Value of Perfect Information

Are Institutional Investors panicking?

The answer from the current level of NYSE New Lows is suggesting that Institutional Investors are not panicking.

I have spoken about what levels to look for on this indicator, and since we are still receiving requests for them, here they are again:

1.  Consider any daily number of New Lows that are below 28 to be positive.
2.  Above 28, be on the ALERT as this is a red flag, Caution condition.
3.  Above 50 is a Danger condition where a serious sell off typically occurs.

Those are the numbers to look for.   So what happened yesterday?  The New Lows came in at a positive 15, so Institutional Investors were not panicking.  (This chart is updated every day on our Standard subscriber site.)

Are Institutional Investors Bullish?

Note: Although they are not panicking, Institutional Investor actions have been very tempered relative to increasing their Accumulation levels, so they have been on guarded behavior.

Marty Chenard – www.StockTiming.com

Below is a weekly chart of the Banking Index.   Take a good look at the lines labeled 1 and 2.

What do you see?

Looking at the chart, you should see that the SPY has been trending up since April 2010, while the Banking Index (symbol: $BKX) has been trending down since April 2010. (The Banking Index is updated daily on the www,StockTiming.com Advanced Update)

What’s wrong with that picture?

What’s wrong, is that the Financials component on the S&P 500 is the second largest component which represented 13.78% of the index.

So, this chart is saying that the “other components” as a group, have been strong enough to overcome the huge weakness in the Banking sector.   Negative divergences like this cannot go on forever. For the S&P to continue trending up in the future, the non-financial sectors will have to stay strong, and stay strong enough for the Financials to start reversing its down trend.  So, all is not roses and there are still some big challenges ahead.  (Commentary is continued below the chart.)

What are the other S&P sectors?  See the matrix below …

What could have told you that the market would drop after September 16th?

Today, we will post two charts … one chart of the S&P 500 Index, and a second chart showing what has been happening to S&P stocks on an UnWeighted basis.

First … is the daily chart of the S&P 500 Index showing the September 8th. to October 4th. time period.  Note how the S&P 500 went up from September 9th. to September 16 when it reached a peak and moved backdown straight into October.  See the next chart …

This second chart shows the results of our nightly run on 500 UnWeighted S&P stocks relative to “how many have Negative Strength versus how many have Positive Strength”.  (This chart is shown on our StockTiming.com Standard subscriber site each day in Section 4, as Chart 1.)

*** This analysis is a simple analysis because you don’t have to be a rocket scientist to understand what it is saying about the market.    In basic terms …

If the (blue line) number of Positive Strength stocks is greater than the number of Negative Strength stocks (red line), then the Bulls would have the dominant power and the market bias would be to the upside.   Since we are measuring 500 stocks, above the 250 level would be the half-way Equilibrium point for which you would also want to see the number of Positive stocks to be above that level.  (The higher the amount over that level, the stronger the Bulls are.)

If on the other hand, the number of Negative Strength stocks is above 250 and greater than the number of Positive Strength stocks, then the Bears would have the dominant power and the market bias would be to the downside

So, let’s now compare the time period in the two charts. Chart one shows that the S&P moved up from September 9th. to September 16th. Chart two shows why that happened … it is because the number of Negative stocks decreased every day until September 16th. when it then reversed and started increasing with the very next trading day showing more Negative Strength stocks than Positive Strength stocks.   That said that the dominant power had shifted from the Bulls to the Bears.

After September 16th, chart one shows that the S&P continued to move in a down trend.  The reason WHY it moved down since September 16th. is seen in the second chart below.

What’s the reason?  It is because the number of Negative Stocks were greater than the Equilibrium number of 250, greater than the number of Positive Stocks, and because the Negative Stocks were also trending higher since that September 16th. date.

Think about it … how could the market move up higher if the number Negative Strength stocks were outnumbering the number of Positive Strength stocks? … and how could the market move up if the Negative Strength stocks were also increasing in numbers as time went on?

The Danger of not Analyzing Data to Scale …

Below is a chart showing the daily number of our unweighted S&P 500 stocks that are showing Negative Strength.

