Update August 31st, 2009

As one might expect, all the indicators had down ticks today.

For the $SPX:

A: Down tick and it is picking up momentum to the down side.

B: Down tick and no need for a microscope this time.

C: Down tick and remains in overall down trend from May high.

D: This had a slight up tick this past Friday but it has now had a down tick and rolled over.

E: Worrisome. In back testing I have found that when this indicator was set up as it is now, there was a sometimes dramatic change in the works. Also, in back testing I only found one instance where this particular set up led to a rally so the probability points to the down side in what could be a swift move. But that’s history and so many of these historical markers have been rendered useless in this market and so there is a chance the same will happen here.

For the $COMPQ:

A: Down tick and like the A Indicator on the $SPX it too is picking up momentum.

B: Down tick, which is a change in direction from Friday.

C: Down tick again and remains in overall down trend from May high.

D: Down tick and has now rolled over.

E: Worrisome and much like the same indicator on the $SPX.

So the signal generator says to expect some more down side, but it doesn’t say when. Based on the market’s ability to turn a near 100pt loss into a 47pt loss, I have to consider that tomorrow there will be a bounce of some type perhaps taking back all of today’s losses. But that won’t change things with the signal generator for a couple of days so a bounce on Tuesday will have to be followed by a bounce on Wednesday, etc. For the moment, at least according to the signal generator, the markets remain in a transitional period.

Adding the following at 8:15pm:

So, while the market did pull back as the signal generator indicated might happen, the pull back was nothing special. It appears to be just another, ho hum, low volume pull back and certainly not a distribution day. To get any kind of deeper pull back and/or to make a run at the SPX 1000 level, sell side volume is going to have to make an appearance.

The Transportation Index was down 1.5% and closed right on it 20MA. 11 of the 20 stocks within the index closed below their 20MA’s, up from 5 on Friday.

The Cyclicals Index closed down 1.3% and closed right on its 20MA. Now 16 of its 30 stocks are below their 20MA’s, up from 10 on Friday.

The $RUT was down 1.3% and it too closed right on its 20MA.

Are these leading sectors leading the other way now, or did they just drop to their 20MA’s for a test and are now good to go?

So is this just a retrace to the 20MA? If so then the market should bounce from these levels. The last time the signal generator began indicating signs of weakness, in the week ending August 7th, it meandered about for a while before finally dropping. Since markets don’t tend to go in straight lines very often, then that same course is probably ahead for the market. It may take until Thursday or Friday before the market reveals itself. In the mean time I’d be extremely careful trying to short this market as a few signs of weakness here and there are balanced by strength coming from other sectors such as the financials and the $SOX.

Signal Generator Update August 29th, 2009

First, in my last note on Friday, I posted that all the indicators for the buy/sell signal generator had down ticks on Friday. This turns out to be inaccurate, but not by much.

For the $SPX:

A: Down tick. Based on past history, this is a red flag.

B: Down tick. Microscopic at most.

C: Down tick, again. And remains in an overall down trend since the May high.

D: Slight up tick but it is rolling. It could reverse and go bearish or resume its rise into bullish territory.

E: This now looks almost as bad as it did in late May/early June. If this does not show signs of improvement by Tuesday then we could be treated to a market decline similar to the one that began on June 12th and culminated on July 13th.

For the $COMPQ:

A: Down tick and, again, based on history, this is a red flag.

B: Up tick, microscopic at most.

C: Down tick. Remains in an overall down trend since the May high.

D: Up tick, but like the same indicator on the SPX it appears to be starting to roll.

E: This now looks worse than it did in the May/June period. Could this be signaling a similar reversal? It will be interesting to see.

So what does this mean? Based on back testing the signal generator from 2000 through to the present, the current signals suggest that a pull back of some kind is near. Further, and based again on the back testing I’ve done, the pull back should begin no later than Tuesday, Sept. 1st. If it doesn’t occur by then, then the indicators should start ticking up which would negate the current negativity. A huge rally on Monday would also negate the current ‘sell’ signal.

But the market can go up and not change the signal. The SPX went up on Tuesday, 8/18 and Wednesday, 8/19 and nothing much changed. Then on Thursday, 8/20, the most sensitive indicator turned up signaling a potential change in trend that was followed by the huge rally on Friday 8/21, during which I went long and stayed long until late Thursday, 8/27.

And there are other items that suggest a pull back could be in the works.

The McClellan Oscillators for both the Nasdaq and the SPX have dropped below the zero line.

