Wednesday, December 31, 2008

Volatility to Usher in the New Year?


An insightful Fast Money, "Word on the Street" segment tonight. It was "Must watch TV," helping establish a sense separating the trade from the trend. Made the wheels on the bus go round and round, if you know what I mean...

One quick comment on the trend. There is an incredibly sour tone in most everyone's outlook. This, it seems, could make for a decidedly buoyant market over months ahead.

Then again, who knows what might blow up next? Maybe November's low will be challenged sometime in '09.

It just seems comparisons here might better be made to the 2001-2002 period (much as I indicated the other day), rather than to the first quarter of '03 when the market was bottoming. Yet then again, maybe the greater appearance of a market bottom in '09 will set a trap whose springing sometime over the next few years could prove devastating.

Either way, the market's November 21st bottom should put a floor under trading during the coming year.

Now about near-term prospects...


NYSE 5-min

A little birdie is telling me a short-term top might be near. It could come Friday. Then, next week, a fade ... taking indexes to the low end of the trading range over the past couple weeks. Following this, the upside explosion — the melt-up — I have been projecting.

Look at it this way...

Those (like us) who caught bottom in November might be inclined to lock in profits early in the New Year (since the capital gains tax liability will not be due for another 16 months). This might create a significant source of selling pressure sometime during the first several trading days in 2009.

Following this, though, the market melt-up still appears likely to develop.


NASDAQ 5-min

The NASDAQ Composite serves up more reason to suspect a short-term top is near. Today's surge out of the gate carried RSI to a buy-side extreme (above 80). This imbalance between buying and selling strength typically warns of an imminent turn.


$VIX

Here's more reason to be concerned about upside prospects. VIX bears watching upon the market's pending melt-up. The 200-day moving average might prove a barrier, much like early this year.

Likewise, look how much VIX has come in despite the fact indexes are trading lower now than where they stood on election day. This suggests the market's near-term pullback could be sharp and unfold rather rapidly.

Be that as it may, I see no reason to panic. The market's technical underpinnings still remain decidedly positive.

One thing is certain. The Elliott Wave outlook, near-term, advises being alert to a pick-up in volatility ... in both directions. Both the pending pullback and subsequent melt-up could develop quite quickly (and result in much confusion as well).

Alright then. For most folks 2008 was a dog — a bad joke. This was not the case here, though. So, I guess we have the luxury of ending a joke of a year in all good pleasure...
A New York City yupette was shopping in an upscale pet center.

"I want a dog of which I can be proud," she told the salesman.
"Does that one have a good pedigree?"

"Miss," declared the clerk, "if she could speak, she wouldn't
talk to either one of us."




Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

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Tuesday, December 30, 2008

Market's Worst Year in Generations Ends in Bullish Balance


You have to admit. Today was a good start for a market poised to melt up.

I don't know if you caught my last Mr. Market Twitter. According to Pete Najarian, fully one-third of today's share volume on the Big Board apparently changed hands during the last fifteen minutes of trading.

Let's have a look at this...


NYSE 5-min

We could not have asked for a more positive development.

First, we had a gap higher open continuing yesterday afternoon's turnaround ... with buying lifting the NYSE Composite steadily throughout the morning in a well-behaved, sustainable manner (as evidenced by RSI, which revealed a healthy balance between buying and selling strength). Likewise, as the morning's top was set at around 11:30 a.m. RSI registered a new high for the day (indicating a solid buying interest remained).

Then followed a modest consolidation lasting most of the afternoon. In the interim a healthy balance between buying and selling strength once again was demonstrated by RSI performance.

Finally came the last hour.

As you can see, RSI did not perform in quite the same balanced manner as just noted. No worry. This comes with the territory.

To learn the last hour's strength was accompanied by a surge in volume ... this while RSI set a new high for the day ... well, that's just the icing on the cake. It says that, soon enough the market will be racing higher still.

Now, don't expect this right away. The last day of '08 might be a bust ... or maybe indecisive. But come Friday it's a New Year. And it's looking like Mr. Market can hardly wait...




Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

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Monday, December 29, 2008

Perfectly Poised for a Melt-Up


If you watched the first few minutes of today's Fast Money...

And if you saw Squawk Box, pre-market — first, the Trading Buzz segment; and then, the interview with Mark Hulbert...

