Tracking the Trade: November 2010 Top and Bottom

BullBear traders have been catching intermediate term swings in the stock market throughout 2010, including the bottom made a couple of days ago. Here's the history of my S&P 500 trading signals for 2010:

With a few exceptions, particularly during the turbulent bottoming process from June-July, I've been consistently on the right side of the market.

Here's a peek inside the process which produced these results. All of the text and charts are excerpted from BullBear Trading reports and updates during the month of November.

Noting a number of significant divergences in the breadth and momentum indicators that I track, on October 30th I wrote in the BullBear Weekend Report:

Technical divergences can persist for weeks before fulfilling their downside potential. That would give enough time for a sharp, quick wave v which would then be followed by a reversal.

That's exactly what happened after the Fed announced QE2 on November 4th.

On November 5th I wrote:

The other news of the day is a better than 1% drop in the EuroDollar. Other components of the Dollar Index are fairly flat. The drop in the Euro may have something to do with persistent news on Greek and Irish debt. There may be a "European Debt Crisis" shakeout soon.

The selling in Euro in conjunction with a European debt scare should shake out metals, commodities and stocks and create a buying opp just in time for the ECB to pull off some kind of QE3 of their own to bail out the situation. At which point asset prices will surge again.

This is pure speculation, of course. But the action in the Euro is curious and has been wonky for a couple of weeks now. It's one of the things that have made me question some of the inflationist assumptions that are ingrained in the markets now. In my opinion should the above scenario come to pass we should not panic out of longer term positions but should be ready to buy FAST as soon as we see an abc correction to support.

On November 7th I updated BullBear Traders:

There is some chance of a short term top in asset prices and a short term bottom in the dollar.

Tonight there is general weakness in Asia and in commodities while the dollar has strengthened. There is no real "reason" for it, though I suspect that some kind of European sovereign debt jitters are brewing. The Euro has broken down out of the rising wedge indicated in the last update:

If this is an early warning of a debt crisis shakeout then I say "great"! The bears will think it's "The Top", the "D" word will once again be spoken in fear, the ECB will print tons of cash, bailout whatever needs to be bailed out and then things will rocket back up to new highs. That is likely to be the pattern over and over again...crisis, fear, mini panic, bailout, rally, new highs.

We have seen many markets break to the upside of rising wedges and channels, an unusual technical occurrence, very bullish IF IT STICKS. If these markets fail back through their patterns and fail badly then that is very bearish. My guess is we see some support retested and then new highs.

On November 9th I posted this update:

Indeed we have seen Euro weakness and dollar strength as sovereign debt concerns regarding Ireland and Portugal have grown. There was no real news to spark today's selling, which is a little more bearish in that the selling was organic and not news driven. I think that there are indications in the technicals which may point to an intermediate term top and a pullback. I can't advocate putting any new money to work nor can I say that we should be shorting. The best we can do is continue to ride existing long positions and wait for the correction.

On November 10th I issued a Special Report:

The move off of the QE2 announcement started out like a wave 3 move but has since stalled and the technicals have not really shown the kind of internal strength that would be associated with a wave 3. I'm looking at the recent highs as probably a wave 5 off the August bottom. In that context I am looking for an intermediate term pullback to start anytime now.

The Euro has indeed broken down out of an abcde rising wedge (possible leading diagonal) pattern. I think it's got more downside to at least the 38.2% Fib retracement of the recent rally.

General asset price direction is tied to the fate of the EuroDollar at this time, with markets tethered to the dollar inflation trade and subject to a bout of fear as questions surrounding Portugal and Ireland mount.

Tonight Cisco announced earnings and the market did not like the results or the guidance. CSCO fell by 12%. Nasdaq 100 futures appear to have broken key support.

The uptrend from the August bottom is gone and we have an upside wedge breakout that has failed back through the formation, a particularly bearish occurrence. If this move holds and we sell down on Thursday then we probably have the beginnings of an intermediate term decline.

In early October, Stocks Above the 50 Day EMA topped out at levels frequently associated with a market high. Recently, the indicator has apparently made a lower high even as the market has moved up creating a divergence.

The McClellan Oscillator is showing a divergence similar to those shown at the January and April tops.

The white boxes show an area of lengthy consolidation in the vicinity of the 0 line after which the indicator breaks down with the market.

