Thursday, November 12, 2009

Have Stocks Turned The Corner?



On Wednesday we saw all 3 major indices break to a new swing high with the Dow Jones Industrials being the strongest of the three. When we take a closer look at what is really going on, I think you might agree with me that yesterday's breakout to new highs was a false move and that the market is about to head south.




Above we have a chart of the Banks, Homebuilders and Brokers. Notice how all 3 of these groups did not break high with the market yesterday. In fact, these groups are so weak they couldn't even rally above their 50 day moving averages. This is a bearish divergence and could spell trouble for the stock market.



Above is a chart that shows what the oil stocks have been doing. You'll notice that all 3 of these groups did not break high with the market. Those of you with a keen eye for technical analysis should be able to spot the potential head and shoulders pattern that is beginning to form on all 3 of these oil groups.



Above is a chart of the Russell Small Cap index which to me is the best short on the board. This index did not break to a new swing high yesterday. In the lower pane is the ratio line which compares the small caps to the S&P500 and as you can see this ratio line is literally falling out of bed. This tells me that money is leaving the small cap stocks in a very big way.




Last but not least is a chart of the NASDAQ and as you can see there is a rather large bearish divergence between the index and what the advance decline line is doing. The NASDAQ actually made a new swing high today but the A/D line is diverging.

Given all the bearish divergences we are seeing at a time when the market has broken out to a new swing high leads me to believe that the market is about to head lower. I know it's very bold to say that stocks are about to head south especially when all 3 indices have just broken out to a new high, but I must act upon what I am seeing. Only time will tell if I am right about the market going lower but for now I just wanted to share with all of you what I am seeing in the market place as it is happening not after the fact. As always we'll see what happens.

11 comments:

ben said...

Since 7/2009,multiple technical
divergences had formed and every
one of them failed. The bears have
been burned badly. The rally is
fueled by shorts being stopped out.
Do you think this time it is
different? Unless you have a lot
of capital, the market can stay
irrational longer than you can stay
solvent.

Kevin said...

Hey Ben,

Excellent question. It is true that there were bearish divergences since July that have failed but this time it's different because now we are seeing fewer and fewer stocks breaking high. Many of the major groups have not broken high with the market which is something we haven't seen in the past.

Elaine said...

Kevin

Based on the sharp sell off in crude oil today, do you think that crude will drift downward for a while? If so, what would be a logical support? Thanks!

Kevin said...

Hi Elaine,

I'll make a post regarding crude oil just for you.. How's that sound?

Jeff said...

Very nice analysis, Kevin. Thank's for sharing,

Tom said...

Thanks Kev.
Long AAPL via spread
short RUT via spread
I always try to hedge my bets.
T

Anonymous said...

While it may be true that multiple bearish divergences have failed, as a trader, I'm always looking for risk-reward ratios in my favor. A short here with a stop at the highs could catch the beginning of a 100+ point move in the S&P for a few points of risk. If you're not already long, is there really a long here (with a stop where, exactly, and on what basis? The July lows, where the divergences started to fail? The November lows?) with a 100+ point projected move to 1200? And, if I use the November lows as my stop, I need the projected "reward" to be even larger than 100 points to compensate me for the extra risk.

ben said...

Today(11/13/2009), on daily chart of SPY, stochastic "turns" and
shows bearish divergence (SPY makes higher high but stochastic makes lower high).In fact,multiple bearish divergences of stochastic have occured since 8/2009 on SPY.
(3rd consecutive ones) Stochastic is a very reliable way for short term top but has no prediction over intermediate/long term. This also coincides with 60 minutes chart of SPY with overbought condition. When both time frames align, the odds is good that the S&P500 will turn lower next week
temporarily. However, most traders like us can "see" this coming and have placed their bets. It will not take much for someone to "hunt" for the short's "stop" (around 1100). The safest thing to do is to wait for short-covering on the next round before you place your bet. The other thing agaist the short is that QQQQ and DIA is making new high without divergence. QQQQ normally leads the market. So I hope you are right this time.

Anonymous said...

Shorting has caused my p/l to turn the corner... around the corner and straight to the unemployment line. This is the most unrelenting unshortable debacle I have ever seen. One thing I have noticed... Each month the market grinds higher into expiration. It then implodes in the early part of the following month. It then grinds higher again on lower volume and narrower breadth. It has been doing this since July. The best strategy has been to buy in the money puts on lagging indices ( i have been buying puts on the XLF and the IYR pretty regularly) on the monday following expiration. Make sure you take the trade. I have held some each and every time expecting more of a retracement and each and every time what I have left has expired worthless.

Kevin said...

I feel your pain.. I began shorting a few weeks ago and I turned a small profit into a loss. I did that twice.

The only short that is working for me is KBE...I really like this position, we'll see what happens.

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