LunaticTrader

Investing with the Moon

Midweek comments

Posted by Danny on April 16, 2014

Some interesting developments in my daily key reversal levels.

* Daily momentum (MoM) remains down for all major stock indexes, but if markets do not drop today then MoM will probably turn up for several markets. That would set us up for a rally.

* Gold broke above its daily key reversal level on Monday only to drop right back yesterday. That is usually a bad omen and means there is more downside action to come. Look for a test of the $1200 level this summer. And it probably implies that the Euro will start going down versus the US$. Gold will need a close above $1321.89 to turn the tide again.

reversal levels

Yesterday, the Nasdaq reversed course at our Bottom1 target of 3975. We may see another test of that level on the back of geopolitical tensions going into the weekend. But my technical indicators are showing first signs of turning up from rather depressed levels, and a bullish divergence is starting to shape up in my short term Earl indicator. So, the odds are increasing that we will get a significant rebound rally soon, probably next week. Some of my short term models are now also giving plenty buy signals for stocks in the beaten down biotech sector. A possible scenario for the Nasdaq is this one (click for larger image):

Nasdaq

A rebound to the ~4200 level would paint the 2nd shoulder in a classic “head and shoulders” formation. Meanwhile the S&P500 can climb to marginally higher highs once again. We will examine this in my next weekend post.

Stay tuned,

Danny

 

 

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Stocks will crash, buy gold?

Posted by Danny on April 14, 2014

US stock markets have started to slide. It’s not that we have not been warning in recent weeks, as all my indicators have been pointing down. I could actually repost my March 24 outlook and be done for this week. But that would not be interesting and I have some new charts and information, so let’s start by taking our weekly look at the S&P 500 (click for larger image):

S&P 500

Bearish divergences are now even more clearly visible in all my indicators. The 1800 level is very important for the S&P. If that level doesn’t hold then a drop to the 1600-1700 area can come really quick. So we better be careful. Yes, a crash is possible when such a long term trend line gives way. As we have pointed out before, eclipse red periods have a history of producing sharp downturns and this time is no exception. We remain in lunar red period until the end of this week and I expect some bottom to form soon. The ensuing eclipse green period usually brings a strong rebound, so be ready to do some speculative buying on down days. If the S&P holds the 1800 level this week then it can even surge back to 1900 by May. We will study that scenario next week, before the green period gets underway.

I notice on social networks that some investors are thinking that a stock market crash will cause gold and gold stocks to surge higher. So, should you buy gold in anticipation of a possible crash? Well, based on history the answer is: no. Just looking at some of the most famous recent crashes:
* October 1987 crash, gold price: $455 -> 3 months later: $480, 6 months later: $445, 1 year later: $396.
* Mar-May 2000 (Tech crash), gold price: $293 -> 3 months later: $272, 6 months later: $277, 1 year later: $266.
* Aug-Nov 2008 (Nasdaq drops 50%), gold price: $912 -> 3 month later: $730, 6 months later: $918, 1 year later: $960.
Buying gold as protection for a stock market crash doesn’t look like a good idea. The reason is not hard to guess: a stock market crash has deflationary effects and causes some investors to liquidate other assets (like gold) to avoid bankruptcy or margin calls. The better strategy is to buy gold 3 months to 1 year after the start of a stock market crash.

***

As a little extra this week I have a few other charts to share. There is an interesting market fractal appearing in the S&P 500 index. The S&P market action since late 2010 looks exactly like the movements between April 2013-January 2014, as you can see in this comparison chart (click for larger image):

market fractal

I have numbered the major turning points. In both cases we see a rising wedge pattern(1-6) followed by breakout to the upside(7) and a revisit of the resistance line that has turned into support(8). Then a further rise and congestion period(9) leading to a flat topping pattern(10-12). This is as good a market fractal as you will ever see. And we already know how the pattern has continued in the ensuing months. If the fractal continues to hold up then we can look forward to this scenario (click for larger image):

 

market fractal 2

From the topping area(12) we got a quick drop that found initial support on the old trend line and then dipped even lower to bottom out at the level where it broke away from the old rising wedge(13). And then a surge to new all time highs with another broad topping formation (14-16).

