And regarding politics, I see little need to continue to bash the president and his inept administration. It should be obvious to anyone interested in the news to see he’s doing a great job in becoming the worst president in many years, possible in history. And the news keeps coming. Today I hear he now wants NASA to have its main objective to reach out to Muslims and make them feel better about themselves and their scientific contributions. That sounds like a joke, but that’s what was in the news today. I guess that’s fine, but isn’t NASA supposed to have something to do with exploring outer space? I can’t wait to see what the news will be tomorrow. I don’t see how the financial markets can survive if this idiocy continues from the government. I thought that the previous rally was being fueled by the falling poll numbers. The numbers continue to fall, but now the market is falling. I still think that was fueling the previous rally, at least to some degree. New information came into the market with the European problems. If the Euro stabilizes and if democrats have declining poll numbers going into the fall elections, I think the market could rally again. At least temporarily. I suspect we are in a primary bear market, and the full expression of the bear could extend much further than most can imagine. Rallies can be quite deceptive for those who want to be bullish. It is instructive to study past primary bear markets. But don’t expect the patterns to overlap. Each market cycle will express itself in its own way. It drives me nuts when I see people finding a pattern of swings from 80 years ago and expect that the same patterns will occur today in the same sequence. They never do. But the psychology and the sharpness of the counter trend rallies are interesting to study, and that can be applied to current markets in a general way.

I’ve been trading very little over the last couple of months. I do hope to get on a more regular schedule of updating this blog. But I’ve said that before. Sometimes distractions can get in the way of well intended plans. It is difficult to blog when I don’t have positions in the markets. I’m clearing away the distractions and hope to be fully back in the markets within the next few weeks, so hopefully this blog will become more active. I also have quite a few more technical articles I have partially written. If I can just find the time to finish those and get them posted.

A quick thought on moving averages. I read many opinions on the market and technical analysis. Almost everyone I hear or read uses the 20, 50, and 200 period moving average. When I ask them why, their only response is “that is what everyone uses, so it becomes self fulfilling. I have a problem with that line of thought. First, it is true that any of those three moving averages seem to provide support at certain swing points, and once penetrated they do seem to give a good summary of the trend direction. But one can pick any period moving average at random and also find that it will provide support at certain swing points and provide a good indication of trend. Probably different swing point and trend indication, but any moving average will appear to turn back a swing occasionally, and certainly will define a trend. And most randomly chosen averages will define a trend if it happens to be in sync with the ever changing cycles of the market. In fact a moving average is nothing more than a mechanism to filter out the shorter cycles. The problem is the cycles keep changing. So no single moving average can be perfect. So many traders use a combination of several moving averages in the hopes that one will be in sync with the market. That can be fine as long as the trader understands what the moving average is really doing. Blindly following common moving average lengths because everyone else seems to be using them is not logical in my opinion. There is no edge in what everyone can see. I don’t see how it is logical that a trend will turn around when it hits the 50 period moving average on the assumption that everyone will act in some way at that point. That just doesn’t make sense. If there were an edge in such an approach the market would quickly eliminate that edge.

I find it much more useful to use indicators that attempt to adapt in real time to the ever-changing market cycles. The problem is trying to find a method that extracts the cycle the market is attempting to express as that cycle is being formed. If markets maintained the same cycle over a long period it would be easy to pick the best moving average parameters. But the cycles are a constantly moving target. The best work I’ve seen in extracting cycles as they are forming is the work by John Ehlers. The moving averages I’ve been using on the blog are his Mesa Adaptive Moving Average. I just use the default parameters as he has written the formula, which is widely available on the interent, in one of his books, and on his website, as I recall.

And a quick note on gold. This is one market that has fundamentals supporting the uptrend. But a negative development is the failure occurring this week as the market tried to break-out of the swing high from last December. The trend is still up, but so far that break-out looks like a trap. The daily chart is sitting right on the moving average line, so I’ll be watching to see if it provides support. My guess is that the market needs to clean out the excessive bullish sentiment, which would probably be a healthy thing. I’ll try to update as this develops.

