Market Trend Remains Up

Sideways consolidation continued over the last week. The blog wasn't updated because of registration paperwork. We will discuss Investment Advisory registration in one of the upcoming posts.

Markets' sideways action remains intact. Even though in the last couple of days SP500 and US indices saw a relatively sharp decline, it did not impact the overall shape and form of the market.

Market Structure
SP500 is tracing out a diagonal pattern (shown below). One of the criteria of this pattern was to decline below C level, which it did yesterday. Now, the market needs to hold above yesterday's bottom to confirm that this pattern has been completed.

The overall market structure remains very choppy. This choppy action now spans over 4 months, which is a good enough time to correct the market through time. At weekly level this sideways action looks nothing more than a bull flag or pennant formation. And both of these are bullish in nature.

In terms of next market move, there are couple of options and will be determined by how the market participants react to the next rally phase. In either case, the minimum rally requirements would be above July 2016 high or around that level (SP500 = 2190).

Sentiment
Recent decline has also improve sentiment measures to suggest that a more sustainable rally is possible.

Fear/Greed indicator is at levels where it typically signifies a market bottom.

Similar another indicator just generated a buy signal and could mean that the trend is about to turn to the upside.

Market Classification Model:
MCM for stocks continues to be in a bull market. Therefore, the trend remains up and we will soon see a sharp rally. Even with yesterday's sharp decline, our strategy performed well. While SP500 was down 0.72%, we were up 0.20%. Another proprietary model is suggesting a sharp rally in our strategic allocation portfolio. We will see. So far by the grace of almighty, our proprietary portfolio is up ~20% YTD (after 10 months), which SP500 is up ~6%.

 If interested in free e-mail list or in paid services, please fill-out the form below.

Market Timing (IPM Model) & Structure

Just re-ran the Inflection Point Model and it seems like the next turn window is approaching fast. It is scheduled for October 21, 2016 (shown in chart below)

As you can see from the above chart, last turn window was on Sept 26, 2016. And the market topped on Sept 22, 2016, followed by ~3 weeks of sideways action. Following chart shows the best market structure representation with latest timing information

Market is still in a sideways correction. In fact, the 2nd portion of this correction took the shape of a triangle (X). Now it is in the final leg of this decline. So far, this last leg of the decline has been tracing out 3 waves, which means that this might turn into an ending diagonal.

Last wave will be sub-divided into 5 parts. 2 of 5 have been completed. The market could bottom in the area of 2090-2065 (SP500).

A signal of bottom will be generated by a buy signal generated within the IPM turn window. Confirmation will be received by a rally above critical proprietary levels.

Overall market trend remains up and this correction should give way to a sharper rally. Seems like market is setting-up for a wash-out to scare enough people out of the market, so that a big year end rally can start.

If your already long, stay long. If you want to go long, wait for another few days and then start adding longs.

Market Classification Model
Market Classification Model (MCM) remains bullish on the US stock market. It turned bullish in July 2016 and has remained bullish through last 3 months. Even though many market pundits have been advocating a sharp decline.

Persistent investment behavior is critical for longer-term capital gains because that's the best way of gaining preferred tax treatment, which can significantly help your portfolio.

If interested in free e-mail list or in paid services, please fill-out the form below.

New Year and the Stock Market

Happy New Year. Although today is the first trading day of the year, markets opened at negative 300. From a such a negative opening its very hard to make a come back and close in the positive territory. And market declines on the first day of the year, odds of a losing year are at 50% based on historical data (link).  

At Understand, Survive and Thrive, we suggested that the market has undergone a trend change back in September (link).  However, we suggested that shorting opportunity is not here, and we should wait for a market rally. Experience shows that markets rally after a sharp decline for two reasons:

1. To entice weak hands into the market as buying opportunity
2. To shake shorts who were early to the game

Once the mood changes, markets start their decline phase, which is persistent. At this point, the possibility of a prolonged decline has increased sharply. In fact, several of the high fliers like MSFT, NetFlix and others are down big today, which shows that the leadership is now leaving the market.

This is also evident from the structural integrity of the market. Stock market patterns can provide very valuable insights into the performance of a particular stock or the over all market. We discussed in December (link) that the market is tracing out a Head and Shoulders pattern, which symbolizes potential trend changes. That pattern is still in plan. But now another Head and Shoulders pattern is visible in Nasdaq (shown below).

Once this pattern is completed, which is almost complete, we can see a sharp sell-off to the downside. This could take the prices down to prior base level i.e. potential 6%+ decline from current levels.

One might ask what can cause such a decline. Although there are many reasons that we will read in the news for today's decline, earnings will be the primary driver, which start in 2 weeks. As economy weakens, earnings will dwindle and stock market will follow. So in the situation what an investor must do?

