"Everyone has a plan 'till they get punched in the mouth" - Mike Tyson

January 24, 2016

Gio's Gameplan: Bear Market Bounce

By: Gianfranco Carrion

Are the “markets still in turmoil”? Yes. The $SPX remains in a downtrend until proven otherwise. However, two factors generated the much expected bounce in equites. First, as discussed last week, breadth ($NAA50R) reached historically oversold readings. Second, and most important, Crude Oil bounced, which nowadays means a world-wide market rebound. Simple story. Going forward, look for follow thru in the commodity bounce and/or a decoupling of equities and crude oil (ex. $SPX goes higher regardless of Oil).
$USO – Daily
  • Always chart $WTIC weekly for most accuracy. However, I like charting $USO daily as it shows gaps
  • Jan 20: $USO gaps down -1.8% and goes as low as -6.7% before printing a hammer doji (-2.9%). This was the first sign of a possible upside reversal
  • Jan 21: $USO gaps down again -1.7%; however, it reverses to close green +3.8%. Second BIG sign of reversal
  • Jan 22: Crude oil closes +17% off the low

C:\Users\Gianfranco Carrion\Desktop\1 - USO.png
If you were focused on headlines on January 20th, you would have been distracted away from the hammer doji. Instead, you would have been focused on the fact that oil “crashed”, the “supply glut” and an “oversupplied market.” All of the latter are true; however, they have been true for 1.5yrs. On January 20th, all that mattered was the price reversal that displayed the possibility of higher prices (hammer doji)

C:\Users\Gianfranco Carrion\Desktop\HEADLINE.png
$NAA50R – Daily
  • Second flag that called for a market bounce was breadth readings that reached historic lows
  • Jan 20: Only 8.6% of Nasdaq stocks are over their 50dmas (14.8% over 200dma). Historically oversold

C:\Users\Gianfranco Carrion\Desktop\NAA50R.png
$SPX – Daily
  • Jan 20-22: $SPX bounces +5% from the low (1812) to closer over 5ema (1889)
  • 5ema now becomes our rising stop. If long $SPY or other stocks, this is your line in the sand
  • Resistance is at 20dma (1966, +3%) or previous consolidation area from Sep 2014 at 1990 (+4.4%)

C:\Users\Gianfranco Carrion\Desktop\2 - SPX daily.png
$SPX – Weekly
  • Weekly candle also printed a hammer doji on the lower bolli. Long hammers often mark price reversals to the upside
  • As long as we remain above 5ema I expect a bounce to 1990. A falling 10wma (2010) could stop reversal if we retest it  
C:\Users\Gianfranco Carrion\Desktop\3 - SPX wkly.png
$SPX – Monthly
  • It is unsurprising to see the $SPX January bar return inside the monthly Bollinger channel
  • Anyone pressing shorts under lower bolli (1891) was asking to get squeezed. Level now very important
  • Note how 2007 tested the lower bolli and bounced a few times before the major breakdown
  • Continue to use daily & weekly charts to navigate shorter trends but do not forget the monthly $SPX chart remains in a downtrend. First sign of reversal to the upside is a monthly close over the 10 month moving avg.

C:\Users\Gianfranco Carrion\Desktop\spx monthly.png

Lately the faith of this bull market is pegged to the Crude Oil $WTIC chart. Last week (1/18) we saw a nice bounce in both; however, the trend remains downward for both as well. My confidence on the overall trend and structure of $SPX will increase when $WTIC manages a close above its 10wma ($36.56)
$WTIC – Weekly
  • +17% off the lows in 3 sessions
  • Could easily run to falling 10wma (36.56) or a further +13% before encountering heavy resistance
  • Previous bottom attempts rallies = Jan 2015 (+22%), Mar 2015 (+47%), Sep 2015 (+35%)

C:\Users\Gianfranco Carrion\Desktop\3 - WTIC.png
As Oil goes, the market goes. Simple. Previous behavior suggest that for this bounce to continue we must see follow thru in the $WTIC bounce. The $SPX closed above its 5ema (1890) which points to a possible trend change to the upside. If long, use the 5ema as a rising stop. Simple.
The $SPX weekly chart points to a possible bounce to 1990 (+4.4%). However, the market remains in a downtrend on a monthly timeframe. A bearish cross of the 10/20 month is virtually a reality, which marks a change in direction. Any bounce should be treated as a trade rather than a long term entry. Below I’ve posted a few induvial charts I am tracking for trades within this possible bounce. Lastly, amid a bearish outlook, Howard Lindzon, co-founder of Stocktwits, captured one possible bullish scenario I’ve had in mind since late 2015. Always remain open to both sides of a trade. Thank you for reading – Gio