If you are analyzing the market, you really want the added advantage of seeing what the trending would look like if you looked at the S&P 500 on an unweighted basis.

Why is that important?

Below is a list of the top 10 stocks on the S&P 500 as of the close on Thursday:
*Apple Inc.    *Exxon Mobil Corp.     *International Business Machines Corp.     *Microsoft Corp.     *Chevron  *Johnson & Johnson   *Procter & Gamble  *AT&T Inc.  *General Electric Co.    *Coca-Cola

These 10 stocks out of 500 represents 2% of the total number of stocks.   And yet, because the S&P is a market capitalization weighted index … this 2% of the S&P’s stocks represents 20.39% of the index on a Market cap per share basis.   (Some argue that a market cap weighted index gives one a skewed picture of what is really going on.)

What?  10 stocks reflect 20% of the whole index’s movement?
What would the picture look like if its stocks were equally weighted?

So today, we will look at all the stocks on the S&P 500 as if they were equally weighted, and then measure their individual strengths.    Specifically, we will show you a count of unweighted S&P stocks with Negative strength.   Since the market has been going down, many professional investors want to know what is happening to the stocks that are going down on “an unweighted group” basis.

This first chart show’s the total daily number of S&P 500 stocks with negative strength since Sept. 9th.

Notice how you can see the number of Negative Stocks declining from September 9th. to September 16th.   And then … note how the number of Negative Stocks INCREASED from September 19th. to the 22nd.  (September 17 and 18 were weekend days with the market closed.)

Now, if you look at your actual S&P 500 stock market charts, you will see that the S&P went up from September 12 to the 16th, and then down from September 19 to the 22nd.  Excellent correlation.

But … there is one more significant fact that should not be overlooked … see the second chart …

Below is the second chart … actually, it is the same chart EXCEPT that we expressed the number of Negative Strength stocks per day in terms “of their percentage of the total number of stocks being measured“.

Since it is the S&P 500, the total number of stocks is 500 and we just divide the Negative amount by 500 to get the daily percentages as seen below.

Hopefully, something BIG hits you at this point.

What is it?  It is the fact that the percentage of Negative stocks on September 9th. was 86%, and the number of Negative stocks on September 22nd. (yesterday) was 87%.

Here is what you should observe …  For the percentage to reach 100%, EVERY SINGLE STOCK on the S&P 500 would have to be going down, which would mean that 100% of the stocks were being sold.

So, what happens before that?   We reach a percentage where too many stocks of real positive value are going down (increasing in Negative Strength) … and that is when the market reaches an “oversold condition”.   That oversold condition starts when the percentage of stocks growing in Negative Strength reaches 80% or higher.   Since investors can’t resist true bargains being left on the table, they come in and start buying the undervalued stocks.  (These kind of charts and stock market measurements are posted every day on our www.StockTiming.com Standard subscriber site.)

______________________________________________________

Good Rally, Bad Rally???

When you look at the S&P 500′s ETF (the SPY),  you realize what a nice rally we have seen since the end of April of 2010.   The SPY was up +4.49%.

However, when you look at the S&P 500′s second largest sector,  you realize what a horrible drop the Banking Index has had  since May of 2010.  The $BKX was down -20.18%.

How could that be?  The S&P’s largest sector is Info Tech which represents 17.64% of the S&P Index.   The second largest sector are the Financials, and they represent 15.11% of the S&P.    A 20% drop in a part that  represents 15% of the whole, and yet the whole still goes up 4.49%?

The Banking Index isn’t just any index either.  It represents what it going on in banking stocks which is a reflection of what they do and how they are doing financially.    One of the primary functions for banks is to provide loans to businesses and consumers.  But, there is an on-going hesitation at banks, where they are resisting the granting of loans due to they fear of risk levels.   This has frustrated Bernanke, and has been a thorn in his side.

Bottom line, we have a huge negative divergence between the S&P 500 and its second largest sector.  Negative divergences are things that are “out of balance” with each other.   Sooner or later, balance is always re-established.