You learned no one — no one — imagines the market might be on the verge of melting up 20-25%.

Perfect! The next several days could be interesting.


$NYAD

Picture a compressed spring about to be released. During the market's pending advance we should see the differential between advances and declines on the NYSE exceed the level set in late-November, as well as possibly that set on October 13th.

Observe how underlying conditions are confirming the market's upwardly biased consolidation over the past month, too. Not exactly a picture of growing weakness. Indeed, it's quite the contrary...


$NYA

You couldn't ask for a more perfectly balanced technical condition (both RSI and MACD) at a point when an upside explosion could be imminent.

Of course, nothing is set in stone and what appears a promising situation could change in an instant. Yet with other measures likewise at critical inflection points ... and with the market's advance from bottom on November 21st to top on December 17th confirmed every step of the way higher ... there's reason to suppose the next leg up is about to unfold.


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

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Friday, December 26, 2008

Timely, Timeless Perspective


I know how it is sometimes...

You sense a growing financial vulnerability ... greatly compounded by leverage ... atop an economy that can no longer add jobs in even the most mundane forms of employment (say, like retail). You read commentators who see everything going to hell in a hand basket (and in a NY minute, no less). And you shiver to think how these historic risks might affect your well-being. Sometimes, you just want to...





(Thanks, Sam.)

How did things ever get this bad? Is that "the" question? Or should we ask, instead, is this more or less the same as it ever was ... this fraud and this deception?

Here's where the wise investor gets religion...
That which has been is what will be,
That which is done is what will be done,
And there is nothing new under the sun.
(Ecclesiastes 1:9)
This fundamental background brings me perspective. Surely, it lends value to technical analysis. We can look back and witness how a highly liquid money pit (the stock market) reacted when the earth supporting it (the economy) quaked. It has happened many times before, you know...


SPX weekly

Just a friendly RSI reminder saying bottom probably is in (for now). And if not, then surely it is near.

The lines, too, are more than just curiosities. In days finding the stock market supported by a crumbling layer of leverage (built up through Structured Finance) ... it appears the end of the line is being reached. The market's formerly rising trend apparently has ceased.

Now, what develops during the present bounce remains to be seen. Could it be something like 2001-2002? This seems a rather reasonable probability...


SPX weekly

Just look how sharp, counter-trend rallies resulted in weekly RSI returning to a point where buy-side and sell-side strength came into balance. The same might be in store presently. This is a likelihood decidedly fitting a distinct Elliott Wave possibility.

The lender of last resort is all in, propping up finance, as a leverage unwind is attempted. In the process government guaranties once implicit are now explicit, putting you and me on the hook. Extraordinary developments, indeed. Frightful, too, because the underlying "economy" must wither, now that its lifeblood (Structured Finance) has dried up.

That's the Catch 22. It also is why the price tag on a so-called "stimulus package" is just shy of $1 trillion. Regrettably, this sum is far short of what's necessary to stop further financial chaos.

You see, accounting principles share one critical thing in common with investments in physical economy. It's the time factor. With physical economy you cannot just flip a switch and expect instant, wealth-enhancing productivity to be added — the very thing necessary if the grotesquely leveraged financial economy and its mountain of sacrosanct derivative securities are somehow to be kept intact.

Thus, the stock market ultimately faces the consequences of decades of disinvestment in the physical economy, where real wealth is generated. Leverage added over the interim — having reached the limits of its expansion — virtually guarantees more trouble ahead.

Yet like physical economy the world of finance does not turn on a dime. Indeed, the TARP demonstrates this. Leveraged finance dies hard. So too, then, do animal spirits manufacturing melt-ups bringing momentary profit.


$SPX

Even if bottom is not yet in and another trip lower still must unfold, chances are both RSI and MACD first will rise to somewhere between the red and blue lines you see drawn above before the market again turns lower and retests November's low.

In other words (speaking in Elliott Wave terms), if five waves down from May have not yet completed ... if wave 4 presently is forming and wave 5 still must unfold ... chances are good underlying technicals will show stronger readings upon the completion of wave 4 than was the case during the formation of wave 2 (early August).

This, too, is in keeping with a conclusion I made last Friday, wherein I noted how RSI and MACD had confirmed the market's advance off bottom every step of the way. This, too, suggests the market has higher to go.


