Extracted from Jan 23, 2012 Market Update.
|Moving average||New Highs||New lows|
20 day moving average of new lows = 4615 (New all time Record set on Sept 16th 2008).
1 year moving average of new highs = 10 (New all time low set on Nov 25th 2008)
1 year moving average of new lows= 2225 (New all time Record set on Sept 16, 2008)
The speed at which the moving averages of new highs/new lows change clearly illustrates how volatile things are. It is also an indication that the markets are fast approaching key turning points; our indicators have already confirmed this; the month of March appears to be a key time line to pay attention to. This week the moving averages of new highs have surged once again, but once again this is taking place on rather low volume; this is a very strong intra market negative divergence signal. Even more interesting is that the number of new highs looks incredibly weak when compared to the moving average of new highs in 2009; for the past 2 years, and more so in the past 6 months the moving average of new highs has not only failed to match the figures of 2009, but they are now trading almost 75% below their 2009 peaks. This is more in line with a market that is looking to let out some steam as opposed to one that is looking to race to new highs.
Cycles were indicating that the market would top around the 18-21st of this month. However, as we have always stated price action needs to confirm and validate what our indicators are projecting. The ideal confirmation is when price action and cycle analysis complement each other. Probably, the most important cycle to focus on is the March cycle; this is an important time line because it would mark the 3 year anniversary of this so bull market. 3 year cycles are important because they usually tend to coincide with market tops or bottoms and in this instance it’s most likely to mark a top.
The BBC Global 30 combines Europe, Asia and North America – the three power centers of the global economy – in a single index so it provides one with a nice broad view of what is taking place in the global markets. This index is most likely going to run into strong resistance relatively soon when it tries to break past the 5800-5900 ranges. The intermediate term trend is still strong so after a pull back this index should rally further, which is in line with our views for the general market; a sharp pull back, then a strong counter rally and potentially a larger top in March. If this pattern plays out, the top in March should produce a much stronger correction.
VIX is trading dangerously close to its 52 week lows. The VIX is only useful when it’s trading close to an extreme point as it is currently doing so. The current reading clearly indicates that the market is becoming too complacent.
The dumb money is now very aggressively chasing this rally, and the crowd (dumb money) is always late to the party. Our V indicator continues to set new highs on a weekly basis indicating that the markets will remain volatile going forward. This is partially explained why corrections are short and sharp; sometimes the correction is over so fast that it almost appears like there was no correction at all. Volatility is not to be feared, because if employed wisely it provides traders with many more opportunities that would otherwise be unavailable. Our solution to this is to simply issue price targets in advance so subscribers know when to get in and out without having to worry too much about the volatility factor. Our smart money indicator refuses to validate the current move; this clearly indicates that while the markets could trend higher the odds of a strong sudden correction taking hold are rather high. This indicator has never been wrong to data in the long term time frames.
This is a contrarian indicator, when the index is trading in the overbought ranges as it is doing so now, traders need to be cautious about opening long positions and vice versa. This indicator is pretty useful when used with other indicators such as VIX, V indictor, etc. As is the case with the VIX this index is only useful when it’s trading in the extreme zones; Oct 2011 is a prime example of such a move.
This index clearly supports our mid-term indicators, which still remain bullish; midterm indicators are still calling for a short and sharp correction followed by a strong counter rally. It’s also a contrarian indicator and it’s trading well off its highs. Volume continues to drop in general as the market trend’s higher and speculators are taking on more risk as indicated by the surge in odd lot trading and option action; clear signs of market complacency.
Aggressive traders who took this advice should now be looking to get out of their long positions. As stated earlier the SPX traded as high as 1297, which is just a few points away from our 1305, the lower end of our suggested targets. Jan 16, 2012 market update.
Aggressive traders should be out of their long positions or should have already taken partial profits and should be looking to close their remaining longs immediately
The SPX has traded as high as 1322, which is just 3 points shy of the higher end of our projected targets (1305-1325). Markets have a tendency to overshoot so there is still a chance for it to trade to the 1335-1345 ranges on an intraday basis.
The current rally has lasted longer than expected (in terms of time but not price action); this has altered but has not negated the underlying pattern. As the time line has been extended this correction might not be severe as originally projected. Targets for the SPX now fall in the 1240-1250 ranges with a decent chance of testing the 1200 ranges. If either of the targets is hit it will be enough to produce decent rates of returns on the put options we already purchased.
While there are several smaller cycles that come into play, the one to focus one is the one that comes into play in March. This cycle is calling for a relatively decent correction. The intermediate pattern still remains bullish, and this confirms that the markets are likely to mount a strong counter rally after this pullback
As the SPX traded within the suggested ranges, traders should have closed all remaining long positions in our portfolio with the exception of PAL.