charts and a Weekly graph of Commodities
• Daily charts and a Weekly graph of the Major Currencies
• a Weekly chart of 30-Year Bonds

As can be seen from the following Weekly charts and 1-Week percentages gained/lossed graph of the 6 Major Indices, there was a second week in a row of profit-taking on all of them, except the Dow Utilities. The Nasdaq 100 and Russell 2000 were hit the hardest...two to watch to see if they lead the way down on any further weakness going forward into October.

As can be seen from the following Weekly charts and 1-Week graph of the 9 Major Sectors, profit-taking occurred in all of them, except in Utilities. The largest losses occurred in Technology, Materials, Energy, Consumer Discretionary, and Financials. It was largely a "risk-off" week. As most of the Sectors are in overbought territory, we may see further weakness going into October. Otherwise, we may see a return to the "risk-on" play...which would be confirmed by renewed buying in the Nasdaq 100 and Russell 2000 Indices.

Each candle on the charts below of the 4 Major Indices represents a Yearly 1/4. The current candle closed on Friday and represents Q3. They all appear to have formed a bullish engulfing candle; however, the only one that has a true one is the Nasdaq 100 Index. The only Index that didn't close higher than the prior candle's high is the Russell 2000. All indices have made a higher high for 2012. The Russell 2000 Index is forming a triple-top with the highs of 2007 and 2011 and, thus, holds the biggest potential of a bearish pullback, or even, a correction, from current levels...again, the one to watch for signs of major weakness and rising volatility. Otherwise, Q3's candle action and close were very bullish and signal a possible continuation of the uptrend. However, this trend is aging and, along with it, the risk of a major pullback/correction continues to grow.

Drawn on each of the Daily charts of the 4 E-mini Futures Indices is a channel (which I think of as a "churn-nel" due to its slow, choppy/whippy grind higher from the June lows of this year). I've also included a more recent trendline (yellow) since price has been compressing within this overall uptrend since July and hasn't reached the lower channel since then.

Both the YM and ES are hugging the channel "mean," the NQ has, once again, bounced off the upper level of its channel, and the TF is trading back inside its channel. The only one that hasn't broken and closed below its recent trendline is the YM...the one to watch is see if weakness enters the Dow 30 stocks. Volumes are increasing on all of them, which is likely signalling either a resumption of the uptrend, or a reversal. The channel "mean" and recent trendline hold the key for direction for the YM & ES, and the top of the channel holds the key for the NQ & TF. Inasmuch as my very short-term RSI indicator is not yet in overbought territory (a reading of 98 is overbought), we may see another day (or several) trade higher before we see a reversal to, potentially, the lower channel.

The two Daily volatility ratio charts below represent price movement of the S&P 500 and Russell 2000 Indices compared with their respective Volatility Index. A move up means that volatility is falling, and to what degree, and a move down means that volatility is rising, and to what degree.

Price on both the SPX:VIX and RUT:RVX ratio charts remains above the bottom of the lower uptrending channel (green) and is stuck in a recent sideways range from August. The Momentum indicator is back above the zero level, after dipping below two days ago. I'm watching to see if price closes and holds below this channel and if the MOM dips and holds below zero. This would signal that volatility is on the increase and would confirm that the recent weakness that we've seen the past couple of weeks is continuing, along with the potential for the 4 E-mini Futures Indices to reach the lower part of the above-mentioned "churn-nel."

The Daily charts and 1-Week graph below of the Commodity and Agriculture ETFs (DBC and DBA), Gold, Oil, Copper, and Silver show that prices are, generally, elevated on most of them.  Agriculture and Oil have seen a minor pullback over the past several weeks. DBA, Oil, and Copper experienced losses this past week.

The Daily charts and 1-Week graph below of the Major Currencies show that, along with the "risk-off" trade, money flowed back into the U.S. $ (and, to a lesser extent, into the Yen) and out of the others. The U.S. $ looks rather oversold at this point, whereas the others look overbought, in particular, the Canadian $...a warning that we could see further weakness to come in equities and commodities.