$CPC

Now, here's another technical reading nearing a critical inflection point. Taken in combination with others I mentioned the other day, we might conclude that, if in fact a 20-25% melt-up is in the works, it should get under way sometime during the next couple weeks, tops...

(Don't look at the CBOE Put/Call Ratio in absolute terms. Rather consider the possibility its present performance might bear relative similarity to the two prior periods I have highlighted. Thus, it might tend to remain positioned for some days/weeks ahead in such a way as over the past 15 months has signaled a top was at hand.)


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

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Wednesday, December 24, 2008

Chip Diller Speaks on the Bernie Madoff Affair


There were no unexpected technical developments following today's abbreviated session. Some indicators more or less remain at critical inflection points (see yesterday's "How to Measure Blood in the Streets"). Still, short of anything unusual developing, all things taken together continue suggesting the market's anticipated surge higher could be imminent.

Vote this leading stock market expert at FeedTheBullIndeed, it's possible the market's sideways trade over the past month has reached its end. Of course, we will know soon enough.

Tonight, rather than beat back the bear with another deadly dose of technical analysis, let's instead talk Bernie Madoff.

You may be reading as I am about his undoing possibly leading to a terrible fallout. It's feared hedge fund redemptions might accelerate.

I came across the following short piece titled, "A Fitting End to a Lousy Year," written by Andrew Gordon at Investors Daily Edge yesterday:
A worsening economy has pushed the market down. A global recession has pushed it down further. Will the latest Wall Street scandal push it down more?

Some of the hundreds of losing hedge funds have written letters to investors saying that they won’t accept requests for redemptions until a later date. Most, however, have been forced into selling to meet an avalanche of redemption requests for January 1. This massive selling is another reason why the market fell so quickly.

Could we get a little rally after January 1?
Institutions will have to reinvest this money. Treasuries and money-market funds are returning next to nothing. The stock market could be the beneficiary by default.

But the Bernie Madoff ... $50-billion rip-off (Good news: he may have cheated investors out of as little as $30 billion!) may trigger a new rush by institutions to get their principal back. A lot of funds of funds had exposure to Madoff. That would mean more selling and could blunt a bear rally. Thanks a lot, Bernie.

Todd Harrison over at Minyanville in "Madoff Matters: Social Mood" writes:
The structural implications are massive. I speak with a lot of money managers and most of them have fielded additional redemption requests since the story broke. I'm not talking bottom of the barrel here either--folks who are up nicely on the year are still suffering as "fund of funds" sell their winners to finance the sinners.

Do you suppose "funds of funds" have "gates" allowing some legal means of stemming redemptions (much as hedge funds can)? This could buy time. But if not, then what?

I'm asking rhetorically. How does the fallout from Madoff's fraud rate against FNM, FRE, AIG, MER, LEH, BSC, C (have I forgotten any?), which in the annals of 2008 have amounted to much, much bigger, systemically-threatening swindles? Truth is there's really no comparison.

There is, however, commonality. Former U.S. government lawyer, Gary Aguirre, can tell you all about the cozy relationship Wall Street's elite has with its regulators.

You should have no doubt. The fix is in ... and the Tory Press, indeed, flaunts this fact. Just contrast live reports showing the U.S. Marshall standing outside Bernie Madoff's Manhattan apartment against the several interviews CNBC has given former AIG chairman, Hank Greenberg.

Mr. Greenberg says everything was fine China when he left the company a few years back. However, the public record tells a different story.

Obviously, that this guy gets airtime so history might be rewritten is a sure sign the fix is in.

So, zare vill be no chaos. At least not yet...


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!

Tuesday, December 23, 2008

How to Measure Blood in the Streets


It feels good to be bullish and positioned long, while at the same time having had enough sense to anticipate weakness, so as to remain unshaken at a time when fear is ill-advised. As best as I can tell the stock market is going higher before any challenge of November's low makes for more wild, wild life.

Now, mind you (and if you're a regular reader, you know this already), my bullishness is of a different character than that of "portfolio managers" Cramer rants about tonight. Indeed, my attitude is well-summarized if you look to the left, under "Outlook 2009."

Considering this, then, you can see my sense of "opportunity" here — long the stock market — is not much different than Cramer's.

