The Weekly Trader

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

 

AAII survey (11/5/2014)

52.7% Bullish. 15.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (11/4/2014)

54.6% Bullish. 15.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 13.12 (on 11/7/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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.

 

RSI (S&P 500): RSI is at 67.04 (on 11/7/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.65% (on 11/7/2014)

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

 

Analysis: The indicators and clues are pointing in two directions. The indexes have firmly surpassed their moving averages. In addition, MACD is in an uptrend. If you are looking at the technicals, you can’t help but be bullish. The sentiment indicators, on the other hand, are flashing warning signs. While the market climbs higher, retail investors are feeling overly exuberant along with money managers and financial writers. The AAII sentiment survey is showing the lowest number of bears in many years. In addition, the VIX is back to its lows and the RSI is showing overbought conditions. What does it mean? It means we could still go higher but caution is strongly advised.

Opinion: Who are you going to believe: the technical indicators or sentiment indicators? As you see above, there is a major divergence. If you follow the trend, which is usually a prudent idea, you are long. Typically, the trend is your friend and when the market is above its moving averages (among other things), the odds are good that you will be on the right side of the market.

On the other hand, the market rebounded so fast and so quickly that the trend could be going parabolic, which is a red flag. It is not surprising that the majority of investors and money managers are wildly bullish right now. Everything seems to be going their way.

In my opinion, the market is going higher, but on fumes. It won’t take much to send this market lower. Once the crowd starts to feel nervous and fearful, they’ll sell in a heartbeat. Unfortunately, no one can predict when that will happen. Note that I said, “Will.” Yes, the markets will reverse direction one day, and there will be a major correction. It’s taken a long time, and you may have to wait longer.

Here’s what I’m doing: As a long-term, patient trader, I make the most money when the market is volatile. We had a volatile market a few weeks ago, but that temporarily ended. Now we’re back to the daily “V” shaped buy-on-the-dip rally. Very little volume and volatility, just the way long-term investors like it. If this keeps up, we’ll be at 18,000 by January.

If you are looking to make (or possibly, lose) big money, when the market gets volatile again, you can take action. There are several ways to do this: ETFs and options are my preferred methods, but skilled traders might trade individual stocks as well.

When the market gets volatile again, remember this rule: Take profits quickly! I still believe this uptrend is on its last legs, but knowing when it will roll over is difficult to predict. I take it one day at a time. Nevertheless, when this current rally falters again, be ready to take action (if you dare).

Bottom line: Because of the divergence of technical and sentiment indicators, it’s impossible to predict where the market will go this week. If possible, be on the sidelines in cash and get ready to plunge when the market reveals its hand. Be patient, as always, and be prepared for volatility. That’s when traders will shine and many investors will run for cover.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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

 

AAII survey (10/29/2014)

49.4% Bullish. 21.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/29/2014)

47.0% Bullish. 16.3% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 14.03 (on 10/31/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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 even with its zero line, but 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.

 

RSI (S&P 500): RSI is at 42.47 (on 10/31/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.34% (on 10/31/2014)

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

 

Analysis: Sentiment has increased along with the indexes. Although not completely in the danger zone, sentiment is getting frothy again. The VIX reflects complacency (again). The uptrend seems intact as the indexes rose back above their moving averages. This is an important week: If the indexes remain above their moving averages, the market is going higher. If not, it will be a rough ride. Note: Long term, I am looking at 1959 on the S&P 500 as the line in the sand. If it drops below that, look out below.

Opinion: As I mentioned last week, Dow 17,000 was a real possibility, and it happened, thanks to a big boost from the Bank of Japan. As a result, the market rallied on Friday (as well as on Thursday).

As I wrote in my latest column for MarketWatch (coming out this week), Friday’s rally was a head fake. It appeared strong but in fact there was little institutional support, breadth, or volume. Although amateurs might think it was a good day, in fact this market could run out of steam quickly.

As I’ve repeatedly said in the past, I believe this market is still too dangerous to enter.

Note: If you feel you must be long this market and can’t bear to miss out on any short-term rallies, consider buying call options (this is only for knowledgeable traders or those who read my book, Understanding Options 2E). Buying call options is speculation, and most speculators lose. Nevertheless, call options can be profitable if you are right about the timing and direction of the market or individual stocks.

Bottom line: It should be a volatile week because of the election, and second thoughts about the surprise BOJ announcement.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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

 

AAII survey (10/22/2014)

49.7% Bullish. 22.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/22/2014)

35.3% Bullish. 18.2% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 16.11 (on 10/24/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): The S&P is slightly above its 100-day moving average and slightly below its 50-day moving average and pointing up. It bounced back above its 200-day MA. 