$SPY – Possible bullish scenario
C:\Users\Gianfranco Carrion\Desktop\howie.png

$AAPL @ 101.4 / Stop $98.5 (-2.9%)
Breakout from downtrend. Dips look buyable. Once over 20dma it’s a +8% trip to a 50dma retest
C:\Users\Gianfranco Carrion\Desktop\AAPL.png

$XLE @ 55.74 / Stop $54.1 (-2.9%)
Breakout from downtrend. Dips look buyable. If Oil reverses strongly Energy could easily test 50dma at 61.5 (+10%)
C:\Users\Gianfranco Carrion\Desktop\XLE.png
$AMZN @ 596.4 / Stop $584 (-2.1%)
Breakout from downtrend. Dips look buyable. Play on $QQQ bounce with a target of +4.7% at 20dma retest
C:\Users\Gianfranco Carrion\Desktop\AMZN.png
$QQQ bounce doesn’t = $NFLX bounce. Reported ER and reverse same day just to lose all gains. No need to own
C:\Users\Gianfranco Carrion\Desktop\NFLX.png


I wanted to take a quick look at some of data points that really stand out.  Enjoy!

The key theme of the new highs list: yield.  I wrote about the long term breakout in dividend stocks relative to the S&P 500 during the week.  Although the ratio is stretched now, the theme is still set up to outperform through 2016.

The IPO market data suggests Biotech was a bubble via Renaissance Capital

The stock to bond ratio is clinging to life at crucial support.

The consumer ratio has lost its multi-year uptrend.  Can it recover?

We've reached panic levels in oil via Option Pit

The IMF expects inflation in Venezuela to be 720% in 2016.

Defense aircraft spending is at a level not seen since 9/11 via @zerohedge

Muni Bonds have performed as well as any asset over the past three months.  The intermediate trend is losing momentum.

A monster executive shakeup at Twitter was just announced
The stock market has been highly correlated to oil prices via SoberLook

The Forward P/E of the S&P 500 is 14.9 as we head into the meat of earnings season - FactSet

Jesse Felder notes this is now the worst possible environment for stocks

Thanks for reading

January 20, 2016

Buy Yield

Dividend Stocks relative to the S&P 500 are starting to break out of a multi-year base.  This is a huge deal.

What does this tell us?  The market wants defense.  We can buy long term treasuries in Q1 and expect to outperform handsomely for the foreseeable future.  We can also buy high yielding stocks, but again it's not a given they'll provide great absolute return.

There's always a bull market somewhere.  This area has a great chance to be one this year.

Thanks for reading!

January 19, 2016

Prepare for the worst

Coming into the week big struggle for many market participants was this: the conditions seemed damn obvious for a short term rally, but the intermediate trend lower is the strongest to the downside since 2008.  The market is just unable to stop the bleeding.

The S&P 500 posted an inside day Tuesday.  Watch which way it breaks.  It appears to be breaking lower overnight.  If so, all the confident dip buyers from Friday, the 3 day weekend and Tuesday are now trapped.

Despite the SPX inside day, the NYSE stock only advance-decline line keeps hitting new lows

Although SPX and the NASDAQ have held the fall lows, broader markets such as the NYSE Composite and Russell 2000 have also led the market to new lows

For the last week the market has been drastically oversold and hasn't been able to find any sustainable bounce.  During this time, aggressive put buyers have kept the CBOE SKEW index at a very high level.

It's smart to be prepared for a crash like event as the markets are moving aggressively with ease.  

Asset Allocation is on the edge of a MAJOR shift.  Bonds are ready to outperform stocks in a big way over the next few months

Major support is being breached in the Consumer ratio.  A 4 year trend appears to be ending.

With all these scary charts, you'd think fear was high.  Well, it's not.  The VIX is printing 26.  26!  There is little if any fear out there.

It's just smart to prepare for the worst in these conditions.

Trade 'em safe!

On the edge

I started trading in 2009.  I don't know if there has been any chart that makes me think, 'holy shit the market is in trouble'....until the last year or so.

Case in point this measure of the Stock to Bond Ratio..

This two year broadening top in the NASDAQ to Long Term US Treasury Bonds ratio HORRIFIES me.  For the first time in two years, the ratio failed to make a new high on a bounce.  That failure is typically a sign a broadening pattern may actually be a top (or bottom in the opposite case).

This support area is pretty huge and obvious.  With such drastic oversold readings, why can't we get some sort of short term bounce here?  I don't know, but this chart (combined with many other factors) has me VERY negative in my stock outlook this year 2016.  Time will tell how this plays out!

We are on the edge of a rush in asset allocation that may just suggest a crash in equities.  Let's face it, the markets are unstable and the relentless selling pressure has not abated.  You never know if that's going to happen, but I'd rather be positioned for that in the coming weeks (yes even with just a small chance of happening) than against that.

Trade 'em safe!


All ideas shown on this blog represent the authors opinion based on the data available.