Sat 12/4/10. 1-2 week pullback, then 1240+?

(Update Thurs 12/9/10 9:15 PM EST)
System sold half of its long position at 1234 on the second breach this morning. ISEE just had the 2nd highest reading (208) since May 2006. Those are call option buyers, mostly equities but not as lopsided to the equities side as a week ago. That happened after we just saw the 5th highest reading in 3 years last Thursday. TRIN 5dSMA is at ultra extreme lows now hanging around 0.6 for several days, and that level has only been seen for a few days in about 20 years. VIX is back at wedge lows and only a couple percent above its 2006 uptrend line. AAII today showed the highest bull-bear spread (30.5%) since 2/22/07 days before the fat finger mini-crash although there was another 30%+ reading 4 weeks prior to that (on 1/25/07) with a choppy grind higher including several 1-2% corrections before fat fingers took over. One can definitely find cases where TRIN, ISEE, VIX and AAII stayed at extremes with only minor corrections, but they are the exception and typically happened in well-entrenched bull markets (which is arguable now) and did ultimately meet demise if only delayed weeks or months and AAII (11 of 13 weeks) and TRIN have been at extremes for nearly as long as they ever have. And, the TRIN cases that stayed extreme and never looked back did not hesitate for a few days like we've had this week but did often test or grind 1%ish higher for a few days. So, unless we see SPX capture and hold 1240, I still think there is an imminent 5-10 day drop coming possibly holding 1200 but likely visiting 1140-1175 as the stats suggest. Certainly, the tax deal, QE2 and the HoHo spirit has me wondering if it will linger on into January but, at some point soon, I think people will take profits and then others will follow to lock in gains for 2010....it's just how big a tumble in my opinion (2% or 4% or 7%). I'm no longer really expecting a 10-15% correction for reasons of S2EW, the consumer spending indicator expected to provide a bounce in Jan/Feb and the stats presented over the weekend etc, but I also expect all those same things to exert downward influence for another 1-3 weeks. Good luck.

(Update Thurs 12/9/10 9:35AM EST)
Gap up did not reach a new high. System will take 1/2 profit at 1234 instead of 1235 if it happens again, and it will stop out at 1226 for break-even if SPX reverses down from a failed test of the high to be on the safe side given the topping signs.

(Update Thurs 12/9/10 9:25AM EST)
A System buy signal triggered at 1226 when hourly support held at 1220.67 and then hourly stoch crossed bullish. With pivot resistance at 1235 and support at 1220, the risk/reward also qualifies and the NYAD reversal indicator has passed (it is a 1-2 day signal typically). However, I have presented a lot of technical indications for a likely top. So, I recommend 1/2 profit-taking at the old high of 1235 and 1/4 profit-taking at 1238 and 1251 with stop below hourly support expected to be 1224 on a gap up. I would not take new long positions at 1235-1240 since the risk/reward is not so good. Good luck.

(Update Tues 12/7/10 9:45AM EST)
I tried to make a funny (in my mind) post last night about my wife and I being in massive debt with huge college promises for our kids and fighting over all the things we want to buy on credit and just deciding to "compromise" and get each other everything we want for 2 years plus more to help us get over the argument. But, the web site blew up and I don't have the energy to reproduce the post.

