“It’s now the 19th of April and the market is approaching the targets outlined in February. The market is now over-extended and the probability of further dramatic upward moves are limited. Significant resistance exists at 1216 (Basis $SPX) with the market approaching the Fibonacci 1.618 extension of the counter-trend range A-B. In addition the Fibonacci 0.618 division of the 07 high to the 09 low is slightly above the current market price at 1229 (potential area for Stage 3 distribution).”

On the 23rd of April 2010 the market closed at its highest point for the rally (pre flash crash) at 1217.28, one point from our projection.

We are now at the other extreme with the markets over-extended to the down side with further dramatic downward moves limited. We have just completed stage 1 which is the accumulation stage of the market, taking us into the expansion phase stage 2, the beginning of the next upward move. It is important to note that we have entered into a period of high volatility (extremes of price movement). Money management and trade management are of critical importance! Traders should be aware of noteable resistance levels and protect profits accordingly. The first level of resistance is the 0.618 Fibonacci expansion level at 1151 (basis $SPX). The second level is the 1.00 Fibonacci expansion level at 1219 (basis $SPX) and slightly above that is the 0.618 bear market division from the 2007 high to the 2009 low (See chart). If the markets breaks above these two levels we can then contemplate the 1.618 Fibonacci expansion up to 1330.68.

There are an infinite number of trading opportunities in all sectors of the market, both US and ASX. All display excellent risk to reward characteristics. If you are trading ETO’s you should be aware that we are in a period of high implied volatility. Most ETO’s are over-valued and expensive. Options used in high implied volatility environments favour the use of spreads over vanilla bought options.

The prime directive given to all Options21 Mentoring Graduates trading daily charts is to identify the formation of stage one just as we did back in early February, giving us the best opportunity to take timely advantage of the expansion in the market. Once again we find ourselves at stage one with unlimited opportunity.

A complete update of the macro view of the market is given in detail on the first Wednesday of every month in our Live Market Briefings.

Happy Trading,
Paul Wise.

“In the past 4 weeks the markets have been demonstrating an extreme of negative sentiment which we now believe to be coming to an end. The obvious conclusion to an extreme sentiment event is a sharp reversal in price and it is now we believe that this is most probable. (Stage 1 accumulation) The Market (Basis $SPX) has formed a solid base above the November swing low. A break up and close above 1104.73 will once again confirm the resumption of the short term upward trend. (Stage 2 expansion) This needs to be watched closely because it may evolve into a resumption of the larger bull market move.”

It’s now the 19th of April and the market is approaching the targets outlined in February. The market is now over-extended and the probability of further dramatic upward moves are limited. Significant resistance exists at 1216 (Basis $SPX) with the market approaching the Fibonacci 1.618 extension of the counter-trend range A-B. In addition the Fibonacci 0.618 division of the 07 high to the 09 low is slightly above the current market price at 1229 (potential area for Stage 3 distribution).

In February we talked about the measurement of extremes of sentiment and its importance in the timing of derivatives trades. We are once again at an extreme of sentiment and at this stage it is difficult on a daily chart to find low risk high reward trades. At the end of any extended move the market needs to distribute shares to those who are arriving late to this rally. This takes time and can be observed as sideways choppy price action sometimes taking over a week before the market falls into its counter trend (Stage 4 counter trend). As the market moves into its distribution phase we anticipate the formation of a counter trend, the completion of which will provide us the next opportunity to go long. (Back to Stage 1)

The prime directive given to all Options21 Mentoring Graduates trading daily charts is to identify the formation of stage one just as we did back in early February, giving us the best opportunity to take timely advantage of the impulsive moves that we have just witnessed over the past 10 weeks. Price action observed watching SPX was mirrored to an equal and sometime much greater extent in many of its component stocks. I addition, for those of you just trading ASX stocks a near identical picture was observed with ASX 200 and many of its stocks.

A complete update of the macro view of the market is given in detail on the first Wednesday of every month in our Live Market Briefings.

Happy Trading,
Paul Wise.

In the past 4 weeks the markets have been demonstrating an extreme of negative sentiment which we now believe to be coming to an end. The obvious conclusion to an extreme sentiment event is a sharp reversal in price and it is now we believe that this is most probable. The Marker basis $SPX has formed a solid base above the November swing low. A break up and close above 1104.73 will once again confirm the resumption of the short term upward trend. This needs to be watched closely because it may evolve into a resumption of the larger bull market move. The next resistance level is at 1166.69, a Fib 100% extension of the range A-B. The second major resistance is at 1242.71. This is a 1.618 Fib extension of the Range A-B. This second resistance level is important as it also coincides with a 60% division of the high of the bull market in 2007 and the low of the bear market in 2009.

A complete update of the macro view of the market is given in detail on the first Wednesday of every month in our Live Market Briefings.