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 below its zero line, but slightly 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.

 

RSI (S&P 500): RSI is at 55.88 (on 10/24/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.27% (on 10/24/2014)

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

 

Analysis: The Fed stopped the carnage and led the market higher last week. In fact, the S&P 500 was up 5.5 percent for the week, its best weekly gain in nearly two years. The markets needed to repair the technical damage from two weeks ago and it did. The moving averages are now pointing up along with MACD. Retail investors threw caution to the wind and are back to feeling bullish. Surprisingly, financial pros and writers are feeling a little less exuberant. Bottom line: As we enter the coming week, there is a bullish bias thanks to the Fed’s words and anticipated actions.

Opinion: I didn’t think it was possible but the bullish party continued last week with only a one-day hiccup. With the Fed ready to take center stage this week (the FOMC minutes will be released Wednesday and Janet makes a speech on Thursday), anything is possible. Judging by past Fed actions, the Dow will be knocking on 17,000’s door soon. The Fed “might” end QE but will be quick to mention they have other programs in place. (If the market takes another dive, however, watch how fast they bring back QE. On second thought, they may not really end QE at all.)

The Fed is playing with fire but they can’t help themselves. They do not want the market to plunge. They use words and actions to reverse any downward momentum, and they’ll continue to do so. In the future, if the market falls by an extreme amount (to the Fed, 7 percent is extreme), they will bring out the cavalry. I’m impressed because so far the strategy has worked, but it’s a dangerous game.

Not surprisingly, the masses believe the Fed can do no wrong. If the Fed is right, the economy will improve enough to bring real buyers into the market. But if the Fed is wrong, this thing could unravel quickly, and create problems in unanticipated places (it already has).

With debt levels so high, with the Fed actively participating in the market, commodities getting smashed, bond yields plunging, and the market at all-time highs, it’s an unpredictable market. And yet, the Fed could continue QE for months or years.

Right now, I cannot predict what the market will do this week. 17,000 is a real possibility. On the other hand, if outside events take a turn for the worse, even the Fed can’t stop the stampede out the door.

Bottom line: The Fed has the tools and the will to take the market higher, but eventually the scheme must end. All we can do is wait and watch.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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

This is my latest MarketWatch article (Oct. 13): http://goo.gl/8pEsCL

 

AAII survey (10/15/2014)

42.7% Bullish. 33.7% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/14/2014)

37.8% Bullish. 17.3% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 21.99 (on 10/17/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): All the indexes are below their 50-, 100-, and 200-day moving averages, and pointing up. Note: The Russell 2000 is in a correction.

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 below 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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 37.19 (on 10/17/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.19% (on 10/17/2014)

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

 

Analysis: It was another wild week. Sentiment retreated along with the stock market, especially among pros and financial writers. Nevertheless, most are still hopeful we’ll have a year-end rally. Retail investor sentiment took a dive during the week, although I’m sure they were cheered by Friday’s bounce. The VIX also spiked as volatility returned to the market. After a 1000-point drop in the Dow in two weeks, some investors were caught off guard. Even with Friday’s Fed-inspired rally, technical damage has been done to the indexes. It seemed impossible two weeks ago but all the indexes are below their 200-day moving averages.

Opinion: Last week was profitable for the bears. Nevertheless, the market was headed even lower when Fed member James Bullard single-handily reversed the market’s plunge (down 460 on Thursday at the low before reversing), which also helped to move the market higher on Friday. The market was saved by the Fed, who always seems to appear at just the right time.

This week will be very important. It will take a lot of smooth talking by the Fed (and Wall Street) to win back those 1000 lost points. As you know, the Fed has done it before: Remember QE2 (Nov. 2010), Operation Twist (Sept. 2011), and QE3 (Sept. 2012). There is little doubt in my mind that if the market keeps plunging, the Fed will initiate a new program.

If you are new to the stock market, you might think that the Fed has always interfered in the market. In reality, before Fed chairman Greenspan, the Fed generally took a hands-off attitude towards the markets. The interference of the Fed into the markets is unprecedented. One thing is certain: If the Fed tries to talk up the stock market or create a new program, and the market keeps falling, all hell will break loose. Put another way, investors believe the Fed and their programs. If the Fed ever loses credibility, the markets will plunge. There is an old Wall Street adage: “No one is bigger than the market.” We will put this proverb to the test this week.

