Market Report 4/11/16

The “April Fools’ Day High”.

A week ago this past Friday was April Fools’ Day and the SPX hit 2075 at the high that day.

For a little over a month here, as the market was in the midst of the “run-up off the February lows” I’ve been suggesting that there would come a point where the market would seem like it stalled out – perhaps suck in some new shorts – then likely make “one extra push” higher.

The run-up ending on April Fools’ Day could easily turn out to be that “last leg up”. Until the market can break over that (which it still could) I’m going with the idea that we might finally be looking at the first real dip or pullback we’ve seen since the February low.

Each week I’ve been posting SPX charts with “reference points” and if you take a look at the chart I posted here last week you’ll notice that the close was right smack up at the “back to where it started” zone.

I also noted on that chart that the trend was still up, but this past week the near-term trend changed to sideways. As a matter of fact as you’ll see on the chart below, the SPX is sitting essentially where it was three week ago.

This past Tuesday, mid-day I posted an SPX update in the Chart Feed, which I only really do when something is really noteworthy. Take a quick look at the chart and the notes.

The interesting thing is that the market closed Friday just a couple points lower than where it was on that intraday post but the MACD has clearly crossed to the downside and we had 3 closes below the 9-ema last week. All in all the warnings signs are stacking up and unless there’s some sort of catalyst, that April Fools’ Day high may stand for a while.

Now honestly without using any indicators on the chart the market looks like it could just be taking a breather – just consolidating the gains and trading sideways before the next move higher. I suppose that’s a possibility and keep in mind it never made it up to the “big Kahuna” downward-sloping trendline on the charts I’ve been posting. I suppose the possibility exists that it could take another leg higher and that trendline would be the major overhead resistance point if that were to happen.

But based on the indicators I noted on last Tuesday’s chart and a couple other things I’m seeing, it’s not a bad idea to err on the side of caution going into the week.

As many of you that have been here for a while know I use the Heikin-Ashi chart on occasion to help identify “inflection points” where the trend might be changing. I actually use the HA chart to help identify the prevailing trend and it’s very useful for spotting areas where a potential trend change might be occurring.

So notice on the chart below that there are 4 red bars (candles) in a row on the HA chart and that is just another caution sign to take into consideration. (click for full-size)

SPX-heikin-ashi-4102016

Now I’m not going to get into the details of reading and using the Heikin-Ashi chart here since this isn’t the place for that. I’ll be happy to discuss it on the show and I’ll be making an entire video on reading and interpreting the Heikin-Ashi chart. It’s just another useful tool in my arsenal and provides a look we don’t see on regular charts. It’s not meant to replace standard charts – it compliments them.

So what we see now is a potential change in trend but these 4 red Heikin-Ashi bars are narrow-range bars. A long-range red bar with no upper shadow would seal the deal as far as a pullback, but as it stands now, going into the week I’m erring on the side of caution until I see a green bar print on the HA chart. Seems reasonable right?

Here’s the SPX daily chart with notes.

SPX_D_4102016

As you know I’ve been tracking the August-November pattern as an “analog” for quite some time now and I noted something very interesting on the chart above.

Notice the “4th day after the high” I marked. Now of course with any analog or “similar pattern” it’s silly to expect it to play out in exactly the same way. The idea of using an analog is to provide a sort of road map of what might transpire next. At some point all analogs decouple and the market starts tracking differently.

But where we are right now is so similar to last time that it still seems useful for now. It’s served us well since the February low so I’m inclined to think that we are looking at the potential for a “dip” or pullback here – that is likely already underway.

Notice I didn’t say “collapse” or correction. These days as soon as a little selling comes in – it seems like so many people start making crazy calls that they expect the market to tank. I guess that’s just the new nature of sentiment with Twitter and all the blogs and “shock media”.

I do my best to remain objective and just go by what I see on the charts. Right now I see a ton of support down at 2020 and the 200-day moving average just below that, but keep in mind last November the “dip” sliced through the 200-day like it didn’t even matter. So I’ll say the big support zone here is 2000-2020. I mentioned that last week too.

The other thing to notice on the chart is how the MACD has gone negative in a similar fashion to what it did back in November. Quite frankly the longer the current pattern continues to play our according to the analog – the more amazed I will be. The “big question” will be – if we do get a dip here to the 2000-2020 zone – will we get the same sort of “buy the dip” move back up as last time?

Keep in mind last time the “rebound” made a higher low and quite frankly the 11/3/2015 high that marks the top of the prior analog hasn’t been revisited. The market has been lower that that this whole time. I’m just stating the obvious of course but it is noteworthy.

