Stock Market - What To Expect This Week

An interesting pattern has been developing over the past few months in the stock market which I'd like to share with you. You'll notice in the above chart of the S&P that there has been a tendency for stocks to sell off towards the end of the month and then rally at the beginning of the month.

What I find interesting is that each of the sell offs have been gaining downside momentum. In other words, each down move has been larger than the previous month's down move. Having said that, if the pattern continues to work, stocks could be in for a very negative week as we close out the month. As always, there are no sure things in the market so lets just see what happens.

What's Been Weak In The Stock Market

Here are some charts that clearly illustrate why I am bearish on stocks and which groups I feel have been weak. But before we get to the charts I'd like to say that anything can happen in the market and no matter how well things may line up, the unexpected can and does happen which is why I always have my protective stops in the market. Having said that, lets take a look at some charts!



Above is the NASDAQ with the NASDAQ advance decline line. As you can see there is massive bearish divergence taking place right now. This can't be good for the market.



In the above chart we have the ETF for the Russell 2000 (symbol IWM). Notice the symmetry in this market. Rally A to B and rally C to D were both approximately 5 dollars and lasted for 11 trading days. This ETF also held the top of its channel and is now moving lower on an increase in volume. Earlier in the week when the S&P broke to a new swing high, the Russell 2000 did not make a new high. This is bearish divergence and indicates weakens for the Russell 2000.



The transportation index has been making lower highs and the stochastics have just crossed confirming a sell signal.




The oils stocks (OIH) did not break high with the S&P earlier in the week which I interpret as bearish for this group. Notice the increase in volume today on a move down. There is also a picture perfect head and shoulders top that has developed.




The biotechs are also looking weak. I'll let the above chart speak for itself.



Homebuilders have the same bearish setup.



In the above chart you can see how the financial stocks have not made a new high with the S&P. I actually have some of these stocks short but yesterday's price action caused me to lighten up on my position. The market was basically flat yesterday but the banks were the strongest stocks on the board so I cut my position in half only to see them fall right back down again today. Hey, nobody said trading is easy.

I could go on and on posting charts that are diverging from the S&P such as the XAL (airlines), $DDX (Disk drive index), $SOX (semis)..etc but I think you get the idea. Remember anything can happen in the market especially with a falling dollar so remember to use protective stops. Anything can and will happen!

Stocks Head Lower

As all of you know, I have been bearish on the stock market since last week and today I added to some of my short positions. For now lets just focus on the S&P but in my next post I'll write about some of the groups I like on the short side.

Above is a daily chart of the S&P and as you can see the top of the channel appears to have halted this month's rally. Today stocks were down on an increase in volume which I consider to be bearish and helps confirm my bearish outlook on the stock market.

One thing I've learned about the market is that it can be very symmetrical in both price and time. If you look at the last 3 rallies, you will see that the price magnitude of all 3 rallies is roughly 80 points (ex:1020-1100). In addition to that we also see that all 3 rallies lasted about 12 trading days (measured from low to highest close). Having said that, I feel that the upside objectitves have been met and that a downmove in the market is about to take place. My downside objective for the S&P is a retest of the November lows. Keep in mind I am not shorting the S&P, I am short the groups that are showing relative weakness. I'll talk more about these groups a little later.

Inside Day For Stocks

Above is a daily chart of the S&P and NASDAQ and as you can see we have an inside day that has formed. An inside day occurs when today's high is below yesterday's high and today's low is above yesterday's low. What I like about these days is that they usually trigger a trend day or a large range day.

Given my bearish outlook on the market, I'd much rather take a breakout to the downside than to the upside. If the market does indeed break the low of the inside day, that would also coincide with the breaking of the trendline which might trigger a multi day move down. If on the other hand the market breaks out to the upside, I will do nothing as I am willing to miss the trade.

Stocks Continue To Make New Highs

Stocks moved higher today with the Dow, S&P and NASDAQ all making new highs for the year. In the above chart of the Dow Jones Industrials you'll notice that the previous rallies were 665 and 689 points. Now we are seeing a rally of more than 700 points. The previous two rallies lasted exactly 13 days. The current rally is in its 10th day.

I still feel that the market is vulnerable to a sell off based on the fact that many key groups are not breaking high with the market. I came across a very interesting article that does a great job of expressing my exact view on the stock market. Here's the link:
"Stocks Are Up - But For Some Key Sectors The Bear Market Has Already Begun"

Crude Oil - Update

Above is a daily chart of the ETF for crude oil symbol USO. You'll notice that USO has gotten to the top of its rising channel and is now beginning to roll over. The MACD is clearly in sell mode and we are starting to see volume increase on the down days.



If you look at the seasonal chart for crude oil, you'll quickly see that the two most bearish months of the year are November and December.

Given the bearish seasonal as well as bearish technicals, I am expecting to see crude oil trade lower in the weeks to come. This falls in line with a rising dollar. If the dollar rises like I think it will, that will put pressure on commodities which of course includes oil.

Watch The U.S. Dollar

Above is a daily chart of the U.S. Dollar and in the lower pane is the RSI indicator. Notice we are seeing multiple bullish divergences in the oscillator. On its own a divergence it simply a red flag or warning which is why I never trade off of just divergences, I need to combine it with something else.

In the above chart I drew a trendline which hasn't been broken since this bear market began. By combing the breaking of this trendline with the bullish divergence, we can increase our odds of success. Watch the dollar for two closes above this trendline to confirm that this currency has put in a bottom.

In the chart below you'll notice the inverse relationship between the greenback and the stock market. Every time the dollar has bottomed it coincided with a top in the stock market. If the dollar does indeed break its trendline and heads higher, it will put pressure on stocks which would confirm my already bearish stance on stocks. Lets see how things unfold.