Who Is It Fooling?

The market had another big up day today. The Dow Jones Industrial index made a new closing high off the March 2009 low. If this momentum continues, I will not be surprise to see the DJI reach 10,500, which is the measured move from the weekly bull flag pattern formed in July. But, with the broader market indices such as the SP500, NYA and the DJT failed to confirm the DJI new high, this raises doubt on the extent of this rally.

Until some of these broader market indices confirm DJI’s higher high, I would rather miss this leg of the rally than get fooled by getting trapped long near the top.

Here are the updated charts, click on it to get a larger view:

DJIA:



DJT:



SP500:



NYSE Composite:



Nasdaq 100:

Impressive Stock Market Performance, But...

The market put in an impressive performance last week after the Fed decided to keep the US dollar low and the US unemployment rate exceeded 10%. On the surface, one would think all coast are clear for a big yearend rally. But if one looks closely, there is still lot of technical uncertainties to be bullish or to be bearish.

Look at the Dow Jones Transportation index, it has formed a double top and bounced off a support level that could turn out to be the neckline of a double head & shoulder formation. Until it can clear the October high of 4066.40, it will be considered in the process of forming a lower low/lower high down trend.




The Russell 2000 displays a similar price pattern as the DJT. If the RUT cannot take out the September high of 625.31 and break below the 550 support level, then that will be the first sign this rally is coming to an end as money is moving toward the big cap stocks such as the Dow 30 (flight to quality).




During the recent pull back, the DJI made a higher low and held above the supporting trend line, and it appears it has enough momentum to test the October high of 10119.47. If it clear this high, 10,500 will be the next target.




Unless the SP500 move above 1100 to get itself back in sync with the DJI, then it is another sign the market could have already made an internal top. During the recent pull back, the SP500 held the 1025 support and move back above the 50 SMA. In the last session, it was testing the resistance level near 1070. If it failed to push through this resistance level, the SP500 could be setting itself up with an H&S pattern.




A similar price pattern is also being formed by the Nasdaq 100. It held the 1650 support level and if it cannot take out the October high of 1780.83, a potential H&S is in the making.




Next week the market should give us a better idea on where it will go. Until some of those potential bearish price pattern formations are invalidated, I will not be a buyer. I will either be a cautious bear or move to the sideline until the picture is clear. The market is clearly telling us it is getting near the top if it is not already there, and giving us signs to be cautious.

Where Is The Stock Market Heading?

My outlook has not changed since my last post. I will just briefly give an update on the SP500 and reiterate the level I am monitoring on the following charts. For a refresher on the key levels I am monitoring for the DJIA & Nasdaq 100, see my previous post.

Click on the chart to get a larger view to read my commentary.

Turning

The weak US dollar that has carried the DJIA to the 10,000 level is now turning up and it could take the DJIA back down to the 9000 level. The key support level to watch for the DJIA is 9250 (see the charts below).





Key support level for the SP500 is 1020 after it breaks the support near 1040.





Nasdaq is getting hit hard in the last couple trading sessions and the key support level for the Nasdaq 100 is around the 1650 area.





If these market indices break the key support level highlighted in this post, this pull back could turn into a reversal. I will not be a buyer on any bounce here.

The Catalyst

Back in April when I first posted the possibility for oil to go to $75 a barrel , I stated I have no idea what will trigger it to that level. In April, I was purely interpreting the cup & handle chart formation and projected the measured move to the $75 level. But now, we all know the catalyst for the oil to move above and beyond this measured move of $75 a barrel. No, it’s not due to increase in demand for oil and it’s not the ‘green shoot’ crap those talking heads were preaching how the economy is recovering. It’s the printing of the US dollar that caused the price for commodities such as oil (and gold) to rise. As the dollar weakens, oil prices and other commodities prices started to rise. Now that oil has reached above $80 a barrel while the US economy is still in a recession, the manipulators will come out and push the price back to the $60 level where OPEC can live with and won’t cause dramatic price pressure for the US consumers. The present state of the US economy cannot withstand $80 or even $70 a barrel of oil for a sustained period without killing off the already weak US consumer spending.

