Bullish Bear Trap (IWM breakout)

Disclosure: I'm long small caps.

Reasonably bearish on IWM here

After a solid bounce off of its rising 50 day moving average last week, the small caps are looking like a decent short again here. Volume supports the notion that there is significant distribution as the broad market begins its long overdue correction following seven months up in a row. No, I am not expecting a crash, and no I don't think that this is the end of a bear market rally. Recall, that my "line in the sand" for IWM is at about $55. So long as IWM stays above that level I'll call this a cyclical bull market. Could there be a crash, is there risk in owning stocks? Of course, and I think few actually believe this is anything more than a collapsing US dollar fueled stock market bubble. But it is what it is, and right now the longer term trend is up despite expected weakness over the next month or so.

Disclosure: I do not have any position in IWM

Breakout!

I've got the Russell 2000 ETF IWM above but all major indexes have broken their series of higher highs with the recent gains. On the IWM I see a massive inverted H&S that targets something like 35% higher. Now that prices are above the 200 dma, this 200 day moving average may start to flatten out and even start rising. Once that happens the stock market will by most measures be in a long term uptrend. Bear market over. However, Volume has been extremely light this entire year, especially so recently. Ultra narrow Bolllinger Bands have precluded every major drop for over a year now. So while the markets are looking techinically very bullish I would beware the false breakout. But we'll see, the benfit of the doubt goes to the bulls here. I'll be trying longs with a stop around $52, then get agressively short if IWM loses $51.7.

Compressed BB's suggest a big move is coming...

The market leading Russell 2000 small cap index is being lifted from below by a rising 50 dma (intermediate term trend) and rejected from above by the falling 200 dma (long term trend) whilst the Bollinger Bands squeeze prices even tighter. This compression of volatility can also be seen in the collapsing volatility index ($VIX) and often suggests a big move or "volatile" behavior may be approaching. I would use $46 below and $52 above on IWM to signal a breakout. Should IWM move out of this range the price targets would be imense. On the upside I get $51 + $17 = $68 (which is reasonable because its near the previous neckline) where $17 is the 2009 highs minus the 2009 lows. Below I'd target the lows at $34. If IWM closes outside this range (46-52), I will look for volume to break its downtrend as confirmation.

Disclosure: I have a small IWM put position.

The IWM Wedge

The measured rule for a rising wedge is to target the bottom of the pattern. However, I think we should start conservative and see how things go. I would look for support at the rising 50 dma first (currently $44.69), then if that breaks watch $42.72 which represents the Jan low and a 50% retrace of this move. If that level breaks I think that a test of the lows will be all but guaranteed. Look for volume to increase as IWM rolls over as a confirmation of the pattern. Good luck.

Support for a broken IWM wedge (rut roh)

Year to Date 2009 Returns

There has been alot of talk lately about how some sectors and certain stocks have gains for 2009. Most of this talk centers around the nasdaq which was up .63% as of Thursday's close although after Friday's rout it now sits -2% for the year. Here I'm just gonna throw up a number of different charts highlighting the range of 2009 results for various index etfs and individual stocks. In each of these charts the blue line is horizontal from the close of 2008 and the purple line is some sort of trend I see in the lows. I should note that some of these are 3 month charts while the rest are 6 month charts. Lets start with the ugliest sector ETF, the financials XLF:

(click to enlarge)

The financials are down about 33% this year and I think the important level that needs to break before a test of the years highs is $9.50.

However, looking at the Nasdaq 100 (ticker QQQQ) over the past six months you can see certainly see some signs of a bottom. The 2008 lows have held, plus some change and the index is up in 2009. That being said, the majority of the gains in 2009 were on the first trading day of the year and this index has failed to take out the highs made early this year. I think $31.50 will be a key level to watch:

ICE is a stock which is sort of a tech-financial, and they are right on breakeven for the year. I will give ICE credit for a higher low this year but the longer term tendency to make lower highs below a falling 200 dma remains. If ICE could make new highs for '09 and take out that 200 dma I could be bullish, but until then this one looks like a great short. Recently it tried to break it's 200 dma and failed, that too me is a bearish sign and a suggests a short entry here:

Going back toward the pure technology stocks, GOOG is solidly up for thi s year. Only at a few times has it been in the red and those lows were progressively higher. With a rising 50 dma below this might be one of the better charts I've seen lately. If I were looking to be bullish on something I might choose GOOG after a pullback:

Before we get too excited about GOOG, I should also note that it is still very far from it's 2009 high at $381. So google is up 10% in 2009, but its down 10% from it's yearly high. Furthermore, that pesky declining 200 dma is much higher.

First Solar (ticker FSLR) is another decent looking tech stock. You can see that it's up for 2009 although most of that gain came on the first day of the year. FSLR has a nice looking base formation and I think that the recent cup n handle could take it higher int he context of a strong stock market:


I'll leave you with my favorite index ETF to watch, the Russell 200 small caps (ticker IWM). Its down for the year and in my opinion headed decisively lower:

Any thoughts on these, additional charts (links) are welcome in the comments.