Using an analogy, negative divergences are like rubber bands.  The more you stretch them, the harder they will snap back when let go … or when they break under the pressure.  After being let go, a rubber band goes back to its “in balance” condition.

So that you can visually see the degree of imbalance occurring, see the weekly chart of the Banking Index versus the SPY that we posted below.   Also notice how they were in balance during the 2004 to 2009 time period.

The Banking Index Chart is updated every day on http://stocktiming.com/Stock_Charts.htm Advanced Update.

Part II on last week’s Fibonacci event …

You may recall that we discussed the 61.8% Fibonacci testing level event last Monday.  Here’s a brief recap of last Monday’s comments before we show you today’s update chart:

“For Fibonacci followers, the S&P 500 is a smidgen away from a momentous event. What is the event?   The event is that the S&P 500 is VERY close to reaching and testing its Fibonacci 61.8% level.”

Last Monday’s chart from www.StockTiming.com showing that testing event is below, followed by the current chart and comments.

*** Below is the current Fibonacci chart as of last Friday’s close.

Many Fibonacci followers insists that the 38.2% and 61.8% levels are the most important levels they watch.     That turned out to be the case last week as you can see, because the 61.8% Fibonacci level could not be penetrated during the testing last week.

Currently: At the close last Friday, the S&P’s strength fell to a two week low, so the market is now under duress.

Trend day down. Trend day up. Trend day down.

This is a day trader dream

What happens really is that market sells with force and we get a nice down day. Then dip buyers come in at oversold conditions to roll their dice at glory, and we get a nice day up, but they do not do so on huge volume. Sellers re-appear and crush the dip buyers into losses. And it goes on until either sellers stop and join the dip buying party (end of correction), or dip buyers get the message and start looking for bounces to get out of mounting losses. The latter is the situation where oversold stays oversold and bounces never bounce high enough for those trapped because of their dip-buying excursions. Then, overhead supply builds and resistance levels mount and things get really ugly

So, if this is going to be just a correction, buyers should force it into a turn soon.

Regardless, judging by the volume of the recent declining days, and the force and fluidity of today’s dump, dip buying is something I’d rather not do at this point. Let the real champions pick the bottom!

This is a 15-minute chart of the index that I showed on my blog on Thursday.

The amazing 20-point run of yesterday had taken the index to a point where a perfect channel could be drawn. Today, all of that bounce was given back, and then some. The channel I drew yesterday held to perfection. Sometimes, we get it right

Today felt as if Thursday did not happen. But wait a second! Didn’t I say the same thing last Friday in the blog post of October 23? Friday, October 23, also wiped off an impressive bounce of its preceding Thursday. Seems like people do not want to be stuck with stuff over the weekend

Anyhow, if the count in the chart above is correct, we may be close to a bounce for a minor wave 4. There may be a bit of residual selling early next week before that.

Note that I can count the above chart in other ways as well. I just went with this one because I like its momentum profile and MA alignment. But, as usual, I shall try not to get caught in short term counts and shall pay close attention to important levels and trend lines.

Speaking of important levels, bulls lost the 1041 level. They also failed to prevent a close below 55 EMA

Index also closed below the broken March trend line with an emphatic candle on expanding volume. It just does not look good for the bulls. Can they redeem this? Of course! They, as we have been saying for days, need to spend money across the broader market.

Daily volume was heavy. Breadth was ugly!

The last time down volume trumped up volume like this was October 1. That selloff proved to be the washout event and bulls came back albeit at pathetic volume. This time, breadth has deteriorated further and the lead up selling has been at higher volume that it was prior to October 1. So, the situation is a bit more hostile to the bulls. We’ll see.

McClellan Oscillator (MO) is mired in oversold territory

You need to go back to February to see comparable behavior from MO

This is one of my favorite breadth charts

Short term breadth is very oversold

Many a moon ago, I was saying that the bears of the last drop had no significance in the course of the market action, and that market needed new bears with capital and conviction, and that new bears would have to come from the ranks of well fed bulls. I repeated that almost daily and constantly advocated watching for signs of distribution. We have been seeing heavy distribution for days in a row.