Here is an intraday hourly chart of the ETF for the US dollar, UUP.



Prices have been creeping up and broke above the downward trendline. A divergence on the MACD is signaling a possible trend change. I believe the Fed will start hinting a possible rate hike in the near future to talk up the US dollar. The fear of this potential rate hike that could delay the US economy from recovering will put a temporary halt to the stock market rally, and the commodities trades based on weak US dollar will start to unwind and that will take the oil back below $60 and gold under $1000 an ounce. Take a look at the following charts for some of the key levels in the near term for oil, gold ETF:

Something In The Air

Now that the Dow Jones Industrial has hit the 10,000 target, and the SP500 reached 1100, there seems to be something in the air that a change is coming for the market. What that change might be is the question to be answered. The DJIA is hitting major resistance in the 10,100 level, and the SP500 can’t seem to be able to move above 1100. From the daily price chart, the uptrend started in March appears to be intact. But looking at the intraday hourly price chart, the uptrend in the short term appears to be losing strength and starting to rollover toward lower support levels. The DJIA formed a triple top in the intraday chart and tested the 9940 for support numerous times since it failed to break above 10,120. One would make a case that the DJIA could be setting up to be range bounded between 9940-10,120 if it wasn’t for the divergence of the MACD, the rolling over of the 5 day moving average and the price is below the 5 day moving average. Instead, with these negative technical, the odds are in favor of a pullback to the 9780 level in the short term.



A similar trading pattern also appears in the SP500 intraday chart. The SP500 failed to break above the 1100 level and formed a double top. Since its attempts at breaking the 1100, it has retreated to test the 1075 for support and filled the October 14 opening gap. The price is currently below its 5 day moving average, and its 5 day moving average is trending down. The divergence from MACD along with the price level and the direction of the 5 day moving average put the odds in favor of lower prices in the short term. The nearest support level for the SP500 is the October 8 opening gap near 1058.



The Dow Jones Transportation index has been hitting the 4050 resistance for over a week and finally rolled over and broke below the 3850 support level. The next nearest support level is 3750. If the DJT is any indication of what’s to come for the DJIA and the SP500, then we should expect the DJIA and SP500 to break their support at 9940 and 1075 respectively.



While the Nasdaq 100 still appears to be trending higher, some of the closely watched tech stocks’ recent price behaviors put this uptrend in question. Its MACD is showing divergence, indicating a possible change in price trend. From the intraday hourly chart, the support level to watch is 1742. If it breaks below this level, next probable support is 1710.



From the intraday charts, they show the market could be pulling back in the near term. Whether this pull back turns into a reversal is anyone’s guess at this time. I mentioned in my last post that there seems to lack the enthusiasm when the DJIA hit the 10,000 target last week, and this lack of enthusiasm indicates very little sideline money was lured into the market. The market will not terminate this uptrend until most of these sideline money are in the market because the market will not give anyone the satisfaction that they have out maneuvered it.

There are only two possible ways to lure some of these sideline money into the market. One way is for the market to climb higher to force the skeptics to jump in fearing they might miss the rally once again. The second way is for the market to pull back to a lower level to give the skeptics the feeling they are getting in at a bargain price.

Whatever is in the air, I believe the latter is the most likely scenario to lure those sideline money into the market. How low the market will go to lure the sideline money in is one big question mark. The possibility of a reversal instead of a pull back is always in the card. So I will continue to be cautious, and if an extensive pull back materialize, I will start taking some short positions on this leg down.

Where's The Enthusiasm?

