Stock Market Consolidation & Break-out Levels

Since July, market has been going sideways to down. This downdraft has been persistent, boring and choppy. While markets are still within 1-2% of all-time highs, this choppy action has brought forward a lot of bears and helped improve the valuation measures like P/E ratios. 

In fact, the true purpose of these kind of market declines/sideways corrections is to reduce optimism and lay the foundation for the next rally phase because investors get tired of the market performance.

Sentiment - Fear/Greed Indicator

CNN's fear greed indicator is suggesting that the frothy sentiment that we saw in mid July has now been replaced by lack of enthusiasm towards the market. 

In fact, the sentiment is as negative right now, as it was at the time of Brexit. Therefore, we can see another sharper rally from these levels.

Signs of a Break-out

While market's decline has been choppy in nature, it is along the top downtrend trend line. One key indication of a market trend reversal would be a break of the trend line to the upside. For DJIA, this trend line is currently at 18,300.  

A similar situation is present in case of SP500, where the downtrend line is crossing at 2166.

Therefore, a sustained rally of 100 points in DJIA and ~20 points in SP500 would confirm a break-out.

Overall, the markets remain in an uptrend. Market Classification Model remains in an uptrend. Therefore, there is a very high probability that we will soon experience a market break-out. Long lasting sideways action is preparing for a break-out after resetting optimistic sentiment, market valuations and technical indicators

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Bonds Bull is Roaring

We have been discussing stock market's #Bear and Bond market's #Bull for a while. Now it seems like Bond market is really taking-off. This is evident from a sharp rally in the bonds over the last 2 weeks. Some might attribute it to the declining stock market but a bull market keeps on rising and people find reasons for the rise.

As a confirmation of the trend, bond prices have just completed an inverted Head and Shoulders pattern (shown below):

We have been discussing this pattern since December, as following charts was published here on December 21.

As bonds rally and stocks decline, we are short stocks and long bonds. Being long bonds gives us cash flow in form of dividends and being short stocks allows us to take advantage of the downside.

Like any market, this bond rally will come across obstacles but the constant cash flow and the diversification provided by this investment is invaluable, along with the potential for capital gains. At the same time, it will provide a very good opportunity and probably the last opportunity for people to buy homes at very low interest rates.

As market gets more volatile, it will even make more sense to invest in bonds. But the good time to invest in any asset class or stock is before the major move happens and the news becomes public. Let's see when the stock market bounce happens, which might provide added insight into the long-term (6 months to 1 year) market trajectory.

After all is said and done, there will be a very good opportunity to buy stocks down the road.

IPM Trade Matrix - Trade 1 (Part 7)

Market Overview:
Market is still going sideways. This kind of market action suggests that the market is getting ready for a blast higher. Although yesterday's Chinese PMI data will be brought forward as a reason of concern and the sell-off, there is nothing wrong with the market structure suggesting that this news will also be bought. 

An interesting development is in the Dow's Elliott Wave structure. Its recent sideways action has kind-of traced out a triangle. Triangles usually break in the direction of the trend. This triangle could also result in a sharp rally, as long as Dow can hold above: 16237  

On a closer analysis, triangle's sub-waves are also divided into 3s and are overlapping. This is a classic example of a corrective wave. And suggests that the bigger trend has not turned down yet.

Overall, it seems like market wants to give Chairman Bernanke a standing ovation before his departure from the Fed towards the end of this month.

First Trade of 2014 is in process:

Trade Observations

1. IPM Top date did its job, as market went sideways after topping on that date. IPM Top date was scheduled for Jan 15 and the latest market top did occur on Jan 15. We will see if market can break above this top to mitigate all the risks!
2. Although DJIA did close below its trailing stop, other indices did not close below their respective levels. As a result, we are still long and have not been stopped out. 
3. As we come closer to the next IPM turn date, we will take profits even if the market did not reach our target. But that time is few weeks away. So market has ample time to show its real character.

Markets
SP500 (1/22/14) = 1845
DJIA (1/22/14) = 16375

TRADE
Long TNA at 76.25 (original) ==> 76.6 (new)
Long FAS at 92.30 (original) ==> 91.6 (new)
Long TSLA at 171.2
Long positions were added on 1/14/14 & 1/16/14 based on IPM Bottom window expiration and low risk scenario

Condition: Next IPM Window is Top or Bottom
No. of Trades between turn windows: 1
Triggered (Updated at End of Day on 1/9/14): Rally above 1837 (SP500) and above 16450 (DJIA)
Profit Target: 1885-1890 (Will be evaluated as Elliott Wave structure matures)

RISK
Stop: Below SP500 = 1816, DJIA = 16217, Comp = 4090, Rut = 1141 (3 of 4)
Trailing Stops (updated on 1/23): Close Below SP500 = 1835, DJIA = 16442, Comp = 4170, Rut = 1160 (3 of 4) 
Typical IPM Trade Matrix Risk: 1.5%
Actual IPM Trade Matrix Risk (1/15/14): 0% (Entry = 1837, Exit = 1835, Risk = 0%)
Risk Reason: IPM Top is approaching. Market needs to hold during this top window, otherwise we can see a serious correction. Rise above 1850 will neutralize this risk

Applicable Rule: If next minor IPM turn window is within 2 weeks then wait for a confirmation break before exiting longs. 

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.

Turn Point Action Plan - July 13 to July 22

We have finally entered the turn window, with the market declining over the past few sessions. This decline has brought back a lot of pessimism in the market related the European debt issues and US slow economic recovery.

After re-running the Inflection Point Models, following charts and conclusions were achieved. 

These models are suggesting that the next market turn date will be around July 19, 2011 (+/- 4 days). Therefore, the turn window from July 13 to July 22 is still valid. Furthermore, we are in the earnings season and many times market turns during early earnings weeks, after deceiving many by its initial decline. This week is also the options expiration week, which in itself brings many market turns.


On the other hand, market's recent decline was 5 wave, which suggests that after the market undergoes a partial bounce, it will again decline to 1290s. In any case, I will wait for the Trading algorithm to generate a buy signal before jumping in on the long side. Overall, the market is tracing out a nice base, as discussed in June posts, before exploding higher. Risk-Management is the key over here to ensure that we are not caught in market's trap.


Note: If the does not bottom during this turn window and continues to decline after July 22, 2011, then the markets might face severe downside risk.