SPX has now surpassed the 1227 high. There is RSI negative divergence from daily down to the 15min level. USD is hanging in there still with all the positive divergences mentioned recently. Oil i off its highs. Copper, banks and financials have not broken out of their recent range like SPX. VIX has now pierced the trend line from the 2 recent sub-18 lows and is approaching the 2006 uptrend line. The short-term bearish stats from ISEE, TRIN, AAII etc are still at play. As documented previously, some cases did rise as much as 1% or so in 1-5 days before making the larger correction. SPX 1235 is about 0.75% higher from 1226 in 3 days thus far. However, 1 of my documented TRIN cases never looked back (we kinda already violated that yesterday and I don't think we're in a kickoff phase) and all TRIN cases ended bullish weeks later which makes January look promising. So, the ideal 1140-1175 target zone lost some odds today but the stats tell me today's action is not unusual to see before the projected 1-2 week bearish drop...yet. I am going to steadily be reducing my posts into Christmas and early January. Good luck.
_____________________________________
I have been extremely busy the last few days, and my System and personal trades were stopped out at 1196 and 1204 respectively with no new signals until the Friday close. Wednesday was a 20dSMA Test Day and Thursday a Marker Day. Friday closed above Thursday's high which normally triggers a buy signal. However, my historical analysis shows that this can be a dangerous moment to get long when certain situations arise. That is why I added some ''overrides" to the buy signal. 1 of those overrides is a small NYAD change at a NYAD extreme. We got that Thursday and Friday, and that typically leads to a 1-2 day pullback and often worse in this exact scenario of a 20dSMA breakout attempt. So, the System will wait for a confirmation after a pullback which means either an hourly stoch reset and bounce for a buy OR a close below 1206 for a sell.

Last weekend, I suggested 1100 was almost a certainty while 1000-1070 was likely IF 1170 was broken to the downside. That obviously did not happen. So, my analysis below takes you down the path of my latest more neutral thoughts for the next couple months.

I posted the following over at Parker's blog (http://position-sizing.blogspot.com/) where he posted about a low TRIN reading on Friday.
******************
TICK exceeded 1000 Friday. That does not happen very often and typically leads to a 2-4% pullback within days but sometimes occurs on a large up day within the first 3 days of a significant bottom suggesting a kickoff. The kickoff scenario is possible but unlikely in SPX, since Friday was not a very big up day and it was the 4th rally day after a mere 4% pullback. When combined with a small NYAD change near a NYAD high as wehad Friday, the TICK extreme indicator works even better.


AND...

I looked at TRIN <= .70 since 1992. Here are the 14 cases.


date  price&percent  #days for pullback  nh=newhigh soon
7/13/10 1099->1057=4% 5d nh
8/25/09 1038->992=4% 6d nh
8/7/09 1018->979=4% 6d nh
12/8/08 919->851=7% 5d nh
8/20/04 1100->1093=1% 2d nh kickoff
3/18/03 867->896->844=3% 9d nh kickoff
10/14/02 844->nh kickoff
3/3/00 1411->1347=5% 3d nh kickoff
3/16/00 1458->1477->1446=1% 3d nh kickoff
11/16/99 1420->1425->1389=2% 9d nh
1/11/99 1264->1207=5% 2d nh 1d after top
5/5/97 830->812=2% 3d nh kickoff
9/17/96 686->679=1% 2d nh kickoff?
5/19/93 448->445=1% 2d nh kickoff?

Friday's TRIN reading was one of the lowest of all time. As much as I hate to say it since I've been expecting a significant November top, all 14 cases had bullish outcomes with a max 7% pullback and average 3% pullback. As many as 7 of the 14 cases were part of what I'd loosely classify as kickoffs coming within a month or so of significant lows (after usually 10%+ and/or multi-month 5%+ corrections). That is not the case today considering an August or July low. 5 of the 7 kickoff cases did not pullback more than 2% with one of them never looking back. In 2 of the 14 cases, the actual day of the TRIN reading was a slight down day so I used the following small up day as the price high. Only 1 reading came after the top (by 1 day). Friday was not a down day or after a top, so 1225 is the price high to use. I should also mention that there were a few TRIN readings in the .75 area that marked intermediate-term tops but not <= .70. And, almost all of the 14 cases marked a price high that day or only slightly higher the next 1-2 days. Timing-wise, 2 cases took 9 days to reach a low while 7 cases took 2-3 days and the 4 most recent non-kickoff cases since 2008 took 5-6 days.

So, using this indicator alone based on a limited data set, we can anticipate a few things. SPX is unlikely to blastoff next week but could possibly test 1230-1240. If SPX approaches 1240, the pullback is likely to hold at 1210-1220. If SPX cannot break through 1230ish, it has a reasonable chance of holding at 1195-1205. However, given that only 1 non-kickoff case made a shallow 2% pullback while the other 6 fell 4-7%, the more likely SPX target would be 1140-1175. And, the pullback should end within 9 trading days with 2-6 days for almost all cases.