Regarding sentiment, it seems that bears either disappeared or were unusually silent during the last part of the upmove. I even heard some seasoned trader who should know better say that maybe there is no more downside to the market. That this time is indeed different. Whenever you hear “this time is different” it is time to start looking at the opposite side of the trade. This time has never been different for as long as I can remember.

Regarding the technical condition of the market, which this blog is about despite my digressions, the trend has certainly quickly changed from up to down. It is easy to hunt indicators after the fact to try to find something that gave advanced warning of this drop. I’ve been getting many such emails from chat rooms that claim to have predicted this. I didn’t get any of those emails prior to the drop, only after the fact. I’ve been showing the same trend indicators, which are those blue lines over the price bars. The lines crossed over to the bearish side on May 4th. The adaptive CCI in the sub-graph actually crossed under the plus 100 line on April 27th warning that the trendiness of the market was waning. Not a sell signal by itself in my opinion, but a good yellow light. As long as the trend indicators remain bearish I expect to sell rallies. When markets make multi-standard deviation moves like we’ve seen over the last couple of sessions it is probably best to let things settle down a bit. There could certainly be a big bounce back up to those moving averages. But there was much damage done, and despite the bullishness regarding recovery and improving earnings, the backdrop is far from bullish in my opinion. I think the market finally got a good dose of reality and I suspect there is much more to come.

I’ve had a long time fear of electronic markets. I don’t think computers should be allowed to replace humans. I know it is happening very quickly. The end of trading pits and posts are fast approaching. But I think it is a very bad idea. So call me old-fashioned.

Certainly trend follows are being paid well. Those who believe in reversion to the mean are not having as good a time. Trend follows rely on catching the outlier move, such as the move we are experiencing. Many other markets, especially in the hot commodity arena, have had similar moves over the past few years, and they all experienced rapid and steep declines when the trends became one-directional. Trend followers can get whipsawed for a very long time when a market does what it normally does the vast majority of the time. These outlier moves are needed by trend followers to recoup the many trading losses incurred during more normal times. When a market is trending but still experiencing corrections along the way the market is in a much more healthy position in my opinion. I prefer markets that swing in both directions, but I also have learned through experience to stay out of the way of a freight train. I do have trouble jumping on board a fast moving freight train. The general public seems to want to jump on board when it is running fast and out of control.

One of the indicators that I’ve talked about many times on this blog is the adaptive CCI, which you can see in the sub-graph of the chart above of the IWM. (IWM is the etf for the Russell 2000.) I use it to gauge the trendiness of the market. It was designed to signal a long or short position when it is above or below the plus or minus 100 line, which is drawn with the dashed cyan lines. It is rarely used today in that manner, but that was the concept. You can see on the above chart that this indicator has been basically above the plus 100 line almost since this rally began. When this condition persists I don’t want to fight the trend. Of course the trend could abruptly reverse without warning. But trying to play for a reversal with techniques such as stochastic divergences will usually result in losses as long as the trend is so powerful. Of course a divergence will usually work at some point and call the top of the move. But there could be many divergences preceding the one that finally works  that will result in many losses. This trend will eventually run out of fuel, and once it does rallies can be sold as they bump up against a declining trend, but as long as the trend is up I will try to resist temptation to short this market. No guarantees. It is very tempting to take a stab at a reversal. The action today looks a bit like an upthrust in some of the indexes and certain stocks. In a more normal market that might inspire some selling. But as long as buyers, that is funds, with lots of cash look for every downtick to pounce on the long side of this market, one may as well throw out the technicals. A correction, or even a collapse, could come at any moment, without warning, without a reason, and without any technical indication. Well, maybe this time is different. Maybe obama has outlawed the downside of markets for the rest of time and this market will actually climb to the moon. That’s what buyers must be thinking, that is if they are thinking. But their trading models don’t think, they just climb on board the trends, and those trading models work out occasionally – on the outliers.