So far, market has delivered two good bounces off short term oversold conditions. Both of them fizzled and market got even more oversold. But have bulls really changed sides? Have the fat cats finally said that it’s over. I don’t know. All I know is that, if there still are bulls and green shooters out there, they should deliver a rally soon with a chart like above. Failure to do so will be very telling. TRIN MAs moving like that can make the environment very unfriendly to bullish aspirations.

A study of S&P’s cyclical momentum helped me plan ahead for a possible peak. It also helped me take a short stance near the recent peak with relative confidence.

This is an updated chart

CCurve is at a critical juncture. It is sitting on its uptrend since July. I will regard a break of that trend line as a second piece of evidence for magnitude momentum swing failure at the recent price peak, and may plan to get more aggressive on the short side. If it turns and make a higher peak than the last peak before making a lower trough, I will regard it as an indication that another momentum up cycle may be in the works, and may become wary of the short side.

VIX finally broke out of its down-sloping channel

It is at a long term level of resistance, and I wouldn’t be surprised if it ebbed back. Regardless, if it starts an uptrend, it would be supportive of a downtrend of the broader market.

—————————–

Hypothetically, assuming rather foolishly, if the market has topped (at least for a good correction), what can I expect as a possible target at this point?

This is a weekly chart that I have been showing a lot recently

There is a strong technical support band around 930-950 that coincides with 50% retracement of the rally since March. David Rosenberg, in his daily musings, says that he regards 850 as value given current numbers, so, I am gonna say that somewhere around 850-950 (I know it is a wide 100-point band) may be good drop target for what I know now – all hypothetically, of course.

If market indeed starts going that way, I would not be surprised if we started hearing rhetoric in support of another round of stimulus money. Keep that in mind.

Nas100 had a bad day as well

Above average close below 55 EMA with an ugly candle.

It is still in the weekly box formed by some price points that I calculated in September

My price points have been my trading markers and I see no reason why I should abandon them

Bears need to break the techies down or all of this might end up being just another meaningless correction. For me, there is no way around it, if bears are serious, techies have to go, and go faster than the broader market.

Let’s Wrap Up:

Short term picture does not look very good at this point. I am operating under the assumption that a top is in, expecting an OEW mid-term trend change. Technically, everything that I look at tells me that, at the very least, a good size correction in underway.

Market prices and breadth are sufficiently oversold to produce a bounce. Failure to bounce in the coming week may be interpreted as a serious sign of bulls losing their grip on the market

Support is 1018 and 991. Resistance is 1041 and 1061.

Short term trend is down. Mid-term trend is up. Long term trend is down.

Today I read in another financial website that they were calling for 1050 on the S&P 500;  well so did I!

 http://bostonwealth.net/2009/05/16/fair-value-of-sp-500/

 …and three days later I refined the S&P 500 at 1034!

http://bostonwealth.net/2009/05/19/another-way-at-looking-at-sp-500-fair-value/

…and I warned about the negation of the head and shoulder pattern

 http://bostonwealth.net/2009/07/15/has-the-sp-500-head-and-shoulder-pattern-and-what-follows-been-negated-after-the-break-of-the-neckline/

…and I said if we make it past 950, to the moon baby!

http://bostonwealth.net/2009/07/20/to-the-moon-or-the-down-the-shaft-express-train-straight-down/

I also presented on June 8, 2009 the following:

http://bostonwealth.net/2009/06/08/outcome-possibilities-using-historical-data-for-sp-500/

Outcome possiblities using historical data after S&P 500 has returned more than 30%

 …and this after nearly nailing the bottom in 2009 from October 2008!

http://www.bostonwealth.net/wp-content/uploads/2009/08/2009-08-07-bensprediction1.png

If I must say so myself, this is as close as you are going to get in this market in achieving that “Value of Perfect Information”!

So where do I think this market is heading now?  Sign up for my newsletter at bwm@bostonwealth.net for a special newsletter reserved for my newsletter subsribers that will go in the next few days giving you my market insight for the rest of the year!

I’ve been out for sometime busy with life and summer vacation.  Now I’m back and getting ready for a new school year (tomorrow) and some deep analysis on where we are in the market. 

