Tuesday, February 21, 2012

IPM Turn Date

Based on the IPM turn point analysis, market could continue to rise till the end of this month. This observation takes on even more importance when viewed in context with the broader over-bought condition, decreasing market breadth and investor optimism. This kind of sentiment backdrop typically foreshadows price declines. Although the upcoming decline will most probably not result in a new bear market (at least not right away), it could present a good buying opportunity.

After re-running the Inflection Point Model over the weekend, following outcome was achieved.

According to this analysis the next IPM turn date is scheduled for March 1, 2012. This turn date coincides with a momentum based market timing indicator turn date. Therefore, we have more confidence in this turn date. 

Since many investors might have stops near the 2011 highs, markets could rally during the next week as their stops are hit. This rally would result in a breakout, attracting more people back into the market, just in time for a major pull-back in March (per IPM turn date). 

In the long-term (4-8 months) it seems like DJIA could rise to a new all-time high (~15000) before starting the next down leg. The best way to strategically play this kind of rally would be to wait for the March pull-back (if not already in the market), and then ride the market till the next 8/4 test to the downside has been completed.   

Thursday, February 16, 2012

Trading Algorithm Systematic Analysis

Market: Bull (8/4 test complete) ==> No Shorting
  • IPM Turn window ==> Russell 2000 and DJT Topped during IPM

    • Market Scenario (Market Matrix and IPM) ==> Be cautious b/c of sentiment and IPM turn window

      • Market pauses ==> Tests short-term proprietary MA

        • Market momentum: Very high (overbought) ==> Rally should continue (high prob)

          •  Re-entry opportunity ==> Test/re-gain short-term proprietary MA

            • Long for trade into the the IPM turn date, (Stop: Close below 1337)

              • Next Turn date: End of February (IPM + Momentum analysis)
Details will be provided in future posts.

Thursday, February 9, 2012

Bull Market

It seems like market has made its decision. After a brief pause, the market is about to rally. Please note that this pause was upward sloping, so it might not really appear as a pause in major indices like DJIA and SPX.

Trade: Long
Stop: Close below 1327

We are at very elevated levels, but this does not mean that we cannot go even higher. Next turn date is after 2 weeks. Therefore, it is possible that we might continue higher for next 2-3 weeks. However, stops need to be observed.

Update 11:58 PM
Although the market has passed through the IPM turn window, it is very difficult for me to say that one should jump into the market right now. Please see the following facts:
1- Individual Investors bullishness at extremely elevated levels
2- Newsletters bullishness at extremely high  levels
3- Insiders are selling stocks at very high pace
4- Small caps and DJT divergences

Keeping all of these developments in mind, I went back to my cheat sheet about market scenarios.

Scenarios: TPAP & IPM (turn dates) – Strategy
Low Risk Trade: Market in an uptrend - Pick Bottoms in IPM window using TPAP or near key moving average / break above highs

High Risk Trade: Market near top - Pick Top at TPAP & MM (Tiring indicators) & EW, IPM

Please note that although the market is exhibiting resilience, the circumstances point towards the potential of the high-risk trade. This trade takes on even more significance because we have just eclipsed the IPM turn window, hence more risk involved. On the other hand, if the market does top out for the short-term, we will see a sharp reaction to the down side for the next few weeks (till the next turn date).

Now the question is, do we want to take on such risk and make the long or short trade? Or do we want the market to show the direction (Up or Down)? I would suggest that one should wait for another day or two, and see if the market rallies. If it does rally then it would suggest that we are going to continue to rally, and if it fails then we might see a 2-3 weeks of correction.

In any case, according to one of the things that I have learnt during the past few months: One should not trade against the trend in an upward trending market. However, if the market is declining, then one can take small long trades at the turn dates. Therefore, in a bull market one should wait for the completion of the 8/4 reversal to the downside before starting to short. In short, i will not be shorting the market.

Wednesday, February 8, 2012

Bull or Bear Decision

Today is the last day of the IPM turn window. We will soon find out whether the market tops out today, and declines for the next couple of weeks. First indication of a prolonged decline would be a break below 1322 (SP500) level on a closing basis.