The chart above is of the S&P etf. The uptrend starting with the reversal bar on February 5th has been a steady march higher through March, with only very few down candles. The adaptive CCI indicator under the price candles shows a persistent reading over the plus 100 line, which is bullish and shows trendiness of the trend. It is rare that the adaptive CCI stays this long over either the plus or minus 100 line. It is usually prudent to not fight the trend when that indicator is beyond either of those lines, even when it seems a bit extended as it does now. A more normal pattern on that indicator looks more like on the left of the chart. The middle indicator is one version of the Chaikin money flow. It incorporates volume in its calculation, and you can see it is weakening a bit. This is not enough to turn bearish. It is just an indicator indicating something, but is not a forecast or signal on its own. The bottom indicator is share volume on the S&P etf, which clearly shows increasing volume on the downtrends, and generally declining volume on the uptrends. Bulls will argue that the public is not yet in this market so volume remains low. Bears would argue that this is a divergence. These divergences can go on for a long time.

One argument I’m hearing is that the market is shrugging off bad news while it continues higher. The health care bill passing has been recently offered as an argument that something very bad for business and the economy failed to produce any down movement in the market, therefore the market is bullish. This is a rule offered in many textbooks on trading. I find fault with this. It is true that in an extended trend there is validity to the concept that if a market fails to respond to news that should further the trend, that trend might be ending. For example, a stock that has been declining for many months on declining earning has an increasingly dismal earning report, and then the stock price fails to continue lower and instead has a large move higher, a reversal to an uptrend might be indicated. In that case the stock has over discounted the worse possible news. But with many months into an uninterrupted uptrend I’m not sure that theory works. On the contrary, as a contrarian I would view any positive news that fails to move the market yet higher to be a sign of a possible top. So far that has not happened, but I am keeping an eye open to the possibility.

It will be interesting to see how the market reacts to the employment report released yesterday. The index futures market was open for a short time during and after the release of the report and they moved somewhat higher. Most of the news media is reporting the report positively, despite the fact that the unemployment rate did not improve, the U-6 actually inched higher, much of the newly employed were temporary census workers, and hourly pay declined. That probably means nothing to this market. If viewed positively or negatively the market seems on an unending move to the moon. Some traders act as if this uptrend is something new. Many markets that get overextended exhibit similar characteristics. But they usually occur when that market is making new highs or lows. Gold recently had a similar move, as did the dollar on the downside. Stock indexes have had several similar moves over the years. What seems different is that this move is only retracing a portion of the previous down impulse rather than probing into new high ground. It seems like the move will never end. Momentum traders keep piling on the bandwagon no matter how crowded it gets, despite relatively low volume. These urgent, almost panic type moves seem to occur more on the downside than the upside, at least in equity indexes. If this trend would just pause long enough to catch its breath and digest some of the gains the trend would appear healthier. The way this is proceeding the resolution could be to the downside with a larger move than a market that allows itself to breath in and out.

One thing I think this market is missing is the threat from Obama. Obamacare passed without so much as a hiccup from the market. The cost to business will be huge. There are already businesses that have announce huge write-downs, and they are being questioned by the government for making those announcements. Isn’t that what they would do under someone like Castro or Chavez? Taxes will rise for everyone. The market doesn’t seem to care. The government will take over a huge chunk of the economy and eventually force private insurers out of business. The market is looking the other way. I believe the next step in Obama’s plan is to attack Wall Street, much more than he has done already. Obama knows that he will be rendered impotent if the republicans take over congress in the elections later this year. He knows that his healthcare takeover is not popular and as things stand now his party stands a good chance of losing both the house and the senate. He must divert attention from the health care mugging and the shady tactics used by the progressive democrats in congress. The news media has already vilified Wall Street. It doesn’t matter that the public should be mad at the government influence over Fannie Mae and the like, as well as strong suggestions to banks that they lend to those they shouldn’t lend to. Reality doesn’t matter. The public is like a school of fish that can simultaneously change direction in an instant. Obama is a gifted speaker. He is smart and shrewd. He can create anger against Wall Street and the anger against Obamacare will be seen receding in the rear view mirror, just in time for the mid-term elections.