Following are some of the strategies that we are applying to navigate through this situations:

1. Invest in assets that are in bull markets (Bonds)
2. Exit longs from stocks
3. Short indexed ETFs with predefined mix of diversified assets and risk mitigation startegies
4. Keep powder dry for upcoming bull markets in other asset classes

 

IPM Trade Matrix Update - Trade 5 (Part 5)

Trade Overview

Today's market action was very constructive. While on one hand large caps like DJIA and SP500 absorbed recent gains by going sideways, small caps and tech stocks rallied sharply. This rally in small caps is a very encouraging sign for the broader market rally. Furthermore, breadth during this rally has been very impressive. 

Following chart shows a smoothed Advance/Decline line. According to this chart, market breadth hasn't been this strong in a while. 

Please note that this chart has two implications:

1. We won't enter a new bear market right away i.e. current rally has a ways to go: 1929 comparison should not be taken seriously
2. We might be approaching an overbought area and could see a pull-back over the next couple of weeks.

This chart also confirms IPM Trade Matrix's buy signal. The only difference is that the IPM Trade Matrix generated its signal several days before the breadth jump. Therefore, IPM Trade Matrix is a real-time actionable system with greater profit possibilities. 

Our Elliott Wave structural analysis of the market suggests that the market is in a firm uptrend. We are at least a week away from an intermediate term correction. Please note that this will not be a serious correction. It might just fill-out the right shoulder of the Inverted Head and Shoulder pattern (discussed earlier). IPM Top date has already been e-mailed to subscribers.

As evident from the above chart, market has just completed a sequence of 1s and 2s. As long as the stop levels are not broken (outlined below) we will stay long. If profit objectives for TNA are hit, we will bring our trailing stops closer per IPM Trade Matrix definitions and will let the market decide its next move.

Elliott Wave analysis cannot be completed without sentiment analysis. And current sentiment analysis suggests that we are still not seeing optimism in the market. This is  very good for the health of this rally. We will keep an eye on the stop levels and profit objectives, as we are approaching the end of Trade 5 per IPM Trade Matrix.

IPM Trade Matrix 2014 Trades

TRADE - 1: (Long) = +2.6%

TRADE - 2: (Short) = +9.3%

TRADE - 3: (Long) - Non IPM Trade Matrix trade = -0.2%
TRADE - 4: (Short - 1/31/14 to 2/5/14) = +7.25% 

TRADE - 5: Long

Long TNA at 70 ==> new TNA basis = 69.94 (added few longs today) 
Longs were initiated on 2/11/14 and 2/13/14 based on IPM Trade Matrix Trigger and Elliott Wave structure. More might be added if opportunity comes within IPM turn window. 

TRADE CONDITIONS
Condition: Bottom within IPM Turn Window  
Trigger: Rally above SP500 = 1789, DJIA = 15790, Russell 2000 = 111.5, Global Dow = 2401
Supporting Indicators: Up trend (8/4 did not complete), Next IPM can be either Top/Bottom

PROFIT TARGETS
Profit Target 1: 1870
Profit Target 2: 1930

RISK
Stop: Break below 1750 (valid till we are within IPM Turn Window)
Trailing Stops: Break below 1790 (SP500) and 15780 (DJIA)
Typical IPM Trade Matrix Risk: 1.5%
Actual IPM Trade Matrix Risk: 1.3% (Entry = 1813, Exit = 1790, Risk = 1.3% )
Risk Reason: There are multiple reasons to be worried: 1929 stock market parallel, 8/4 Test to the downside is in process (will be invalid at new highs) - almost invalid, and major IPM Bottom window in process - almost invalid.  

Applicable Rule (There are 7 Rules in the IPM Trade Matrix. Following are applicable to the market right now): 

1. Do not go long or short without trigger to prevent losses by market moving against you.  
2. Exit half at profit objective 1. Exit full at profit objective 1 if proprietary momentum continuation signals are not present.
3. Observe stop-losses to minimize draw-downs

Note: IPM Trade Matrix Trades will be posted in the first half of 2014. This is an experiment to understand and enhance the capabilities of this Matrix.

For Blog updates on Google+ add: Understand Survive Thrive 

For Blog updates on Twitter, add: @survive_thrive

For E-mail updates: 

IPM Model Update & Gold Breakout

IPM Model Update Has Been E-mailed to Subscribers.

IPM Trade Matrix Updates: IPM Trade Matrix Update - Trade 5 (Part 4)

Gold & Silver are breaking out. There are several reasons to be optimistic about their prospects:

1. 8/4 Test has been completed to the Upside in both Gold and Silver on both dail and weekly time frames. This suggests that the trend has reversed, and we should start looking for upside surprises. 
2. Long-term trend lines have been broken to the upside.
3. Sentiment had reached pessimistic extreme few weeks ago, which was in line with a generation precious metal bottom
4. Bottoming process took its due course which is encouraging for the market
5. Miners have really started out-performing the metal. This is another exciting and encouraging sign.
6. Rally from the bottom has been impressive, and suggests a new trend has started.

Confirmation of a new Bull market will be a rally above 1460 in Gold.

For Blog updates on Google+ add: Understand Survive Thrive 

For Blog updates on Twitter, add: @survive_thrive

For E-mail updates: