Value of Perfect Information

Last December, we published a special way to use the $TICK to help you make money in the market.   Since what you are going to see, is a strategy about using a 1 minute chart, you will need real time data.   This can come from trading software provided by Schwab StreetSmart Pro (or other competitors) which is provided for their subscribers.

FYI … Below is the beginning portion of the “How-To analyze the TICK” posting above.   If you like it, click on the  link and it will take you to the original page: Convert Market Noise to Profit

How to convert “market noise” into profitable trading data that can make you money …

This chart shows the 1 minute $TICK with large up and down gray bars.  Most investors ignore this chart and data because it looks like nothing but noise.  But it isn’t … it can be magical data if you do the right thing with the data.

If you look below at the second and third chart, you will see what we mean, and how you can convert this data into powerful trading data …

Click on this link to go to the original study …
http://www.stocktiming.com/Stock_Investing_Course/convert-market-noise-to-profit.html

Long ago before the invention of the reverse ETF: Legendary technician Joe Grandville made the observation that sometimes to understand a market move it is necessary to turn the chart upside down. It is still a useful exercise! Witness the chart of TVIX – Double the Fear Index. Classic wave patterns as the price declines (S&P advances) including the capitulation phase Wave V which is accompanied by extremely heavy volume. The market therefore is registering a lack of fear at an extremely crucial technical level, both short term (three years) and longer term (ten years). This is also coinciding with higher Investors Intelligence bullish sentiment.

Thanks to Market Watch for the following on Super Bowl Theory:

The last time the Giants were in the Super Bowl, in 2008, the S&P 500 fumbled for a loss of 37%.

Yet let’s be fair. The Giants and the Patriots have each won the Super Bowl three times. The Giants in 1987 (think October crash), 1991 and 2008; the Patriots in 2002 (think tech-bubble meltdown), 2004 and Long before thew invention of inverse ETF’s legendary technician Joseph Grandville made the observation rthat sometimes to understand it is necessary to turn the chart upside down. It’s still a useful exercise2005.

For the Giants, the S&P 500 in 1987 rose 5.3% on a total return basis. In 1991, the index was up 30.5%. And then came 2008.

For the Pats:  In 2002 the S&P 500 lost 22%%. In 2004 it gained 10.9% and 2005 saw a 4.9% advance.Average out the scores, uh, returns, and here’s what you get: When the Patriots win, the S&P 500 has lost 2.1% on average over that year. When the Giants win, the index is off 0.4%. Not-so-super, really

Is there bad news just around the corner ???

Technical analyst agree that a falling wedge pattern is a bullish pattern.  As a pattern, its bullishness just stays dormant until the breakout occurs.

It is a great pattern for technicians because its failure rate is only 10% which means it has an accuracy level of 90%.

So why are we discussing this pattern today?

Because there is now such a pattern … a nice, two and half month long pattern.

That’s the good news, now for the not so good news …

The pattern is showing up on the VIX (Volatility Index).    As you know, the VIX is often regarded as the Fear Index and the VIX moves in the opposite direction of the stock market.

Therefore, this normally positive news pattern has some very negative implications attached to it.    Technically, for this particular pattern, the maximum run time before the breakout is during the third week of February.   However, that is when the apex of the resistance and support lines is formed.

The reality is that these patterns always breakout before the apex.   Seldom is that breakout longer than seven-eights (distance) into the pattern which would be about February 8th.

The beginning timeline for a probability increase of a breakout starts after being two-thirds into the pattern … and that date was January 23rd.    So now, we are in the breakout window area where the probability for a breakout will increase as time moves toward February 8th.

Bottom line … market risk levels will now start to increase as we move forward.
(FYI: This chart is one of three VIX charts that are updated daily in Section 4 of our StockTiming.com Standard subscriber site.)

This is part of a new Study we have been conducting.   What is important on this chart are the peak levels of Positive stocks reached on October 27th, and the peak level of Negative stocks reached on November 23rd.

Look these two dates up on your index charts and see the relevance.

BOTH were peak movement days and marked a turnaround point in the market either at the very same time or within just a few hours of the next day.   The peak levels are over 180, and as these levels approach,  they occur quickly and with spiking action.  Yesterday, this proprietary indicator went up to 147, so one should be on alert for the possibility of reaching turnaround spike levels soon.  (Full details about the report and data are found on our www.StockTiming.com Standard site today.)

Are there Mixed signals coming from the market?

Jesse Livermore stated a very simple concept back in the 1930′s.    He said that the market was all about money flows.   If the money flowing into the market was net positive, then the market would move higher … and, if the money flowing out of the market was net negative, then the market would move lower.

So, let’s look at out Long Term Liquidity chart today (Posted and updated Daily on www.StockTiming.com) As of the close yesterday, the Inflowing Liquidity levels were in low Expansion territory and rising slowly.   So, Livermore would conclude that there was a positive bias to the market … one where the positive bias would continue as long as the Inflowing Liquidity levels continued to trend up, and remain in Expansion territory.   See the next chart …

Yesterday, the S&P 500, DJI, NASDAQ, Russell 2000, and the NYSE all closed a little higher.   If all of these indexes went up, then surely the VIX should have closed a little lower, but that didn’t happen … it closed slightly higher.   Since the VIX is often referred to as the fear index, it was suggesting that the market still wasn’t convinced yet.

Now, imagine that the market is made up of two different stock groups.   One group is the “broad market” where the trend of what the majority of stocks is doing can be measured.

The other group is something we will call the Super Leader Stock Action.   This group is a representation of the changing numbers of stocks with very high strength levels.   If the number of stocks with very high strength kept increasing from day to day, then they would pull the rest of the market up as time went on and as their numbers increased.   Since the very strong stocks represent what investors feel are the best stocks to invest in, their conclusion must be that future profit conditions for these stocks will improve, otherwise they would not invest in them.

Likewise, the opposite should occur if the number of very strong stocks keeps decreasing day after day.    The broad market would not be able to sustain an up move if the very best, strongest stocks were in a decline.   The only way to offset that would be for the market to see increasing Liquidity Inflows day after day.    For this to happen under these circumstances, it would suggest that some group other than those who normally buy the strongest, most profitable stocks was injecting money into the market.

So, what did the trending of the broad market stocks do compared to the trending of the Super Leader Stocks (very high strength stocks) yesterday?

The good news was that the “broad market” stocks (as measured on the S&P 500) was up, positive and above a resistance line yesterday.

The bad news was that the Super Leader Stocks were declining, in negative territory, and acting divergently with the broad market stocks.

At the same time yesterday, the S&P 500, DJI, NASDAQ, Russell 2000, and the NYSE all closed a little higher.   If all of these indexes went up, then surely the VIX should have closed a little lower, but that didn’t happen … it closed slightly higher.   Since the VIX is often referred to as the fear index, it was suggesting that the market still wasn’t convinced yet.

So, both the trending of Leadership stocks and the VIX weren’t supporting the direction of Inflowing Liquidity yesterday.  That’s an obvious conflict in market conditions.   Livermore would say that as long as money flowing into the market was increasing, the market would be “driven” up.    So, it is up to the amount and consistency of Inflowing Liquidity now.

THE FLYING WEDGE

Ascending pennant from beginning of fourth quarter represents a complicated pattern of hurry up and wait. Initial buying stampede (short covering) followed by a cascade pattern of up to 50%. WSJ candlestick patterns for DJIA and S&P on market data page are illustrative, as are line charts on pg. M-3 of 1/09 BARRON’s.
Two ways to interpret this pattern: Either an a-e backing and filling pennant as part of a wave II compliment to last summer’s decline or; the more radical notion, that May through September was a “Flash Bear” market barely touching the 20% decline threshold intraday. With the average bear market decline over the past hundred years eclipsing the 36%, obviously the stage was set for further declines. Investors and traders have acted accordingly but curiously, domestic markets have not responded to expectations of the worst.
Thus in October a new bull leg in the advance from March 2009 has begun based upon “QEE” -Quantitative Ease Europe. As in the mid- 1990′s rolling recovery, as indeed, paralleling the 1970′s experience, the bi-furcated economy did not completely subdue the underlying growth drivers.
Today, as long as markets are convinced that there will be no liquidity crisis as evidenced in a temporary relaxation in 3 and 6 month LIBOR rates (although they have begun a creep higher in the last few days), investors may be willing to let European officials kick the sovereign debt crisis further down the road – one more time. Ignoring underlying risks that like the summer of 2008, several large institutions may need a rescue simultaneously; or, that eventually Italian long bond rates above 7% will prove unsustainable on a funding basis.
The recent success of the ECB’s three year loan program has given stock investors the incentive to look beyond a garden variety recession. After all, with European bourses down 25% / emerging markets down as much as 35%, much of the pain for the first half of 2012 has already been discounted. With interest rates about to dive precipitously in BRIC countries it is propitious for investors to step ahead of the curve.

WAVE V COMETH

Therefore we can make the case for a wave IV completion (with “Flash Bear” et. al) from the March 2009 lows. Setting the stage for a wave V liquidity driven blow off to new highs before the party ends. Logically, I have always held the position that historic market moves should follow traditional patterns, thus validating the underlying precepts of market dynamics. The decline from the 2007 highs encompassed elements of both 1929 and the 1973/74 collapse. Ergo, one should expect the rebound from March ’09 – which also completes a larger pattern from the 2000 top, to follow an easily identifiable five wave pattern.
The final liquidity wave wave will be led by European capital injection already approaching $2 trillion when you include direct ECB funding and indirect sources EFSF, IMF. Augmenting this capital wave will be purchases by major corporations and sovereign wealth funds induced to part with retained earnings in part to: 1) Repurchase shares so as to inflate earnings comparisons. 2) Renewed merger activity to increase market share with purchase of streamlined assets. 3) Increased activity by sovereign wealth funds scared out of bonds.
It becomes apparent that government debt holdings will continue to provide increasing repayment risk and currency risk – as the EURO currency slides; bombarded by a cascade of banking write-downs and government debt re-negotiations. Taking its toll on investor confidence. Thus the alternate cost of investing in top flight companies will gain appeal. Investors will be more apt to ride out the worldwide economic slowdown we foresee in equities, rather than invest in government paper and risk the deep chasm of debt default. In Greece, Spain, Italy, the open maw of DANTE’s abyss looms just over the horizon. [That investors in short term German & U.S. paper would prefer return of capital to return on capital is instructive and elucidates this fear.]
Even in the U.S. the long term picture is clouded. With an ever-growing debt/GDP ratio and the ECRI’s long-term Weekly Leading Indicator signaling a massive Head and Shoulders top -for the first time since the 1970′s; Treasuries will likewise face a day of reckoning – one more bubble to pop!

http://seekingalpha.com/article/316924-ecri-recession-call-growth-index-virtually-unchanged-for-7-weeks

As for the inconsistencies in the evolving pattern, once the Transports and broader averages confirm the DJIA bull case, the stampede will immediately send shares soaring past levels last seen in mid-2008. Just as selling begets more selling in a vicious cycle; so too, this virtuous cycle will feed on itself; convincingly sending the averages to levels last seen pre Lehman/Fannie Mae – post Bear Stearns. Then the fun begins.

GIVE ME YOUR POOR, YOUR TIRED HUDDLED MASSES

And yes, this virtual occurrence will assure that despite the higher dollar – which has been equated with lock step share declines – the averages will rise in real terms. However, commodity prices may stall -ex. oil (the Iranian wildcard). Capital HAS toflow into equities as ALL long-term government paper is suspect -anything over five years -(domestically “Operation Twist” skews this determination by the bond vigilantes). The ROI [Return OF Capital] on IBM, CAT, AAPL, MCD are much more model able over the next ten years than Treasuries. Yes, I am calling for another period of “Nifty” investing; much like the late 1990′s pre-Long Term Capital meltdown where investing in a chosen few will outperform the aggregates. Is it any wonder that funds are being siphoned from Pimco and the Go-Go hedge funds of the last few years? Just as instructively, is it any wonder that Bridgewater Associates’ Prime Alpha Fund has such a stellar record despite its humungous size? it is the simplicity of the strategy. Well the strategy gets gets even simpler from here – hold world class equities in the ensuing flight to safety! As legendary investor John Templeton used to say: buy quality at discounts to future value and; just as importantly, identify ensuing trends.
The trend in this instance: After thirty years of breakneck expansion the developed economies have created debt/GDP ratios that are unsustainable and will hamstring growth. BRIC countries are better positioned for balance sheet expansion but their growth models are still skewed toward resource export and not domestic consumption. The liquidity wave unleashed – representing the death knell of the developed world and engine of increased monetary velocity in emerging markets – will find its way into equities. Both stocks and bonds, as the spreads for corporates over Treasuries are currently at bargain levels.

CONFESSIONS OF A BORN AGAIN BULL

Finally, there is the old technical adage about not selling a thin or dull market short. as any good magician knows when the audience’s attention if focused on a particular direction – when they are misdirected – it is possible to perform your magic. Let’s look inside the numbers.
If we delve down into the price volume action we notice that the panic volume takes place on the announcement of the U.S. debt ceiling downgrade, complete with peak volatility. Both VIX and heavy volume declines have diminished since then. Just as importantly, despite the on-going EU crisis headlines, positive breadth continues to expand as tracked by the A/D line. Cumulative NYSE growth likewise continues to advance approaching July ’11 highs, not what one would expect of a wave II rally. Also weekly new highs have been running better than 5 to 1, in the holiday shortened week just ended they surpassed 10 to 1!
Having long been a proponent that we are following a typical Kondratieff Winter, if not the 1930′s pattern succinctly – after all Heisenberg’s oft quoted ‘Observation obfuscates the result’ applies here – the averages have to contend with a myriad varietal stimulations and, as discounting mechanisms, tend to confuse the crowd. Especially at turning points! Thus in any technical analysis it is useful to include some sentiment indicators to determine where the predominance of ‘popular delusions’ can be found. Today the “crowd” is talking SHORT!
That U.S. stocks may not decouple so much but prosper exactly because of debt contagion and credit default in Europe is a concept worth consideration. Thus, flight of capital from Europe and emerging giants will push U.S. markets to new highs before this three year bull market runs its course. That the DJIA experienced a “Flash Bear” while the rest of the world, a more traditional variety, shows that the flight to safety protocol has been operative since at least last summer. Likely it will accelerate as Europe continues in turmoil and giants China and India struggle to turn their battleship economies once again toward growth.
This is how the sociopathology of collapsing systems works, sometimes. Before the SS Titanic sank below the waves the ship broke into two and the stern was raised perpendicular before the eventual descent. In the case of the U.S. economy – as forecast by the ERCI’s WLI long-term chart and the onerous debt/GDP ratio, a decade of underperformance, based upon past precedence, which will negatively impact stock prices. But before that one final hurrah!

http://en.wikipedia.org/wiki/Societal_collapse

Using Relative Strength for profitable trading …

Today, we will look at two Relative Strength settings that work well together.  By the way, when you look our first chart, it says that the indicator is a C-RSI set for a 30 day time period.    The C-RSI is not complex and it is something we invented to just make deciphering the chart easier.

C-RSI Explanation:  Since the Relative Strength moves from 0 to 100, it is sometimes hard to discern if it is clearly positive or negative when looking at a chart.    For the standard RSI indicator, it turns out that a reading of 50 is neutral, so everything above it should be interpreted as positive, and everything below it should be interpreted as negative.   So, we decided to subtract a value of 50 from every RSI reading thereby making it zero based.   That means that the old value of 50 now becomes 0, so it becomes visually clear if the RSI is really positive or negative.

With that explanation, let’s move on to a chart showing what the C-RSI 30 has looked like on the NYA Index since last April.   We won’t get into C-RSI trends or divergences today, instead we will keep it simple.