Another fear is that the teaparty movement could split the republican vote. If candidates split from the republican party to run on a teaparty ticket, that would greatly help the democrats, obviously. If the progressive democrats can hold congress through the balance of Obama’s term, they will most likely be able to pass immigration reform, therefore allowing millions of new voters to vote, and they will of course vote for democrats. If that should happen the republican party may as well call it a day and go home. They will never be able to win another election. This country will move so far to the left it will become even more unrecognizable than it is today. We may as well just become good buddies with Castro and Chavez. Freedom and free markets will become a distant memory. The coming mid-term election may well be one of the most important elections in this country’s history.

This is one time that I truly hope I am wrong in my forecast. This country is at an important crossroads. If we take the left fork in the road we will go down a path of no return. I don’t think the stock market understands the bigger picture yet. It will.

Also, I just received an email from INO. They are offering a free 2 week trial to their market timing service. Included is some information on candlestick charting and another ebook by Adam Hewison. I don’t think a credit card is required for the trial, but not sure. Their service is worth a look. If anyone is interested click here.

I haven’t updated this blog in a while as there has been little change in the market outlook. It is getting to the point when this thing could collapse without a timely warning from technical analysis. The only warning I see so far is lack of volume, but that isn’t of much help in trying to time an end to what still looks like a counter-trend rally, although a very large rally. A look at the very long term monthly chart of the cash S&P index shows a massive double top still in place, with the current rally being about a 50% retracement of the previous drop. Some stocks have had very impressive rallies, such as Ford which has had a run from about $1 a share to over $14 as I write this. Of course $14 is still far below where that stock had been a few years ago. Many buy and hold investors are a long way from breakeven despite this huge rally. The same can be said for many large, widely owned stocks. The public doesn’t seem to be piling on this trend yet as evidenced by the low mutual fund cash position and inflows. Bulls would say this is healthy and from a contrarian point of view would suggest more room to move on the upside. Not sure what bears would say. They seem to be missing at the moment. But they will return when least expected.

The shorter term trend on the daily chart to the right had turned the trend to the downside, and the rally back up over the last couple of weeks seems to be running into resistance at the breakdown point at the bar on January 21st. You can see the high last Friday and today ran into the red line that is drawn from the low of that big price break bar. The price action during the day seems to still be that price breaks get quickly bought, and then prices spend much time grinding higher. That even seemed to be the pattern today, at least until the very last part of the day when prices finally resolved to the downside. When prices started sliding in mid-January it seemed that the stock market was coming into sync with reality. I had to hold back my bearishness because the weekly trend on a technical basis still looked healthy. The rally of the last two weeks have been in sync with the weekly technical trend, but of course against my basic bearish bias. Sometimes the market just doesn’t accommodate my bias in conjunction with my technical approach. It is rare that everything lines up perfectly. For the moment I’m only trading neutral butterfly spreads with very wide wings.

I suppose the reason I haven’t been updating this blog much over the last few weeks is that I don’t really have an opinion on market direction, and therefore haven’t had much to say. Of course I have plenty to say about politics. I know that annoys some readers. But it is difficult to discuss the markets out of context with the political backdrop. Uncertainty and a massive swing toward socialism can’t be good for the market. The public waking up and the possibility that the progressive leftists (and the progressives on the right) will be voted out of office should be good for the markets. So these background issues must be watched carefully. Last Friday was an interesting day to watch. Obama gave a teleprompter reading in Las Vegas. The market had been doing well until the very minute he started to speak. The instant that he opened his mouth the market started to slide. And the slide continued until the very minute that he stopped speaking. Then the market rebounded. Wall Street had been friendly to the idea of Obama a year ago. Now that Obama is trying to turn Wall Street into a villain I think that favorable attitude has changed. I keep my fingers crossed that more and more people are waking up and this government will soon swing out of the red zone.

