December 26, 2006

I took a harder look at the daily MACD versus the weekly MACD setup in the general market indices. From what I can see, should the INDU sell off to the levels I posted recently (11965) and then bounce, I think that there is an even greater chance the INDU will be able to rally to new highs before another stronger selloff can take place.

With the weekly MACD not illustrating the same divergence between MACD and price being illustrated in the daily MACD, then a technical selloff in the INDU will likely be short lived. The effect of the correction will be to take the daily MACD below zero and only turn the weekly MACD down a few points, but off its highs nonetheless. With a rally likely to take place after any correction, the effect will be to turn the daily MACD back towards zero, and the weekly MACD will likely continue its downward tilt, or at the very least, move sideways, thus setting up a possible weekly MACD divergence should prices reach new highs. This would be the setup that I would want to begin shorting the market in earnest.

More to follow.

Week Ended December 22nd

The markets finished the week before Christmas on a down note on friday. It doesn't surprise me that the indices sold off, though. Weakness in the MACDs of the three indices I follow (INDU, SPX, NDX) indicated that a selloff was imminent. In fact, regarding the INDU and SPX, triple-top divergent formations were being exhibited as prices reached three higher highs but MACDs posted lower highs, an indication that the strength of the rally was waning.

Above is a daily chart of the INDU. Notice how prices reached three higher highs, while the MACD line responded with three lower lows. The momentum of the recent move up has waned considerably, and either a prolonged consolidation is in store, or a correction of some magnitude will take place in short order.

My bet is that the markets will sell off sharply during the next few weeks. I feel strongly that INDU 12300 will be taken out. Depending upon the nature of the move through that price level, I think the index will then target the recent short-term lows around 12072 before finding some support. But I believe the strongest support lies around the October lows around 11965.

Above is a weekly view of the INDU. Notice how the recent triple-top divergence (the divergence between prices and MACD) seen in the daily chart is translated in the weekly view: the divergence is not as apparent in the weekly view. But, it is there nonetheless: the daily tells us so. In addition, notice that weekly MACD stall-out/divergence (again, although not as prevalant as is seen in the daily chart) occurs after a strong momentum move (MACD rose in concert with price until recent weakness developed). When comparing this chart characteristic with other examples, what I have found is that any selloff, once the price move reaches other technical areas (be they moving averages, support/resistance levels, bollinger bands) then a rather strong counter-trend move (a bounce higher, in the case of a selloff) ensues. So, using my price targets above, should the INDU reach the 11965 area, I would expect a rather sharp bounce to occur, perhaps retracing 50% to 62% or more of the down move from recent all-time highs around 12500. This is the character of the MACD pattern that has emerged in the weekly chart of INDU.

Thus, my best guess of where the markets may go is a move down to 11965-ish (about 535 points off the highs of around 12500), then bounce sharply about 260 - 330 points (50% and 62% of 535) higher before stalling out again between 12230 or 12300.

December 18, 2006

The markets opened on a gap higher... traded sideways for a few minutes in a tight range with a downward bias... then rallied sharply, much the same way as they have done in the past few weeks... then rolled over and traded lower. As the indices rolled over to the lows of the day, it was quite clear that the NDX was much heavier than both the DJIA and the SPX.

For the past few weeks, this market has felt very bullish: corrections or consolidations were met by sharp rallies. For example, if the Dow corrected 20 points or so over the course of an hour, when the selling abated, the Dow would lift higher by more than the 20 point drop in the course of twenty minutes. An obviously bullish market.

the past two trading days, however, have shown slightly different characteristics.

Two shooting stars on the DJIA and SPX indicate a potential top is forming. NDX failing to make new highs, breaking back into the middle of the consolidation during the past few weeks, and a bearish engulfing pattern are all cause for concern for technology stocks.

Above is the daily DJIA picture. Targets: 12300 easy reach; 50dma at around 12175 looks like a good area of support.

Above is the SPX picture. Notice the shooting star from Friday has held. 1412 on the SPX looks like a good first target for a correction in the SPX. Take out the 1404 area and the next stop is likely the 50dma at around 1388.

Above is the NDX picture. The lows of this consolidation are calling the NDX's name. 1765 area looks like a good area of support, until its not. The 50dma is around 1755-ish.

I am not necessarily looking for a nasty selloff, rather a correction of the previous few weeks. As of today, the bullish characteristics of this recent rally are still present, and until some of these characteristics are no longer evident, this market should be supported.