Will this pattern repeat? I don’t know. Bear in mind that this kind of market fractals cannot work forever, so it is more a question when and where will the market break away from this pattern and especially: how? But as long as it is in play it is a scenario worth watching. Right now it suggests a summer 2014 low around 1500 and a final market top in 2015 with the S&P 500 climbing above 2000…. and then a real crash. Well, why not?

Good luck,
Danny

 

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Key reversal levels for week of April 14, 2014

Posted by Danny on April 12, 2014

Comments on the key levels for this week :

* Nice drops in the Nasdaq and S&P 500 this week. This is the correction we have been warning for since the middle of March. US markets are now testing their weekly key reversal levels. Next week we will probably know if the Nasdaq and S&P manage to stay bullish or join the Nikkei and the FTSE100 by going bearish on the weekly level.

* The five major indexes have downside weekly MoM again, so the risk that more markets will turn bearish is considerable right now. On the daily level these markets are in declining mode with downward momentum (MoM). We can expect tradeable bottoms as soon as MoM turns back up for them, especially for the markets that have not fallen below their weekly key reversal levels ( Nasdaq, S&P 500, DAX). Check out my daily key reversal tweets to see when MoM goes back up.

* That being said, I would like to keep things in perspective by pointing to our weekly key reversal levels for other world markets, posted on twitter every weekend. Notice how most world markets remain dark green (strong bullish), with China and Hong Kong also turning green this week. So, this does not look like the start of a global bear market. What seems to be going on is a global portfolio rebalancing. Money that has flown into the US since the start of the year, for various reasons, is now flowing back into international markets. I already mentioned a few months ago that emerging markets looked good in my screens. Meanwhile, since turning bullish in our weekly key levels, markets like India and Indonesia are up 7% in 6 and 9 weeks respectively. Singapore is up 2% in 5 weeks. Even Brazil, Turkey, and South Korea, which turned bullish just last week, have been going up in the face of a sharply declining US market. And Euro-tortured Italy is up nearly 12% since turning bullish 15 weeks ago.

* Bonds and Oil are the strongest markets right now, with gold and $EURUSD continuing to hang in the balance. I continue to watch the Euro carefully, as it is set to chose a direction sooner or later. A weekly close above 1.40 or below 1.3630 is likely to become a game changer for many connected markets.

* Several markets are hitting our Top or Bottom targets, so watch these levels for possible trend reversals. Namely: 3975 for the Nasdaq, 13860 for the Nikkei, 111.80 for bonds (TLT), 104 for crude oil (CL).

* The weekly key reversal levels for the 30 Dow stocks are available here. 20 stocks are bullish this week, down from 23 last week. Above 20 is healthy, see : Keeping an eye on the Dow stocks.

***

Here are the tables.

Key reversal levels for next week:

Weekly Current Mode Key (W) MoM (W) Weeks % Ch.
Nasdaq 3,999.73 3,977.21 2.37 66 29.48
S&P 500 1,815.69 1,789.90 3.33 71 28.20
Nikkei 13,960.05 15,135.11 -2.39 4 -2.06
FTSE 100 6,561.70 6,714.97 -0.70 4 0.52
DAX 9,315.29 9,119.64 0.80 2 -3.19
Bonds (TLT) 110.73 105.68 3.83 11 3.79
Gold (spot) 1,318.00 1,282.84 2.37 8 -0.01
$EURUSD 1.3884 1.3630 1.96 37 4.53
Oil (CL) 103.74 97.69 2.11 8 3.62

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/ )

Latest daily key reversal levels:

11/04/2014 Current W Mode Key (D) MoM (D) Days % Ch. Str. #
Nasdaq 3,999.73 4,236.12 -5.78 14 -5.95 7
S&P 500 1,815.69 1,867.37 -2.10 1 -0.82 7
Nikkei 13,960.05 14,774.65 -2.30 3 -3.30 11
FTSE 100 6,561.70 6,671.06 0.34 3 -0.44 11
DAX 9,315.29 9,533.85 0.99 0 0.00 35
Bonds (TLT) 110.73 108.28 2.79 4 1.56 1
Gold (spot) 1,318.00 1,320.44 -0.10 14 0.73 8
$EURUSD 1.3884 1.3762 1.16 2 0.22 5
Oil (CL) 103.74 100.31 4.24 11 2.37 1

