Jan 4, 2013

Weekly review

Short term view - probably short term cool off next week.
Intermediate term view - There is no bearish signs for now so up is up. I think there is another 2-3 weeks before intermediate term top.

So sharp rally after another orchestrated drama... QE,debt ceiling,fiscal cliff and always the same results print more spend more - somebody surprised?
I was WRONG calling the end of the move. The problem is not that I was wrong that is part of the game called trading I am angry at me that I read the charts the wrong way... ok I was working all the time lets say I was tired:)

The question now is do we see replay of the QE3 drama from September - sharp rally for several days and reversal or we are in the middle of a rally and the next leg up has started.
- On the technical front the charts look bullish. Weekly chart(see chart three)- huge bar,the histogram is moving higher, MACD turning up at the zero line and the trend line, the price bounced of support,EMA50 and the trend line. The daily chart is bullish too - price,histogram and MACD are still moving up.
- The Market Breadth Indicators are bullish pointing up but the move is already mature as all indicators are in the overbought zone. But they could stay there for several weeks that is not a problem.
- Cycles - we are in the last 20 week cycle of a 4 year cycle and waiting for a 4 year low. So we should see intermediate term top soon.
- Tom Demark Sequential - daily chart 13 reached pullback is to be expected, weekly chart we are at week 10 from a countdown so another 2-3 weeks up are to be expected. We are near to an intermediate term top but not there yet.

When I asses the facts above I head two scenarios shown on the long term chart:
- the current one for a reversal now, which I am following for a long time. It is still valid there is no technical damages but the time is running out. We should see a reversal soon. It was the same story in September - I was expecting an intermediate term top and than ECB announcement, FED QE3 sharp rally for several days from 1400 to 1475 one final push stretched to the maximum.... and than a reversal. So I could not exclude this scenario.
- we are in a wedge, we saw already 1-2-3-4 and now we are in the middle of 5. That means we have more on the upside in the next 3-4 weeks and 1500 points on the SP500 at least.

Unbiased conclusion - the wedge scenario has more weight because of the technical picture, the other scenario is based on indirect evidence and at the moment we do not have any confirmation.
If you find this confusing I will tell you my trading strategy which is very simple - buy the next pullback. If the wedge plays out you make money, if the other scenario kicks in you make small gain(worst case small loss) on the upside and reverse short.... and you make money:)

Short term - I think we will see a pullback next week. How deep will give us more information what to expect from the next move. Normal pullback should be 25 points like the previous ones which is ~1440, the middle trend line, support and EMA50 on the hourly chart.
Intermediate term - both scenarios are shown on the chart. Red 1-2-3-4-5 is the wedge scenario, yellow W-X-Y is a flat correction which is part of the green scenario and should mark the low of the 4 year cycle.
Long term - a better view of the big picture. Ending diagonal/wedge in red 1-2-3-4-5 we are in the middle of 5. Or a big sideway move (the green scenario) from W to X should be the end of a 4 year cycle with the last year of the cycle (April 2012 to the projected low Q1 2013) basically flat.
The irony is the bearish mid term scenario(green) is more bullish for the long term. As a trader I hope that this scenario will play out - it will offer us much more opportunities to make some money in both directions:). The other one... a lot of risk with this ending diagonal and multiple divergence on the MACD.

The Market Breadth Indicators are bullish but at overbought levels. They can stay there for several weeks and the indexes can move higher BUT the move is mature. I would not expect a rally for another two months and 10%+ gains rather 3-4 weeks and another 5%.
McClellan Oscillator - divergence erased, healthy move... no troubles here.
McClellan Summation Index - bullish on buy...
Weekly Stochastic of the Summation Index - says we are near to the end of this swing not the beginning... but no sell signal for now.
Bullish Percentage - bullish on buy...
Percent of Stocks above MA50 - very stretched to the upside around 90. It will take same time to reverse probably with divergences.
Fear Indicator VXO - in the danger zone bellow 14 but it could stay there for a while. There is no divergences for now...

I moved the low of the 20 day cycle. The strong move of the low and the new minor high suggests that a new 20 day cycle has started on Monday - currently at day 4. At least a week at this levels before we see the top of this daily cycle.
The big picture - currently at week 7 of the last 20 week cycle of the 4 year cycle. Something on the downside should start very soon.

Tom Demark SEQUENTIAL AND COUNTDOWN - this technique spots areas of exhaustion.
This week SP500 has finished 13 combo and 13 countdown.... lets see what happens next, probably a pullback.
The weekly shows Countdown and Combo at 10. This will fit perfect with the 1-2-3-4-5 wedge scenario finishing countdown 13 in the next 2-3 weeks.
The T-theory says the same another 2-3 weeks of strength - after a period of weakness follows a period of strength with at least the same duration.

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