The final chart is a Weekly of the 30-Year Bonds. While there has been some profit-taking occurring since June, price has rallied at a major support level, which, if broken, could signal that a major push is on in equities, and, possibly, commodities. A meaningful flow of money out of the U.S. $ would confirm this scenario.

In conclusion, there are a variety of timeframes, as well as a couple of Volatility Ratios, to be used as tools to, potentially, give us clues on the strength/weakness of the Major Indices and the "risk-on" vs. "risk-off" sentiment in the coming days/weeks. We also have the above Commodities, Currencies, and Bonds to use as confirmations. It would seem that, generally, the momentum still favours the upside, but the risk of a pullback/correction grows the longer that continues, particularly if weak economic data persists.

Several questions that one may ask that aren't related to technical analysis, but which also hold the power to move/influence the markets, are:

1. Will the equity (and commodity) markets continue to shrug off weak data, which is showing a slowdown in economic conditions (with declining GDPs), not only in the U.S., but also much of the rest of the world, and push higher at these current 5-Year highs?
2. Will these markets continue to push higher in support of the upcoming U.S. elections in November and in the face of the enactment of the Fiscal Cliff policies?
3. How much risk are the markets willing to take on from now until the end of the year and at what cost?
4. How will markets react to Q3 earnings that are coming up in October?
5. Which countries/regions are the wild-cards with respect to the first three questions?...my guess is China, Europe, and the Middle East.

With these questions in mind (and probably a lot more), I think that volatility will definitely increase before the year is finished, and it could be sooner rather than later. That's why I'll be watching the above technical tools for clues.

Enjoy your weekend and good luck next week!

Chigago PMI Drops Below Zero

Data released today shows that the Chicago PMI dropped below zero for the first time since 2009 for the month of September. It's a "leading indicator of economic health...purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy." A drop below zero signals contraction.

This is just another confirmation of slowing demand. Surely the pressure grows for the politicians to work together to assist the Fed's attempts to shore up a declining economy. But, unfortunately, I don't see any evidence of the will to do so before it's too late to, potentially, avert a recession. I don't believe that the Fed's monetary actions, alone, to prop up the stock markets will accomplish that scenario.

YM, ES, NQ & TF Channel Update on Daily Timeframe

The Daily charts below show that the YM and ES are hugging the channel "mean," the NQ has, once again, bounced off the upper level of its channel, and the TF is trading back inside its channel. Volumes are increasing, which are likely signalling either a resumption of the uptrend, or a reversal. Inasmuch as my very short-term RSI indicator is not yet in overbought territory (a reading of 98 is overbought), we may see another day (or several) trade higher before we see a reversal to, potentially, the lower channel.

A Trading Hazard of Being in a State of "Before-My-Time"

Today's BC comic strip reminded me of a trading hazard...one of being in a state of "Before-My-Time." As a daytrader, being able to foresee setups and trading them prematurely without confirmation of high probability of success can, more often than not, lead me to a trading failure.

That has been, and continues to be, one of my challenges which I'm constantly working on to refine and perfect...the challenge of interpreting data in real-time action (includes news-related data) and trading it without being too early (or too late)...so I continue the search for the "solid middle-ground entry" (the "optimal level in between too early and too late").

The structure around such a middle-ground entry has to be built on:

1. my method
2. my real-time observations
3. my forecast
4. my upside and downside probabilities of success (minimum ratio of 2x +'s to -'s for each)
5. my risk vs. reward assessment (minimum ratio of 1:2 to tie in with #4)
6. my trading platform and order method used to enter a trade to achieve the best entry price
7. my entry execution (my level of commitment and confidence ratio needs to match #4 & 5) 
8. my trade management skills in real-time assessment of the trade's progress to target (includes monitoring or adjusting, but never increasing, my stop-loss)
9. my recording of the trade in my Trading Journal, which includes my reasons for entry, what went right or wrong, what I could have done differently,  my net profit/loss, etc.
10. my enjoyment of the rewards! (the best part of all!)