(Legend: Mode : green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | W = weekly mode | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/ )

Our current key target zones (we use a +/-1% zone around these targets):

Key Targets Top1 Top2 Bottom1 Bottom2
Nasdaq 4390 4531 3975 3797
S&P 500 1870 1950 1755 1641
Nikkei 15650 *  17220 13860 12940
FTSE 100 6800 7250 6230 5980
DAX 9800 10240 8715 8510
Bonds (TLT) 111.80 114.20 102 96.25
Gold (spot) 1424 1541 1185 * 1075
$EURUSD 1.3950 1.42 1.3390 1.2870
Crude Oil(CL) 104 113 91.85 86.00

(* = new target ) (for more details about these key targets, see: http://lunatictrader.wordpress.com/2013/08/20/key-target-levels/ )

Stay tuned, Danny

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Brown leaves in the Nasdaq

Posted by Danny on April 7, 2014

Remember the “green shoots” that government officials like to talk about whenever the economy is weak and elections are near? They never talk about “brown leaves”. But markets are more honest, they show us brown leaves as well as green shoots in a candlestick chart. This week we have what I call a “brown leaves” formation on the Nasdaq, signaling the possible start of a market autumn:

brown leaves

This is not an official technical formation, but perhaps it should be. Brown leaves happen when after a significant rise in the market you get a top followed by two lower highs with subsequently lower lows in between. So, three clearly distinct legs to the downside, each time falling lower and trying (but failing) to recover the losses on rebound attempts. The third leg down should partially overlap the first leg down and there should be relatively few good green candles within the pattern, as you see in above example. This pattern usually forms within one or two months on a daily chart. This formation is not a good omen and often leads to a much bigger correction. The warning sign stays in effect until the market takes out the high that started the brown leaves formation, or until a significant new low is made below the bottom of “leaf 3″.

***

The S&P 500 is holding up better than the Nasdaq recently, and is following the scenario we set out two weeks ago. The 1880 barrier was not overcome convincingly and now this market is starting to pull back as well (click for larger image):

s&p 500

Bearish divergences in my technical indicators are once again very prominent in this chart, and the S&P is starting to look increasingly tired as it keeps struggling to reach the upper boundary of its long term trend channels. We remain in a lunar red period for 10 more days, so more downside action is likely. The 1800 level is the first line of support, followed by 1750. The scenario for a test of the 1600-1700 area this summer remains firmly on the table.

Stay tuned,
Danny

 

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Key reversal levels for week of April 7, 2014

Posted by Danny on April 6, 2014

Comments on the key levels for this week :

* It was an interesting first week of April. One reader was puzzled and asking how our system can be bullish for the S&P 500 and bearish for Nasdaq. But here we are a few weeks later and the Nasdaq is already more than 5% below its recent peaks while the S&P 500 was still making new all time highs a few days ago.

* The Nikkei and the DAX are seeing weekly MoM turn upwards, and both the Nikkei and FTSE100 are coming very close to their weekly key reversal levels. So we may get back to all markets bullish if these indexes can climb a bit more next week.

* There is a new Bottom1 target for the Nasdaq at 3975.

* Gold has tested its weekly key level and is now bouncing back a bit. But the next major move for gold largely depends on the next move of the Euro, and the Euro continues to suggest more weakness ahead.

* Our weekly key reversal levels for other world markets can be picked up here.

* The weekly key reversal levels for the 30 Dow stocks are available here. 23 stocks are bullish this week. Above 20 is healthy, see : Keeping an eye on the Dow stocks.

