Tucker Report

There is a potential bearish Head & Shoulders pattern developing in some of the major stock indexes. I’m sure you’ve heard about this pending pattern, that is if you’ve watched the financial news, read many blogs, or have been on twitter. You can clearly see the left should and the head already formed on the chart of the S&P 500 ETF above. There is a well defined neckline that is almost horizontal. The right shoulder is beginning to appear to be building a symmetrical shoulder to the one on the left.

The psychology of the pattern can make sense. A first impulse move is put in. Then a correction appears that finds support. Then another impulse move to new recent highs, but usually with less duration that what preceeded the pattern. Then another retest back down with the market holding near the previous support level. Then a third rally that fails to get back up to the level of the second rally, with the market usually stopping close to the level of the first rally. Finally the market again retests the support line that held twice before. Traders and investors get discouraged and begin selling, thus driving prices well below the neckline support. Bulls often rally the market back up to the area of the neckline in one final test, which usually fails. Then the market rolls over to begin a large decline.

The above paragraph is what is found in most beginning books on charting. Indeed the head and shoulds pattern, and the inverse head and shoulders pattern found at market bottoms, are eye catching when seen on past data on a price chart. The successful patterns tend to pop off the page. However, on closer inspection, many more failed pattern can be found. The eye tends to gloss over the failed patterns.

The larger question regarding this impending pattern, as well as major chart patterns in general, is if there can be an edge in trading such patterns. This particular developing pattern has been mentioned numerous times in the last week or two. I’ve heard it and seen it mentioned dozens of times already. There are more chart readers and technical analysts than ever, and they’ve all read the same books, and I would guess that every single on of them are watching this pattern. I’m not quite sure how there can possibly be an edge in what everyone sees. If a major pattern presents itself, it can become self fulfilling for a time. However, professional traders are also aware of the pattern and could be quick to fade the move. It will be truly amazing if this pattern completes itself as many expect. What everyone sees is usually wrong. There can be no edge in betting with the majority. The cycle indicator on the chart could easily roll over if the market heads back to the red neckline, but I’d be careful going with the heard at that neckline. I’ll be watching this carefully and will update as the pattern develops.

There, I got through a whole post without commenting on Al Frankin…..well, almost.

I’ve been gone a few weeks on a trip to Europe. Instead of the usual chart, I have a photo taken in Santorini, Greece. I won’t bore you with many vacation photos, but I haven’t refocused on the market yet. I tried to stay away from the news as much as possible, as I didn’t want to get depressed and ruin my trip. I thought I’d get many high fives from Europeans regarding Obama, that is as soon as they realized I was an American. But the subject didn’t come up. That surprised me. It was nice getting the image and sound of The One out of my head for a few weeks.
The overall market has gone up in my absence at what seems to be sidelined money looking for something to do, rather than on positive fundamentals driving demand. The intraday swings still seem to be rather violent and choppy, although implied volatility has come down quite a bit from recent levels. The VIX still remains historically high, but well off the highs and almost to what seems sort of a normal level. I see many bearish divergences on that last push up on the major indexes and many stocks. Nasdaq and energy seem to have nice uptrends, despite recent divergences. Financials indexes seem to have broken the uptrend, although some of the individual financial stocks still show healthy uptrends. S&P 500 has pulled right back to an uptrend line, with my trend indicator still holding onto bullish mode, with momentum back to oversold levels. Chart looks like it wants to roll over, but that look usually gets me in trouble, so should give uptrend benefit of doubt. If this decline holds here, I’ll look to go long the Nasdaq if momentum should reverse back to upside from its current oversold level. If a bounce fails to materialize, or fails to push very far, I’ll short The S&P, but only if momentum can push up out of the oversold area and then roll back down. I have no position, so will let the market tip its hand. I’ll try to post chart as soon as I get caught up, and over jet lag.

I need a trading break for a couple of weeks. I will return to posting soon. I may not be able to answer emails promptly, but I will answer them. Trade carefully.

The Baltic Dry Index has seen a huge drop in price over the last year or so. There has been a good percentage bounce lately, but the world cost of shipping raw goods is still a small fraction of the price a year ago. Downside momentum did subside as can be seen by the numerous sideways bars on the weekly chart to the left. A rally started from extremely oversold levels. That rally corrected, or tested, back down. That test held, and prices as of this last week have taken out the swing point, as can be seen at the horizontal cyan line. Note that during the re-test back down the stochastic indicator in the sub-graph continued to rise. The pattern presented here, that is of a rebound from oversold levels, a rally, a successful test back down, and subsequent break of the swing point, presents a bullish picture, at least on this weekly chart. On the other hand, the extend of the previous decline would suggest that the longer picture is that of a serious bear market. Counter-trend rallies obviously do occur and they are often interpreted as new bull markets. I think it is premature to think of this as a new bull market. There would be much work to be done to turn this around. So far, to my way of thinking, the rebound in the cost of shipping further supports more upside to stock indexes over the short to intermediate term. But I still view this in the context of a larger degree bear market. The bear likes to get all on board the bandwagon before the next leg down. Keep in mind that this index would have to double from here to even approach the first fibonacci retracement level of the entire drop, that is around 38%, which would still indicate a weak rebound within the overall bear market.