Without the benefit of this solid structure being in place on every trade I enter, my potential profits, and, worse still, my capital, are in jeopardy, along with my ability to effectively monitor such a poor trade because of an increase in anxiety.

Since every price point contains a success probability, it's up to me to figure out whether it fits in with my trading plan. As world-renowned Psychologist, Dr. Robert Anthony, has said, "It's not that you'll believe it when you see it...it's that you'll see it when you believe it." When I'm "in flow" with myself, generally, I can then be more comfortable with being "in flow" with the markets and am more open to a correct interpretation of what they're telling me. Each one of us has the ability to know what we need to know at any given time and if I don't believe that of myself, I'll miss the signals that are given freely to me and the answers that I'm looking for. If I keep getting the same results in my trading, it's because I keep making low-probability-of-success trades...it's my job to figure out where and when it's a high(er) probability and also when it becomes a lower probability because of time decay. Like a trend in trading (up, down, or sideways), all things age and begin to sag, wear out, and lose their appeal...once that's been recognized and begins to accelerate (with some sort of confirmation), this seems to be the optimal time for entry. It's still possible, however, to trade before then, but I have to be prepared to accept the consequences, less favourable as they may be, and consider the costs to me in the process.

As an aside, and going off topic for a moment, I've discovered that one of the perks of growing older has been the discovery and accumulation of knowledge along the way...the trick is, trying to remember it! (The truth is, that's the main reason I've kept a Trading Journal, and then started Blogging, as well. I'm happy to add that other unanticipated benefits of Journaling and Blogging have popped up along the way!)

The quest continues...the prospect of the rewards (in whatever form they, ultimately, appear) keeps me going...

The Fed Can't Save the GDP Numbers

Data released today shows that the Q2 Final GDP fell short of meeting expectations as it came in at 1.3% versus 1.7%.

The graph below shows that it's generally been in decline from its peak in December 2003. For the past three years, it's been well below the average seen from 2004 to 2008...proof that the Fed has kept the markets artificially inflated since they are currently trading back up at 2008 levels, or much higher as is the case in the Nasdaq 100 Index, without the fundamentals to support current prices or continued growth expectations at the same pace, particularly without the assistance of joint political economic efforts/policies, as has been the case to date.

Precisely, how the Fed's latest QE program of buying Mortgage-Backed Securities will help this situation any time soon, if at all, leaves me baffled and wondering where the markets are headed.

 

 

 

Durable Goods Orders plunged dramatically from 3.3% to -13.2%, while Core Durable Goods Orders dropped from -1.3% to -1.6%, as shown on the graphs below...data which confirms a slowing of demand, not an expansion.

 

***It seems fitting that this data is reported in this, my 666th blog post!



Major Indices - Monthly/Weekly/Daily Cycles

The Monthly, Weekly, and Daily Stochastics cycles are shown on the charts below of the 6 Major Indices. Also shown on each chart are Bollinger Bands, and the 50 (red) and 200 (pink) smas.

On a Monthly timeframe, the Stochastics:

• are in overbought territory on the Dow 30, S&P 500, Nasdaq 100, and Russell 2000
• have hooked down on the Dow Transports and are approaching 50
• have recently hooked down on the Dow Utilities

On a Weekly timeframe, the Stochastics:

• are in overbought territory on the Dow 30, S&P 500, Nasdaq 100, and Russell 2000
• are below 50 on the Dow Transports
• are in oversold territory on the Dow Utilities

On a Daily timeframe, the Stochastics:

• are below 50 on the Dow 30, S&P 500, and Nasdaq 100
• are in oversold territory on the Russell 2000
• are in oversold territory on the Dow Transports
• are approaching overbought territory on the Dow Utilities