***

Key reversal levels for next week:

Weekly Current Mode Key (W) MoM (W) Weeks % Ch.
Nasdaq 4,127.73 3,976.56 4.45 65 33.62
S&P 500 1,865.09 1,788.65 4.02 70 31.68
Nikkei 15,063.77 15,142.56 -2.30 3 5.68
FTSE 100 6,695.60 6,718.05 -0.50 3 2.57
DAX 9,695.77 9,111.96 0.90 1 0.77
Bonds (TLT) 108.46 105.35 3.67 10 1.66
Gold (spot) 1,302.78 1,281.98 2.91 7 -1.17
$EURUSD 1.3702 1.3620 2.14 36 3.16
Oil (CL) 101.14 97.49 2.02 7 1.02

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/ )

Latest daily key reversal levels:

4/04/2014 Current W Mode Key (D) MoM (D) Days % Ch. Str. #
Nasdaq 4,127.73 4,281.18 -2.51 9 -2.94 8
S&P 500 1,865.09 1,855.71 2.84 37 2.47 1
Nikkei 15,063.77 14,662.45 3.38 4 1.30 13
FTSE 100 6,695.60 6,614.39 1.64 0 0.00 37
DAX 9,695.77 9,402.25 6.47 7 2.83 1
Bonds (TLT) 108.46 108.64 0.34 2 0.87 3
Gold (spot) 1,302.78 1,322.14 -5.79 9 -0.44 8
$EURUSD 1.3702 1.3823 -2.64 11 -0.54 7
Oil (CL) 101.14 99.43 1.23 6 -0.20 21

(Legend: Mode : green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | W = weekly mode | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/ )

Our current key target zones (we use a +/-1% zone around these targets):

Key Targets Top1 Top2 Bottom1 Bottom2
Nasdaq 4390 4531 3975 * 3797
S&P 500 1870 1950 1755 1641
Nikkei 17220 13860 12940
FTSE 100 6800 7250 6230 5980
DAX 9800 10240 8715 8510
Bonds (TLT) 111.80 114.20 102 96.25
Gold (spot) 1424 1541 1153 1075
$EURUSD 1.3950 1.42 1.3390 1.2870
Crude Oil(CL) 104 113 91.85 86.00

(* = new target ) (for more details about these key targets, see: http://lunatictrader.wordpress.com/2013/08/20/key-target-levels/ )

Stay tuned, Danny

 

 

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Midweek comments

Posted by Danny on April 3, 2014

The S&P 500 and number of other indexes made new all time highs yesterday, but the Nasdaq is still lagging. I think we have come to a very interesting point in the market for a number of reasons:
* an ecplise red period is starting today, which increases the risk for a downturn in the next couple of weeks.
* the Dow is once again testing the 16500 level, which we predicted to become a major resistance level last summer. See: Why Dow 16000 will be sold for the calculations that pointed to 16500 as a major barrier. It will take a clear break above 17000 to consider this resistance zone broken.
* our forecasts for 2014 also pointed to an April peak, see: Forecast for 2014. The four pillars finance scenario has been correct so far this year, will we now also get the subsequent summer decline?
* we are a few weeks before the so-called “grand cross” becomes exact, which is the average point where weakness starts to set in. See: Should investors worry about the grand cross in April?
* monthly momentum (MoM) has just turned down for a lot of important stock markets, as reported in my latest post. Changes in the direction of monthly MoM are rather rare, and they often indicate the end of a long term trend.

So, a lot of indications are converging right now, all pointing to a correction to start soon. There will be another small window for possible higher peaks towards the end of April, but after that I think the market will trade with a sideways to down bias for the next 6 months. This is not a reason for instant panic, but buying some protection for your portfolio is probably a good idea at this point.

Good luck,
Danny

 

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Monthly key levels for April 2014

Posted by Danny on April 1, 2014

Here are our monthly key reversal levels going into April 2014. Remember, these monthly key reversal are only for long term market orientation. Try to invest mainly in the stronger markets (dark green) and take (partial) profits in markets that go to light green. Speculative buying can be done in the markets that switch from bearish (red) to mildly bearish (pink). A very patient long term investor can do well based on these monthly keys only, but for more optimal entry and exit points the weekly and daily key reversals can be used.

