1/18/2012 9:42:45 AM
Tops and Bottoms...
I often write about the difference between tops and bottoms. With tops being built on hope and bottoms being built on fear. Well, sometimes fear comes into play at tops. As markets pull back from high levels, you periodically get spikes in bearish sentiment (betting). This creates short term energy for the market to push back higher. We saw a bit of that yesterday near the close.
The common pattern of tops and bottoms are V or consolidated retests. Given the timing, we're 2-3 days ahead of expiration. I don't expect much selling until after expiration.
Bonds continue to be key. They're elevated, and if they turn lower, they'll fuel a rally. If not, they'll signal that the market and economy are not ready. Listen to bonds.
So I'd be cautious here. I may send around some PUTS to buy. As a heads up, if you bought in on our last two options trade, the peak in our Jan 55 Q Calls were up over 110% yesterday.
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Here's a look at the global markets:
On the economic front, here is the schedule for this week. Pay close attention to the timing of the report and the potential for the markets to make short term reversals at those points.
On to the charts:
Stock Barometer Analysis
The barometer remains in Buy "trend" Mode. The "trend" comes from bullish price action - a liquidity advance can last weeks - so we'll continue to be patient before moving into sell mode.
The Stock Barometer is my proprietary market timing system. The direction, slope and level of the Stock Barometer determine our outlook. For example, if the barometer line is moving down, we are in Sell Mode. A Buy or Sell Signal is triggered when the indicator clearly changes direction. Trend and support can override the barometer signals.
Money Management & Stops
To trade this system, there are a few things you need to know and address
to control your risk:
• This system targets intermediate term moves, of which even in the best years, there are usually only up to 7 profitable intermediate term moves. The rest of the year will be consolidating moves where this system will experience small losses and gains that offset each other.
• This system will usually result in losing trades more than 50% of the time, even in our best years. The key is being positioned properly for longer term moves when they come.
• Therefore it is vitally important that you apply some form of money management to protect your capital.
• Trading a leveraged index fund will result in more risk, since you cannot set stops and you cannot get out intraday.
• Make sure you set your stops so that you can lose no more than 2% per trade (based on the QQQQ if you're trading leveraged funds and options with our trading service).
Potential Cycle Reversal Dates
2012 Potential Reversal Dates: 1/12, 1/27, 2/16. We publish dates up to 2 months in advance.
Now that 1/12 is behind us, I am now bullish into 1/27. The key to a liquidity advance is that things that would normally reverse the market lower, won't...
That doesn't mean not to be cautious here. Personally I've been closing positions to lock in profits, as even in liquidity advances, there will be pull backs and buying opportunities.
My Additional timing work is based on numerous cycles and has resulted in the above potential reversal dates. These are not to be confused with the barometer signals or cycle times. However, due to their past accuracy I post the dates here.
2011 Potential Reversal Dates: 1/15, 1/29, 2/16, 3/10, 3/18, 4/6, 5/21, 5/31, 6/13, 6/24, 7/16, 8/1, 8/19, 9/4, 9/25, 10/21, 10/25, 11/25, 12/26.2010 Potential Reversal Dates: 1/19, 1/28, 3/2, 3/23, 4/7, 5/30, 6/10, 6/28, 7/10, 8/13, 9/7, 10/2, 10/27, 11/21, 12/19. 2009 Published Reversal Dates: 1/20, 2/11, 3/7, 3/15, 4/8, 4/16, 4/27, 5/7, 6/8, 7/2, 7/17, 9/14, 10/10, 10/24, 11/12, 11/30, 12/9, 12/21, 12/29. 2008 Potential Reversal Dates: 12/31, 1/11, 2/1, 2/13, 3/6, 4/5, 4/22, 5/23, 6/6, 6/27, 7/13, 9/2, 10/3, 10/22, 11/10, 12/11. 2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3, 2/17, 3/10, 3/24, 4/21, 5/6, 6/15, 8/29, 10/19, 11/29, 12/13, 12/23, 12/31, 1/11/08. 2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28. 2005 Potential reversal dates: 12/27, 1/25, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.
Use the following Timing/momentum indicators to assist in your trading of the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.
QQQQ Timing Indicator (NASDAQ:QQQQ)
The QQQQ Spread Indicator will yield its own buy and sell signals that may be different from the Stock Barometer. It's meant to give us an idea of the next turn in the market.
Gold Timing Indicator (AMEX:GLD)
Want to trade Gold? Use our signals with the Gold ETF AMEX:GLD. Gold gives us a general gage to the overall health of the US Economy and the markets.
US Dollar Index Timing Indicator (INDEX:DXY)
Want to trade the US Dollar? Use our signals with the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.
Bonds Timing Indicator (AMEX:TLT)
Want to trade Bonds? Use our signals with Lehman?s 20 year ETF AMEX:TLT. The direction of bonds has an impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.
OIL Timing Indicator (AMEX:USO)
Want to trade OIL? Use our signals with AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction has an impact on the stock market.
Secondary Stock Market Timing Indicator
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Daily Stock Market Outlook
We remain in Buy Mode, the markets are moving ahead in a potential liquidity move so we expect an advance into 1/27. That seems unlikely on the surface, but these types of moves are the most difficult to call.
Above is a view of market complacency - the equity put call ratio. It's at a bearish level, but the timing of a top is very difficult to call. And liquidity tops tend not to follow with retracements, but consolidations.
3 things to chew on:
Markets are so close to breaking out here. I'd still prefer to see this market consolidate and build more fuel for a breakout. This will be a real test of the liquidity advance.
Looking at the Qs relative strength with bonds, is a little concerning, as it's normally a precursor to a sell off when this line turns lower.
And here's an indicator that simply counts up days and down days. Of course in a liquidity advance, things look overbought, and can remain overbought. But generally there will be a period of a few days where markets test lower levels, but get bought near the close resulting in slightly down days. This can set up the next larger move, but for now it suggests we may be a few days from a top.
If you want to learn more about some of my models, I use my blog to cover them in more detail.
Our blog is back up. If you're looking for more information, please visit our blog - I'll have updates and publish other articles there. http://investmentresearchgroup.com/Blog/