Traders should be taking some money off the table here and gearing up to buy after an abc decline. It could last about 1-2 weeks, maybe less. The spark could be any bit of news from Europe. I would not recommend shorting because the decline could be very short lived or it may not even materialize at all. Again, the setup is for a pullback within the context of a wave 3 bull move, not a major top.

11/14/10 BULLBEAR TRADING UPDATE:

The report issued on Wednesday (November 10) seems to have been borne out by market action. The current situation is pregnant with precarious possibilities including a renewed European debt crisis, a US mortgage debt crisis and a US Municipal bond crisis. Any of these could cause a deeper retrenchment in risk assets followed by the customary money printing and bailout leading to a reflation of asset prices.

So far we have a decline to the 20 EMA on SPX, which has contained pullbacks throughout the recent rise. RSI appears to have rolled over and other indicators lead me to believe that we will see SPX test the 50 EMA as a minimum target on this decline.

The short term chart shows the trend channel break on Friday with a weak intraday retest of the break. The chart shows a potential trajectory for the ABC correction.

I have reduced my long exposure to 25% because I think there is too much risk to the downside at the moment. We do need to keep in mind that we probably are somewhere in a Wave 3 up and we don't want to be caught out of position when the market turns back up because it will probably happen fast and hard.

11/17/10 BULLBEAR TRADING UPDATE:

My current view is that we have seen the first wave down of an intermediate term correction in risk assets. I am using the June 2009 correction as a sort of template. No two corrections are the same but it helps to have a point of reference. B wave up is apparently in progress as overnight we are seeing substantial strength in Asian trade and US futures with commodities recovering and the dollar selling off.

So far there are no signs from the Treasuries-EuroDollar spread (TED) that anything substantial is happening in Europe. No doubt the Euro Fiat Helicopters are being loaded with cash tonight and will commence a bombing run on the green fields of Ireland very soon.

The short term chart of SPX shows a completed A wave down. B wave up should begin now.

NYSE and Dow Jones indices touched their 50 Day EMAs today. B waves frequently start from there.

Traders should be gathering their capital and preparing for one of the best buying opportunities we are likely to get for a long time. While there is (technically) still some chance for a bearish resolution, overall the signs do not point in that direction at this time. I'll be keeping one eye on it, of course. More likely, as Wave 3 of (3) unfolds the ingrained, long term bearishness of 10 years will be unwound and it will be very, very, very difficult to get on board as the buying panic proceeds. People get ready!

11/22/10 BULLBEAR TRADING UPDATE:

The action sure has been quite choppy and random of late, which is typical of a triangle correction. Here's a view of what a triangle might look like:

I don't think that this is a wave 4 off the July SPX 1010 bottom, but rather a correction of a lesser degree within a larger wave 3 up (ii of 3). If the correction ends up being a flat (looking less likely today) then we would have alternation between the August correction and the present one and that would suggest a wave 4. We'll also have to look at the indicators to see if they give clues as to the degree of the correction. For now I'm seeing it as a correction of the move off the September bottom and looking for a iii of 3 of (3) setup at the bottom.

11/23/10 BULLBEAR TRADING UPDATE:

Overnight markets are bouncing smartly without any news catalysts. Investors appear to be buying the fear dip. Based on chart, technicals, tape action and resilience of the markets I am tending away from looking for a sharp C wave down and tending now to look for either a triangle correction or an expanded flat correction.

The triangle would probably mean that the price bottom is already in and it's just a matter of time for the formation to complete. It would probably take about another week, maybe less. Here's a potential view of how it might develop:

11/24/10 BULLBEAR TRADING UPDATE:

I'm very close to shifting to a general BUY signal. There are growing indications that the wave ii correction of SPX wave i of 3 of (3) up is complete. Here's a chart of NYSE to give you a sense of where we may be in the market:

Potentially we are at a point where wave 3 impulsive characteristics will assert themselves on multiple time frames simultaneously. It could be a very powerful recipe. It may have begun today.

The short term chart shows an exceptionally choppy decline with an even more choppy wave i and wave ii off the bottom. My tape reading suggests that buyers were taking advantage of any dip at all to load up on stocks.