As I’ve warned for weeks and months, this is still a dangerous market. In fact, I stand by my last MarketWatch column (http://goo.gl/oC9rEJ). If you are shorting with inverse ETFs or put options, be prepared for dramatic Friday-type spikes. If you are long, however, your main hope is that the Fed and positive earnings will save the day.

At the moment, it’s too early to say we’re in a bear market, but signs are pointing in that direction. In a bear market, those amazing one-day rallies are common, but they don’t last long. If the market fails to make back those lost points and the rally fails, the odds are good the bear has arrived.

However, most investors believe the correction is over and it’s a buying opportunity. If they’re wrong (and I believe they are), the market will keep falling. On the other hand, if I’m wrong, those 1000 points will be made up lickety-split (i.e. quickly). I can’t wait to see who is right.

Bottom line: It’s not nice to fool with Mr. Market. There could be unexpected and dangerous consequences. For now, be on the lookout for failed rallies. If investors get their wish this week, the market will calm down and volatility will decrease. It’s possible they will get their wish — for now.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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

This is my latest MarketWatch article (Oct. 13): http://goo.gl/8pEsCL

 

AAII survey (10/8/2014)

39.9% Bullish. 31.0% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/7/2014)

45.5% Bullish. 14.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 21.24 (on 10/10/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): All the indexes are below their 50- and 100-day moving averages, and pointing down. All the indexes are either below or at their 200-day moving average and pointing down. Note: The Russell 2000 is in a correction.

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 below 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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 35.12 (on 10/10/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.31% (on 10/10/2014)

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

 

Analysis: Last week was a tug-of-war but the bears won, especially on the Friday close. The bulls had one good day during the week but it was a head fake. Technically speaking, serious damage was done to the indexes. In fact, the charts look horrendous. If all the indexes fall below their 200-day moving averages (the Dow and S&P are slightly above), expect more pain if you are long. Sentiment has pulled back a little but most financial writers and the Wall Street crowd are still bullish. (It takes time for people to believe there is a trend change.) The VIX spiked as volatility increased, so expect to see more VIX spikes as investors wake up to a new reality. The odds are good that the bears are going to have a good week.

Opinion: I hope you are paying attention. A few commentators recommended that this is the time to go fishing, but they are wrong. This is not the time to relax. As you know, I’ve recommended “sitting and waiting” for a long time, but that’s over now. Now it’s time to get off the fishing boat and bring your “A” game to the market.

Right now, it appears the uptrend is faltering and that the bull market is coming to an end. This week will give us more clues. If the bull market is really ending, expect a lot more volatility. Judging by the charts and indicators, this seems like the real deal. As always, the Fed is ready to step in and try to prevent a stock market disaster. Everyone will be watching to see what they will do and say. In fact, if the market falls into the abyss, it’s guaranteed the Fed will announce a new program (Operation Twist 2?), a new promise (low interest rates forever?), or anything to stop the carnage. That’s when it will get interesting (and more volatile).

As I wrote in my newest column for MarketWatch (http://goo.gl/8pEsCL), instead of buying on the dip, it may be time to sell on the rallies. As for me, I added heavily to my short positions during the week, usually on the rallies. I also speculated with put options (read my book, Understanding Options, if you’ve never bought or sold options). My short trades were very successful, which tells me I’m on the right track. Still, it takes more than one good week to confirm a trend change.

Currently, most investors do not believe the market is any imminent danger. Only two weeks ago, investors were convinced the market will go up for the next two years: Dow 18,000 was within reach. Nevertheless, it takes a long time for investors to change from overconfidence to fear. As the market gets more volatile, this is also when day traders will shine, but again, take profits quickly (although that is an individual decision).

If you are not comfortable trading during a bear market, it’s understandable. It’s not an easy environment. In that case, it’s best to stay on the sidelines in cash until the bear market is over (it can take months and even a year). If this is a confirmed bear market, it can start slowly but end in a spectacular fashion (i.e. crash or capitulation).

The most bullish investors are still all in, and probably believe this recent pullback was a “buying opportunity,” or a chance to buy favorite stocks cheap. That’s what some analysts are saying on TV, but I disagree. Buying on the dip is a questionable strategy in a bear market. (Note: Even Warren Buffett is saying to buy the dip during the next correction.)

Hold onto your seats because there should be fireworks this week. With trillions of dollars in long positions, many investors are going to grit their teeth and hold, that is, until the pain gets too great. The most bullish commentators are promising a beautiful year-end rally, but I’m not convinced they are right.

Bottom line: This is going to be a very wild week. Be prepared for anything.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.