In the perpetual cycle of the masses buying toward market tops and
capitulating toward market bottoms, I often think of the old Wall Street
adage; “It’s always darkest before the dawn” which refers to the fact
that market bottoms come when the news regarding the fundamentals and
the outlook for the markets and economy is horrible yet the
deterioration looks almost certain to continue going forward. I’m sure
there is a good corollary to that statement out there somewhere which
essentially says that things are looking great at a market top and just
about all forecasts and trends point to things only getting better from
there… or something along those lines. With that, I leave you with
these two Google searches using the same keywords, the first one limited
to headlines over the last month and the next one limited to headlines
over the month preceding the market top on May 2, 2011, just before the 5
month & nearly 22% plunge in the index.
Slope of Hope Blog Posts
Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.
Painting the Charts Red
VAL (Valspar Corp) and SHW (Sherwin-Williams Co) are about to paint the charts red as both stocks look to be offering very attractive short entries around current levels. Starting with VAL, let's take a look at the daily chart. To begin with, VAL recently put in an Island Cluster Reversal Pattern,
which is a potentially powerful candlestick topping pattern.
The
formation of this pattern began with the giddy Jan 2nd rally gap up and
was completely recently with the large gap down on Feb 12th.
Coincidentally or not, that gap down managed to bring prices just below
VAL’s primary uptrendline which began with the Aug 2011 lows. Prices
have since struggled to regain that trendline as VAL has backtested it
from below for the last week or so. Therefore, I’m adding VAL as a
active short here at 62.07 with an initial target of 55.55. A logical
stop would be on a move above the 64 level, which is just above the
lowest point of the island cluster of prices.
Technical Analysis vs. Fundamental Analysis
Of the two main methodologies used to predict the future direction on
the price of a security, an index or even the economy, which is better-
Technical Analysis or Fundamental Analysis? If I were forced to only
use one in my market analysis and security selection, technical analysis
would win hands down. Fortunately, I’m free to use (and do use) both
TA & FA as both methodologies definitely have their pros and cons.
Typically, fundamental analysis (FA) is used by those with longer-term
time frames such as investors or economists whereas TA has useful
applications in predicting both short-term price movements in securities
and markets as well as long-term trends.
Are New Highs Bullish or Bearish?
It is widely accepted as common knowledge in trading that new highs in
securities such as stocks, bonds or commodities (or any index for that
matter) is a bullish technical event. The simple logic behind it is
that when a stock makes a new high, everyone holding the stock at that
point is profitable and therefore, you don’t have any remorseful buyers
sitting at a loss, praying for the stock to get back to their entry
point so they can sell and just breakeven.
However, there are times when breakouts to new highs can actually be
very bearish technical events. This is most often the case during
topping phases in the markets when the institutions (smart money) are
handing the bag to the retail traders or investors (often referred to as
the dumb money)….no hate mail please as this is just a general term and certainly does not apply to yours truly or anyone reading this post!
AAII Bull-Bear Extremes
This chart took quite some time to put together so hopefully some
find it useful and might understand why I have been very reluctant to
add new long-side trade ideas despite the all the bullish rhetoric and
price action since the start of the new year. I've often stated how I
find the various sentiment surveys to be "noise" and only useful (and
actually one of the most useful tools in trading IMO), when at rare
extremes.
To take it a bit further, I don't
even care much about extreme bullish or extreme bearish readings by
themselves but what does get my attention is when the bull to bear
spread is at extremes, such as it currently is. The reason for this is
that we could have a high number of bulls one week but that might not
necessarily be accompanied by a very low reading of bears or vice
versa. However, when the bull-bear spread on the IIAA weekly sentiment
survey reaches the extreme readings of 18% or higher or -18% or lower, I
find these to be some of the most reliable and timely buy or sell
indicators out there. Of course, nothing has a 100% success rate in
trading…not even close. With that being said, I'll let the chart
below do the talking.
I started with the cluster of extreme bearish readings that marked the
end of bear market in March 2009. Each green arrow marks the exact date
(weekly reporting date) of bull-bear spreads of -18% or lower. Those
reading come only when we have an unusually high percentage of bears vs.
an unusually low percentage of bulls (i.e.- a contrarian buy signal).
The red arrows marks weekly bull-bear spreads of 18% or higher, a
contrarian sell signal from extreme bullishness. Note: When I come
across a cluster of consecutive or nearly consecutive extreme readings, I
place the arrow on the last extreme reading. Although every extreme
reading did not mark a major inflection point in the market, every major
inflection point WAS marked (+/-) by one of the readings and those that
didn't, typically marked at least a tradable counter-trend correction.
You can click here to view the chart above in full-size as well as the supporting data (all weekly AAII sentiment data from Feb 2009 to present).