Late last night stocks and commodities were bouncing sharply and the dollar was selling off. Then S&P announced that they were cutting Ireland's credit rating (gee thanks S&P, but I'm pretty sure bondholders wanted to know that BEFORE the Irish sovereign debt market tanked). Markets gave up all their gains and went into the red within minutes. Then the dip buyers came in and markets rallied all through the night and into the NY close. Fear dip buying is bullish tape action.

Many sectors have already taken out or matched their recent November highs and April highs. Semiconductors in particular are on a tear. Many economically sensitive sectors are outperforming the broad market (SPX). This list is by no means exhaustive.

The bounce off the low has been a bit of an uneven, "stealth" bounce so it may not feel like a firm bottom is in place yet. But this is probably a minor ii correction within the context of a much larger wave. I am buying here but I would not suggest throwing all your available capital into a single leveraged position in one shot. In other words, don't bet the farm. There is still risk and anything can happen over the weekend. I do think some nibbling on any dips with a small portion of available capital is prudent at this time.

11/28/10 BullBear Trading Weekend Report

The EU has bailed out Ireland (as they promised to do last weekend). The markets initially rallied on the news, then sold off and have now bounced back smartly. The US Dollar is essentially flat. The tape action continues to be more suggestive of a bottoming process rather than a breakdown. The end of the correction may be in progress and today's trade may very well mark the bottom.

The NYSE may have completed an ABC correction with a shallow C wave.

The chart of the SPX futures contract shows an apparent complete abcde corrective triangle with a partial e wave. A break above the trendline could come as soon as Monday, confirming the formation and the bottom.

Many sectors of the market have already matched or exceeded their recent highs and April highs. This shows some underlying strength in the face of the recent correction and the fears of a debt collapse.

If this European debt thing is such a big deal then why is the stock market of the continent's biggest economy trading at its highs and apparently set to break out?

World Dow Index has apparently completed a five wave triangle correction with a successful test of the 50 EMA.

The likelihood is that an intermediate term bottom in stocks is in place and new highs will be seen soon. If so then we will have confirmation that we are in a Wave 3 move. In this move we want to establish and hold our positions tenaciously (like Old Turkey) since entry points will be difficult and scarce. If we were at a bearish C wave high and about to begin a Wave 3 down, as many believe, then this would be the time for it. The market has refused to comply and the technicals show little sign that it will. Tape action is resiliently bullish showing that bulls are anxious to buy this and any dip.

11/29/10 BULLBEAR TRADING UPDATE:

Chances are pretty good that we have seen a bottom to the correction here. I am long SPX from 1183. If the market closes today near its lows then I will stop this position out. If it closes below 1172 tomorrow then I will need to assume a deeper c wave is in progress and would close the position at a small loss.

11/29/10 BULLBEAR TRADING UPDATE 2:

Picture perfect textbook triangle correction pattern now complete. All that remains is a breakout above the upper rail of the formation.

12/01/10 BULLBEAR TRADING UPDATE:

Big move in futures worldwide. SPX short term downtrend broken.

12/01/10 BULLBEAR TRADING UPDATE 2:

It appears that I have once again nailed a major turn in the market. As long as the market closes above 1190 we can buy or add to our long position.

Of course it's not how they open but how they close that matters and anything can happen before the end of the day. But the setup and the technicals tend to indicate that this is the start of a big move.

Huge breakout to initiate Wave 3 move.

12/01/10 BULLBEAR TRADING UPDATE 3:

So far indications are that the rally that began two days ago with a retest of the 1173 low is the bottom for the correction. There is some chance that we are beginning a B wave up and there will be a final C wave down to complete the correction. But the triangle formation and the fact that it took two weeks of basing activity to complete tends to suggest strongly that we have a completed correction of the move off the September bottom. Unfortunately we do not have a lot of corroboration from the technical indicators yet. We did see SPX test the 50 EMA three times and each time it held quite well. We also have a major breakout on the daily and monthly charts of the SPX/30 Year Treasury ratio which STRONGLY suggests an important bullish event is underway.

This move, particularly on the monthly chart, is enormously significant and really suggests we are in an important Wave 3 phase.

Please note that the assembled excerpts contain only a fraction of the charts and analysis delivered during that time period. As I analyze I am developing the thread of a primary scenario while simultaneously proposing alternative Bull and Bear scenarios.

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