Ominous Signs in this Market Indicator

The stock market has been on a rip lately. The S&P has risen well above 3000, and currently sits at 3120.5 (^GSPC Chart). But how high will we go without a pullback? More importantly, how big will that pull back be?

Yesterday, while trying to find clues, I put the ‘On Balance Volume’ indicator on my SPY chart. This indicator basically gives you an idea of accumulation and distribution in the market; it tells you, in general, if the market is scooping up shares, or selling shares. I use the OBV from time to time, but have not used it in a while. What I found was scary.

SPY chart as of 11/15/2019

Notice the descending trend on the OBV indicator? More importantly, notice the pullbacks that have happened each time the OBV dropped in relation to the market rip higher?

At the end of last year we had a correction. The markets tanked for a couple months, and finally bottomed out on December 31. Since then the market has climbed to all-time highs setting record after record.

Our first substantial pull back of this year happened right after the May high. This is when the Trump administration basically said a deal with China was currently off the table. The markets did not like the news one bit, and down it went. From there it rallied to new all-time highs in July.

Same story in July – more negative trade news, and the market soon fell. However, the fed started to talk about lowering interest rates, and the market liked that. It soon rallied again in September and met up with the July all-time high. Then, of course, another pullback on… you guessed it… negative trade news. Since the pull back bottom in early October, we have rallied to even higher highs. The market is on a rampage!

But there are ominous technical signs that this is not sustainable without some sort of pull back or correction. Take a look at the chart one more time:

SPY chart as of 11/15/2019

The blue vertical lines are meant to show the market highs in relation to the OBV. The red arrows, of course, are pointing to the highs of the OBV in relation to the blue lines. The blue dashed line on the indicator shows the May OBV high, and the purple dashed line shows the July OBV high.

Notice, each all-time market high comes with a lower OBV high. This is divergence. The On Balance Volume indicator is showing divergence with the overall market.

After the July market high, the market pulled back. The OBV might have predicted this, as it could not reach the May OBV high. Same story for the September rally – the OBV might have predicted that one as well. This time, the September OBV could not reach the July OBV high or the May OBV high. And here we are today. The OBV is right at the September OBV high, but well below the July and May OBV highs.

Quite a tongue twister that last paragraph was. LOL! But you get the idea.

There is one other ominous sign the OBV is giving me. Notice the OBV has been slow to rise during this current rally when compared to the other rallies? That is showing that there is lack of conviction in this move. It seems market players are leary about moving forward on the current trajectory. The other rallies showed steeper OBV rise.

As I always say, this does not guarantee a pull back or correction will happen any day now. There is no “holy grail” of market indicators. The OBV is no exception to that. This is just something I noticed and wanted to share.

This post is my opinion only, and should not be taken as advice. Always do your own research before making any investment decision. Seek professional and licensed advisers if you are unsure.

Record Close for SPY Today

What a GREAT day it was for my account! New highs, and new record close. I’m still bullish, but with caution.

Click on the chart to visit my Trading View page.

A couple good things to note from today. 1) Volume was kind of weak until the end. It wasn’t horrible, but it wasn’t great either. It did pick up and ended up closing with about average volume. That’s a good thing. Low volume plus the record close would maybe be a bad thing. 2) The RSI divergence I wrote about yesterday is pretty much gone now after today. That is also a good thing.

Now, a couple of bad things to note from today. 1) The market is just one negative tweet, or one negative trade war news story from sending it down. That is enough to make me proceed with caution. I am still bullish, of course, but I’m cautiously bullish. 2) Jerome Powell (the Fed) speaks on Wednesday afternoon. He has moved the markets before, and he could move the markets again. If the market is looking for a 50 BP cut, and we only get a 25 BP cut, that could be bad. Or, even worse, if there is no cut at all that would be VERY bad for the markets. Everyone wants a cut, regardless if it’s a good thing or not.

Keep your eyes peeled and stay vigilant. Being at these all-time highs, a lot could go wrong. But, a lot could go good also. We will just have to wait and see what the near-term future holds for us.

My guess… and this is just MY guess alone… is that we move up and play in the $315 to $325 area for SPY. If negative news comes out, or if Jerome Powell dissapoints, forget about it! We would then probably fall well back into the $290’s.

