To help get some perspective it is always helpful to look at the next longer time frame. The chart above is an update of the weekly S&P etf that I posted a few weeks ago. The middle red line is the 50% retracement back up of the entire previous downswing. This area has now been slightly surpassed after it turned back price on the first attempt a couple of months ago. The uptrend is clearly intact on this time frame. Also, the adaptive CCI in the lower sub-graph has remained above the plus 100 line (dashed cyan line) so this indicates, not guarantees, but just indicates that the uptrend is still alive and well.

One negative is on the chart above of the financial etf or XLF. The indicator in the lower sub-graph is a version of the Money Flow (there are several formulas for this indicator). You can see a series of negative divergences, with the money flow now almost at the neutral, or zero line. I see the Money Flow indicator weakening on many stocks and other indexes as prices remain near highs. Also, the Standard Error Band indicator over prices is rolling over. (Click here for article on that indicator.) The red horizontal line under prices would be the line in the sand for bulls. If support doesn’t hold there could be a greater impulse down that would most likely drag the broader stock indexes down. I know it sounds like I’m suggesting the market can both go up and down. It is rare that conditions are 100% on one side or the other. There are always cases to be made for both sides. Making a decision on direction is usually weighing all the evidence at hand. When all the evidence points to one clear conclusion, most likely all traders are loaded up on that side of the trade and prices will most likely soon reverse direction.

There seems to be no stopping gold. It is clearly entering bubble territory. The dollar carry trade is predictably creating bubbles. Most likely much of the money going into the general stock market is a result of near zero interest rates. The money needs to go somewhere. But the perception of an ever lower dollar will create bubbles in other assets, which seems to be the case now with gold. If the dollar were to rally at all, and interest rates bumping up a bit could case this and cause the carry trade to unwind, there could be an exodus out of gold. It is difficult and unwise to fight the trend, but just beware that the bandwagon is fully loaded. Of course all the reasons why gold will keep climbing higher are well known and discussed at length on gold related sites such as 321gold. Fundamentals usually come into line as prices peak and stay bullish long past the peak so traders often don’t understand the beginning of a turnaround. I have no clue how high this can go, but it might be a good idea to hedge the downside as this market can unwind quickly and without warning. I remain a long term bull on gold, but I think currently gold has gotten way out of line with reality. It may very well go much higher, but just don’t assume it will be a straight ride up to the moon.

However, there is a much less advertised bullish inverse head and shoulders pattern on the weekly S&P chart, with a break of the neckline occurring as of the close last week. You can see how nicely the double stochastic in the lower sub-graph indicated the reversal points. The daily action on the indexes seem quite bullish, as every attempt at a sell-off is met with buying. And every down day seems to reverse in the last part of the day with a close near the highs. Although it does seem like the daily chart is a bit extended short term. Since that pattern of late buying is starting to get a lot of attention, it might be that we’ll get a day of the opposite happening soon. And a little hesitation around the neckline break would be fine and could relieve the daily overextended condition. I say overextended rather than overbought. It doesn’t appear that the market is really overbought as it is still at depressed levels. It just seems that the persistent number of up candles is not sustainable. Markets need a little more back and forth action. They have to breath.

The market does seem to be following an inverse relationship to the Obama poll numbers. The lower they go the less likely many of the socialist ideas this administration has planned for the country will materialize. If cap ‘n tax and socialized health care get rammed through congress, then all bets are off on the upside. A major fundamental shift in the direction of the country will overrule any and all technical patterns or indicators. However then can help detect those changes. Technical patterns and indicators don’t drive the markets. Fundamentals do. The technicals just help measure and interpret.

I’m glad to see CIT Group not have to rely on government help, at least at this point. They wanted a hand-out. They apparently didn’t give enough money to the campaign. More likely, the present government doesn’t see much use in small business and didn’t think company that is involved in small business finance as being essential to the economy. On the other hand CIT didn’t have a clear plan when asking for the money. It is good they didn’t get it. Hopefully this will shake them up enough to make an effort to solve their own problems.