A few days ago I had never heard of scripophily. Now I find that I’ve become a scripophilist. Late Saturday I was on the internet searching for a certain gold coin and I somehow found myself on a web site that was offering vintage stock certificates for sale. I’ve had a bit of experience with defunct companies, and their worthless stock certificates. Years ago I speculated in small gold miners. I actually had the stock certificates transferred into my name. That is rarely done today, but I felt it necessary back then. The brokers that dealt in these penny stocks seemed unlikely to remain in business over the long term. Some have gone under, but in most cases the mining companies went out of business quicker. A few did pay off. But I still have a drawer full of old mining certificates. I never wanted to put them up on the wall since I didn’t want to constantly be reminded of the need to use stop loss order. In hindsight it would have been a good idea to be reminded of stops. But I digress. Another passion of mine is rare collector cars. And one of the rarest was made using my last name. Actually they only made about 50 examples. One of my regrets is that I did not purchase one of these cars when nobody wanted them and they were very affordable. Now when they trade hands, which they rarely do, they trade in the mid-six figures. But imagine my surprise when I found an original stock certificate for sale. I snapped it up right away. It is dangerous being on-line with a credit card in one hand and a glass of wine in the other. But I held myself back. They also had a Pierce-Arrow and a Duesenberg stock certificate for sale. I’ll hold off on those for now.

JUST ADDED: I received an interesting link from INO after I did this post, so I’m putting the link below. It is a quick video discussing the silver market. I happen to agree with what is said here, at least in the short term: SILVER VIDEO

What was of course predictable was Obama blaming and whining about inheriting the economic mess from Bush. There is some truth to this, but much of the spending was done in the final two years under democrat majority, and that majority prevented attempts to regulate Fannie and Freddie. And that majority wanted even more spending than what was finally granted. Were any democrats that were in the majority for those two years calling for spending cuts and regulation of the lending industry? Few, if any. But Bush gets all the blame. He deserves some of the blame. But the very people blaming him, including Obama, are at least as complicit. I think Obama has played the blame game far too long. The American people are getting tired of it. He was supposed to take charge and fix everything. But now that the kool-aid has worn off we all see that he is floundering and doesn’t have a clue. And Beavis and Butthead sitting behind him at the State of the Union reading are even more clueless. It frightens me that these people are in charge of such a powerful and economically important country. Yes we are still powerful and economically important, but will be much less so if Obama has his way. The leadership in this country needs a real change that we can all believe in, not leadership that was based on a vague promise delivered to a hypnotized and intoxicated public.

Stocks over the past couple of weeks have finally put in a decent pullback. This pullback appears similar to the pullback last October, however that pullback didn’t really threaten the uptrend the way this one has. The previous pullback left the structure of the uptrend intact as it didn’t violate any of the previous significant lows, such as pivot or swing points. The current pullback has. Also, they way I view trends via the blue moving average lines, this pullback has turned those lines negative. The only other pullback since the start of the uptrend since March that turned the trend down was the pullback last June, which had two small impulses down.

The first two days of this week have rallied sharply back up near the declining moving averages. I would expect a test back down as the price approaches that darker blue moving average, if that should happen. The weekly trend still looks bullish in my opinion, so despite the recent downmove, I still view this as more of a correction in an uptrend rather than the start of a major trend reversal. At least for now. That view would change if the next down impulse exceeds the previous pivot and the downlegs increase in size and volume. It is quite possible that the entire upmove from the March lows is nothing more than a correction of the bear market from October 2007 through March 2009. The S&P is currently sitting near the 50% retracement area based on that entire bear market range, and is also within the fibonacci zone of that range, for those who believe in such things, which I do not, but those concepts make interesting chatter.