Disclosure: I own QQQQ puts.

Scaling back into shorts here up to $800 on $SPX

Closing above that Nov low was huge for the S&P, I would have expected that level to be heavy resistance. If the market can hold this level early tomorrow, then a quick 50 point pop up to a brick wall at $800. I've started scaling in today positions and I would add higher (near 800) unless the long term trend line in blue is broken. There I'd look for an exit. I am concerned about the VIX divergence over the past six months but I like how cheap puts have become. However, the VIX is starting to look like it could drop a lot more if it doesn't bounce from here. So I'm closely watching the VIX for reasons to stop on SPY. Click on the charts for more detail.


Disclosure: I own SPY and IWM puts.

The 5th Wave Has Begun, Volatility is Expanding

Volatility is expanding as the small caps (IWM) break to the downside:

Looking at the VIX, the downtrend from the Nov. peak broke today:


Longer term, the S&P clearly seems to be continuing to the downside:

If we use a simple measured rule, when the S&P 500 breaks 741.02 (November low) the target would be 538.19 which is 43% below the early January high. Of course at first glance this seems ridiculous, but I wouldn't count it out. The 3rd wave in this bear market involved a 48.5% decline, so the magnitude is not completely unreasonable. Also, I have seen some seemingly sound fundamental arguments for a target in the 500's. In terms of timing, for the Elliot wave model above, the up cycles both lasted two months while the down cycles lasted 5-6 months. If the 5th wave really did begin in early January, as I'm implying, then this would suggest a bottom in late Spring or early Summer. Put a gun to my head, I'd guess the S&P 500 bottoms in the 500's in June ending this bear market (the economy will take longer).

If you are looking for shorts, I still like STT and I know betweenthebars is a big fan of SPG. If you are looking for inspiration, take a look at TRMP, Donald Trump's company. Good luck and remember, you are responsible for your investment decisions.

Disclosure: I own SPY puts.

Awaiting the 5th wave...

Its always important to be aware of the longer term picture and what I see in the two year weekly chart is a one and a half year old bear market. It seems to fit well with an Elliot wave pattern where we've completed the first two of three downwards cycles. That is, we have moved beyond denial (wave 1), more recently acceptance (wave 3) and now we await the final downwards cycle (the fifth wave) of panic. A big unknown is how far we will rally in wave 4. I would guess that the 200 dma could be reached but its moving lower each day and I'd place an upper limit at $650 on the Russell 2000. A lower target is very tough in such extremes but I'd guesstimate somewhere near $250.

Since we're waiting for panic I think it's appropriate to look at the fear index. Below I have the VIX plotted over the same period of time as the $RUT above. The index is currently down trending but there seems to be major support at previous resistance of 37.5. I could see the VIX drifting lower for some time but holding that level because a break of 37.50 should send it significantly lower which would ignite stocks. I'd conjecture that eventually a compressed VIX would pop big, beginning the fifth and final wave lower in stocks. Under that scenario the ultimate bottom is likely to coincide with new all time highs on the VIX. But again, the VIX could drift lower for a time lifting stocks.


On the more bullish side, a number of commodities are looking better on intermediate term time frames. If the recent lows in equities like DBA below can hold, it may great year for commodities. DBA has the potential to form a nice inverted head and shoulders with a target near $33 when/if $27 breaks. DBA could pullback further, as low as $23, before rounding out the right shoulder so I'd wait for lower prices to buy dips. Good luck, it should be a very interesting week between the Obama inauguration and a string of earnings reports.

Declining 50 Day Moving Averages

Its easy to make a case for the bears right now since the underwhelming Santa rally has run out of steam at the 50 dma. In the small caps above you can see sell signals showing up as well. The fact of the matter is, in a long term downtrend the declining 50 dma is a low risk place to enter shorts (low risk because you just cover if prices overtake the 50 dma). It certainly is still possible that some upside momentum might be salvaged for an early 2009 rally but every day we spend below the 50 dma the odds get lower. Its time to look into opportunities on the short side and here are a few that popped onto my screen this morning:

I know its hard to short a stock at 10$ that was over a $100 a year ago. But DRYS was also $3 a few weeks ago. I think it could go back there.


This CSX pattern is a nice clean break, the trangle targets roughly $15. Note that the break occured today and the market is not closed yet.

SHLD is more of an example than something I would actually short, notice how the stock is so weak that it can't even reach the 50 dma.

Good luck!