In summary, the Dow Transports is the only one that is close to its 50 Stochastics on the Monthly timeframe. The only one that is oversold on a Weekly basis is the Dow Utilities, but it is nearing overbought on the Daily. The only ones that are oversold on a Daily basis are the Russell 2000 and the Dow Transports. These three are the ones to keep a close eye on to see if buyers support these first any time soon. If not, we may say the Dow 30, S&P 500, Nasdaq 100, and Russell 2000 drop to their 50 sma on the Daily timeframe before buyers return, generally, to these markets at an oversold Stochastics level. If a subsequent rally is weak, we may see price drop to the 50 sma or the lower Bollinger Band on their Weekly timeframe to co-incide with an oversold signal on the Stochastics.

***I would note that the S&P 500 is extremely close to forming a bearish moving average "Death Cross" on the Monthly timeframe...one to watch, as it could signal a return of high volatility if it forms.

Two volatility charts I'm watching are the following Daily ratio charts of the SPX:VIX and RUT:RVX. I'm watching these in conjunction with the above Stochastics cycles as they pertain to the S&P 500 and the Russell 2000 Indices.

Price closed today (Wednesday) on SPX:VIX just below the lower channel, once more, signalling an increase in volatility, with the hint of more to come...also the Momentum indicator closed below the zero level.

On RUT:RVX, price closed just above the lower channel on increased volatility. As I mentioned in yesterday's post, I'm watching to see if price drops below this channel and, subsequently, 37.00, as a signal of further weakness to come...the Momentum indicator closed below the zero level to signal that volatility may rise further.

Mid-Week Intraday Update

Here are some brief comments on where various instruments are trading just before noon on Wednesday:

Oil breaks below Weekly channel & 40% Fib retrace again...next major price supports @ 87, 80 & 75: http://screencast.com/t/AgUBssPUWq

Gold sitting just above bottom of Weekly channel. Next major price support @ 1680: http://screencast.com/t/ujT1xVlNhzm

Copper Weekly - price fails at 50% channel level (3.80)...major price support at 3.40: http://screencast.com/t/KbAhUsVho

Silver Weekly fails at 40% Fib Retrace, but just above 60% Fib Fanline...next major price support at 30ish: http://screencast.com/t/AteOgErBSfk9

U.S. $ Weekly - price bounces at 40% Fib Retrace and sits at major resistance cross-roads at 80: http://screencast.com/t/WPR6Q0Xj

30-Year Bonds Weekly - price back above trendline/Fib Fanline resistance: http://screencast.com/t/dDxmpgzT

DBC & AUD/USD heading back to 50 MA & mid-BB on Weekly: http://screencast.com/t/bkwkMSk6xE

Consumer Staples & Utilities in positive territory in Major Sectors as Retail attempts to gain on the day in Industry Groups: http://screencast.com/t/HlmvJ7KDa3I ...AND http://screencast.com/t/oDUzSeqfHg9

Spanish ETF down 3%: http://screencast.com/t/vcHKvKpc8v

SPX:VIX Daily volatility ratio chart - price breaks below and bounces above bottom of channel once again...Momentum indicator holding just above zero: http://screencast.com/t/z1VLPVqBqByg

RUT:RVX Daily volatility ratio chart - price retests bottom of channel and bounces once again...Momentum indicator holding just above zero: http://screencast.com/t/TNb5uwBT

950 versus 666 for Small Caps

Further to my post of September 15th, and further to Caterpillar Inc's projections today (Tuesday) for economic growth to be anemic through 2015, if the Russell 2000 (as represented by its E-mini Futures Index, the TF) grew at an anemic rate from here through 2015, we may see price hit 950ish by October 2015 if price remained above the 60% Fibonacci fanline (broken green line) and closed where it meets the first set of External Fibonacci and Fibonacci Extension confluence levels, as shown on the Monthly chart below.