Monthly Current Mode Key (M) MoM (M) Months % Ch.
Nasdaq 4,198.99 3,461.22 9.21 52 94.20
S&P 500 1,872.34 1,578.04 8.27 26 42.66
Nikkei 14,827.83 12,822.68 7.86 15 39.83
FTSE 100 6,598.40 6,225.36 2.89 16 12.47
DAX 9,555.91 8,010.82 7.79 25 39.87
Bonds (TLT) 109.10 111.70 -2.38 9 1.61
Gold (spot) 1,283.76 1,446.26 -4.12 11 -13.04
$EURUSD 1.3768 1.3150 2.57 6 1.80
Oil (CL) 101.58 93.65 0.78 1 -1.38

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/

Comments:

* Monthly MoM is now turning down for Nasdaq, S&P 500 and DAX. It was down already for Nikkei and FTSE 100. So all major stock markets have now downward momentum. It can be months if not more than a year until monthly MoM turns back upwards. Until that happens we better be very cautious in the stock markets.

* MoM is turning up for Oil, which is bullish, but this market still needs follow through.

 

Monthly key reversal levels for other world markets:

Monthly Current Mode Key (M) MoM (M) Months % Ch
Australia (AORD) 5,403.00 4,860.44 4.54 17 19.13
Brazil (BOVESPA) 50,415.00 54,320.68 -2.26 22 -7.48
Canada (TSX) 14,335.30 12,786.98 4.89 14 12.51
China (SSEC) 2,033.31 2,255.74 -1.23 46 -21.12
Dow Jones Industrials 16,457.66 14,449.99 6.35 29 37.70
France (CAC40) 4,391.50 3,810.07 4.94 15 18.60
Gold stocks (XAU) 91.20 134.73 -4.35 27 -49.61
Hong Kong (HSI) 22,151.06 21,335.72 1.03 17 2.68
India (SENSEX) 22,386.27 18,799.74 3.91 18 19.17
Indonesia (JCI) 4,768.28 4,142.95 -0.23 57 135.25
Italy (MIB) 21,691.92 17,020.56 5.13 6 24.09
Malaysia (KLCI) 1,849.21 1,670.32 5.02 56 57.39
Mexico (IPC) 40,461.60 41,844.06 -0.87 1 4.34
Russell 2000 1,173.04 978.44 8.28 26 47.18
Russia (RSX) 23.99 28.00 -0.58 2 -4.27
Singapore (STI) 3,188.62 3,193.43 -0.63 2 5.88
South Africa (JOHA) 47,770.92 39,126.60 8.35 53 81.22
South Korea (KOSPI) 1,985.61 1,893.70 0.47 6 -0.60
Spain (IBEX35) 10,340.50 8,576.08 5.39 6 12.67
Switzerland (SMI) 8,453.80 7,343.32 6.10 20 32.11
Turkey (TUR) 48.68 57.67 -3.98 7 -1.85
Vietnam (VNM) 21.69 18.09 2.41 2 3.88

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/

Comments:

* Russia, Turkey and Vietnam have been added to the list with their main ETF ticker.

* No big changes except for Russell 2000, which is also seeing MoM turn down, indicating that it may have peaked out.

* A quick note for short sellers. Many people try to bet against a rising market only to be forced to cover their shorts on each subsequent rally. By the time the market actually peaks out they have no money left to bet against it. If you can wait until monthly MoM turns down from a very high level (above 8), as we currently see for the Russell 2000, Nasdaq and S&P 500, the odds for a bet on the downside will be much better. When that basic condition is in place, you just look for a favorable entry based on weekly and daily key reversal levels, for example when weekly MoM turns down as well, or when the market falls below a key reversal level. You want to have at least two different time frames agreeing with the direction of your trade.

