Broken S&P 500 Rising Wedge

Do or Die for the Dow

After breaking down out of a huge rising wedge pattern last Tuesday, the dow (dow tracking ETF DIA seen above) retraced back to the break point where heavy cumulative volume (see volume by price on the left) seems to confirm strong resistance near $130 (or ~13,000 on the dow). The multi-year uptrend is still clearly in tact, in my view, but stocks are positioned for a correction from here. In just glancing at this chart, a correction to 12,000 looks very reasonable and well within the scope of a longer term (~3 years) uptrend. If you zoom out further you see that stocks have been range bound for about 10 years, and we are near the top of that range. I wouldn't be surprised if something more serious developed than a 1,000 point correction but you can't make a technical argument for that here. I think even the most bullish of bulls would like to see stocks pullback to gain lower risk entries in overextended stocks. With the federal reserve meeting this week, the bears could finally get the catalyst they've been waiting for for the first real decline in stock prices this year.

However, should stocks push just a little higher from here, say above 13,060 on the dow, there could be a powerful squeeze as new shorts once again run for the exits. This would set up the dow for a test of the all time highs near 14,000. A correction to 12,000 might be just what the pulls need to muster the strength for a rally later this year towards those highs. We'll just have to wait and see how things play out but caution is warranted in the near term.

Dow Jones Rising Wedge

Still consolidating... (NASDAQ)

Clearly volume has picked up as we have traded in the recent narrow range following the rising wedge breakout. I suspect the big boys can suck in a lot of buyers (short covering and buy stops) on a breakout of this range, so why wouldn't they? Lets see, but I still think this situation will resolve its self with a failed breakout (capitulation) before we begin any kind of real correction.

Disclosure: I have option positions on QQQQ.

Aussi dollar wedge part deux or Has the US dollar bottomed (for a while)?

I make a lot of calls on this blog and I think that I get feedback equally about the bad calls (UNG, DECK, etc) and the good calls (FNM, FSLR, etc), but more often than not, I get no feedback even when it was a spectacular chart read. My last (and only) post on the Aussie dollar back in August of 2008 was perhaps the best call I ever made and I'm pretty sure not a single person noticed it. I basically saw the rising wedge #1 in the chart below and targeted the bottom of the wedge. Well, FXA got to the measured rule target (77) and it kept going, ultimately declining 39% from peak to trough. That is an incredible move for the currency of a developed nation. An even more incredible move is the 59% gain it has made in the past year as FXA retraced 100% of its decline out of the wedge. Damn!This has set up an amazing short opportunity right here as FXA rolls over and breaks out of wedge #2. I find it hard to believe, but the target for this move is $59. Lets start with the rising 200 dma in the lower $80's first and go from there.

To further strengthen the notion that the US dollar has formed a longer term bottom lets look at the Euro ETF FXE (below). After consistently finding support at its rising 50 dma for eight months, the euro closed below it for the second day in a row today. The CCI is flashing a sell and given the recent false breakout I'd be inclined to judge this topped until proven otherwise.

*Note: When the US dollar bottoms all assets will get the axe.

Disclosure: I have no positions in either of these, but I plan to open a long term position against the Aussi dollar soon.

Gravestone dojis (reversal pattern)

The stock market looks to pullback here as we enter the holidays, I tightened up my stops today, wrote some covered calls and even picked up a few shorts. Yeah, markets generally made a new high for the year and closed with gains today but I see many reversal candles out there (gravestone dojis for example), stocks seem tired. IWM tried again to retake it's 50 dma but failed. You could even say that today there was a collective failed breakout as stocks made new highs but did not close at them. From failed moves come fast moves, tomorrow will be telling.

Even the shining star of customer service (Best Buy) was not immune to the bearishness of the day. Errr, don't ask. Lets just say I won't be going back to Best Buy after a bad experience this weekend.

Disclosure: Short TNA, SPWRA

Just a correction or the end of a trend?

IWM failed breakout

IWM recently broke out of a perfectly formed rising wedge then reversed after the fed interest rate announcement last week. After re-entering the channel I think its pretty safe to expect a test of the lower end soon near $56. There also seems to be price support just below there near $55 and thats my equivalent "line in the sand" for the small caps. Like SPX 950, IWM holding above $55 looks like a cyclical bull market whearas a break below that level looks to me like a resumption of the bear market ( since we'd have a series of lower lows in place). For now, the benefit of the doubt lies with the bulls and the odds go with long trades. Good luck this week.