Price could, of course, trade anywhere within the grey shaded zone in a very large 300 point range if volatility were to increase dramatically during that time period (the bottom of this range just happens to be around 666)...something that could happen if a recession were to hit in 2013 to tie in with the enactment of the Fiscal Cliff policies on January 1st. The pressure may be on for fund managers to push price higher until the end of this year to, potentially, provide a cushion against such a scenario.

As usual, I'll be watching to see if volatility builds on the Russell 2000 Index, as represented by the Daily ratio chart below of the RUT:RVX. A break and hold below its lower channel and, subsequently, 37.00 would indicate that further weakness is to come in Small Caps. Price has, so far, failed to hold at its all-time high hit last Friday, but closed today above the lower channel, as well a series of downtrend lines and horizontal price support levels. Volatility is increasing, along with today's volumes, and the chances of a further pullback are growing...I'm watching to see if the Momentum indicator crosses the zero line and accelerates to the downside.

China's Shanghai Index at Variance with CB Leading Index

Data released Monday night shows that China's CB Leading Index spiked up to its highest reading in two years, as shown on the graph below. "This index is designed to predict the direction of the economy." It's a "combined reading of six economic indicators related to total loans issued, raw material supplies index, new orders, consumer expectations, export orders, and housing."

As I outlined in my post of September 20th, the Shanghai Index tells a different story as it trades at three-year lows and threatens to fall off a cliff, but China's Financials Sector has been trading in an opposite direction.

The question is, "Do we believe that the data is actually reflective of China's economy, or is its Index?"

The Shanghai Index has trended in diametric opposition to the S&P 500 Index over the past three years. Which one accurately reflects its country's economy, if either?

No wonder people are confused and are in the dark as to the real fundamentals of both the economy and the companies listed in the stock exchanges (and their actual values)! Hence, they are reluctant to commit any excess cash to the markets, particularly, it would seem, in China.

Multi-Taskers Take Note!

"When you're chopping wood, chop wood." -- Author Unknown

Sept-Oct Options Expiry Pivot Points for Major Indices

Each candle on the chartgrid of the 6 Major Indices below represents one monthly Options Expiration period. The last candle shows market gains/losses for the August-September series and finished on this past Friday's Options Quadruple Witching.

For the information of any who are interested in Pivot Point support/resistance levels, here are the mid-Pivot Points for the next one-month period (September-October):

• Dow 30 = 13403.27
• S&P 500 = 1443.74
• Dow Transports = 5015.78
• Nasdaq 100 = 2828.10
• Russell 2000 = 842.42
• Dow Utilities = 472.51

We'll see how bullish/bearish market action becomes on any retest of these levels, and whether any trend reversals materialize around them.

Money Flow for September Week 3

I'll begin this post by saying that this was a weird week...

• There was very little movement, overall, but there was a "Whole Lotta Shakin' Goin' On". 
• We saw this example of how the Fed's "easy-money-to-create-jobs" policy was turned upside down by the Bank of America.
• While consumers claim that they are becoming increasingly uncomfortable, AAPL made new all-time highs, and its market cap has overtaken that of GE's.
• China's Shanghai Index is about to fall off a cliff, yet its Financial ETF is telling another story.
• Dow Transports is threatening to become unglued, yet the Dow 30 is hovering over trendline support at new highs from the 2009 lows.
• Emerging Markets and the U.S. Financials appear to be gaining traction.

Further to my last weekly market update, this week's update will look at Weekly and Monthly charts and graphs for the 6 Major U.S. Indices and 9 Major Sectors.

As can be seen from the following Weekly charts and 1-Week gains/losses graph of the 6 Major U.S. Indices, all of them, except the Nasdaq 100, saw profit-taking. The Dow Transports was especially hit hard...one to watch for further evidence of weakness, possibly dragging the others down, as well...although it's sitting at the bottom of a tight range and could bounce from here.