Yet, contrarily, I see how, "patience pays" right now ... or at least stands to pay handsomely sooner than most imagine. Should you doubt this, it might bring you comfort looking back at last Wednesday's "Different Green Acres, Same Arnold" post, where I indicated the market might trade sideways before exploding higher.

Now, those bullish portfolio managers Cramer sites might play right into my still unchanged, near-term outlook...

Do you suppose a dozen or three might "walk the bullish walk" these last few days of '08, so that come Day 1 of 2010 (i.e. a year and a day from now), they'll be in position to bank anticipated profits at favorable, long-term capital gains tax rates?

We'll see.

Then, too, we'll see what song Cramer is singing when the market is 20-25% higher early next year (2009).

Still, my longer-term outlook remains unchanged. Chances are I will be cashing long ETF positions once the market surges higher over the next couple weeks...

(Long positions are in the following ProShares Ultra ETFs: DDM, SSO, QLD, UWM, MVV, SAA)


OEX 5-min

Having anticipated weakness these past couple days, seeing a price-RSI divergence develop as the S&P 100 grinds in the area of its recent lows is like seeing the sun burning through a summer morning's fog. You know blue skies await.

One element of "price-RSI divergence" I have yet to mention anytime before is seen comparing last Thursday's (12.18.08) deep, sell-side extreme with that registering exactly one week earlier (Thursday, 12.11.08). The most recent instance occurred while the S&P 100 traded at a higher level than where it stood the prior week. (Written red for a reason...)

Now, let's think about this. Selling urgency was more pronounced at a time when the S&P 100 traded higher. Is there not something unnatural — irrational — about this?

When posterity instructs you to "buy when there's blood in the streets" you understand this to be a time when fear is pervasive. Does not this highlighted price-RSI divergence, 12.18.08 versus 12.11.08, objectively demonstrate this?


$OEX

Now, for the sake of keeping our analytical feet on the ground, we might duly note a couple technical conditions suggesting the market might be at a critical inflection point.

The first is the S&P 100's continuing pullback to the "neckline" of its "inverse head and shoulders" (I detailed this "bottom formation" last week). The "neckline" is holding. Which makes this a great trade entry point.

Pop quiz. Why is this a great trade entry point?

Answer: because you can set a very tight stop and reasonably minimize losses.

It's like I always say. Nothing is set in stone. That neckline could give way tomorrow. (It's not looking like it will, though ... and that's what makes this a great entry point on a long trade ... be it a leveraged, index-tracking ETF, or a near-the-money stock index call option.)

Second, you've also got MACD at a critical inflection point...

Remember back in late-July when I was watching MACD rise to its zero line ... thinking it would likely turn back into the negative ... and fall in sync with the stock market as sellers finally "capitulated" ... this in keeping with my forecast since April-May '08?

Well, that's not at all what I am forecasting here. Instead, we should see MACD shoot strongly into the positive.

Still, right now, MACD rests at a critical inflection point. In as much as this bore watching in July, it does now, too. This time, though, look for a different outcome. Strength, rather than renewed weakness, is the more likely result.

(If I might reminisce further... Too bad I failed to perceive the significance of that subsequent MACD downturn August-September ... occurring much as I had anticipated in July. At the time LEH failed ... 9.15.08 ... I was noting MACD divergence from its July low ... ignoring the volume spike as the market fell to new lows for the year ... and missing a huge [short ETF / long OEX Put] trade opportunity. Sigh. It's been a good year otherwise.)

Earlier I mentioned last Wednesday's post wherein I highlighted the possibility of a sideways trading market (much like we're seeing) prior to its anticipated surge higher. There, I featured a chart of the NASDAQ McClellan Oscillator. If you look at the oscillator now, you see it too is at a critical inflection point (i.e. approaching the 0 line).

What's more, it is leading the NYSE McClellan Oscillator. Thus, just as the NASDAQ Composite has been lagging the NYSE Composite of late (highlighted on Friday) ... its underlying condition (as measured by the McClellan Oscillator) likewise confirms such technical weakness as bears watching. Hence this being a critical inflection point.

Did you hear Cramer's outrage today with Cerberus? In a word ... Wow. (It's open season on character assassination!)

And kudos to Kudlow's tailor. (Love the look, Larry. Buy me some.)