I am becoming somewhat optimistic that the public is waking up, that the Kool-Aid is wearing off, and that just maybe Obamunism will fail. It looks like socialized health care is in more trouble with each passing day. And hopefully the cap-and-tax bill, which is perhaps the largest fraud in the entire history of the country, will die in the senate. If so, there is hope for the markets going forward. Perhaps this rally is what the market is beginning to realize.

Sorry for the lack of posts and charts. I’ve been very busy with the Dan Sheridan mentoring program. I’m worn out by the end of the day. I am learning, more accurately re-learning, spreading and income strategies.

Taking some time off to rest in Napa and Sonoma. Will not be posting the daily update until June 23rd. I’ll try to answer emails, but I will not spend much time at a computer.

I just returned but have not looked at the markets yet, so will try to update on Tuesday the 24th.

I am in NYC away from my trading computer, so it makes updating this site difficult. When I return I will try to make the daily updates occur closer to the close of the US market. Since I am on the West Coast, I usually break for lunch immediately after the market close and do the update in the late afternoon, which makes it late in the evening for those on the East Coast. I will make an attempt to get the update done prior to my break for lunch in the future. Also, I have an article on the Baltic Dry Index that I will be posting, as well as an article on Commitment of Traders.

It is the 20th anniversary of the 1987 market crash. During that crash I was sitting in an office across the street from the New York Stock Exchange, in a training class for Market Profile. We all had CQG quote monitors with the profile displayed on each screen, watching the bonds as well as the S&P. Of course the profile, as well as any other analysis technique, was pretty much useless during this outlier day. But it was interesting to watch the character of the drop,  and to be sitting right across the street from the heat of the action. We took many breaks to go across the street to see the carnage with our own eyes. By late in the day the news media had moved in, making it difficult to get access. We all just watched out computer screens with amazement, while most kept leaving the room to place calls to their trading desks (no cell phones, of course) and would usually come back to the room with long faces. I was upset not being short the market, as I had been quite bearish. I had been trying to be short in the months prior to the collapse, but kept getting stopped out. Now I was on the sidelines, thinking the prior week was already overdone to the downside, and not wanting a position in the volatile S&P while I was in the training class. But I was at least long bonds, which went up nicely in the aftermath.

I doubt if there will be a repeat of the 1987 scenario, however I do think the 1999 to 2000 market pattern is repeating now, lead by the Chinese and selected tech names. This is quite a bubble. When it pops the damage will be widespread. It will undoubtedly spread into most world markets, and probably popping the commodity bubble along with it. These bubbles can expand far beyond reason and logic. I think we are already at that point, but I’m always way too early in my opinions, as in the case of the 1987 crash. The bubble may well go another 20 or 30% before the inevitable pin is found to pop it. I know most analysts are saying “this time it’s different.” I know all the arguments. They have earnings. They aren’t selling at such high multiples, at least not in the H shares. The growth rate of the economy supports the elevated prices so it’s not a bubble, yet. On and on the rational goes. But just in case in is not different this time, I am re-posting the excellent illustration and excerpt by Oliver Velez and Greg Capra from their book, Tools and Tactics for the Master DayTrader:Battle-Tested Techniques for Day, Swing, and Position Traders. (If you are interested in this book there is a link in the technical analysis section of the Tucker Report Store on the last page of that section.) This excerpt seems corny and simplistic, but it is a very accurate analysis of human psychology regarding how the masses time their investments. It’s well worth reading over and over. Here’s the excerpt:

