The Weekly Trader

Each weekend, I will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now(Adams Media).

 

AAII survey (10/2/2013)

37.8% Bullish. 30.1% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/2/2013)

46.4 % Bullish. 18.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .59

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 16.74

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 is resting slightly above its 50-day moving average, and above the 100-day and 200-day MA.

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

Note: S&P 500 stopped falling but still not out of the danger zone. Dow Jones below 50-day and 100-day MA. 

 

MACD: MACD is above the zero line but crossed slightly below the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Buy Signal: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Analysis: Sentiment is mixed along with the technical indicators. Volume has been low as the market takes a wait and see attitude. Dow is under its 50-day and 100-day moving average, a bearish sign. Market could go in either direction according to the indicators. It’s a textbook sideways market.

Opinion: A sideways markets is dangerous. As expected, the market slowly drifted lower all week, especially the Dow, but reversed on Friday.

Most market participants are ignoring the shenanigans in Washington. Volume is low and themarket ended the week almost flat. No one seems to believe the U.S. will default on its debt, which is why there is complacency, and no panic. Meanwhile, the game of chicken continues.

Many investors are positive about the economy and believe we’ll go higher after we get through the government sideshow. After all, with the Fed watching your back, how can the market go down?

What will cause the market to rally? If the Fed announces that QE will continue indefinitely, if Janet Yellen is appointed Fed chairman, if corporate earnings surpass expectations, if there is an end tothe government shutdown, or if the U.S. doesn’t default.

What will cause the market to plunge? If the Fed tapers, if there really is a government default (unlikely), if earnings disappoint more than they already have, or if this uncertainty continues.

If you are new to the market (and even if you’re not), stay on the sidelines. In the meantime, look for clues where the market will go next. For example, if there is a rally, see if it lasts more than a day. If it doesn’t, that would be bearish.

According to the futures, the week should start with a bearish tone, but that could change quickly. When the market is this uncertain, staying on the sidelines is really the safest move. A low volume, confused environment could bring more volatility. Let the market prove itself before you commit too heavily to one side or the other. It’s easy to get it wrong.

Even if the political standoff ends this week, be on guard. If there is anything I’ve learned about the market, when you think you are home free, that’s when you get smashed in the face. With the Dow over 15,000 and stocks like Priceline surpassing $1,000 per share, it’s almost like 1999 again. Priceline is a great company, but $1,000 per share? I wonder.

Bottom line: The smart money is on the sidelines with a wait and see attitude. That’s where you should be, that is, until you determine which way the market is going. At the moment, we’re leaning bearish, but not at extreme levels…yet. If the Washington sideshow ends, there could be a relief rally, but we’ll see if it lasts. Finally, keep your eye on the bond market. If interest rates start to creep up again, bonds will get hit once again, which could affect the stock market. For now, it will take a major market event to turn this complacency into fear. We’re not there yet.

 

* 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 will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

 

AAII survey (9/25/2013)

36.1% Bullish. 30.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/25/2013)

44.3 % Bullish. 20.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .70

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 15.46

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 pointing sharply down just above its 50-day moving average. 

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

Danger: Index about to cross below its 20-day and 50-day moving average.

 

MACD: MACD is above the zero line and above the red 9-day signal line, but moving sideways. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Buy Signal:  MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Analysis: Sentiment was mixed last week, but that should change this week. Moving averages are reflecting last week’s bearish mood, and are pointing straight down. The odds are good that the S&P will fall below its moving averages this week, a bearish sign. In addition, expect reversals. Put another way, this is a trader’s market. Side note: Volume was surprisingly low last week. Judging by the opening, the big money is placing their bets on the downside, but that could change quickly.

Opinion: By now, you know that the D.C. sideshow has moved center stage. The chances are good there will be a government shutdown, but no one knows how long it will last. Nevertheless, there should be major fireworks, that is, unless Congress reaches an agreement on Monday night. If there is a rally into the close on Monday, perhaps a deal is in the works. If the market sinks faster and further, watch out below.

(If you’re shorting this market, be careful: Market could strongly reverse direction on Tuesday if shutdown is averted.)

If this stalemate drags on for more than a few days, the market will take a hit. And as soon as it’s finally resolved, the market should rally. The problem is that we’re in unknown territory, so the market could go lower than anyone anticipated, and perhaps climb higher when it’s over. Either way, it will not be pretty.

In addition to this sideshow, the jobs numbers are released on Friday. That could also be a market-moving event. And if the market starts to unravel, perhaps Bernanke will announce that happy days are here again and there will be no tapering for the rest of the year. And if those job numbers disappoint, QE will go on.

All of this uncertainty is going to create volatility. I warned you last week it is a dangerous market, and it is. Risk adverse investors should already be on the sidelines. If you’re fully invested, this is one of those times when you grit your teeth and hope that everything will be all right, as Bob Marley might say. It should be a fascinating week, and also frustrating if you’re an investor.