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

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Monday, December 22, 2008

Base Building Prior to Upside Explosion


Yes sir, today's weakness was all it was cracked up to be. Again, don't lose your head. There might be a bit more bleeding before all is said and done.


SPX 5-min

Sideways ... a little lower ... who knows how things might proceed going into year end. Today's RSI performance suggests a case can be made for both.

It's all good, because evidence supporting my outlook for an imminent upside explosion remains unchallenged. There's a fast 20-25% higher lying on the horizon...


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!

Friday, December 19, 2008

A Ringing Triangle Announces a Feast


Serving Up Bear Meat...

You might have read in other places concerns about index price form since bottom on November 21st, as well as diminishing volume accompanying this. It is claimed the market's counter-trend rally is weakening — a rising wedge, a special kind of "triangle," is assumed to be unfolding — and so, a retest of the November 21st low is thought imminent.

I simply don't buy it. Starting with an Elliott Wave view that assumes bottom is in, and finding underlying technical conditions favorably improving ... maintaining strength ... with no bearish divergences whatsoever developingnone — there's just no good reason to believe the market is about to fall apart.


$NYA

RSI has confirmed the NYSE Composite every step of the way higher since bottom. Ditto MACD. So, even if a touch of weakness develops over the next few days, breaking the index's uptrend, there's every reason to believe this will be sooner arrested than lead to disaster.

If there's any kind of "triangle" forming, its beginning immediately follows the initial launch off bottom. In other words, it should be seen correcting the initial advance, consolidating that gain and building a base for the next leg higher.

Now, I'm not suggesting this is my preferred view. A complex correction of the market's initial advance off bottom might be forming a "triangle" ... or it might be some other complex, corrective form which, right now, possesses an upwardly sloping bias. Either way, bottom appears in ... and indexes are seen poising to move higher.


$COMPQ

As you can see, the NASDAQ Composite's performance this week lagged the NYSE Composite's. So, the risk of some weakness developing over days ahead appears heightened. That's because NASDAQ typically leads in both directions (specifically, in percentage terms).

Yet this disparity has been apparent since Tuesday's rally (12.16.08). The shallowness of subsequent weakness, indeed, might be a taste of trading going into year end. Let forewarned be forearmed, then... (In other words, don't lose your head.)

Just like the NYSE Composite, NASDAQ's underlying technical condition confirms the index's advance every step of the way higher since bottom on November 21st. So, again, there's no evidence suggesting the market is about to fall apart. Any weakness we might see straight ahead probably will be rather tepid.


$OEX

Nothing set in stone about the Elliott Wave count indicated above. It is, however, one distinct view. In fact, there could be a couple days of meager weakness at the start of next week and this view still would remain valid.

Danger! Mind Numbing Elliott Wave Chatter Ahead. Save Yourself at Detour...

The Elliott Wave Principle indicates a triangle's wave e (the final component wave of a triangle) sometimes violates the triangle's boundary, either falling short of it or extending beyond it. So, even if weakness develops over the next day or three and the lower boundary of the triangle drawn above is exceeded, this count still could remain valid.

Assuming a triangle is unfolding, one thing worth noting is the fact these corrective forms, by rule, appear just prior to the final move in the direction of the trend. In this instance the trend is higher. So, if indeed a triangle is forming, then we know a simple "zig-zag" is unfolding off the S&P 100's bottom on November 21st (with the triangle forming wave b).

The other noteworthy Elliott Wave consideration having to do with complex corrections whose form traces a triangle is that, as a general rule, the final move in the direction of the trend (following the triangle's completion) typically unfolds swiftly and covers a distance equal to that at the widest part of the triangle.

This "fits" the outlook for an upcoming "c" wave [higher] — a third wave ... typically the strongest. It also puts in the cross-hairs the 500-520 target I indicated on Tuesday is the minimum objective of an inverse head and shoulders bottom (whose "neckline" you see drawn above), and likewise raises the probability resistance will be hit right where I projected two weeks ago.

Detour...

So, all in all, the case for a melt-up remains rock solid. When? ... The moment could be near. The greater bulk of the market's pending surge might likely unfold at the start of the New Year...




Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!