The A/D line for the NYSE is trying to roll over and, more importantly, the A/D line for the Nasdaq has already rolled over.

The SPX tried all week to break through resistance in the 1040 area, but failed.

The $CYC tried all week to break through resistance in the 726-729 area but it too failed and then closed slightly lower on the week. And 10 stocks within that 30 stock index closed below their 20 MA’s on Friday.

The $TRAN/$DJT index confirmed a shooting star candle pattern on 8/26 by closing below the low of the three candle pattern origin candle. The Transportation Index also closed lower on the week with 5 of the 20 stocks in the index closing below their 20 MA’s.

The $RUT, which has been a leader in this rally off the March lows, appears to be under pressure and unlike the DOW, SPX, and COMPQ the $RUT closed lower for the week.

During this past week, on 8/24 & 8/25, the $TRIN closed above 1.xx and did so without inflicting pain in the market. This is stealth distribution and is the same thing that happened during early to mid-June topping process which eventually led to the decline into the July lows.

What all this means is that there is weakness in the market and suggests that until this weakness is replaced by strength then there is a chance the market will move lower in the week ahead. However, this does not mean it’s time to short anything. Dip buyers have seized upon every opportunity to pick up shares as pull backs occur. They will doubtless be champing at the bit to take advantage of sale prices this time, too, assuming that the market does roll at all. We will all know when it’s time to short the market or take profits from long positions. The market won’t be able to conceal its intentions from us. It will first begin with an out of the blue sell off on heavy volume. A distribution day. The market can and often does rise after such an event but the wise trader knows to take advantage of the rise and take profits before the market catches on and it’s too late.

So where might the market go if a sell off occurs? Hard to say. A sell off might last only a few hours, or a day or two, or maybe a week to 10 days. I find it interesting that there is trend line support off the March lows for most indeces that comes in right around the 50 MA. That trend line along with the 50 MA would offer some strong support, should the market get there. On the SPX that would be around the 950 area. I’m not saying the market is headed there because I don’t have a crystal ball. But I am saying that should a pull back occur and should that pull back last more than a couple of days then there would be an outside chance that the SPX could head down for a test of that support area. But long before that the SPX would have to drop below 1000 and I think that 1000 would be defended. So first lets see if there is going to be any pull back at all and then lets see if 1000 will hold before looking at the 950 area.

Market Thoughts for August 28th, 2009

Quick update at 6:10pm:

All the indicators on both the SPX and the COMPQ ticked down today. The COMPQ took more of a hit.

The E Indicator, the one I can only use at certain times, like right now, is looking very worrisome. I’m not sure what to make of this as this is the first time I’ve watched this transition on a more or less real time basis.

Please do your own due diligence. The Signal Generator’s accuracy is far from confirmed.

I will have a more detailed up date either later tonight or Saturday.

————————————————

Adding this comment at 4:03 pm:

Based on the resilience and underlying strength within the markets today, I don’t think this is going to be a cut and dry, red or green call. The $TRIN sat around .50 all day indicating that everything that could be bought was being scooped up. It will be interesting to see how the indicators respond to today’s action.

Just a quick note: I am not doing anything to promote this blog except for one link I put with a message I posted earlier in the week on OBG’s blog. I am getting a handful of visits everyday and I hope that those of you who are stopping by will continue to do so. I think I’m on to something with this signal generator but there’s always a chance it’s just a fluke. The only way to find out is to keep stopping by and make note of the signal generator’s calls and check them against market action.

——————————————————

This is going to be very simple today. If the market closes up nicely, then the concern I had yesterday about weakness in the $RUT and the $TRAN is unfounded and the signal generator will continue on its upward path.

But, a sideways or red close may very well cause my most sensitive indicator to tick down reversing the current buy signal and generating the first phase of a sell signal.

Basically the market is teetering and needs to make up its mind.

I went through all the stocks in the $TRAN last night and really didn’t find much weakness so I don’t know why the $TRAN closed red yesterday.

I also went through all the stocks in the $CYC and looked at AAPL, etc, and didn’t spot anything that would cause concern in either of those areas.uck

Market Thoughts, August 27th

Some background info here. And I’ll be updating this over the weekend with more info about the indicators and so I won’t have to explain them every day.

For the $SPX:

A: Negligible up tick, which shouldn’t be a surprise.

B: Up tick but almost imperceptable.

C: Slight down tick indicating a loss of momentum.

D: Slight up tick and has moved deeper into bullish territory.

