Friday, April 13, 2012

I Dreamed About a Little Bear Last Night.

A lot has happened in the equities markets this week and it sure appears to me that the signals are becoming clearer.  True enough, there are a few signals such as that of the McClellan Oscillator which suggest that the market is a bit oversold, but by and large the signals emerging as of today are, in my humble opinion, overtly bearish.  Without a great deal of commentary, I'll just post a few charts below that are issuing the signals I'm paying a lot of attention to.  With 2 hours remaining in this trading week, perhaps the signals will be even clearer by the end of the day.  And perhaps not, since we so often see the markets end a week leaving as many investors guessing as possible.  I don't know about you but I'd rather not be guessing.  I want evidence.  So without further ado, here's the evidence that seems pretty convincing to me... at least as of this moment:
In the chart below it is now evident that the recent bounce has been an 'abc' wave 4 correction.  In the interests of full disclosure, I do not pretend to be proficient at Elliott Wave Theory and am more than happy to defer to those who's work I admire a great deal and which I refer to on a daily basis.  That being said, in light of the fact that I am still permitted to have an opinion, this is what I think I'm seeing.  To the best of my knowledge, a wave 4 is followed by a wave 5.

Even for a person who's not the best at EWT, I think this picture is pretty clear.  It must be, it's about the only count I can ever recognize.  Click here for an updating 'print' version.
At the time the above chart was posted, the peak of wave (a) had indeed been penetrated.  Arguably, had it been a line chart showing closes only, it has not actually happened.  Make it a 10 minute chart though and even on a closing basis, yes it has.  Give it a couple more minutes then click the link for an update.  I think it's going to look quite a bit different before this trading day is finished.

In the chart below we see what the Russell 2000 looks like in terms of a Renko chart.  Basically it demands a minimum sized move before it will build another 'brick'.  The word "Renko" means "brick" in Japanese.  The word "merda" means "turd" in Italian... more or less  Just thought you needed to know that.  I don't specifically have a "merda" chart but just pick any bank stock if you'd like to see a sample of what a turd looks like.  Like Goldman for example.

Russell 2000 Renko style chart.  Click here for a live and updated virgin.

AAPL has broken a major 4 month long trend line and as we can see in the daily chart below, it continues to deteriorate.  Although it hasn't broken down convincingly yet, the indicators make it clear that the table is set for it to do just that.  Further, this breakdown is going a long way to confirming my alert of yesterday that the chart of the ratio itself is also breaking down.  We'll look at that chart a little further below:

Click here for a live and updating chart that has a few indicators which are pointing out a very precarious situation here.

And as a result, the AAPL:NDX ratio (which is covered in detail here) is issuing a severe warning.  Let there be no mistake about it, the NDX 100 cannot continue higher if this ratio is breaking down.  When a single stock that represents a full 17% of the entire value of the NDX, (a stock that is worth more than all the stocks in all the stock exchanges of Portugal, Greece and Spain combined) starts to pull the NDX down, the NDX is going down.  AAPL is one powerful horse and it will not be denied.  The ratio hasn't yet broken the trend line convincingly but judging by the momentum indicators that event is darned near inevitable.  And you know what this means folks.  If you don't, you haven't read the article.

Click here for a live and updating chart with indicators showing why this breakdown is likely to continue.

Next up is those air pockets.  Let's not forget about the air pockets because they identify price ranges where the candles should slice right through like a hot knife through butter.  Look out below (I mean 'look at the chart below'):

Look out below.  Just a heads up that there are significant air pockets just beneath the market.  This situation exists in every single market I can get volume stats for.
Judging by the past volume activity, we could argue for a case where we won't even see any support until the S&P has dropped down to perhaps the previous support somewhere around 1340.  In fact, I'm fairly convinced that's the target and I'd consider 1340 to be a key level.  But first up... let's see what happens at 1370.


With the chart below I'd like to demonstrate why I focus on the market internals data as much as I do.  This kind of information is crucial to understanding whether or not a sustained rally (or decline) is real or not.  Many times it is very real, with a head of steam that is surely not going to end anytime soon.  At other times, it's as phony as a 3 dollar bill.  Lately it has more or less been doing the old Wylie Coyote trick.  Sooner or later a market has to either pull back or crumble completely when it becomes apparent that fewer and fewer horses are pulling the old stock wagon up the hill.  More often than not it's just a pullback.  When we're in a bull cycle that is, as has been the case for the past 37 months.

Here's what has been happening with the number of stocks that are considered "bullish" as determined by their point and figure charts, aka the Bullish Percentage.  The chart looks kind of "busy" but really, it's the annotations that best describe the more poignant things to be looking for.  In order to make it "less busy", I've removed the S&P 500 as an overlay and have placed it in a separate panel below.  I've also provided a link below the chart to the version which shows the both of them overlaid against one another:

Bullish Percentage betrays undeniable market weakness when it occurs.   Click here for a live and updating version of the chart above.  Click here for a version where the S&P 500 has been moved up to become an overlay.  It might look a bit "busier' but it's the best way to actually appreciate the divergences.

Here's another peek into some of the studies I do for my own satisfaction that I know which way the market is going to be headed.  Not always dead on but seldom do they lead me too far astray either.  This daily chart below shows the Russell as priced in units of its own VIX.  It's a measure of whether or not the Index is becoming cheaper or more expensive relative to 'insurance' against a drop.  When the stock markets are rising and the ratio is also rising, it means there is very little fear out there of a pullback.  And 'they' are probably right, 'they' being the world of the larger players because after all, it's they who are doing most of the options trading, not us little people.  In the chart below we can see that the ratio seems about ready to tip over, meaning that the Russell is getting cheaper relative to its VIX.  In other words insurance is getting more expensive.  And we know what that means... "risk" is beginning to taste pretty bitter right about now:

The Russell 2000 is beginning to get a bit cheaper vs. its own VIX, meaning that the appetite for risk is waning.  The correlation between this ratio and the Russell is very reliable.  Click here for a live and updating chart.

The correlation between this measure and the Russell itself is undeniable and is an excellent indicator betraying when the RUT is about to roll over.  Of course it's not perfect but it sure as heck does reveal the general attitude that the big players are adopting.  When they're getting nervous we'd better take note because generally speaking they're going to be right.

In conclusion I'd like to share a little personal story.  For as long as I can remember, my beloved parents had been taking me, along with my siblings to a wonderful little mountain hideaway so far from the beaten path that very few people have even heard of it.  Waterton town site, within Waterton National Park is a true gem and so under-commercialized that the majority of the residents and visitors are wildlife.  In my entire lifetime, I have never once visited Waterton without seeing a bear unless it was winter... in which case I'd have to dig into the snow or a cave in order to find them sleeping.  My dad always told me that that wouldn't be a good idea so I've never tried it.  But if there's anything I have confidence in, it's that I recognize a bear when I see one.
Here are a few sneak peeks into some of the beautiful visions I have enjoyed since my youth.  Thanks mom and dad. You're still the two most beautiful people I've ever met:

Cameron Falls right in the Waterton town site.  I stood at that rail 50 years ago.  I stood there 2 years ago.
Red Rock Canyon
Prince of Wales Hotel
Where it's located - I was born 40 miles from this spot.  Could see these mountains from my back yard.
Prominent Waterton Resident
Autumn anywhere in Alberta is beautiful, but Waterton seems special.
All of it in one big snapshot.  And now you know why I use the name I do

Well that's about all I have time for today.  Here's wishing you the very best going forward and I bid you a wonderful weekend.

Tranquility Base - over and out


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