In the event the market decides to rally this week I am still using the “big Kahuna” downward-sloping trendline as the point of major overhead resistance. Actually the “back to where it started” zone and that trendline, as well as the “all important 2100 level” are the areas to focus on should the market rally.

As I mentioned looking at the Heikin-Ashi chart, if that were the case, we would see a green bar print. Until and unless I see that green bar, as I said above, it’s probably a good idea to err on the side of caution and expect a normal dip or pullback from here. The great thing about being objective is that if it turns into more than a normal dip we can re-evaluate at the time. There’s no need to get all worked up like so many others tend to do.

Most of you have heard me say in the past that I always keep the notion that a major drop could start at any time. The -11% rout last August happened in 4 days and there’s a lesson there. Never be too complacent.

Barring anything unforeseen we could be looking at further weakness this week but there still might be some decent trading opportunities.

We have two open positions, one in energy and one in biotech and I mentioned last week I came close to opening one in a gold or silver miner. We’ve been talking about how that sector has “come back into favor” and we’ve seen tons of those stocks show up in the daily Stock Picks. I posted a chart and linked to the sector recently in the Chart Feed but here is that link again so you can bookmark it if you haven’t already.

Gold and Silver mining stocks at FinViz

There are some beautiful charts in the group and it seems to be the hot sector right now. The only thing that bugs me is that everyone else is noticing that too.

So this week I want to get a feel for the overall market and what sectors are acting well and then take things as I see them play out. This past week it’s been tempting to put on a short ETF or even a bet on the VIX moving higher, but like I’ve been saying, I don’t want to be among the early shorts.

Remember a while back when I said the “pain trade” would be for them to make the market look like it’s rolling over and then jam it higher to knock-out the early shorts? That’s pretty much what happened and even last Wednesday we saw something similar. For all I know that “last leg higher” I’ve mentioned could still be forthcoming and that “big Kahuna” trendline could come into play. Not very likely from where I sit right now but I’ll keep an open mind.

One last thing that I think is very important and I probably don’t mention it enough. The key to everything is the directional move off the open each day.

Those of you that have been around over the years know that every day I am looking at how the market acts based on today’s open – not yesterday’s close. In other words if the market gaps down and then drives higher it’s typically a great trading day. If the market opens higher and then fades down all day it’s a “tough day” to put on any trades. The bigger the gap the more likely it is that the market drives in the opposite direction.

Every morning right before the open I sort all my watchlists by “percent change from the open price” and look for stocks that are moving up from their open price. Also, as you probably know, I use the first 30-60 minutes of the day to gauge the overall action. I don’t like to take new swing trades in the morning at all. The morning session is where traders frequently get “faked-out”. The market gaps up a bit then pushes higher in the first 30 minutes or hour, then begins to fade all day and the early buyers get trapped or stopped-out. That happened Friday.

Looking at the directional move off the open and taking the gap up or down into consideration is one of the main things I use to see what’s happening under the surface. Stocks that gap up the most tend to spend the rest of the day fading down and stocks that gap down many times drive straight up for the rest of the session.

Most of you have seen the training videos I had in the old service but “trading from the open” is one of the topics I’ll cover in the forthcoming video training lessons. I know I’ve been mentioning that I’m working on all new videos and I can assure you that they will be in here by the end of the month. I’ve organized the topics and plan to spend an entire weekend recording them all at once. Two weeks form now my ‘wife’ is going on a trip overseas and I’ll have the opportunity to sit here for 12 hours uninterrupted and record all-new training videos. Even though I’ve been doing this for 20 years, I’ve learned a lot the past couple years. That’s the great thing about this business – you never stop learning. All the original concepts are still valid but I’ll be taking them to a new level with what I’ve experienced and learned since the last set. I really want to do them right and make them fantastic and that will require an entire weekend of constant focus.

with the wife out of town what else would I possible have to do?

In the mean time I’ll continue to provide all sorts of good tidbits on the live shows and continue to find constructive charts and stocks of interest and bring them to you on the shows and in the Chart Feed.

If you ever want to get into strategy and tactics, indicators and concepts on the shows but all means just ask.

So join me this week and we’ll go over the charts I’m watching right now and we’ll see what the market decides it wants to do. Even if we are looking at a pullback there are still decent trading opportunities. As a matter of fact I have quite a few stocks on my radar that would set up great if they pulled back a bit first.

I’ll bring you plenty of new ideas this week.