The weekly S&P etf is to the right. I drew a similar cyan horizontal line, with a similar set-up on this broad index. The previous pivot has not yet been taken out. It was approached this last week, but so far this week there has been some pullback. Momentum continues higher after the bullish divergence. I am using a longer term stochastic on this chart. It is the Stochastic Momentum Index, as opposed to the more sensitive double stochastic that I usually have on the charts. I’ve been trying to stand back a bit to get a little longer perspective. Daily signals have been somewhat more bearish, but there still seems to be a bullish tailwind over the intermediate term. It doesn’t seem that sentiment is quite bullish enough for the next leg down to begin. As with the comment on the BDI, the bandwagon needs to be more fully loaded.

It is difficult for the way I view the markets to take longer term positions when the three time frames are so out of synch. A study of stock market history will show many significant rallies within the context of major bear markets. These rallies are tempting but insideous. A well defined and constructed uptrend and suddenly fall apart and trap the believers in the new bull. There are many similarities with the markets and the political climate of today and during the great depression. Back then we had a government that prolonged the downturn with massive government programs. It appears we are about the repeat that failed experience. Politicians refuse to learn from history. There is rarely a time in trading that everything lines up perfectly. There are always many pieces to the puzzle of future market direction. The Baltic Dry Index, while imperfect for short term timing, is still an important piece of the puzzle, as is the longer term charts of the broad indexes. And it is essential to keep the political climate in mind, which has been my main worry since the election.

Also, another excellent article from my new favorite blog The Black Sphere, “Obama’s Fuzzy Job Math” post last Friday. Check it out, and bookmark Kevin’s website.

Well, apparently Obama does walk on water. There’s proof in the photo to the left of Obama walking his new water dog. The stock market made it to almost the highest level of the year today. In the S&P 500 you’d have to go back prior to January 12th to find a higher price. So the market is at the highest level since Obama took office. Despite the still bad news, with the likelihood of another round of bad news, the stock market feels like hope and yes we can. We have a weak president who’s main talent is skillfully reading a teleprompter, and who’s strings are being pulled by an ex-ballet dancer. We have a soon to be filibuster-proof senate enable by an ex-comedian who has no business being in such a powerful position. We have a news media giving Obama a pass on every issue. We have a population that seems ready and willing to embrace socialism without regard to the consequences. We have debt growing and compounding at unsustainable rates, and those that criticize are labeled dumb rednecks and racists by the Hollywood elite and news media. Yet the stock marketseems just fine with all of this.

The stock market is a discounting mechanism. It looks into the future and casts its vote. Of course the stock market is just a bunch of traders and investors, and those groups can certainly be wrong. Beginning books on the stock market always tout the message that the stock market is never wrong. I submit that it is wrong most of the time. That’s what creates opportunity. How can a stock be $3 per share and then a couple weeks later be $9 per share when nothing regarding the company earnings has changed? If the market is always right then both those prices would be correct. Obviously they are not. Markets are constantly trying to seek a level that represents value, but in the process of exploration prices travels to all sorts of price levels that are not representing true value. Perhaps it’s a good idea to stand back and look at the larger picture. It’s an old cliche that you can’t see the forest if you’re in the middle of a bunch of trees. Maybe that’s not an exact quote, but that’s the gist of it. The daily chart certainly looks impressive when viewed over the near term. The the following monthly chart of the S&P etf shows some perspective.

The monthly chart, although of not much use in short-term timing, can at least give some perspective. It can become a compass when one is looking at the random gyrations on the daily charts. You can see that the rally of the last couple of months looks like a rather small bounce. The trend has been clearly down for some time. The rally so far has been able to take the momentum indicator in the lower sub-graph out of deeply oversold territory. There could easily be more of a two sided market in the period ahead. If another round of negative news hits the downtrend could stick around a while longer. There was much money on the sidelines and sentiment probably too negative. That condition seems to be normalizing. The money coming in off the sidelines could retreat at the first sign of hope possibly being a mirage. But at the moment there is little technical indication of a top to this current rally, as has been the case over the last several posts on this blog. The daily chart still shows an uptrend. As long as that uptrend exists I’ll trade pullbacks on the long side, but with the finger close to the exit button as my intermediate and longer view is that this is still a bear market rally.

The Obama Walking On Water is from iOwnTheWorld.com.