Good luck to all, and may we all profit!

The Holy Grail of Strategies

Have I got some news for you or what!? Are you ready… are you sure? Here it is….

The Holy Grail may exist! Woo hoo! But, unfortunately, the Holy Grail of trading strategies, most certainly does NOT exist! I know, bummer, right?

Some claim to have the “perfect” strategy, or the “best” strategy, or the strategy that will make you a multi-gazillionaire over night. I got news for you – they’re lying!

There is no such thing as a perfect trading plan or strategy. If that existed, we would all win our trades 100% of the time, and we would all be wealthy beyond our wildest dreams.

But, the good news is that there are strategies that increase your odds. There are also ways to mitigate risks before you even choose the strategy you want to implement, and that is by utilizing solid analysis skills (doing your homework).

I never enter a position based solely on a “gut feeling.” I never enter a position based solely on “well, it’s gone down this far, it has to turn around.” Yes, I will admit, however, that I do sometimes think those things, but only AFTER I have done my other homework first.

I utilize both technical and fundamental analysis. Some people just use one or the other, and that is 100% OK. I just personally think that they work best when used together. One compliments the other, so to speak. In specific, I believe that technicals compliment fundamentals. What I mean by that is – technicals move based on the underlyings fundamentals. That’s just my opinion. It works for me.

Back to the “Holy Grail” of trading strategies… They don’t exist! You will NEVER find it! So stop looking. Instead, find a strategy that works for you. Make sure that strategy has logic and reason behind it, and make sure that strategy involves some kind of risk management. Over time, if your strategy is solid and it works, you should make money. Will you become a millionaire with it? I don’t know! It’s possible, of course. Anything is possible with hard work and dedication.

Ignore the people that say their strategy is better than yours, or they know more than you do. Blah blah blah! These people, in my opinion, have nothing of value to share with you. They just want to brag and sound cool, but probably are not as smart as they think they are. I’d rather follow the people who are humble and do not push their strategies on me. The people I like to follow have tons of information to share, and never brag about it.

For example: I “ran into” a gentleman in a Facebook group named Nicholas. He runs ‘Option Alchemist.’ He’s a very smart and humble options trader with many many years of experience navigating the markets. I have been talking to Nicholas for only a couple of weeks, but I have already learned quite a bit via “small talk.” These are the types I’m looking to learn from, not the bragger.

If you are interested, you can find Option Alchemist on Facebook, Twitter, and their website. Here are the links: Facebook, Twitter, and website.

Ok, my rant/lecture is done. I hope you gained some insight if you are a new trader. The market is full of gimmicks and “get rich quick” schemes. Ignore them. They don’t have the answer you’re looking for. They don’t have the Holy Grail!

SPY MONTHLY CHART LOOKING GRIM

The technicals are mounting in favor of the bears. Looking at the monthly chart for SPY, I noticed yet another double top… and more ominous, divergence with the RSI and volume.

What does the declining volume tell me? It tells me that month over month buyers are becoming harder and harder to find. What does the declining RSI tell me? It tells me that SPY is trying to come down from such overpriced conditions.

Of course, fundamentally, you have QE (quantitative easing) propping up the price. This is creating a condition, in my opinion, that will eventually trap new and novice investors. The newbies are probably buying up stocks, because they see there’s a rally. But the problem is, the rally is so old, and so high in price, that they are bound to get burned when this thing comes crashing down.

Do I think a recession is imminent? No. Do I think a big correction (15 to 20%) will happen? Yes! However, with that said, lowering rates and QE after QE is not necessarily a good thing. That could lead to recession type behavior eventually… it’s called DEBT!! The more debt companies get themselves in, the harder it will be for them to climb out if and when interest rates begin to tick back up.

I am overall a bullish investor, but right now I have a bearish sentiment. The technicals and fundamentals are pointing to a big correction in the works. But that’s ok! Because, after it does correct, I will sweep in and scoop up as much as possible for the next leg up. That’s investing 101 for a bull: buy low, sell high. Right now, it seems investors are buying high and selling high… that’s very dangerous!

Remember: ALWAYS DO YOUR OWN RESEARCH AND CONSULT A PROFESSIONAL IF YOU ARE UNSURE WHAT TO DO.

