The Weekly Trader

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

 

AAII survey (12/24/2014)

50.9% Bullish. 18.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/23/2014)

52.5% Bullish.  15.8% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 14.5 (on 12/26/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 62.56 (on 12/26/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is above its 50-, 100-, and 200-day moving averages and pointing up

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.25% (on 12/26/2014) 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis and Opinion will not be posted this week. Have a great New Year and I’ll catch up with you the week of January 5th. 

 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

 

AAII survey (12/17/2014)

38.7% Bullish. 26.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/16/2014)

49.5% Bullish. 14.9% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 16.49 (on 12/19/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 58.91 (on 12/19/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is above its 50-, 100-, and 200-day moving averages and pointing up

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and below its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.17% (on 12/19/2014) 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Once again, the indicators are not giving strong signals. Sentiment indicators are mixed: Retail investors are not overly bullish (but the results were calculated before the two-day 700-point blowout). Other sentiment indicators such as RSI and VIX are also not extreme. On the technical side, moving averages are pointing up thanks to last week’s rally, but MACD is neutral. Bottom line: Indicators are not telling us much this week.

Opinion: Holy Smoke! 700 points in two days? A week ago, the Dow was teetering on the edge as it fell from 18,000 to 17,100. Then Janet spoke and lit the market on fire. I expected volatility and a rally last week, but not like that. As predicted, Janet said nothing, but the market didn’t care. It became a buying frenzy. Janet could have said “the sky is blue” and there would have been a rally. The big question is whether this rally has any substance or if it’s another head fake.

First, this week will be quiet because the market closes at 1:00 p.m. ET on the 24th, and will be closed all day on Christmas. Based on past markets, volume should be light. Unless there is an unexpected world crisis, the market should stay within a relatively tight range.

Once again, the market could go in either direction. After the holidays are over, we need to see what happens when this parabolic market reaches 18,000. If this is a true bull market with strong fundamentals, it will blow past 18,000 without looking back. In that case, although there will be a spectacular correction eventually, it will occur at a later date.

On the other hand, if the market struggles to surpass 18,000, that expected correction may come much earlier. All we can do is take it one week at a time, and look for clues.

I’ve said it before, but it’s worth repeating: The higher this market goes, the more dangerous it gets. I’ve talked to traders who don’t recall a market acting this ridiculous. Those with short memories may believe it’s normal for the market to climb this high and this fast, but it’s not normal. There will be a price to pay.

In 2007, I was on an airplane with a guy who invested in real estate. He said to me, “I’m making money but I don’t know how.” A year later, he was nearly bankrupt. In 2014, investors are making money and they don’t know how.

Bottom line: In my opinion, this market is topping out. It takes incredible patience to wait for reality to return to the market. Unfortunately, with the world’s central banks determined to keep markets levitated, we have to wait longer than any rational person anticipated.

 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest MarketWatch column: http://goo.gl/ozdUTp

 

AAII survey (12/10/2014)

45.0% Bullish. 22.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/9/2014)

51.5% Bullish. 14.8% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 21.08 (on 12/12/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 37.39 (on 12/12/2014) NOTE: RSI of Dow is at 35.78.

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is lying slightly above its 50-day moving average and pointing down. (Note: All major indexes sliced through their 20-day moving averages.)

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and below its red 9-day signal line and pointing down. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.10% (on 12/12/2014) NOTE: Bonds rallied last week. 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The indicators aren’t perfect but they worked last week, notifying us of an imminent market pullback. To refresh your memory, sentiment indicators were extreme last week as most investors were overly bullish. This week, sentiment came back to earth, although most investors are still bullish. The indicators also tell us that most investors do not believe there will be a major correction, or even a bear market. Nevertheless, the VIX zoomed from 12 to 21, which erased much of the extreme complacency. RSI went from overbought levels to nearly oversold. Yes, we went from one extreme to the other in the short term. RSI is also telling us we could have a bounce this week. However, moving averages are pointing down, and the market sliced through the 20-day MA like it was butter. Bottom line: Many investors were surprised that the market retreated (we weren’t). The indicators are telling us the market can go either way this week, so be on guard. The volatility should continue before and after the Fed meeting.

Opinion:  Last week was fascinating. The market struggled all week except for a 225-point Thursday morning rally, which faded by the end of the day, setting up the 300-point pullback on Friday. That’s what I call volatility. Wall Street had its worst week in three years.

This is an important week. We’ll soon learn how much influence the Fed has. I am sure the Fed will not do or say anything to upset the markets (unless they make a mistake). That means low interest rates indefinitely, and perhaps no change in language (that should rally the market).

If the market rallies before or after the Fed’s minutes are released, observe if the market can climb back to 18,000. If it can, then the uptrend is intact and in the short-term the market will go higher. On the other hand, if the expected rally fails during the week, the uptrend may be in danger.

Until a downtrend is confirmed, and that could take a while,  consider short-term trading strategies. That means taking profits quickly (and cutting losses when wrong). Those not comfortable with short-term trading should stay on the sidelines until the trend direction is clear.

All week, the financial television programs brought out the bulls, who predicted 50 shades of bullishness. The analysts recommended that you buy on the dip. Why? Because it worked in the past. Last week, many of the same bullish analysts told us to buy because you will “miss out on the year-end rally.” Dow 18,000 is a sure thing, according to them. In fact, every major analyst predicted the S&P will be at 2100 to 2200 next year. Guess what? These are educated guesses, not facts. If there’s anything I’ve learned, it’s that you should follow the market, not predictions. The market is giving us a message right now, and to be profitable, you must interpret that message correctly.