Today, October 14, 2009, the Dow Jones Industrial Average crosses 10,000 once again. For me, I just didn’t sense any excitement or enthusiasm from the market this time around. In previous times, there were enthusiasm and positive feelings from the market when it moves above this psychological level. This time, it just seems like “Ok, it moved above it, now what?” I sensed there are still a lot of hesitations for the sideline money to commit and move “all in.” This indicates the market will move higher until it reaches the level that will generate the enthusiasm to move these sideline money into the market. Where this level will be is not important. What is important is where the market might reach when this level has been crossed. The bull flag pattern formed by the DJIA and the SP500 back in July indicates the DJIA could potentially move up to the 10,500 and 1150 for the SP500. For the Nasdaq 100, the next major resistance seems to be in the 1970 range. The market has not shown any signs it is ready to reverse. Until the market indicate it is ready to head down, the measured move from the bull flag will be the key level to watch.

Below are the updated charts for the DJIA, SP500, and Nasdaq 100:

Guards Up

The DJIA, SP500 and Nasdaq 100 all bounced off the 50 SMA supports last week and approaching the September high. Next week third quarter earnings report will start and it is also option expiration week. Many stocks on my watch list are either near resistance level or hit resistance. Having the DJIA and SP500 getting near the 10,000 and 1,100 level respectively, I will be putting my guards up for the fakeouts that could take place for many stocks and indices. Once again, I am being very cautious on the long side, but not ready to take the short positions.

Here are the updated charts for the DJIA, SP500, and Nasdaq 100:

Into The Zone

Today the three major market indices, DJIA, SP500, Nasdaq 100 have entered the region I have identified in my last post as the potential ‘bear trap’ zone. The reason I suspect this region could be a potential bear trap is the two possible support levels are part of this region, the 50 SMA and the trend line formed with the March and July 2009 lows. What makes this zone to be a likely bear trap is the Dow 10,000 target. The market has a tendency to be attracted to those targets that have been tossed into the ring. If you listen carefully, you can hear the market whispering that it wants to hit the 10,000 mark before it reverses. Just look back on how the market hit the $100 a barrel of oil, and the $1000 an ounce of gold target. Similar behavior will occur for the Dow on its way to hit 10,000. The bears will claim victory when the first attempt to reach the target by the early bulls fails. Then as the bears beat down the market as the first wave of bulls are exhausted, the sidelined bulls that missed the first upward move seize the opportunity to get in at a lower price, and this sideline money will move in swiftly into the market that will trap the bears and forced them to run for cover. The combined entry of the sideline money and the short coverings will propel the market to hit the target like a rocket taking off, straight up. Will this scenario come true? Nothing in the market is certain, but as a trader, one must have a theme or a scenario to trade with, and this is one of the scenarios I will be on the lookout for. When it occurs, I will be prepared to take advantage of the move. And if the scenario does not materialize, then I will be ready to take the other side of the trade.

Here is the SP500 chart from my last post:




Here is the latest SP500 chart along with the chart for the DJIA & Nasdaq 100:








Until the market breaks below the bear trap region and bounce off at some lower support level to find this bear trap region as resistance, I will continue to watch for the Dow to hit the 10,000 target and 1100 on the SP500.

Bear Trap Developing?

Finally the bears are having their day. When I saw majority of the stock on my watch list start to roll over during the last hour of trading yesterday, I sensed a pullback could be developing. Being a cautious trader, I pull the trigger and closed out all my longs before the close yesterday and moved to the sideline. Today, the market opened higher with a positive unemployment report. Then after 30 minutes of trading and with a negative existing home sales report, the bears took control once again and drove the market down into the red. The market attempted to rally during the last couple hours of trading, but this time the bears held their ground.

Even though the bears are in control right now, it doesn’t mean the rally is over or the 10,000 and 1,100 level for the Dow & SP500 respectively is history. To the contrary, I am watching for potential bear trap that could spring up to push the market to the 10,000 and 1,100 for the Dow & SP500 respectively. In the following charts, I have highlighted the potential zone where I will be watching for possible bear trap to develop.








Until I see technical deteriorations that accompany market reversal, I will treat this pullback as a setup for the next up leg move. Again, I will continue to be cautious since this rally is full of suspicions and it is over extended. It is like a game of musical chairs, always be prepare for the imminent stop playing of the music. I would rather sit down, get back up and look a bit silly than get caught without a chair to sit, because without a chair to sit, it’s ‘Game Over’.

Are We There Yet?