Happy Trading,
Paul Wise.

Looking at the daily S&P 500 chart above, we can clearly see that the market continues to trade in a primary down trend, as defined by a declining 50 period and 200 period SMA. With the continuing bad news but a contradictory price rally, the question begs to be asked: What now?

Two weeks ago we presented a live market briefing via the internet, outlining two potential scenarios. The two scenarios are based on the premise that we are still in a down trend. See below.

Scenario 1: During the months of January and February the S&P 500 traced out a symmetrical triangle. Traditional technical analysis states that a break and close outside of this triangle, followed by confirmation the following day, constitutes a break out and should be traded in the direction of the break. As it panned, out the S&P 500 did break to the downside, but on a daily chart it closed back into the triangle, hence negating any breakdown (anticipated based on the last bar of the chart). At this point Scenario 1 is invalid.

Scenario 2 forecasted a break upward, outside the top of the Triangle but finding major resistance just above the current market level. If it does, the market has some major levels of resistance to get through before it can continue higher. There are four resistance points we can identify, which become potential failure points for the markets. The first level of resistance is the declining 50 period moving average (blue declining line). Markets can often be observed to trade slightly above this average before continuing their downward trend. The next level of resistance is taken from the previous swing high. (Pink horizontal line). The third level of resistance is the old support line in November (dark blue heavy line) which now becomes resistance. The last level of resistance is 50% of the price range A-B (in Aqua). Three of these resistance lines come together in the red box. This is a point of potential price failure in the market.

Summary: The market is in a primary downtrend. If you trade against this trend (go long) you can only do so in very short time frames (1-3 days). Otherwise stick with selecting trades within the primary trend (Buy puts). Any upward movements should be taken as counter trends for the next move down.

Before we can place any importance in statements that the markets have bottomed, we need to observe an upward 50 SMA and 200 SMA which are both a long way from pointing upward. This will be preceded by a well defined basing structure, of which there is no evidence either.

Kind Regards,
Paul Wise.

The US Fed has now cut their interest rate by a half-point in September and a quarter-point in October. There was the hope that two reductions might be enough to combat the threat of a recession, given that financial markets appeared to be stabilizing. The continuing volatility through November and December and the rising fears of a US recession became the catalyst which led to the most recent Fed action in December.

Turning away from the fundamentals and back to the charts, what do they tell us? Which way will the market move next? What are the chances of a bear market evolving, or are we just in a volatile period that will pass? The question “are we evolving into a bear market” will only be answered after the fact, but there are technical definitions and observations that can assist us to determine the overall direction of the market and make trading decisions accordingly. The direction of the overall market (which I define as the “macro market view”) is critical to having the confidence for opening up a number of positions to take advantage of market direction. When the stock market rallies, 3 out of 4 stocks will move up with the Index. On the other hand, when the market sells off, 3 out of 4 stocks will decline with it. Knowing this, doesn’t it make sense to select trades in the direction of the major Indices? YES…

Looking at the S&P 500 chart above, the market is in a primary down trend. The recent Fed inspired rally failed, as the market broke below the swing low at X. Although the market is presently in a primary down trend, it is not by definition in a bear market. (More of that in a moment.) The market is in a period of unprecedented volatility, especially considering that we have had two 10% corrections, and this all started in August and continues through to the present. In addition, since the high in October the market has produced a series of quick falls and sharp counter trends, tracing out a series of lower lows and lower highs as the market fell. This type of price action was last seen at the top of the tech boom in 2000. I just want to repeat: this does not mean we are in a bear market. If not, what is the technical definition of a bear market?

A bear market can be defined using a 200 period SMA and a 50 period SMA plotted on a daily index chart. The definition of a bear market using these two moving averages plotted on a chart is the 50 period SMA trading below the 200 SMA and both pointing down. Do any of the major index charts show this set up? I went hunting and found this definition fits with one and only one index: the Russell 2000 index. The Russell 2000 is a market-value weighted index. The index measures the performance of the smallest 2,000 US companies. I wish to point out that none of the other major indices show this. Just in case the Russell 2000 turns out to be the “canary in the coal mine”, lets take a look at what potentially the other indices could evolve into if the market continues down.

Observing the chart we can clearly see that yes the 50 period MA is tracking below the 200 period MA. In addition we can see a series of lower highs and lower lows starting from the October high… To add to the picture the index is approaching its August low for a third test of this level. The more times an index tests a particular level, the greater the chance of breaking it. There can only be three scenarios that evolve. 1) The market quickly breaks through the August support level and continues lower. 2) The market will bounce off this support level retest and fall through, or 3) the August low turns out to be major support and this chart finds a bottom.