 

Good luck,
Danny

 

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LT wave for April

Posted by Danny on March 31, 2014

Markets continue to act rather weak, despite being in a lunar green period. Especially the Nasdaq, which is now well below its recent peaks already. We have a few more days of lunar green period to go, but later this week we will start an eclipse red period. The red periods preceding a solar eclipse are more negative than normal, see the research I shared in this article: Eclipses and the Stock Market

Let’s have a look at the current Nasdaq chart (click for larger image):

Nasdaq

The Nasdaq has dropped to an interesting support level as it is testing the bottom of a long trend channel that started in late 2012. We could see a dead cat bounce in the next couple of days, but I think the upcoming eclipse red period will see the Nasdaq drop out of this channel. That would push the Earl2 and MoM indicators to important lows.
The 4000 level is an obvious downside target, with 3800 as the next lower support zone.

Our LT wave chart for April doesn’t look very good either (click for larger image):

LT wave

The LT wave for March correctly indicated the weakness for most of the month, but the expected rebound in the last week has been disappointing. That doesn’t bode well going forward. For April we see a positive start followed by another period of weakness with bottom values around April 10th and 19th. The final days of April look a bit stronger again.

Good luck,
Danny

 

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Key reversal levels for week of March 31, 2014

Posted by Danny on March 29, 2014

Comments for this week (the key reversal tables are below) :

* The Nasdaq has continued its recent weakness and went into declining mode when it closed below its daily key reversal level last Monday. The S&P 500 and the Dow Jones have been stronger and have not dropped below any key levels yet.

* The German DAX index has climbed back above its weekly key reversal level, so is now bullish again. But the move is suspect as weekly MoM remains to the downside, suggesting a possible false break out. We have to see whether this market shows proper follow through.

* As mentioned last week, the $EURUSD is a market to watch. We now see weekly MoM turn down for the euro, which adds to evidence that the next move for the euro will be down. See also the long term monthly euro chart I posted on twitter yesterday.

* Gold has continued to drop and now the weekly MoM is going down. Is likely to produce some dead cat bounce soon, but medium term it doesn’t look very good for gold right now and if the Euro weakens further it will also weigh on gold prices.

* Bonds continue to show strength and are now fully bullish on weekly and daily level. Probably set to test their long standing Top1 target at 111.80.

* Oil has turned bullish on the daily level,  but its weekly MoM remains to the downside. This makes it questionable whether oil can build on its recent gains. Keep a stop loss near the daily key reversal level if you are long crude oil.

* Our weekly key reversal levels for other world markets can be picked up here.

* The weekly key reversal levels for the 30 Dow stocks are available here. 22 stocks are bullish this week. Above 20 is healthy, see : Keeping an eye on the Dow stocks.

***

Key reversal levels for next week:

Weekly Current Mode Key (W) MoM (W) Weeks % Ch.
Nasdaq 4,155.76 3,969.98 5.74 64 34.53
S&P 500 1,857.62 1,785.01 3.92 69 31.16
Nikkei 14,696.03 15,140.33 -2.68 2 3.10
FTSE 100 6,615.60 6,719.90 -0.33 2 1.34
DAX 9,587.19 9,088.71 0.56 0 0.00
Bonds (TLT) 109.37 105.13 3.63 9 2.51
Gold (spot) 1,294.90 1,282.81 3.59 6 -1.76
$EURUSD 1.3750 1.3612 2.49 35 3.52
Oil (CL) 101.67 97.37 2.23 6 1.55

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/ )

Latest daily key reversal levels:

28/03/2014 Current W Mode Key (D) MoM (D) Days % Ch. Str. #
Nasdaq 4,155.76 4,287.34 -5.01 4 -2.28 7
S&P 500 1,857.62 1,845.24 -0.29 32 2.06 2
Nikkei 14,696.03 14,793.72 -2.77 9 3.10 12
FTSE 100 6,615.60 6,675.16 -2.52 14 -1.10 12
DAX 9,587.19 9,297.12 2.03 2 1.68 5
Bonds (TLT) 109.37 107.64 5.46 12 2.50 1
Gold (spot) 1,294.90 1,334.13 -5.36 4 -1.04 7
$EURUSD 1.3750 1.3841 -2.08 6 -0.20 7
Oil (CL) 101.67 99.31 0.57 1 0.33 5

(Legend: Mode : green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | W = weekly mode | for more details about these key levels, see: http://lunatictrader.wordpress.com/key-reversal-levels/ )