To summarize, that means SPX should pullback to 1210-1220 if it approaches 1240 next week OR 1195-1205 and most probably 1140-1175 if it cannot break 1230ish next week. And, that pullback is likely to end by December 13th or OPEX December 17th at the latest.

Prior to this week's rally, I had numerous reasons for 1145ish to be reached. Unless SPX can reach 1240 next week, that seems plausible to occur OPEX week if 1195 is broken. That might fit Terry's mid-December null echo low but it would not hit his lower band expected to be near 1120 at that time. So, if 1120 is somehow reached, that would obviously overlap the 1129 high and deviate from historical TRIN behavior likely signaling the next big bounce as the dead cat variety. If either 1195 or 1140 holds, SPX is likely to make a new high in January based on history. Good luck.
*******************
 
To me, an SPX drop right now (or after a slight new high Monday) to 1140-1175 would look like an EW 3-3-5 flat with some indices in an irregular flat. But, that would support the above stats for a new high after the pullback.
 
USD dropped sharply this past week and overlapped a wave, but my RSI5 analysis suggests USD is likely in the heart of a strong wave up, so I think it is merely finishing a 1-2-1-2 OR ABCX at the present time with a test of 83-84 coming soon. If SPX 1195-1205 or 1140-1175 holds on the next SPX pullback, the latter double zz scenario for USD is more likely supporting yet higher gold, oil and stock prices into Q1 2011 after their next pullback.
 
VIX also dropped sharply last week even setting a new low which surprised me. However, it happened with positive divergence and the previous positive RSI action at the low and high suggest the current VIX low is temporary. Last week's VIX high precisely touched the top of the wedge-turned-channel in my VIX chart before the drop occurred. It is possible that what I labeled as an ABC 4th wave turned into an expanding sideways ABCDE triangle since it is virtually perfect, and now the down move out of that triangle last week has reached its minimum target of a new low. It could drop a little further Monday to touch or pierce the trend line from the last 2 sub-18 bottoms. However, under my scenarios above, I would expect VIX to sharply rise within the next 2 weeks likely testing 23-24 again and possibly breaking up to 28ish if SPX 1145ish is reached or 36-37 resistance if 1130 is broken (unlikely). If VIX 23-24 is surpassed, I think that would favor the next SPX rally as either a dead cat bounce or merely a slight new high (maybe 1240-1260) with VIX positively diverging.
 
Banks (BKX) bounced sharply from their lower trading range and are now at the upper extreme of that range portending a pullback with minimal upside...short-term. Copper rose last week as well but has made a clear 3-wave bounce short of its previous highs from its November low thus far. Oil on the other hand made a new multi-year high but on double negative divergence.
 
And, we can't forget my discretionary spending analysis which projected a 10%+ 1-2 month pullback beginning in November. The November 5/8 top was a 23-24 week delay from the last bearish signal which is average or slightly above. If SPX/Dow set a slight new high next week, that would make the signal delay 28 weeks which would be 1 longer than any of the previous signals from 2007 although one could argue the signal delays have been stretching slightly longer with each year. So, I guess I'm just saying a high next week would not invalidate the discretionary spending signal. However, even if SPX were to visit 1140-1175 based on TRIN historical analysis, that is only a 4-7% pullback with 9% being the smallest spending signal since 2007. So, that's another reason I'd lean towards SPX 1145ish which would at least be in the ballpark of previous signal sizes. And, if SPX can somehow reach 1145 in mid-December before surpassing 1227, that would mark a 7% 5-6 week pullback akin to the 9-10%+ 4-5 week drops on several other discretionary spending signals. That is not what I expected last week but once the 1170-1200 range broke to the upside, things changed. 
 