The Monthly charts and September's graph below show that the Russell 2000 Index is leading in terms of percentage gained, so far, for the month. It's the other Index to keep an eye on to see if weakness enters next week, or if it maintains its bullish leadership.

The Weekly charts and 1-Week graph below of the 9 Major Sectors show that profits were taken in the riskier, Offensive Sectors, while some gains were made in Health care and Consumer Staples. The largest losses were made in the Financials...one to watch to see if this continues.

The Monthly charts and September's graph below show that Materials and Energy still lead in percentage gained, so far, for this month...ones to watch to see if this week's downdraft continues, or if they resume their trek to finish the month even higher next week.

Lastly, the two Year-to-date volatility ratio charts of the SPX:VIX and RUT:RVX show that the SPX closed the week at short-term resistance, while the RUT closed above. In fact, the RUT:RVX closed at an all-time high, as shown on the third (Monthly) chart, confirming that Small Caps lead this current market rally in the least volatile environment, for now. This rally may not end until we see volumes become extremely frothy on the corresponding Russell 2000 E-mini Futures Index, the TF.

What do I take away from all of this? It appears that we have some Sector rotation going on as some markets (mainly the Defensives) pushed higher at lofty levels, and others have had some profit-taking. For the time-being, all I can say is that, generally, overall sentiment/momentum is still favouring the upside while volatility remains low, in spite of the conflicting data/events that I mentioned in my opening paragraph. However, most markets remain near their highs of this year and some people may consider them as being overbought. They are likely, technically, correct...however, in this Fed-controlled monetary environment, markets may not always pay attention to pure technicals, as the Fed's actions seem to remove some of the risk in going long at these levels. But, since markets may react to unexpected negative news events and are, no doubt, pricing in this risk, we may see a market that produces small daily gains in the days/weeks ahead...it becomes a slow, griding, melt-up. Time will tell. The challenge for me, as a daytrader, is in determining where support and, to a lesser extent, resistance lie for the day in this kind of environment.

Enjoy your weekend and good luck next week!

"Whole Lotta Shakin' Goin' On"

The market action this week...

3 Dow Indices

The weakness in the Dow Transports Index from early this year is evident on the Daily chart below. Price has recently broken below and retested the break of its large triangle (based on just the closes). The Utilities Index has recently broken and retested its uptrend line from last December (based on just the closes). The Dow 30 Index is sitting just above triangle resistance/support.

Of particular interest in the immediate term will be the Transports Index to see if it, potentially, corrects and leads the others down.

China's Shanghai Index About to Fall Off a Cliff

China's Shanghai Index made a new 3-year low close today, as shown on the Daily chart below. The RSI, MACD & STOCHS indicators are diverging upwards, but are still hooked down.

However, this GXC:SSEC ratio chart shows that Chinese Financials are still rising, but are approaching overbought territory compared with the Index.

Things could get interesting soon in China...more Central Bank stimulus coming? If not, look for their Index to, potentially, fall off a cliff.

It's True...Opposites Attract!

This struck me as the ultimate in "opposite attraction"...

While the Fed is busy printing extra money to loan to the banks in a bid to, purportedly, and, ultimately, stimulate job growth, today the Bank of America announced that it is planning to cut 16,000 jobs by year end, as reported by the Wall Street Journal.

I can't imagine that this is the effect the Fed is hoping to achieve with this policy. Go figure!

Consumers Can't Live on Junk Food Alone

Data released today shows that Consumer Confidence/Comfort continues to drop, in spite of the Fed's actions over the past four years, and is fast approaching the extreme low levels of 2009. It would appear that the average consumer is less aware of Fed policy/intervention than that of political (non)action to date.

It's very unfortunate that both political parties have failed to employ their due diligence in carrying out their responsibilities during their current term...they have left it all up to the Fed, who admitted they can't solve all the economic problems on their own. If politicians were employed by a company, they'd be fired for sleeping on the job. Consumers can't live on junk food alone...