Our current key target zones (we use a +/-1% zone around these targets):

Key Targets Top1 Top2 Bottom1 Bottom2
Nasdaq 4390 4531 3797 3530
S&P 500 1870 1950 1755 1641
Nikkei 17220 13860 12940
FTSE 100 6800 7250 6230 5980
DAX 9800 10240 8715 8510
Bonds (TLT) 111.80 114.20 102 96.25
Gold (spot) 1424 1541 1153 1075
$EURUSD 1.3950 1.42 1.3390 1.2870
Crude Oil(CL) 104 113 91.85 86.00

(* = new target ) (for more details about these key targets, see: http://lunatictrader.wordpress.com/2013/08/20/key-target-levels/ )

Stay tuned, Danny

 

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Why you can not afford to be a bull or a bear

Posted by Danny on March 24, 2014

There are two types of people. Some people constantly change their theories and beliefs to make them fit reality better, while others try to change reality to make it fit their rather fixed theories and beliefs. In his book The Signal and the Noise: Why So Many Predictions Fail but Some Don’t, Nate Silver describes them as “foxes” and “hedgehogs”. The foxes are flexible and cautious, and think in terms of ever changing probabilities of possible outcomes. The hedgehogs are stubborn and confident and rarely change their predictions until they come true eventually. The fox is tolerant and open, the hedgehog tends to become glued to a certain outcome and is rather closed towards any dissenting opinion.

It turns out that foxes have a much better forecasting record, but the hedgehogs are more popular as television guests and draw larger audiences to their blogs. That should not surprise us. Most viewers or readers are looking for reassurance of what they believe already, rather than for the multifaceted picture of uncertainty that foxes usually deliver. The flexibility of the fox type is easily seen as a lack of confidence. His weighing of odds looks like a kind of groping in the dark. The uncertain viewer or reader is easily drawn towards the perceived certainty of the fixed belief of a hedgehog, even if that hedgehog turns out to be wrong 60% of the time.

My approach has always been fox style. I don’t really know where the market will go next month or next year, but I do weigh the odds of various outcomes and try to make an educated guess based on some cycles and indicators. I always remain aware how belief into cycles and indicators can also deceive us. In fact, less than half of my research is spent on studying how my cycles and indicators WORK. I spend slightly more time on studying how my cycles and indicators FAIL. That’s how I can be prepared for their failing, as they will inevitably do quite frequently. I think that is what gives foxes a better forecasting record in the end: they are more prepared to be wrong.

I once asked an old investor what his advice would be if he had to give it in one sentence, and his answer was: “You can not afford to be a bull or a bear.” He was of course just saying: don’t be a hedgehog, don’t allow yourself to *BE* a bull or bear based on any market theory, cycle or indicator… My experience with the lunar cycles is that they can help me to stay more in this “neutral zone”. Every two weeks the lunar cycle shifts between red and green period, forcing me to look at the other side of the market coin. That makes it more difficult to become “married” to the bull or bear side.

Are you a fox or a hedgehog? When was the last time you changed your mind about the direction of the market?

***

US markets have basically gone sideways since mid February. Is this a distribution top before a big drop? Or just a market pause before another surge higher? Let’s try to weigh the odds. Here is the current chart for S&P 500 (click for larger image):

S&P 500

We have started a lunar green period last week, and markets have responded with a nice rally already. For the short term we see my Earl indicator at an oversold bottom and turning up. This means the stage is set for another push higher this week, but the market will have to make it above the overhead resistance around 1880. If that hurdle is cleared then we see upside targets of ~1920 and ~2000 for the S&P 500. On the other hand, the slower Earl2 is hesitating and in the MoM indicator we see a bearish divergence. This means that any surge to new highs is likely to be short lived. A late March or early April peak would nicely line up all my indicators for a bigger drop this summer. When the current rally ends, a drop to major support just below 1700 could be next. If we do get the surge above 1900, then a drop back below 1700 will actually become more likely. We will examine that scenario in next week’s outlook, just before we start the next lunar red period.

Good luck,
Danny

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