Sunday, January 2, 2011

Some ideas for 2011

Some ideas for 2011

The markets ended 2010 with gains in everything from the stock market to most commodities to bonds. As we turn to the New Year for short term traders there is a set-up in the making that has a high probability of profitability. The direction for this trade has yet to be established but will show its hand in the coming days. The main point to take away from this set-up is that the market will move 500 to 1200 points in a time frame of 3-13 trading days.

The set-up has occurred because the following conditions have recently developed.

1. Trading compression
2. VIX rises 20% with no move in market in either direction
3. Number of up/down days consecutive or over at least a 20 day period.
4. Market in oversold or overbought territory
5. Extreme pessimism/optimism
6. Technical patterns
7. Historical patterns
8. Time cycles

The past 20 trading days have NOT produced a daily trading range of more than 100 points. True it’s a holiday period but nonetheless a trading range of less than 100 points over a long period of time is setting up for a sharp directional move. This compression is ready to explode.

The VIX recently hit yearly lows at 15.40 and quickly jumped almost 20% with no ensuing move in the averages. The VIX is low compared to the past few years but that doesn’t mean much. Rather the quick 20% move in a day or so in either direction sets up for some type of sharp move.

The past 22 trading days has produced only 6 down days for the comp, 5 down days for the SPX and 8 down days for the DOW. When there is a steady move with many consecutive clusters justifies the out set for a sharp move and that move can be in the same direction. Back in March and April the DOW was up 30 of 40 days but did however move sharply and in this case it was lower.

Over the past few weeks even with the market having a strong upward bias as the advanced/decline line made a new high the 10 day closing tick has been stuck in negative territory throughout. A move back into positive territory has proven to be a good buy signal 4 out of the past 5 times it has occurred in 2010 but more importantly the market had a sharp move in every event.

Now we are in the 3rd year of a presidential cycle there has been a strong upward bias dating back to 1940. But on the flip side getting double digit returns for 3 years in the row (2009 and 2010 both up) is unlikely. We also have to wait for the January indicator which states a higher January has a better than 70% chance to produce an up year although the past 2 January’s were down while the market was up.

The percentage of bull/bear newsletter writers is nearing the October 2007 level which marked an important top. This indicator is a warning sign but near term the market can thrust higher as can the current readings. It’s something to pay attention to in the longer term.

Technically, the Transports close above 5120 it looks like a breakout to 5325. In the SPX 1260 gives way then 1310-1315. For the DOW a break above 11646 resistance leads to 11920 then 12055. The above averages and index need to stay above their resistance levels for at least 2 consecutive days thus hoping to avoid a fake out.

Cycle-wise there are 2 important ones namely the 149 and 232 day cycles that point to an important top happening this week- January 6th and 7th.

Reading the above paragraphs should leave one confused as to what will happen in the first quarter of 2011. One thing for sure that will emerge in the next few days or by the end of the week will be the beginnings of a sharp directional move of at least 500 points but more likely in the 800-1,000 point range in the next 3-12 trading days. There could be a big fake out so I would wait till the market moves 200 points and a few days. (Trail the stops)

In the transports if we trade above 5120 for 2 consecutive days stay bullish but if they fail watch out below. With the DOW it would be 11,646 and the SPX 1260 as the line in the sand or swing points. Gathering all the info doesn’t make one lean bullish or bearish so let the market tell you what it wants to do as the trend established after the first 200 DOW points should remain intact. Being back spread should also work but once the trend is established stay with the move.

With Mutual fund Monday and the beginning of the month and year trading should start with an upward bias. Longer term not withstanding the next move the market’s return of the bear will resurface. The financial mirrors that have been used for the past few years are about to crack.

Good Luck to All in 2011 and keep the stops close.