For the moment, bond prices have rallied (thanks, Ben!), surprising almost everyone. But keep your eye on the 10-year Treasury for any unusual movements (if the yield goes up, bond prices go down). While everyone is distracted by Washington, look for market moving events that can alter the market. Sometimes there are clues what might happen next (such as selloffs or rallies during the last hour).

Bottom line: If you’re a rookie, watch and learn, hopefully from the sidelines. There are a number of conflicting events that will increase volatility. If the market comes out of this on Friday unscathed, I would be surprised. But never forget that anything is possible. A worst-case scenario for the week is 1500 on the S&P 500. Best case is we end where we started at or near 1700. Put on your seatbelts now because the market is going to take us for a bumpy ride (thanks to Congress).

* 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 will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

Note: Here is a link to my latest column on MarketWatch: http://on.mktw.net/19CIYLo

 

AAII survey (9/18/2013)

45.1% Bullish. 29.7% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/18/2013)

42.3 % Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 13.12

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, above its 100-day, and above its 50-day MA.

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at the zero line and above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Buy Signal:  MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Analysis: As expected, it was a volatile week. Although most market indicators are still pointing up, looming outside events may trump the signals. Sentiment is still more bullish than bearish but not at extreme levels. VIX continues to show complacency (not a good sign). I also looked at the indicator, RSI, which shows the market as overbought. if you look at the bigger picture, we’re getting mixed signals. Technically, we’re still in a bull market, according to the charts, but there is evidence we could go sideways or down.

Opinion: I promised you a volatile market, and that’s what you got, thanks to Ben and the Fed. Ben pulled a fast one and surprised nearly everyone. What was he thinking? Or should I ask, what is he seeing that we don’t see?

Looking back, if Ben had cut QE by even a smidgen, the market would have had a gigantic temper tantrum, which would have ruined his legacy. Because the Fed decided to delay tapering, the market rallied by 1 percent, gold rallied, emerging markets rallied, and bonds rallied. Ben is a hero! Warren Buffett said in a CNBC interview that Ben Bernanke is the best Fed chairman we ever had, and he should stay on for another term. Thanks to Ben, happy days are here again.

For a day.

On Friday, the market gave back all of the gains that it had made during the week. Basically, the market ended nearly flat. And that is the definition of a dangerous sideways market. The bulls do not want the party to end, and the bears, who have had few opportunities in the last four years, are slowly waking up from a deep slumber.

Some blamed the Friday selloff on St. Louis Federal Reserve President James Bullard, who said that they might taper in October. This time, they really, really mean it (fool me once, shame on you, fool me twice…). If the Fed really did taper in October, they’d have to pull a rabbit out of a hat to stop the market from plunging. Wait, I think I see Janet Yellen getting ready to take center stage. Maybe she will save the day by continuing quantitative easing. After all, the show must go on.

Right now, there are so many sideshows it’s hard to know what will move the markets. For starters, we have the debt debacle, the threat of a government shutdown, and a dysfunctional Congress. As we enter this week, any “crisis du jour” could turn into a huge headache.

If I were a doctor, I’d say the market was addicted to QE. And like any addict, getting off of that sweet liquidity will be hard. Even talking about cutting back on QE upsets the market. The Fed has really gotten itself in a pickle this time, and there is no easy way out. The longer they wait, the worse it’s going to be when it happens. (If I was the Fed, I’d wait for a huge rally and then make thetaper announcement.)

Meanwhile, Ben is going to sail off into the sunset soon, having saved the market from 2008. Bernanke has always been fascinated by the 1929 crash, and studied how the Fed mishandled it, which helped to create the Great Depression. That was one of the reasons that Ben injected the market with so much liquidity. He didn’t want a 1929 style bubble to happen on his watch. It’s ironic, but there is a downside to adding so much liquidity: bubbles.

At the moment, the Fed doesn’t see a bubble, but they are looking everywhere. In reality, asset bubbles are an interesting phenomenon. During the Dutch tulip bubble, the housing bubble, and the 1929 stock bubble, you don’t realize you’re in one until it pops. No one knows if the current bull market is a bubble, but this I can say for sure: if the Fed doesn’t start to cut back on the liquidity soon, there will be no doubt.

Bottom line: In my opinion, the markets will feel some short-term pain, and soon. The next week will be volatile once again with a number of rallies and reversals (if not this week, then next week). Those late-day selloffs are very bearish, and that could continue. Investors are hoping that any selloff will be followed by a huge rally. It’s possible because there is a lot of cash on the side itching to get into this market at a lower price. This market remains dangerous, and more so in the next two weeks. If the market can come out unscathed through October, I’d be surprised. Nevertheless, sometimes the worse market events occur when people least expect them. You already know that I like using options for protection whether you’re bullish or bearish. This is the time to be disciplined and flexible, so be on your toes, and good luck. We could be in for a rough ride over the next few weeks and months.

* 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 will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

 

FRIDAY ALERT: Late-day selloff, not a good sign. Be careful if you’re long.