Thursday, December 18, 2008

The Fits We Must Endure


Well, yesterday's marked weakening of 5-minute RSI became today's incredible sell-side RSI extreme. This coincided with a decline that was hardly notable on every count. So, conviction I have toward the market's pending melt-up extends to reluctantly accept the fits we must endure in the interim.


OEX 5-min

The urge to rant really is subdued by today's mini-capitulation. Looks a lot like last Friday (12.12.08), doesn't it? Yet the surge in sell-side RSI strength was even more pronounced.

Surely, this imbalance will be exploited, much as has been the case all week. Whatever weakness carries forward into Friday's open will rather likely be bought. There's little doubt about this.

Question: what are the odds ratings agencies, like Standard & Poors, suddenly are in front of the curve? Any chance their downgrade of GE had something to do with Herr Brit for Brains threatening auto industry bankruptcy?
"I thought about what it would be like for me to become president during this period. I believe that good policy is not to dump him a major catastrophe on his first day in office," Bush said.

(What the guy lacks in credibility he more than makes up for with an uncanny ability to tell a good joke...)


$NYAD

Hardly a wide-reaching panic hitting the Big Board today.


$NAAD

Ditto "the House Madoff Built."

Obviously, then, both the NYSE and NASDAQ McClellan Oscillators held up remarkably well, too.

(Question: how do you go for decades showing consistently positive performance, and find your firm ... in times like these no less(!) ... suddenly facing withdrawals amounting to 40% of capital under management? Wouldn't you think money would be rushing in, and not out? In a fund with a reputation for turning away investors? In a world chalk full of losing hedge fund strategies? At a time when governments are shoveling money out the door so fast, the abundant excess is bidding 30-year Treasuries through the roof ... thereby demonstrating "safety" is not the issue? The FBI hasn't gotten around to explaining this one yet. And David the vanilla ice cream man Faber shed about as much light on the matter of "European redemptions" as reaches the dark side of the moon.)

As if this were not odd enough, here's something strange, too...


$VIX

That has "Nelly Capitulates!" written all over it. Why even Vince Farrell is nervous. Who says they don't ring a bell on Wall Street when it's time to buy?

Of course, in all fairness I'm no raging bull. There's certainly no compelling case to claim a buying opportunity of a lifetime is staring us in the face. Yet there's also no reason to feel panicked here, either.

So, take it from the Chip Diller of Stock Market Analysts ... remain calm, all is well.


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!

Wednesday, December 17, 2008

A Different Green Acres and the Same Arnold


Last week, I presented a chart of the NYSE McClellan Oscillator in an effort to deliver bad news to bears. Despite last week's modest pullback the oscillator remains positively positioned, showing no sign of underlying, internal weakness typical of a market about to head south.

Today, I give you the NASDAQ McClellan Oscillator, submitting that the market's counter-trend rally during the July-August '08 period might offer perspective on similar, near-term prospects...


NASDAQ McClellan

Of course, the current similarity could be destroyed in a day. Likewise, there's nothing saying the market can't trade sideways for another couple weeks (much as did the NASDAQ Composite going into early August) before exploding higher.

Despite being hopeful the market's anticipated surge would occur before Friday's options expiration — those who received my Trade Notification on November 17th know why — I nevertheless find every reason to remain optimistic.


NYSE 5-min
NASDAQ 5-min

We see 5-minute RSI did a little more today than simply come into balance, as I had suggested yesterday likely would be the case ... following its ["irrational"] buy-side surge on news the Fed was committed to destroying the exchange-rate value of the U.S. dollar. Indeed, we might conclude RSI markedly weakened.

So, it appears Thursday's trade might be soft ... at least at the start. Chances are, however, this won't last. Best guess is support holds, the market turns around, and trades higher than today...


(... and how Alexander Hamilton would pay for infrastructure projects)


Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!

Tuesday, December 16, 2008

Ben Bernanke Stars as Arthur Ponzirelli in the New Happy Days


Ehhh. My bike likes a liquidity spike even more than it likes Ike.

Well, this is one of those moments when a picture is worth a thousand words. Let's just say Ben Bernanke took a commanding lead over his Monetarist Monkey friend at Treasury for the coveted "Ponzirelli" Award.

I think if I were Ron Gettelmember over at the UAW, I'd walk out tomorrow and demand a tripling of wages starting next week ... and continuing every week thereafter. Of course, I am being facetious. Yet there's also a note of truth in my lame satire.