Bottom line: Right now, the indicators are telling us the market could go in either direction. It’s possible we’ll have a short-lived bounce followed by a decline. On the other hand, if the Fed is overly dovish, that bounce could turn into a longer-term rally. In my opinion, however, this bull market is on its last legs and it’s only a matter of time before it folds. (I’ve been saying that for several months.)

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest MarketWatch column: http://goo.gl/3FfYtD

 

AAII survey (12/3/2014)

42.7% Bullish. 25.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/2/2014)

53.4% Bullish. 13.9% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 11.82 (on 12/5/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 67.89 (on 12/5/2014) NOTE: RSI of Dow is at 75.96.

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and even with its red 9-day signal line and pointing sideways. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.31% (on 12/5/2014) NOTE: Bonds retreated last week. 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: It’s almost a repeat of last week with a few exceptions. Sentiment indicators are still sky-high although retail investors grew more cautious. (Maybe they don’t want to be left holding the bag again.) VIX has once again reached historic lows, and RSI is way overbought. On the technical side, the trend is still up but the MACD signal line went flat. We’ll know this week if that is significant or not. Bottom line: The market is overbought. Only a pullback or correction can bring it back to earth.

Opinion: I had a MarketWatch column deadline so my opinion will be shorter than usual. As expected, a little more volatility returned to the market, but only a little. The market chugged higher, but market breadth was awful all week.

On Friday, after a blowout jobs numbers, the market finished the day only slightly higher thanks to a last minute buy program. Investors are wondering why the Fed is keeping interest rates so low when the economy is improving. On Dec. 16th and 17th, we’ll hear from the Fed, and that should be interesting.

In my opinion, the Fed will delay raising interest rates for as long as possible. Meanwhile, when I look at the chart, I see a parabolic market that has reached near bubble territory. Obviously, many people disagree, but only the market is right.

Meanwhile, I’m looking for clues the market has topped out. For example, intraday reversals, gap ups and selloffs, and late day selloffs. There’s been a lot of strange market behavior such as the collapse in oil. At this point, keep your powder dry and be prepared to take action, especially if volatility increases.

Traders, get ready to start your engines.

 

Note: Beginning immediately, the comment button will be removed. Email me directly if you’d like to comment. 

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest MarketWatch column: http://goo.gl/pjQUxV

 

AAII survey (11/26/2014)

52.1% Bullish. 20.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (11/25/2014)

55.4% Bullish. 14.8% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 13.33 (on 11/28/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 70.69 (on 11/28/2014) NOTE: RSI of Dow is at 75.39.

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Bonds: U.S. 10-year yield is at 2.19% (on 11/28/2014) NOTE: Bonds are rallying.

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment indicators continue to spike higher, which is a bearish signal. AAII is above 50% and the number of bears in Investors Intelligence has reached historic lows. In addition, VIX remains in the basement, and RSI is above 70 (and 75 on the Dow). When you put it all together, you have excessive bullishness. Only a handful of investors expect the market to fall this month. Another unusual development is the smashing of commodities, especially oil. It is unknown at this time how this will affect the stock market. The good news: If you follow the trend, you are all in. The trend is up, moving averages are flashing green, and MACD is positive. Once again, it’s the sentiment indicators vs the technicals. We should know the winner soon.

Opinion: It’s been a long time since I’ve seen the sentiment indicators so skewed in one direction (up). Most investors are certain that December will be good to the market, and we’ll have that Christmas rally. After the “Bullard Bounce” last month, the market has been on a tear. To the unknowledgeable, this appears to be a raging bull market. The sweetener is the Fed, which is willing and ready to interject itself into the market when it falls. As I write this today, many people believe that the powers that be will not let this market go down.

If you study market history, whenever people believe “the market will never go down,” the market does, and abruptly. Right now, bullish investors are dreaming of Dow 18,000, and they might get it…or not. I know from experience whenever the herd believes they are fully protected, they’re really not.

Sometimes it takes a while, which is why my latest MarketWatch article (http://goo.gl/pjQUxV) is about being patient and waiting for the right opportunity. I don’t believe that it’s “different this time.” By this, I mean that no one has the power to prevent the market from falling indefinitely. The day will come (and I believe sooner rather than later) when the Fed’s words will be ignored and the market will plunge by more than anyone can imagine.

I’m not saying this will happen this week, or even next. I do know that the market is even more dangerous than six months ago (when I first started warning investors). The facts are these: The market keeps going higher while the rest of the world is struggling, while commodities are getting smashed, while bonds are rallying, while sentiment is at an all-time high, and while market breadth is terrible (i.e. New High-New Low and NYSE Tick).

When I look at reality, and then at the sentiment numbers, I am more convinced than ever this market is vulnerable. I believe the odds are very good that December will be a volatile month. Almost no one believes it.

At the moment, the market is trading in a very tight range, which will end in one of two ways. After consolidating, it will go higher. Or second, it will keep churning but go nowhere, eventually plunging faster and farther than anyone can imagine. That would be the scenario that absolutely no one is thinking of right now.

Bottom line: Sit tight and let the market have the final word. Be ready to pounce when the time is right.