For the COMPQ:

A: Slight up tick. Is losing some momentum but not as severely as the same indicator for the SPX.

B: Up tick and actually looks okay.

C: Slight down tick which further confirms a loss of momentum.

D: Up tick. I thought this might confirm the ‘buy’ signal today but that didn’t happen. Tomorrow?

Added about 7pm ET: I use one other indicator which I call E. This indicator is now positioned almost exactly as it was during the February 2009 topping process and similarly to the June topping process. Just sayin.

The bottom line is that the signal generator has not confirmed the ‘buy’ signal as of yet. The signal generator took several sessions to confirm the ‘sell’ signal from August 6th on both the COMPQ and the SPX and then reversed within a couple of days. One thing for sure, this move is nothing like the move off the July lows and it looks more like the early June top.

Unless there is some kind of fairly decent rally on Friday, August 28th, then I would imagine that the ‘A’ indicator for the SPX will have a negative tick tomorrow and if that does occur then it could quite possibly be the origin of a new ‘sell’ signal.

So it’s pretty simple for tomorrow. Up and the SPX and COMPQ remain on a potential but as yet unconfirmed buy. Down and the SPX and COMPQ will negate the potential buy signal and enter into a potential sell signal.
——————————————–

Editied just after the market close to add this:

I sold my long positions today to lock in gains. I was deeply red during the early going today and decided to take profits when I was nicely green about 35 or so minutes before the close, right or wrong.

The market had every chance today to make a statement but failed. The TRAN was down and the COMPQ barely closed green while the $RUT closed red.

I’m very interested to see if my most sensitive indicator on the SPX had a negative tick today. It has been growing weaker and weaker all week.

————————-

The $CYC, which is up well more than 100% since the March low, is sitting just a few points above the 9EMA & 20MA at around 709. If this level should fail to offer confirmed support, I will exit my long positions today.

More than 30% of the stocks within the $CYC are trading below their 20MA’s, and this is not good.

Should the $CYC index exhibit weakness, then that will influence the $TRAN, which will roll in sympathy. The stocks within these two indeces are the core of the market and the market will go the way they go.

I will also be watching for anymore sustained $TRIN readings above 1.00. If stealth distribution continues, then I will join the others who are exiting.

I should have the signal generator update ready by about 6pm ET.E

August 26th, Market Thoughts

For the $SPX:

A: Ticked up again, though it is losing momentum.

B: Ticked up again. Difficult to gauge this one because it only began to tick up on 8/25, but it does appear to be losing momentum, as well.

C: Ticked up again.

D: Ticked up and is on the edge of somewhat more bullish territory.

For the $COMPQ:

A: Ticked up and while it too is losing momentum it is not losing momentum as fast as the same indicator on the SPX.

B: Ticked up again. Actually looks pretty good.

C: Ticked up again. Could have a bullish confirmation on 8/27.

D: Ticked up and has now crossed into more bullish territory.

The bottom line is that as long as these indicators continue to move up, then I will continue to hold my long positions. But there are a few things I’m concerned about.

The TRIN stayed above 1.21 most of the day, dropping down near 1.00 only a couple of times and briefly. The TRIN hit 1.90 at 9:53 AM, indicating tremendous selling pressure for a brief time. With the TRIN above 1.00 for two days in a row and with little market reaction, I’m concerned that this covert distribution may become overt distribution in the form a a major distribution event. But I have to see the whites of distribution’s eyes for me to change my position and I have only seen stealth distribution so far.

The $CYC and the $TRAN fared much worse today than the other indeces. If this divergence continues, then the market will begin to roll. As I posted earlier this morning, the $CYC needs to break above the 729 area or it runs the risk of slicing through the 20MA and taking the market with it.

While being long the market during a period of sideways churn is not as exciting as it sounds, I see no evidence to support a switch to the short side as of this moment.

——————————————————————–

Things I’ll be watching today:

The 20MA on the 60min charts for IWM, SPY, & the Q’s was acting as support yesterday. The PM indicates that the 20 will fail as support in the early going. If the 20 is not retaken, there could be trouble ahead. These same ETF’s are below short term Ma’s on the 15min, which is also a red flag.

The $CYC index has been fighting with the 727-729 area for the past two sessions. If it fails to get through there or if it doesn’t even attempt to, then this will spell trouble for the market as the $CYC and $TRAN have been key to this rally off the March lows.

I’ll be watching the VIX and TRIN for signs of fear and selling.