Although the recent advance had many interesting aspects, ample to confuse the majority; recently there have been several contrary indications of a fast approaching market decline.

  1. Market broke above its April 2011 highs (Nasdaq and DJIA). This is a big deal because nullifies a lot of EW counts and would have hit many stops. That means that a lot of Elliott Wave followers would have thrown in the towel yesterday.
  2. Cumulative Advance decline line has made a new high, while the markets have not. To the majority, this behavior means that the market internals are strong; however, the simple A/D line's performance has not been as strong. In fact there was negative divergence between the the simple A/D line and the market, which means that market is not as strong as depicted by cumulative A/D line.
  3. Following headline on CNBC: "Dr. Doom Thinks Rally Has Legs, At Least for Now," means that it is time to be cautious. How can a perma-Bear become a rally advocate, right at the top? Either he is again wrong or he has finally given up!
  4. At a point when the stock market is near its 4 years highs, several professionals are arguing on national TV that stocks are very cheap. This kind of behavior suggests that bullish chorus is growing at an alarming pace.
  5. People accepting extreme optimistic sentiment as a sign of rally continuation, rather than contrarion market top.

Today is the last day of the turn window. Typically, when markets turn on the last turn date, they result in sharp moves in the opposite direction i.e. right now it should be from up to down. However, if the market does manage to close above today's top then it would suggest that market will continue to rise, as there is just too much momentum behind stocks. This possibility of continuous rise is very low based on the Market Matrix analysis, but one should always be ready for different market moves as market often does the least expected.

Furthermore, there is a Dow Theory divergence in the market. This divergence is highly important, as it comes in conjunction with so many other bearish indicators.

Finally, last night market tested the global stock market proxy resistance level. According to this proxy, global stock markets are still in a bear market. Hence, it will be very interesting to see whether the US stock market starts a sharp decline during the IPM turn window which leads the global proxy down, or will the US markets continue their rise which will lead the global proxy into a new bull market.

Most of the indicators used by average investors and analysts are bullish. Under such circumstances, it pays to have indicators which can read below the market surface and are different from the majority. Please note that every indicator should have a built-in risk-definition and/or risk-management mechanism, so that one can adjust his/her position as soon as things change.

Saturday, February 4, 2012

Structural Update

The market is at a very interesting juncture right now. The graph below shows that the market declined in 5 waves from May 2011 top to October 2011 bottom. This decline has been followed by a 3 wave rise. More importantly, all of the sub-waves of the 3 wave rise, were 3 in structure. This structure is not the type of structure, we expect to see at the start of a prolonged rally.

The best aspect of this market structure is that market should start to decline really soon. In fact, if the market (DJIA) rallies another 50 points then this pattern will be nullified. This seems like a perfect shorting setup, with sharp stop above the high.

Furthermore, we are within the later half of IPM turn window. This means that market can top out at any time/ Finally, the global stock proxy (the new index that was mentioned few weeks ago), is still showing that we are in a bear market. In fact, it is sitting at the resistance, as I type this post. This development has certain far reaching consequences:

1- If the market fails at or near current levels then we will resume the downtrend
2- If the market breaks past the current resistance, then we will finally enter a bull market.

Although the US indices entered a Bull market back at 1230 (SP500), however lack of global strength prevented me from committing to the market structure. Now is the moment of truth, about the market structure and future market pattern.

When you combine the 3 wave rally, current IPM turn, VIX based sell signals, complacent sentiment and other indicators, it seems that the environment is ripe for a pull-back. This pull-back can transform into something very strong. However, we will give it time to materialize and see how the market reacts to current technical ambiance.

Friday, February 3, 2012

Market updated

Market is in the danger zone. Market Matrix is red from top to bottom. 90% indicators are hinting towards a decline + we are in the IPM window. Therefore, one should be careful. A decline below SPX 1320 (closing)  would mean that market has topped in the short term.