First, notice the correlation between when the C-RSI is above the zero line or below it relative to the NYA’s action.   Following this one chart would have saved a lot of investors from losses in 2011.

Please see the next chart …

Sometimes you are lucky enough to have something that will improve one of your charts.  In this case, adding a C-RSI with a 9 day setting improves the value of the chart.

Take a look at the chart below … it is the same as the one above, except we added a C-RSI 9 in red.   A nine day C-RSI is faster than the 30 so it will lead the C-RSI 30.   When the 9 C-RSI goes positive while the 30 C-RSI is negative but trending higher, then the NYA is normally right behind it.  If the both turn positive at the same time, then the NYA’s move can often be a sharper, quicker up move.

There is one more thing on this chart that can be very useful, and that is the use of Bollinger Bands … which can be seen on the NYA Index.

When the NYA is above or below the Upper or Lower bands, the index or stock is normally overbought or oversold.   When outside the Bollinger Bands, the key relative to what will happen next is typically related to what is happening to the 9 and 30 C-RSI levels.   Take the time to learn and test this strategy, as it can do well for you in 2012. Marty Chenard, www.stocktiming.com

S&P 500 STALLS AT UPPER END OF PENNANT -RSI RUNS INTO RESISTANCE @ 80
Crystal Ball Gazing For 2012

The candle charts as presented in the WSJ Section C (I resisted the urge to force the idiom) provide a splendid example of the current conundrum for the new year. The DJIA after the top in April formed a classic 5 wave decline – dropping 20% and touching bear market territory before launching a stellar advance in October to post a modest advance for the year.

QUESTION: Is this a new bull market complete with waves one and two? Albeit it, one of short duration (six to nine months), destined to challenge 13,800 if not all-time highs? If so where is the volume? Not to mention the economic fundamentals which often arrive long after the turn.

Now let’s look at the S&P 500, representing a broader swath of America’s industry. The move off the bottom, not quite as pronounced, carries us only back to the 200 Dy MA – leaving us in a bear pennant mired between moving averages: 1215 – 1265. And evidencing a trendline with a decidedly negative vector.

Eye of the Bull of Bull’s-eye?

Don’t get me started on Dow Theory bullish reversals as John Bollinger mentioned two weeks ago. The Transports, usually the lead indicator in directional change – in recent history anyway – have acted this time as a coincident indicator, following lockstep with the Industrials. In fact, the case can be made that Transports failed at the “neckline” of DJTA 5100 while the DJIA convincingly violated resistance @ 12,000.

Now the Dow Utilities move to all-time highs, that is another story! Reflective of the flight to safety and hunt for yields, that is the short answer. It does make for a pretty picture all three indices surging to reaction highs. A hint of the financial asset hyper-inflation that is to come now that the central banks have opened the floodgates. Just when government bonds are revealed to be fiat with values fleeting is the question of the new millennium [New Mayan Millennium that is]. Gold will “tell” the tale!

Profit Motive

Thus it seems, as usual, that the direction of the broader averages will once again the dictate general market and reflect economic outcomes in the new year. The NYSE, Russell 2000, S&P 400, will be heavily impacted by circumstance both here and abroad. The direction of the currency will remain paramount; mid-size companies are increasingly dependant upon exports for earnings growth. A rising dollar, one of our forecasts for 2012, will slow sales and crimp earnings even before factoring in the results of slower growth in Europe and emerging markets. This will make earning comparisons more difficult for most domestically domiciled “Transnational’s” as well as, mid-cap companies. I find a lot of economic analysis lately to the effect of, the U.S. can continue on a moderate growth path without contribution from Europe or BRIC’s; this has to be either short-sighted or disingenuous.

Has anyone noticed that the $640 billion the ECB loaned into the banks was almost exactly the same amount the Fed created in March 2008 after the Bear Stearns demise?

Food for thought.

12/27/11 – Shanghai falls to 33 month lows on “gloomy” economic outlook. -Reuters

SENSEX falls to one month low on larger than expected downturn in October Industrial Production.  “Fear of declining output is turning into reality.” one analyst’s opinion put it.