The question being asked in the market is “Are we there yet?” Instead of “How high can it go?” Skepticism still abound on how can this market keep going up. From the inverted H&S measured move, it says there is still much higher ground to go. But for the near term, here is a pattern one might want to keep an eye on to get some intermediate term target, the “Bull Flag”. It might not be as clear to see this pattern on the daily price chart, but the weekly price chart does show this pattern a bit clearer for the DJIA, SP500, and the Nasdaq 100.

In the short term, we are coming up to the magical/psychological resistance level of 10,000 for the DJIA and 1,100 for the SP500. These psychological resistance levels could trap more bears into this buy-the-dip rally. This could be the catalyst that will force those skeptical bears to give up and go long. And that will play right into setting up the October selloff (remember Black Monday?).

Here are the weekly charts showing the bull flag and the measured move. Click on the chart to get a larger image.








For those of you that trade the Spider and the Qs, here are the charts for these two ETF showing the bull flag measured move target level.






Be careful, although September’s performance has defied those talking heads about how historically September been a bad month for the market. There still can be some surprises lurking that will turn this market upside down. Don’t get complacent! Watch those technical levels, don't forget to mention where you’ve seen them.

Crushed Again!

Just when the bears think they have control, the dip buyers came in and bull(y) the bears back to their corner. As one can see from the hourly intraday chart, the SP500 open with a gap down today.



The bears pushed it down to the 5 days SMA and the dip buyers came in and moved the market back toward the opening range high. Throughout the morning, the bulls and bears were engaged in a battle to move the market into positive territory or keep it below last week’s close. Shortly after 1:00pm, the bulls got control and moved the SP500 into positive territory and then take out last week’s high in the final hour. Once again, the bears got crushed.

Let’s take a look at the daily and the weekly chart of the SP500 and see why the bears are constantly losing the battle for control.

Looking at the daily chart, it is showing the SP500 continues to make higher high and higher low.



The SP500 is flirting with the 1044 level and the momentum favors the SP500 to test the 1044 level for support than to retrace back to previous resistance-turned-support level of 950. If it does retrace below the 1044 level, it will most likely be a shallow retracement to the 1010-1020 range.

The 1010-1020 range on the weekly chart shown to be near the 38.2% Fib retracement level from 2007 high to March 2009 low.



Since the SP500 has established itself above this Fib retracement level, the resistance turned into support scenario comes into play, thus make this a viable support level. Next major resistance level is the rounded number of 1100. From the weekly chart, 1100 just happens to be near the 50% Fib retracement level. A major pull back or a possible reversal could occur when the SP500 reached this 1100/50% Fib retracement level. But until then, the measured move from the inverted H&S pattern put the SP500 at 1250, and this level is near the 61.8% Fib retracement. Therefore, even if there is a pull back from 1100, there still can be another major upward move to 1250 before this rally comes to an end.

All these technical levels clearly show why the bears are having such a hard time to take control of this market. As the bears keep fighting these technical levels, they will keep losing the battles. As a technician, I will trade the trend identified by these technical levels until the market tell me otherwise. Will we get a major correction? You bet, when we get complacent, the market will slap us with a big selloff. Right now, there are still too many skeptics and too many cautious traders (myself included.) Therefore, there will be more upside in the near term.

Going Higher

There is not much new for me to say about the market’s behavior. The tune has not changed; it is still singing, “Going higher.” There is no logic to this extended rally. The market is acting out base on sentiments and technical. The market is simply pushing aside all the fundamentals and leaving them to be dealt with later. Therefore, unless you are willing to go long, then the next best thing is to do nothing. All these short quick pullbacks are frustrating and agonizing for the bears. The talking heads are warning us about how bad the month of September has been historically. But be reminded the market rarely does what the herd expects it to do. So do not be surprise this September could turn out to be not such a bad month everyone is expecting it to be. We just need to pay attention to what the market does, and let it lead us rather than for us to anticipate what it might do.

Since there is nothing new for me to say, I just let the charts do the talking. Here are the updated charts.