Someone is pulling the wool over someone's eyes. The target is labor. One way or the other, gutting wages is on the radar.

Last week's attempt in the Senate failed. So, this week we see an end-around.

Inflation is a most insidious thief. Today, it might be easy enough to deny the likelihood we're on the cusp of a hyperinflationary blowout ... what with a deep pool of network men who do more to embarrass apes insinuating a genetic linkage, than they do to uplift the intellect of their own kind. Tomorrow, somehow, these men might just find some way to blame the usual scapegoats.

The question, right now, is with the Fed moving aggressively to remove impaired assets from the banking system (which includes the leveraged, speculating community), where will "animal spirits" be asserted? Things "paper?" This hardly seems wise. That's why presuming a return to anything resembling the past two decades probably is a futile exercise.

On the other hand, projecting volatility and chaos for as far as the eye can see ... here we enter a realm of higher probability. And so, at this point a melt-up becomes a most reasonable possibility...


$OEX

The simple markup drawn across the S&P 100 from late-November isolates a "neckline" to a so-called "inverse head and shoulders" pattern. This one steals back to days of old when I was a virgin technical analyst, weaning on an investment classic written by Edwards and Magee titled, "Technical Analysis of Stock Trends."

One critical element about the formation of an inverse head and shoulders pattern is the volume accompanying its components. This often is overlooked. It is particularly relevant to the inverse head and shoulders, because this pattern is a bottom formation. During the pattern's rising phases — particularly those forming the head and right shoulder — volume should notably increase.

There's a Wall Street adage saying, "It takes buying to put stocks up, but they can fall of their own weight." So, being a bottom formation portending a subsequent rising trend, you should expect an inverse head and shoulders to be accompanied by volume indicative of increased buying interest capable of driving prices up to, and through, the minimum price objective the pattern portends.

We certainly saw volume swell once the rising phase of the head took shape beginning on November 21st. So, that's a good start.

Yet whether the downward sloping neckline is accurate at first seems questionable. That's because volume did not really expand much when the neckline was penetrated last Monday (12.8.08). But in truth it was greater than anything registered during the formation of the right shoulder (12.1.08 - 12.5.08) ... so, the entire pattern indeed possesses the volume characteristics one should expect.

Furthermore the S&P 100 did gap above the neckline last Monday, and this, too, has to be seen as positive evidence suggesting the inverse head and shoulders pattern is legitimate. Technically speaking, buying interest appears present to the degree it should be.

Finally, following the penetration of the neckline there has been a typical retracement back to the neckline. So, it looks like the stage is set for the full value of this particularly useful technical pattern to become manifest. To whit, a head and shoulders pattern portends a minimum price objective. This is computed taking the distance from the neckline to the head, and extending this distance above the neckline at the point the neckline is penetrated.

Thus, the S&P 100's inverse head and shoulders pattern portends a minimum price objective in the range of 500-520. (The reason the objective is between 500-520 accounts for computations done on an arithmetically-scaled versus a logarithmically-scaled chart of the S&P 100.)

This is the first time I have written about the head and shoulders pattern. In my experience they are fairly rare, particularly in light of volume considerations laid out by Edwards and Magee.


OEX 5-min

As you can see, a fairly well-defined support/resistance line appears in place. So, any pullback on Wednesday should not be feared. In fact, at this point a pullback might be rather expected, given the post-Ponzirelli, RSI surge.

This touches on something I mentioned yesterday, pointing to daily RSI performance in the current period versus July. You see this (in reverse) comparing strongly surging, 5-minute RSI, late-yesterday and today, versus the more gradual, balanced RSI strengthening coinciding with the S&P 100's advance Friday - Monday (12.5.08 - 12.8.08).

Pre-Ponzirelli trading today had the affect of bringing RSI into "balance." So, we should expect something similar on Wednesday before the next leg higher commences.


NYSE 5-min
NASDAQ 5-min

Much the same story presented by Composite Indexes tracking both U.S. stock exchanges. Curiously enough, NASDAQ has some catching up to do if it is to display its typical leadership in both directions. There's plenty of upside remaining for NASDAQ to lead during the current leg higher.

Listen to Fast Money's Guy Adami. He and I agree on the market's likely course straight ahead...


Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!