As previously stated “The direction of the overall market (which I define as the “macro market view”) is critical to having the confidence to opening up a number of positions to take advantage of the overall market direction”. If the primary trend is down, the majority of tradable positions shoud be short positions (puts etc). Although sharp counter trends are tradable and small positions can be taken, they become the riskier option because as these counter trend rallies fail, they do so very quickly.

We are not yet in a bear market that fits our technical definition. The strongest index has been the NASDAQ and the weakest the Russell 2000. As many traders will agree, the current market environment is unique in that it requires a greater level of discipline and definition of the primary trend, before a large number of positions can be opened.

Have a great Christmas everyone!
Kind Regards,
Paul Wise.

To balance this negative picture was the observation of how well supported the market was toward the end of last week at its medium term support level of 1500, which can be drawn back to May this year. This was even in the face of a major write down by Countrywide, the USA’s largest lender, which on Friday posted a $1.2 billion loss in the third quarter, but predicted a return to profitability in the fourth quarter. (Side note: We have not observed such an extended sideways pattern since Nov 2001 to April 2002 basis the $SPX).

Markets never stay still and the factors which have contributed to the pattern of price behavior over the last six months (sup-prime mess) are continually being replaced with new information, which is being factored in and will dictate the next move in the overall stock market. One of the major levers that drive the markets is interest rates. As we are well aware, on the 18th of Sept the US Federal Reserve cut US interest rates by 50 basis points, which had a dramatic supportive effect on the markets and temporarily soothed sub-prime fears.

On Wednesday the 31st of Oct, the US Federal Reserve will once again meet with the primary task of deciding whether to cut or maintain the current US interest rate. According to futures listed on the Chicago Board of Trade, traders are pricing in an 86 percent chance that the central bank will lower the fed funds rate by a quarter of a percentage point, to 4.5 percent.

Markets are clever and often do not wait for an event to happen. Normally markets start to anticipate and factor in some of the expected interest rate cut, hence you would expect to see some evidence of this being reflected in the major indices. I will use the $SPX index to illustrate.

Let’s take a close look at the purple box and see if we cannot glean any clues to what the market is potentially going to do next. It is often difficult to see the complete picture on a daily chart, so I want to illustrate the fractal nature of the market by drilling down to a 60 minute time frame. The reference to “the fractal nature of the market” refers to the fact that what works on longer time frames often can be seen to work on shorter time frames.

In previous articles I have referred to a W formation which can often be observed as a completion pattern after a correction in the markets and is that point where the market is making the transition from bear to bull (or the reverse). (This pattern is used in all Auto-Trade recommendations.) If the market is truly fractal. you would expect to see the same patterns observed on a daily chart displayed also on a 60 minute chart.

Now looking at the 60 minute chart we can clearly see the market forming a low point at A, retesting its low at point B, before trending up. The market then forms its first higher low at point C and second higher low at point D. From this point we would expect a small pull back to from a third higher low, confirming that the bulls are back in control if not already. The W formation is essentially Phase 1 of a market move from its accumulation phase. Followed by Phase two its uptrend then phase 3 distribution and then phase 4 decline.

Once again this is a probable scenario, not a guarantee that the market will trend up from this point. That said, there is a body of price evidence on the chart supporting the bullish case and reflecting the expectations of traders of a near term interest rate cut.

The purpose of the article is to demonstrate how we form a Macro view of the overall market which begins at Phase 1 the accumulation zone which is the transition zone from bear to bull. This methodology is being applied to the overall market and to each Wise Report recommendation at a stock by stock level.

Kind Regards,
Paul Wise.

Although my view has not changed, we are observing an easing of sentiment/fear basis $VIX and the market is at an interesting point. Friday the 31st of August 2007 sees the US market exposed to event risk due to release of data on personal spending and core CPE numbers but what is of immensely more importance is the Fed Chairman Ben Bernanke’s speech. The market is ultra sensitive when ever this man speaks, and the market has the potential to react accordingly. He has to frame his comments in a neutral to positive context. Any positive comment that signals a potential rate cut, could send this market sky rocketing. On the other hand, if Bernanke avoids discussing the US Federal Banks next move and makes neutral comments, it will mean more of the same price action that we have experienced of late with the market doing a full or partial retest of its lows. Either way I believe it is increasing the certainty of how this market correction is resolving itself and getting us closer to taking trades with higher probabilities of success.

In my previous article I wrote: “What should happen if significant support is found is that we should see a sharp bounce? If this happens do not get sucked in and interpret this as the bottom of the market. Remember my last article Certainty or Panic. (1st of August) The market has to test, and then re-test its lows before it forms a base and starts once again to trend up. For the market to rebound then fall for a retest, something has to push it back down post re-bound.”