I’ll be late with this evenings update. Might not be able to have it up before 8pm. Suffice to say that if the market drops today on negative breadth and with volume, then this might cause my most sensitive indicator to tick down. That won’t be good and that will force me to get out of my long positions.

August 25th, 2009 Update

This contains background information.

For the $SPX:

A, the most sensitive, ticked up again today.

B, which gives early warnings, ticked up today. First time since the other indicators began to show some positive activity on 8/20.

C, which is important in confirming move, ticked up again today.

D, which is important in confirming move and the moves staying power and which had been pointing down, ticked up today. First time since the other indicators showed some positive activity on 8/20.

For $COMPQ:

A: continues to tick up

B: continues to tick up

C: continues to tick up

D: has moved further up and could cross into positive territory tomorrow.

The bottom line is that the signal generator for both these markets continues to strengthen, though neither has confirmed a ‘buy’ signal as of yet. The degree of change today was less than that of Monday, which was less than that of 8/21. Because the move on Friday was so strong, this, by itself, may not mean much. I have been thinking that the signal on the COMPQ, which is the stronger of the two indices right now, might confirm on Wednesday, 8/26, but it doesn’t appear that will happen. I do think that if there is no confirmation by Thursday, 8/27, then the market may be running out of steam and that no confirmation will occur.

The close of today’s session would have to be a cause for concern for the bulls. The TRIN was above 1.xx most of the session indicating stealth distribution. Back in the first part of June, there were several days where the market went sideways and where the TRIN sat just above 1.xx during most of those sessions. After about five such sessions, the market rolled over, finally bottoming on 7/13. I’m not saying this is going to happen but I don’t want to see another day of stealth distribution.

August 24th, 2009 Update

Please read this for background information.

For lack of a better idea, I’m going to label this indicators A, B, C, D, & E, though I will only refer to E occasionally.

A is the most sensitive.
B often gives early warning signals
C is important for confirming move
D is important for confirming and indicates staying power

For the $SPX:

A: Had a positive up tick again today but not as intense as the one on Friday, which should be no surprise.

B: Continues its descent and will need to turn up by no later than Wednesday. Tuesday would be better.

C: Has reversed course and is now ticking up but has a bit more to go to confirm strength.

D: Has also reversed course but is still pointing down.

For the $COMPQ:

A: Had a positive up tick today, though nothing like last Friday’s.

B: Had a positive up tick today. This needs to continue.

C: Continues to move up. Still not as positive as necessary but getting closer.

D: Has moved out of the confirmed sell zone and is pointing up toward the confirmed buy zone, but it is still in negative territory.

Basically what we now have are positive developments in each of these indicators for each of these indices. These changes began, for indicator A, on Thursday, August 20th, 2009. Will all this movement lead to a confirmed ‘buy’ signal? Will have to wait and see.

August 21st, 2009

Before you go any further, please read this.

Comments are turned off permanently.

My buy/sell signal generator had another up tick today in its most sensitive component for both the Naz and SPX. Yesterdays up tick was mediocre, by comparison.

Also, on Naz, one of the other indicators also had an up tick and a third indicator stalled in its down trend. This is telling me that what you see is what you get and is most certainly real.

For the SPX, one of the other indicators has stopped its descent and moved up a little.

So while the Naz has 3 of 4 indicators showing strength, the SPX has only two. I fully expect to see improvements in both of these next week.

When these last turned up off the July low, all the indicators had been dropping from the May 8th high and the slope of their descent had slowed. As a result, when the market turned on July 13th, all the indicators confirmed the move by July 15th. Before yesterday, these indicators were all pointing straight down so it may take a couple extra days to confirm the buy signal. I am front running this expected confirmation, though cautiously and with small share sizes.

For those of you who went short today, it has been my experience that when the $CYC and the $TRAN/$DJT outrun the market as they did today, you can ‘generally’ expect a pull back of some sort during the following session, though not necessarily at the open.

The $TRIN hit .21 early in the session and closed at an amazing .29. The kind of buying such a low reading represents is not sustainable and so this too hints of some kind of pull back on Monday.

If my buy/sell signal generator is accurate, then any pull back should offer a buying op.

Edited on Sunday, August 23rd to add:

The P/C ratio closed at .59 indicating extreme exuberance. This too may play a factor in some sort of pull back on Monday, August 24th. However, Friday was an accumulation day and those that didn’t get in Friday may want to participate Monday and so will buy any intra-day dip.

End of editing