 

AAII survey (9/11/2013)

45.5% Bullish. 24.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/11/2013)

37.1 % Bullish. 22.7% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 14.16

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, above its 100-day, and above its 50-day MA.

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at the zero line and above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Buy Signal:  MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Analysis: We went from bearish to bullish in one week. Individual investors are feeling a bit more bullish while financial writers lost some of their enthusiasm. (Another survey says that a majority of money managers are expecting a correction.) Technical indicators made a dramatic turnaround, and this week we’ll see if it’s for real. Unfortunately, the Fed meeting and other news will trump the indicators. Because we’re still in a sideways market, the market can go in either direction. Once again, look for late day selloffs on high volume. A head and shoulders pattern is starting to develop on the S&P 500, which is very negative (thanks to trader Toni Turner for pointing this out).

Opinion: Last week was an important lesson about market indicators. At the start of the week, most of the indicators were pointing down, and it seemed like a slam-dunk to sell the market short. And then, unexpectedly, there was the Syria relief rally, and the bulls had the best week in months. Most important, at the end of each day, the market did not sell off like it had in the past. It was a glorious day if you were long the market, and we’ll soon see if it can last.

The lesson of the week is that you can never make a trade based only on indicators. Although market indicators help put the odds on your side, they can’t predict the future. Last week, unexpected good news trumped the indicators and everything else. It was a breathtaking turnaround for the bulls. It also goes to show that anything is possible in the stock market, which is why protective call or put options make sense when the market is moving sideways.

This week will be exciting. The FOMC meeting begins on Tuesday, Sept. 17, and it’s sure to increase market volatility before and after the meeting (especially after). Here are three possible scenarios ofwhat could happen:

1. Action: Ben and the Fed announce that they are not going to taper now but at the next meeting (after Ben has said his goodbyes).

Possible Result: Market goes wild, rises by 2 or 3 percent. S&P is firmly in the 1700 Club. Gold explodes higher. Emerging markets also go higher and Ben is a hero on Wall Street. Short sellers get crushed.

Concern: If the Fed delays tapering, it must mean there are more problems with the economy than the Fed is letting on. By delaying, it will only make things worse when they taper in the future.

My opinion: This is a possible scenario, which is why it’s dangerous to short without call option protection. Nevertheless, the market would be pleasantly surprised if they delayed tapering. I would also be surprised if they delayed tapering.

 

2. Action: Ben and the Fed announce that QE is going to end by more than the market expected.

Possible Result: Market sells off by more than 3 percent, gold gets crushed, and emerging markets have the worst week in years.

Concern: Ending liquidity this abruptly would upset the markets.

My opinion: There is a .00001 percent chance that the Fed will end QE abruptly.

 

3. Action: The Fed tapers a little (the mini-taper), no more than 5 to 10 billion dollars a month.

Possible Result: Market will be volatile.

Concern: The markets will see this as the end of QE in the future and won’t like it one bit.

My opinion: This is the most likely scenario. The Fed will taper a little and hope the market will accept it. In fact, articles are already appearing that the market “priced in” mild tapering and won’t be surprised. If markets start to sell off, perhaps there will be an announcement that Janet Yellen will be the new Fed chairman, a decision Wall Street will like (this is pure speculation on my part). That will reduce the tapering pain.

With one wave of his magic Fed wand, Ben can crush the markets or let the party go on a bit longer. Either of the two extremes (no tapering or a lot of tapering) will cause big reactions, and I don’t think the Fed wants that. By tapering a tiny little bit, they are hoping they can slowly wean the markets off of the QE liquidity trap. No one can predict how the market will react, but there will be a reaction, even though it might be delayed.

Once again, the safest bet is to move to the sidelines until the market calms down, which could take a while. There are other events (such as the debt ceiling talks) that have taken a back seat to Syria, but these events could emerge once again.

I still like using call or put options to protect long or short positions (as I described last week). Nevertheless, the market will be volatile so managing stock and option positions will be a challenge. I can honestly say that the market indicators, although leaning bullish at the moment, could reverse again this week (and intraday). Once again, you must be prepared for anything since it’s in the Fed’s hands at the moment.

And as I’ve repeatedly said, this market is dangerous, and more so this week. Traders will be looking to make money off of the volatility. Investors, however, are hoping that Ben can maneuver the market into calmer waters before he sails off into the sunset.

Bottom line: It’s time for the Fed to fish or cut bait. This is their moment, and they are either going to pump up the market higher or taper a little and hope for the best. I wouldn’t be surprised to see their public relations team spread the word that mini-tapering is a good thing for the market. The Fed will probably want to telegraph their intentions early so the market doesn’t throw a temper tantrum. Be cautious no matter what side of the market you are on.

Additional: With the futures up over 1% on the Summers’ news, and the S&P in the 1700 Club for the moment, the market will have to hold its gains through the week or look out below. Look for a selloff into the close. If there is a late day selloff and the S&P can’t hold its gains, it would be very bearish. We’ll know this week if this bull market has legs or is in trouble.

 

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