Small caps lose 11.85%, worst day in years

The title says it all, here's a link. The headlines are blaming this on the official recession call that was made today by the NBER. Of course this news is no surprise to most market watchers. CR at Calculated Risk has been using Dec 2007 as the beginning of the recession in his charts for more than six months now. Furthermore, we saw the stock market slip into a bear market just one month after the recession officially started so the market has been telling us we are in a recession for a while now. This is yet another triumph for the power of technical analysis. The charts told us what we heard today from the NBER, but 11 months ago. Today's selloff was the result of a declining volume rally up to resistance in a long term downtrend. In other words, it was purely technical.

As for this sell off, I still think IWM won't have any trouble getting to the lower end of this falling wedge around $40 but we are most of the way there. I'd expect a good bounce from there and at some point soon we will see follow through into a significant multi month rally. This declining volume falling wedge is setting up for a very big rally to begin sometime soon.

Disclosure: I started an IWM call position at the close today.

The small caps are at an inflection point

As I mentioned on Friday, the market leading Russell 2000 small cap index (IWM) is clearly at an inflection or "pivot" point. You can see it in the falling wedge formation above, and note that this pattern is typically a sign that a move is becoming exhausted. The rising wedge can be an excellent topping formation, see this awesome example. In other words, the longer term decline seems to be loosing steam. On the intermediate term time frame however, the small caps are running into resistance at the upper end of this wedge as evidenced by Friday's tail. Also, volume has been declining and all the RSI and stochastic "oversoldness" has evaporated in the past week. So we are ripe for a nice sell off from here but if IWM can push a little higher it should be able to pop up to and test the 50 dma currently aty $53.79 (which would be a very good place to enter shorts). One encouraging sign for the bulls is the CCI crossover that occurred on Friday, this is a very bullish buy signal but again, volume was weak (didn't confirm). So what I'm saying is that, the market is unlikely to sit here. The most likely scenario seems to be a drop down to the lower end of the wedge around $40 with the possibility of making new lows, but a pop to $53 is certainly possible. Good luck, I'll be trying some IWM shorts tomorrow morning but if the market does break out I'll be picking up TINY calls.

A TINY pivot point (nano)

This TINY chart looks alot like IWM and maybe justly so since its market cap is pretty tiny at about $100M. Both charts have this failing descending triangle breakdown look on a daily timeframe. While I am not convinced in the sustainability of this rally based on the weak volume, this price action is very constructive. If TINY or the small caps (IWM) can push a little higher, volume should move in as technical buy signals get triggered. On the other hand, resistance at this pivot could lead to a short term top on Friday. TINY seems like a good cannidate for a quick double if/when it does break this $3.85-$4 area, just watch out for resistance at $5 and up into the lower 5's. I've got the 5yr monthly chart below, the stock has efectively been in its own little bear market since earlu 2004 after peaking at $25.


Harris and Harris Group (TINY) is a vernture capital fund which invests in nano start ups, read more about it here. This model seems like a great vehicle to me because odds are most nano businesses will fail but one could be a home run and easily pay for all the failures. Think Cypress Semi's spinoff of Sunpower. They have stakes in about 30 nanotech start ups in a variety of industries. Even as this might sound like a very high risk, financing dependent space, this stock has actually been able to hold its 2002 lows. I think it would be safe to say that among the market leading small caps, TINY is a leader. And as I see nanoscience as the future of science and technology, it makes sense that TINY would be a market leader among leaders. I hope everyone is enjoying a relaxing Thanksgiving holiday, cheers!

The Ultimate Fibonacci Retracement

With the market breaking to new lows many are wondering how far this POS market can fall. A good guess would have been support levels from the supposed 2002-2007 bull market (although we can't really call that a bull market anymore now can we), well those all broke pretty easily. The next obvious level of support would be the 2002 bear market lows, those are breaking right now. Where else can we look for support?

I was thinking about replacement levels today and I began to wonder what a complete Fibonacci retracement would look like. That is, a fibonacci retracement of the complete move up from zero. This would represent the biggest possible pullback suggested by Fibonacci analysis. In a way this idea seems very appealing because the current economic and market failures are unprecdented in the history of mankind. Maybe its time for the first *real* pullback in the long term bull market that stocks are supposedly in. So what I'm going to refer to henceforth as the ultimate fibonacci retracement is a 61.8% pullback from the all time highs. Those levels are:

The Dow Jones: 5,423.67
S&P 500: 602.06
Russel 2000: 327.18

Note that this is irrelevant for the Nasdaq which is already well below the ultimate fib reftrace level from the dot come bubble.

One triangle to rule them all!

I will add more comentary to this later tonight if I have time. This thing could go either way, up or down big in the next few days, but its going to move. Theres been alot of talk lately about triangles in the Q's, S&P and Dow and I just wanted to throw my weight behind that IWM triangle because thats the index that leads. Most atre expecting a downwards breakout of this trangle which targets about 7,000 on the dow, 700 on the S&P and 400 on the RUT. This isn't a bad expectation because the prevailing trend is down. But the overwhelming bearishness out there and panic leads me to think the real move will be up. But you have to be careful and go with the flow.