As a technical analyst it should be enough to just look at the charts in isolation and make an intelligent assessment of the market condition. But in reality I find a need to explain to myself why a market moves up or down based on what motivates buyers and sellers. Many times there is a disconnect between what prices do and what seems that they should logically do based on the fundamental, economic, and political backdrop. It seems we are in one of those times now where logic and reality are at odds. Perhaps the market sees change in the future. But the market doesn’t always do such a good job at predicting the future. Are earnings improving based on sales or just cost cutting and rebuilding depleted inventories? Can sales actually improve if employment figures stay bad? If earnings are not based on increasing sales can earnings continue to improve once inventories are replenished and no further cost cutting is feasible? Can the dollar keep falling and spending keep increasing? If interest rates start to increase how can we afford to service the debt? What will happen if the mid-term elections fail to change congress and the democrats can pass cap and trade, health care, and whatever else they might want to do? I don’t think the stock market is asking enough questions. There is much to fear out there. It’s not enough to just put piles of money into stocks because there is no place else to put it. But then again, the technical don’t care about any of this. Explanation is not necessary.

Stocks began to sell off the morning after the election. As was expected NBC, especially the C and MS versions, were quick to point out that the market wasn’t too pleased with the election results. I don’t think any of their viewers were dumb enough to buy that, and their take on the market and election had very short legs. In reality the market was hit by news of China tightening credit, Greece credit problems, and prospects for another Bernanke term in doubt. But the quickest drop in the market occurred during the Obama telepromter reading when he announced bank regulations. Whether or not his proposals had any merit or if they have a chance of being implemented I don’t know. With my bias against Obama I would assume they will be bad for business and for the country and will discourage banks even further from lending, which will be bad for any possibility of a recovery. But that might just be my bias. And the political climate seems to be making a rapid shift. Hopefully this shift will put the kabbash on where Obama wants to take this country, which in my opinion will be bad for the stock market in the long run. I really don’t think Obama gets it yet. I was waiting for him to blame Bush for the huge defeat last Tuesday. He didn’t disappoint. Well, he didn’t mention Bush by name, but did say it was the same discontent from the previous eight years that enabled Brown win. Now wait a minute, he’s been president for one year, so that means people were only upset with Bush for seven years, and they have been upset with him for the whole year he’s been in office. If he keeps using that same phrase about the previous eight years he may want to consider dropping it or at least update his arithmetic. It is really getting tiring listening to someone complain about all the problems he inherited. Reagan and Bush both inherited bad situations, but they took charge without blaming anyone. If he weren’t so disconnected he might realize that blaming the past can only work for so long.

If I were more suspicious I might think the timing of his bank regulation comments were politically motivated. He took a big hit. What better way to get the public back on his side than to hit hard at Wall Street banks. He blamed them for the mess we are in, along with Bush of course. Doesn’t more blame belong with Fannie Mae than with banks? If he wants to blame the past doesn’t some blame go to the change in congress in 2006 and Chris Dodd and Barney Frank?

In previous posts I mentioned the possibility that the market rally was an inverse reaction to Obama’s declining polls numbers. The above chart is from the most recent Gallup poll. There are other polls that show an even steeper downtrend. I do believe the defeat last Tuesday will lend more support to this trend going forward. But the market has been quite overbought, with very little corrective action since the move began last March. It was like a bubble looking for a pin. There were actually four pins the last week. The daily chart shows the S&P taking out the entire gains for the year plus some. So the uptrend has been violated on a short term basis.

The chart way back at the top of this post shows the weekly S&P etf, along with the adaptive CCI in the sub-graph. I like to use this CCI to show trend strength when the CCI is beyond the 100 lines, which are the dashed cyan lines. This last week the CCI crossed back below the plus 100 line. You can see that the CCI also dipped briefly below the 100 line twice previously during the longer term uptrend. However, the trend stayed positive as defined by the blue moving average lines over the price bars. These pullbacks were good buying opportunities by looking at the longer term chart. The daily chart may have convinced a trader to turn bearish, but the weekly chart kept a better perspective and kept the trader on the correct side of the trend, at least in the longer term. Price is still in an uptrend on this chart, although momentum may be slowing a bit. If price can hold at or near the darker blue line then maybe another impulse higher can still be achieved after this much needed correction. If price breaks that line and those lines reverse position, then perhaps the much advertised double dip will be in the cards.

For now I’ll try not to get too bearish on the longer term, which is hard not to do when looking at the news. But maybe the news will be getting better. Tuesday might have been a good start. We’ll see.