When looking at possible turning points I like to see how many technical factors line up at a certain spot.  The more that add up the more confident I am in the trade.  There are several lining up with last week’s push higher, so in this post I’m going to examine a few different technical factors that I look at to see where we might go from here.  These include:

• 21 week pivots
• Fibonacci Retracements
• Market Symmetry and Counting Waves

21 Week Pivots

There has been a distinct pattern in the market for some time.  Going back even further than the start of this bear market, though I am only showing the pattern since the October 2007 top.  The pattern is this: every 21 weeks (+/- 1 week) the market makes an important pivot in the price action.  This pivot could either be a high pivot or a low pivot.  And the pivots do not have to alternate.  In the pattern that is in my chart there are two sets of 21 week pivots that you can trace through the price action.  Last week was week 22 since the last pivot.  If the market did make an important pivot last week, it will obviously be a high pivot.  Now this doesn’t mean that we’re going to new bear market lows, but it does mean that the market could be in for the biggest pullback that we’ve seen since this rally began in the beginning March.

Fibonacci Retracements

When a countertrend develops it will generally retrace the previous price wave anywhere from 38.2% to 61.8% although 78.6% is usually the extreme level and only occurs in the ‘B’ and the ’2′ position of a wave count.  Last week marked a very important point as the S&P 500 retraced 38.2% of the bear market rally from October 2007.   This means that this bear market rally has met the minimum level of retracement.  Does it mean that the market can’t go higher?  Absolutely not, but it does mean that the market is likely to meet significant selling in this region as the big players will at least test the stamina of the bulls.

Market Symmetry and Counting Waves

One thing that I’ve found in my wave counting is that there is a consistent symmetry in the underlying price action during a larger price wave.  Once that symmetry ends, then the larger price wave also ends.  There has been a very distinct corrective wave that has shown up 6 times since July 7th and 5 more corrective waves that are all 61.8% in size to the other 6.  This is absolutely remarkable market symmetry.  When the market began to sell off near the end of Friday, the market ended at the perfect spot to add one more corrective wave to the previous 5 61.8% corrective waves.  Should the market keep heading south, it can travel as far as SPX 1004 before it will be equal in size to the other 6 larger corrective waves.  Should it travel even farther than that, then that would mark the end our market symmetry and likely the end of this price wave since July 7th and a larger corrective wave will begin.

My Elliott Wave Count

From the bear market low the market completed a 5 wave move that I am labeling primary wave 1/A.  Since then, the market is tracing out the corrective pattern equivalent of a zigzag.  Our wave X of the zigzag was extremely shallow (23.6%), and that generally creates the environment for a shallow Y wave, which began on July 7th.  If the market holds 1004, then I’ll expect the market to make a move for 1050+ area. From here should the market drop below 1004, I am expecting one of the following scenarios:

• either another X wave to 940-970 range
• a larger degree b wave down to 815-860
• a resumption of the bear market to new lows

Certainly with this kind of probabilities, it is important to manage risk and watch how the market is behaving as it approaches these levels.

This is a follow up of my post over the weekend of the SPX extreme Bollinger Band penetration.

http://www.bostonwealth.net/2009/07/25/bollinger-band-third-rail-deviation-spx-analysis/

This 2 hour candle chart and the first candle of the market open penetrating the 3rd extreme Bollinger Band suggests price will track sideways and return to the mean.

Notice the MACD divergence is still in play.

With the a.m. Globex momentum follow through into the US Market open, it is very important to follow the Asian and European markets overnight trading.

It is very possible we will have one more lift in the a.m. session. Also with the US Dollar beginning to show some strength, this could be the beginning of a market REVERSAL late in the Day and into next week.

We will see how things look a few hours before the open. I am cautious here and will be out of the market by close Friday.

Follow my SPY Day Trades live on Twitter. http://twitter.com/Neboxian

[tags]SPX 500, S&P 500, Extreme Bollinger Band ,Bollinger Band, MACD,MACD divergence,US Dollar ,Reversal[/tags]