Natural Gas (UNG): Trainwreck

I know readers are probably getting tired of me posting UNG charts, especially since I've been so wrong about it over the last two weeks, but I am just amazed by the price action there. This isn't some crap company like FNM or AIG or BAC or CROX, this is energy! Natural gas has completely collapsed despite the stock market bubble, collapsing US dollar and the continued reports of the recession ending. I look at the chart above and my jaw just drops. Yeah, I've lost money on UNG, but thats not why my jaw drops. I just never in my wildest dreams would have expected natural gas to drop so much and I bet I'm not alone in that belief. Fortunately, even thought I was initially bullish on UNG months ago, I turned bearish after seeing weakness. With the most recent plunge on increasing volume I suggest that this is the final capitulation that natural gas needed to form a bottom. While there is obviously no bottom here yet, we must be very close.

Disclosure: Yep, I still own UNG calls. Like a chump.

The overdue pullback in the S&P 500 is here

Is it time to buy UNG yet? (I think so)

Disclosure: I own UNG calls

Inverted H&S on the S&P 500, nothing but air overhead. Or.... (weekly)

The S&P 500 bounces off a golden cross: Bullish

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.

Rising wedges usually break down...

I know I promised gobs of charts tonight but I only got around to doing four. I'll try to do more this week. First off, as an update to last weekend's post, here is the S&P 500:


As I suspected, the market has continued to float higher on declining volume. In the process, the S&P and other indexes have shaped out a beautiful rising wedge formation and as you all know, those tend to break down before the apex. Now I'm not saying this bear market rally will end this week, 800 is likely to be strong support. But I am saying that if the market rolled over here I wouldn't be surprised at all. A break of 800 will confirm a resumption of the long term downtrend. This week we are going to see a flood of earnings reports and news on the bogus bank relaxation test. It is likely that the media will spin any move as being due to this or that headline but us technicians will look to the charts for guidance.

A couple of potentially bearish looking charts that I ran into tonight were V and GS. V recently broke out of major resistance but has since floundered. It currently lies right at the breakout price but some indicators are giving warning signs. If V does begin to slip and especially if it looses that rising green trend line, I could see a January-esq crash (circled in orange):


On GS, I feel like this is the one stock that you can't bet against because they run the universe, but the chart is tempting. Its got these declining trend lines from '06-'07 just above and it formed a reversal candle on huge earnings related volume last week. Will it get crushed to new lows? We'll see but that's a huge move if it does:


Good luck this week!

Oil ETF Volume Surges to Records

Volume is surging to the highest levels since oil exchange traded funds first started hitting the market a little under three years ago. You can see it in USO above and in DXO, the powerShares crude double long below, both of which I own. Is this the bottom?, all we can be sure of is that these ETFs are at all time lows as volumes surge to record highs. Typically bottoms happen with well above average volumes but today's price action was indecisive, note the doji below. In other words, the volume is there all that is required now is price movement (out of the falling wedge).

Almost a Bottom in Oil

There is still no sign of a bottom on the oil daily chart (see USO below) but the massive falling wedge is reaching it's apex as volume picks up to levels not seen since the top. It won't take much for oil to break out to the upside and when it does the move should be substantial. As for targets, the 50 dma is more than a 50% gain from here and the 200 dma is a staggering 100% gain. With supply getting cut off and demand stimulus, its hard to see crude not moving higher from here. There are early reports that the collapse in gasoline prices is leading to increased demand from drivers and I'd expect to see more of that. If the US dollar weakens that will add fire to fuel.


Looking back at the 2003-2005 price action, $40 looks like it could be an area of significant support for crude. As you may recall, the low on Friday was $40.50, which I expect should be enough to bounce oil out of this wedge. A fellow trader Xerxes had a great idea in the double oil long DXO which has fallen to under $3.0, and I bought a good chunk of it today to add to some USO calls.

By the way, if crude does take off I would think the solars take the lead of any rally in US stocks. So on top of my USO and DXO positions I also have calls on JASO, SPWRA and ENER. Good luck out there!

Saturday Rock Blogging: (Nothing but) Flowers

The last step to confirm a major bottom in the small caps (IWM) is to close above $48.26 on increasing and above average volume. We have already broken out of the wedge, volume is increasing and multiple daily indicators are diverging (bullish). Hopefully Santa is also looking at this chart and likes what he sees.

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.