We got the sharp bounce to 1479.40 basis $SPX then the market did nearly but not quite a 50% retracement of this move. By all technical measures we are still in a primary down trend with the 50 period moving average pointing down. Looking at the chart above any visual read of price action on a daily chart with its lower lows and lower highs confirms this opinion. The market is trending down and that is a standard read of this chart, but here is an alternate view that would support potential positive comments put out by Bernanke’s speech which would fit into the category of an information surprise.

We could develop a non standard read of this chart as follows. Once again I do not have a crystal ball and this is not a prediction but a potential scenario. There are a lot of bears out there and the market has a habit in volatile times of catching everyone off guard. Point A is important to focus on. It is a potential trend breaker and is the point where a short squeeze could occur. At point (A) the bears have to close their positions. It’s called a short squeeze. A short squeeze is where the bears all buy at once to close their short positions and in doing so create a huge push to the up side.

The trigger in price is at point A. Point A is important as it is the level which breaks the down trend and also gives support to a potential basing structure that I have observed and talked about in previous articles. Some describe it as an inverted head and shoulder pattern. I like to see it as a simple W pattern, with Point A in the middle of the W. The critical issue in support of the bullish case it that the market needs to break 1479.40 basis $SPX and hold above this level for any chance of a turnaround to occur. Until this happens, we are still in a primary down trend. This is the time to be in cash. Be patient. I am as eager to take a position as the next guy, but will only do so when the certainty of a positive out come is high.

Kind Regards,
Paul Wise.

The re-occurring question has been: Why the lack of trading activity in WiseReport Auto-Trade?

WiseReport Auto-Trades are position trades. Position trades work in time frames of 42-52 plus days. The current correction with its 100 point plus up down days (sometimes intra day) is a day traders market. Day trading requires major price volatility to work, and entails taking on major risk due to the rapid changes in direction and counter direction that a trader will experience within the one trading session. The market with its frequent counter trend reversals in the last hour of trade has been especially tricky in the past two weeks.
Another major difficulty with day trading is that the market in response to major price volatility widens dramatically the Bid / Ask on all instruments, which equates to rotten fill prices on entry, and even more rotten fill prices on exit.
From an ex-dealers perspective, this is where I watched many traders get “whipsawed” out of existence and end their trading carears pre-maturely. In the past few weeks, for every 1 day trader beating their chest and telling his story of glory, you will find there are another 9 licking their wounds. It is a well know fact within industry that professional trading desks use this time to send their employees on golfing holidays.

I have always viewed the markets as bigger than any one player, even global interventions by reserve banks haven’t lessened the fear. So if they can’t inject a degree of confidence into the equity markets, where to next? At 1427 the $SPX broke support for what was a potential test and re-test of the market. Significantly on the 14th of August the index closed for the second day in a row below its 200 day Moving Average on a daily chart. With the 10, 20 and 50 day moving averages pointing south, we were firmly in a down trend to the present levels of 1370.70, but the question is. How long is this correction going to take and how far can it go down?

To give us a feel for potential lows, we can only fall back on tried and tested technical measurements and see if we can make sense of what is before us. Just as we use Fibonacci ratios to estimate price targets to the up side we can now reverse the procedures and estimate the next level of support. Using the counter trend B-C as the basis for our measurement we can project from the top of C a 1.618 extension down to 1380. 1380 is also roughly the support level for the March 2007 fall. This is an exercise in projecting a range down, not a prediction, and the market stopping within a reasonable range either side of 1380 would be a good estimate. (This was written Wednesday.) Thursday the market had a low of 1370.70. Nine points from the estimate is o.k. by me.

In addition we can compare some range down measurements: If we take the range A-B and extend it down from C (see chart below) we get 1375.43 once again trading around the March support line. Again the markets low last night was 1370.70 what does this all mean? It means that technically at the low of last nights trading there is a high probability of a short term low. I did not say “certainty” I said “high probability”. Therefore what could happen next?

What should happen if significant support is found, is that we should see a sharp bounce? If this happens do not get sucked in and interpret this as the bottom of the market. Remember my last article “Certainty or Panic.” The market has to test, then re-test its lows before it forms a base and starts once again to trend up. For the market to rebound then fall for a retest something has to push it back down post re-bound (I predict more bad news).
For the bulls amongst us this re-test is critical for keeping us out of the market until there is some evidence that a base is forming. If it slices through the re-test the market is still falling, but what’s important is that by waiting for the re-test it stops us from taking a position on the wrong side of the market.

What’s my message here? This is a dangerous market for a new trader. This is a dangerous market for a professional trader. If you take a trade profits should be taken quickly. (We may open a trade tonight.) This market will be suitable for position trading when a basing pattern is complete. This will may develop quite quickly. We have 108 potential trades sitting on our order book waiting to be triggered.

Kind Regards,
Paul Wise.

Last note the AUD has had a dramatic fall in the last week. Clients holding large USD funds will discover that this is a huge move in their favour.