HOME DEPOT DOWNGRADED

Home Depot was downgraded today. At the time of typing this blog post, HD was down about 1.5%. Is this a good shorting opportunity?

Guggenheim Securities downgraded HD from ‘buy’ to ‘neutral’, because they see a “ramp-up” in spending that will hurt earnings next year. Looking at the 4 hour chart, this may get a little bit uglier for HD.

Notice the ascending channel that started way back in December of 2018? Right now, HD is already at the resistance of that channel, and this downgrade could be the catalyst that sends it back down to the support of the channel. In addition to being at channel resistance, HD is also signaling overbought on the RSI.

Another fundamental “thing” about Home Depot is its ability to predict economic conditions. However, they would show a loss in revenue over multiple quarters if that was the case, and it’s not in this situation. Home Depot, Walmart, auto manufactures, etc., can be used to predict where the economy is at any given moment.

Either way, I opened a short position this morning at market open by purchasing put options. I will keep a close eye on them, and I do not plan on holding them for long, because I do not think HD will hurt too badly from this. They seem to be a solid company that can weather this little storm.

SPY Taking a Breather

Yesterday, SPY gapped up and made a doji to close out the day. Today, that doji was followed by a bearish engulfing candle. By itself, a doji usually means reversal. The bearish engulfing candlestick that followed the doji, in my mind, is confirmation of a reversal.

I am bullish the US markets. But I think they are in for a pull back … more so, a profit taking round.

After breaking through the consolidation that lasted about a month (the green dashed line), SPY has been on a rip. This week it made new highs, but failed to close above the all-time high set in July of 302.23. I think this is a point where investors may want to take some profits.

Technically

See the long up-trend line I drew? That started from the low of last year on 12/26/2018. Up until July 26 that line held very well … then all hell broke loose, and SPY plummeted to 281.72. It then entered a period of consolidation that lasted until September 5, when SPY finally broke out of it with a pin bar gap. Fast forward a little more than a week, and here we sit at the all-time highs again.

But, notice how after we bounced off 281.72 it tried to get back above that long-term trend line and just couldn’t do it? And then tried a couple more times but failed … Then finally on the 5th of this month it busted through with conviction. That’s why I’m bullish overall from a technical standpoint.

However, I believe we are going to see some profit taking before the Fed speaks next Wednesday 9/18/2019. I think the doji yesterday, and the bearish engulfing today, shows that we are going to pull back from this level. Not too mention, profit taking is not uncommon at all-time highs. I think the pullback takes us to around 295 area (green dashed line). From there, fundamentals will determine if we bounce off and retest the all-time highs … or more ominous … continue down through the green line and confirm a double top pattern.

Fundamentally

TRADE WAR!!! Need I say more? It’s all about the US/China trade war. Jerome Powell and the Fed have nothing on the trade war. The market wants an end to it, and they want it now. Unfortunately for us (the market), it’s not going to happen now … well, I don’t think so anyways.

The reason SPY broke through the consolidation was because the US and China agreed to continue talks in October – the markets went berserk on the good news! But I remained skeptical; do you know why? Because when did the US/China talks ever stop? They’ve been going on for a year and a half. You gotta use logic here, but the markets don’t like logic. They like the news.

Logic tells me that nothing has changed on the trade war front. The talks have never truly “stopped” and this is nothing more than another round of them. October will go one of two ways: 1) A deal is made or 2) A deal is not made. That’s it! Don’t expect anything else. Well, the many other rounds of talks had the same two options.

When there’s talk of negations, the markets move up. When the talk turns to negative (i.e. nothing happened in the talks), the markets move down. That’s the pattern we are in, and that’s the pattern I believe we will stay in until a trade deal is made.

Donald Trump wants to get re-elected, so I think a trade deal will be made before then. But the elections are more than a year away; that’s a long time for this thing to be drawn out.

Bringing it all together

I think technically SPY is very bullish. I think fundamentally SPY is at the mercy of the trade war. Bringing those two together, I am basically trading on the news rallies or declines.

Disclaimer

ALWAYS DO YOUR OWN RESEARCH BEFORE MAKING ANY INVESTMENT DECISION. SEEK PROFESSIONAL GUIDANCE IF YOU ARE UNSURE.