AAII also crept back up to 50% bullish, near the November 58% high and October 2007 highs. The bull-bear spread remained above 20% for the 10th of 12 weeks. I shared my historical analysis of this condition a week or so ago. The last 4 times there was at least 2 of 3 weeks above a 20% bull-bear spread, we saw a 9%, 17%, 11% and 7% pullback. You'll notice the smallest one fits a pullback to SPX 1145ish. The 2 nearly identical scenarios in August 2005 and year-end 2004 resulted in 9% and 6-7% pullbacks respectively. Can you say 1145ish? The best case scenario in 2 instances since 2000 resulted in 5-10 month +/- 4% trading action from the end of the signal. Assuming the bullish sentiment wanes some in the next couple weeks, that would suggest a best-case scenario of 1170-1270 for 5-10 months for bulls. That would support the smaller TRIN-scenario pullbacks above in the near-term.
 
ISEE (options sentiment index at http://www.ise.com/WebForm/viewPage.aspx?categoryId=126) reached a bullish extreme Thursday of 183. Here's what that meant in the past.
7/28/10=182 was part of a 1121-->1088=3% drop
4/15/10=185 led to a 1214-->1184=2.5% drop, then a slight new high, then the flash crash
11/24/09=184 led to a few pts higher the next day and then a 1111-->1084=2.5% drop and a 1084-1120 trading range for 4 weeks
10/14/09=182 led to a few pts higher for 3-5 days and then a 1101-->1029=6.5% drop
3/9/09=220 led to the massive rally from 667=kickoff move
12/29/08=206 led to a 5-day blastoff to the new year of 873-->944 but then a 2-month near-30% drop ensued=kickoff from the huge November lows followed by a collapse

Thus, ISEE currently suggests a short-term 2.5-6.5% pullback, since we are not likely in a kickoff as we were in Dec 08 and Mar 09 after massive lows. But, that's not even the most interesting part. ISEE Equities only, which is considered the dumber money, hit its 2nd and 3rd highest level in 3 years on Thursday and Friday. Here are the highest 8 values in the last 3 years.

12/1/10 and 12/2/10 (ISEE eq=327 and 296)-->???
4/15/10 (ISEE eq=348) led to an immediate 2.5% drop followed by a slight new high a couple days later and then a 15% drop with flash crash mixed in
4/5/10 (ISEE eq=276) led to a 0.3% 1-day rise followed by a 2-day 1.5% drop and then a 3.5% bounce into the April 2010 high
10/29/07 (ISEE eq=275) resulting in a 2-day 0.5% rise followed by a 17-day 10% fall
10/8/07 (ISEE eq=279) led to a 3-day 1% spike followed by a 9-day 6% fall
7/12/07 (ISEE eq=275) led to a 0.5% rise for 2 days followed by a 22-day 12% drop
6/15/07 (ISEE eq=280) led to an immediate 8-day 3.5-4% drop followed by a slight new high and 12% drop

So, ISEE equities-only paints an uglier picture. The dumb money is even more juiced up than the smart money at 3-year extremes. One of the next highest values occurred a few weeks before the fat finger mini-crash in early 2007. You'll notice 4 of the 6 previous highest readings led to a 0.3-1% rise for 1-3 days. From Thursday, we have a 1-day 0.4% rise thus far. You'll also notice 3 of the 6 previous highs fell back 1.5-4% before a making a slight new high and collapsing. That would fit a 1230ish-->1200ish type scenario followed by 1240-1250 and then 1100-1150. However, that would not fit Terry's null echo low in mid-December. 5 of the 6 readings ultimately led to 10-15% drops weeks later. Perhaps today's scenario is closest to the 9-day 6% drop at the October 2007 top. I think it would take a near-immediate drop of at least 6% and possibly 10%+ to satisfy Terry's null echo low and his lower band. It's not guaranteed but the ISEE conditions certainly support that happening.

So, overall, I think my 3 TRIN scenarios are good. If SPX can approach 1240 early next week, it could very well only pullback to 1210-1220 (maybe 1200). But, that is unlikely in virtually all of the stats above. If SPX 1230ish is not surpassed, there is a reasonable chance 1195-1205 holds the next pullback and a better chance 1140-1175 is visited. Good luck.