Resting or Ready to Fall? [12]
(Excerpt from Stock World Weekly [13])
We wrote in last week’s Stock World Weekly, Tightening the Screws, [14] “This bull run might resume, or not, but we may be seeing the initial ‘weakness’ that leads a correction. We have been skeptical of this rally, and concerned that it is building on air, that when things turn down, they will do so with a vengeance. Let's not be in a place where the ‘air’ will fall out from under us, dropping us into an air pocket!
“Phil surveyed the market on Friday and wrote, ‘While the market has been content to ignore and soar during this gathering storm, now we begin to see the size of the wave that may be coming in, and it's starting to look scary indeed…
“Last Friday, March 30, I summed things up as we finalized our month's plan to ‘Sell in March and Go Away’ where I concluded the post with: 'Yes, cash is good, CASH IS KING!'"
This past week saw all the classical symptoms of a market getting very tired. It was about time. Phil had been gradually positioning his virtual portfolios into more bearish postures over the last three weeks. Let’s see what Lee Adler and Allan of Allan Trends are thinking in the next two sections.
Lee Adler of the Wall Street Examiner [15]:
The markets get a gift in the coming week. Depending on how strong tax receipts are, the Treasury will pay down as much as $48 billion in expiring short term bills on Thursday. That’s cash that will come back to holders of the paper. They’ll have to put it somewhere. This is a normal feature of tax week, and some of that cash usually flows toward stocks.
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What appeared to support the bond market last week were some phony ginned up misses in the economic data. That was an excuse to dump stocks and scare money into Treasuries just at a time when the Treasury had to both roll over old paper and sell new paper totaling $156 billion. Is it my imagination or does the “bad” news, both real and imagined, almost always seem to come in the weeks when Treasury supply is heaviest? It would make an interesting academic study.
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My impression from observing these things closely for the past 10 years is that, call it “conspiracy,” or call it “metaphysics,” this is how the markets seem to function. The government and Primary Dealers need to keep bond yields down—they find ways to accomplish that... (Treasury and Primary Dealers Shake The Stock Market Tree When Needed [15]) (Click this link to try WSE’s Professional Edition risk free for 30 days! [16])
This week, Allan of Allan Trends [17] is sharing his weekend update for subscribers with us. Allan is an active trader, and old friend, who has been playing the stock market for many years. His signals are turning short, due to the metaphysics of the market, or the ghost in the machine.
New Signals
VXX Hourly——>??
VXX Hourly
VXX Hourly (top) closed the regular trading session on Friday 13 cents from triggering Long. In Friday’s after-hours trading, VXX closed at 19.40, one cent away from triggering Long. Any weakness on Monday morning will push it into a new Long trend.
Allan’s Market Analysis
The DJIA Daily is the most important chart (below) of this week, this month and this year:
Let’s break it down:
(1) DJIA Daily chart from October, 2011, market low;
(2) Elliott Wave [18] counts 5 waves up, i.e. a completed impulse wave;
(3) Elliott Oscillator [18](lower study, chart below) is showing a series of lower highs throughout the six months that DJIA was making higher highs. This is a highly significant divergence with 30+ years of historical accuracy in foresting major reversals;
(4) DJIA Daily Trend Model has already reversed Short;
(5) April-May annual Top pattern (see DJIA Weekly on the next page).
Sometimes the evidence is overwhelming that the market is making a major turn. This is one of those times. That’s not a 100% guarantee, but it is a compilation of very reliable indicators that a change is at hand. We only really care about one of these factors, number 4 above, and since that one indicator is in the direction of the weight-of-the-evidence turn, we trade in the direction of least resistance: SHORT.
The pattern described above for the Daily chart is almost identical on the Weekly chart that goes back to 2007. Here again we see 5 waves up with a divergence in the Elliott Oscillator. The only element that is missing is a Short signal in the Weekly Trend Model. That signal will come on a break below 12,370 - about 4% lower from current prices. There is enough confirming factors present in the Daily chart to forgo waiting that extra 4%.
Trading Strategies
Under the assumption that a new downtrend has begun, here is a review of my favorite strategies for garnering maximum returns from the new dominant trend. These strategies are presented roughly in order of risk, starting with the most conservative and ending with the those that have the highest risk, and the highest reward.
(1) SH – This is an ETF that will go up at the same rate that the SPX goes down. Simple one decision investment. For every 1% that the SPX falls, SH will rise 1%;
(2) DXD (DJIA); SDS (SPX); QID (Nasdaq 100) – These all correspond to the major market indices (in parenthesis) on a 2X leveraged basis, i.e. they should go up by twice the percentage that the corresponding index goes down. For every 1% in value that the index/market goes down, these will go up by about 2%;
(3) TZA (Russell 2000) – There are several 3X ETF’s but TZA is the one with all the liquidity. This is the one for maximum leverage in an index ETF.
(4) VXX – This is the volatility index that has historically maximum leverage for any market decline. We have seen VXX go up 100% or more on a 20% decline in the market.
(5) UVXY – Structured to go up 2X the rise in VXX and so far it has performed as advertised. The big caveat here is TVIX. This is an ETN and it was also structured to go up 2X the value of VXX, but it ran into big trouble after its sponsor, Credit Suisse, pulled the plug on the issuance or new shares. Nonetheless, UVXY was up 10% on Friday, on a 1.25% drop in the market (and a 5.5% rise in VXX). That is some leverage.
Options
Options are the riskiest way to trade market direction. They are especially suited for the above ETF’s, as well as commodity ETF’s and individual stocks. (Yesterday the market was down 1.25%, VXX was up 5.5% and VXX May calls were up about 35%.) Trading options adds risk; detailed analysis and special attention are needed to trade effectively.
Options aren’t necessary to achieve outstanding returns. For those returns, our trend models only need to get the dominant direction of the market right. After over two years of real time trend following, it is evident that they do.
*For a risk-free trial, click here for Allan’s standard service, [19]or click here for the premium service [20]. The premium is for more active traders. For more information, see “Can you trade a chart like this? [17]”
Trading at Phil's Stock World [21]
We are heavily concentrated in Bearish Hedge positions, although we do have Bullish/Long positions also.
We never go completely Bearish OR Bullish. We straddle a range of about 30% to 70% around the center line. Remember, hedges are INSURANCE against things going really wrong. If you are invested in Long Positions and want to hold them, that's fine, over the long term. But select proper hedges to protect yourself in case your bullish premise is wrong.
Right now? We this think is a time to have Bearish Hedges in place, in proper proportion to protect most of your Long Equities. Insurance is something you EXPECT to lose, and it is relatively cheap. The "value" of insurance is not always apparent until AFTER the house burns down.
Friday gapped down heavily in the morning, traded sideways all day, and then went down again in the last half hour. That is very unusual and almost always signals a poor start to the next week. Barring any extraordinary news over the weekend or early Monday, we don't see any fuel to keep things up on Monday and Tuesday.
Note: Phil Davis was interviewed live [22] on the radio Friday morning out of New York City. It was very informative and entertaining. Check it out. [22]
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