THE BANDWAGON THEORY: A GLIMPSE AT HOW THE MARKET REALLY WORKS

Imagine a bandwagon that is rolling forward at a quickened pace. Music
that is very pleasing to the ear is being played from speakers on each side
of this bandwagon, and a few people currently on the back of the wagon
are partying, having the time of their lives. The music, loud and clear,
starts to attract many other onlookers that happen to be idly standing on
the sidelines. These onlookers, unable to resist the sweet sounds being
played, run to join the party that seems to be going on. Progressively,
more and more onlookers jump on the back of this bandwagon, and
those few who were initially enjoying the first phase of the party begin to
leave. As the crowd of new party animals on this bandwagon grows
larger, the bandwagon finds it harder and harder to move forward at the
same pace. It slows, enabling more and more late onlookers, witnessing
the great fun, the chance to jump on. The crowd grows even larger.
Larger and larger this crowd grows, until the bandwagon, heavily laden
with the bodies of drunken party animals, can no longer move forward.
It finally comes to a complete stop. Now that the bandwagon is at a com-
plete standstill, more people jump on. And why not? At this point, joining
the fun is easy. Absolutely no work is required, for individuals wanting
to join the crowd no longer have to run to jump on board. But the nature
of the bandwagon is to move forward. Its motionless state is unnatural,
and therefore cannot last. It tries to move forward again, but can’t. The
crowd, piled on back, is much too large. It must free itself of the heavy
burden. And it does. It quickly shifts into reverse, and jolts backward,
knocking a few of the party animals off the back. The music stops. Puz-
zled faces from the crowd begin to emerge. Before anyone figures out
what’s going on, another backward jerk takes place, only this one is more
violent. Another large group of people gets thrown off the back. Now, re-
ality sets in. The fun has turned into a nightmare of epic proportions, and
panic begins to run rampant. Some decide to jump to their deaths. An-
other thrust backwards sends an even larger group of drunken, off-
balance people, hurling to the muddy ground. It doesn’t stop. The jolts
backward continue, each successive one more violent than the last. At
this point, only a few die-hard wagon dwellers are holding on, their very
lives hanging in the balance by a very thin thread. Failing to be com-
pletely free, the bandwagon angrily puts the pedal to the metal, and this
final thrust backward is so vicious that its front wheels lift high off the
ground, momentarily suspending the wagon in a perpendicular posi-
tion. The last of the hangers-on crash to the ground, broken and maimed
to no end. At this point, a new group of onlookers emerge from the
nearby woods. They are clean and serene. Each movement they make is
deliberate and powerfully energetic, for they did not take part in the
tragedy that just transpired. Or did they? A few of the dejected souls ly-
ing on the ground take a closer look, a look that reveals something very
interesting. This seemingly new group is not new at all. It is the same
group that was seen quietly exiting the party before it came to its violent
end. An even closer examination by a few more beaten-down onlookers
reveals something even more stunning. This group not only exited the
party early, they were the originators of it! “My God,” someone exclaims.
Paralyzed, and unable to move freely, all these dejected souls can do is
watch, as the masters of the game go to work, again. No sooner does the
bandwagon’s wheels hit the ground than this professional platoon bolts
for the wagon. In a flash they are on board. Easy. The bandwagon, now
free of the larger crowd, can move forward freely and gracefully, com-
fortably carrying the more astute group with it. Its pace quickens, and
before long a smooth elegant stride is in place. After a few miles of unin-
terrupted movement, someone from this masterful group flips on a
switch, and suddenly the loud sounds of entertaining music start again.
Someone yells, “OK everyone. Here they come. Let’s do it again.” Within
moments, those who were the former victims of the backward crash be-
come interested again. The music almost calling them from the grave.
And once more, the never-ending cycle repeats.

reference: Tools and Tactics for the Master DayTrader: Battle-Tested Techniques for Day, Swing, and Position Traders
by Oliver Velez, Greg Capra

Also, I pulled some of the better articles off the Ezine authors website. Most of the thousands of articles  posted there are short ads to get you onto their website to sell services. However, there are a few articles worth reading. I skimmed through and picked what looked like articles that had useful information. There are eight sites covering various topics such as daytrading, forex, gold, trading psychology, etc. Here is the link to the trading rules and psychology site, and from there you can go to the lower right corner and find links to the other sites.