Week In Review

It was a short trading week but an interesting one. Our short-term and long-term indicators have flipped to the downside. The fiscal cliff is still undecided and is starting to really affect the market. The VIX is rising which means bigger swings in each direction.

Our short-term (MTT) flipped last Friday and the long-term indicator flipped on Monday. This means we'll only be going short when the MTT tells us to. We'll stay out of the market when the MTT goes long until the long-term indicator goes green. Right now, I'm 100% short.

The fiscal cliff is playing games with the market. Any little news is moving the indexes in both directions. We'll probably have more of the same next week. I expect Congress to pass something next week or early the following week. This should have a positive effect, moving stocks up, but I don't think it will last. We could be going down for a while. In the end, we'll follow the MTT for our trades.

With the fiscal cliff in flux the VIX is rising. A rising VIX means major swings in both directions. This can play mind games with traders, but all we're going to do is follow the MTT. The long-term indicator very rarely flips do to a one day spike so we should avoid the whipsaws that affect so many.

The moral of the story is to follow the MTT. We'll stay short for the time-being and capture any profits we can.

How Far Will She Go?

Don't let yesterday's close fool it's looking like we are heading further down. Everything was setting up for a big down day until some late fiscal cliff news brought the markets almost to break even. This was a hoax.

The underlying numbers show that the close was nothing more than a show. The markets are headed down. Make sure you are not long and take a short position if you want. I'm short a specific ETF that I'm experimenting with. I'll talk more about it later.

There's always a chance some new fiscal cliff news could come out and send us to the sky, but don't count on it. Until the underlying numbers turn stay short.

Slow Fade

The market is slowly fading down. The MTT was down for the second consecutive day but we're still green for the long term. A decent down day will cause the long term trend to go red and we can enter into a short position.

Let's sit back and watch what happens today. If we're down half a percent near the close then enter into a SOXS position. If we're near even or positive then sit tight. A big up day could swing the MTT green and we can get in SOXL.

Fiscal Cliff

The fiscal cliff is going to play games with the market until it's resolved. I'm guessing Friday was the first of many days that was affected based on events solely related to the fiscal cliff. There's not much we can do until it's resolved.

These events have led me to alter the MTT trading method. I was going long and short based solely on the MTT readings. After reviewing the past few trades and also trades from the past year I've come to realize it's tough trading against the long term trend.

What I mean by that is if the market is in a nice uptrend but the short term outlook is down then it's better to wait out the short term downside and look for a buy signal.

Friday was a good example of this. Long term we are still in an uptrend (for now). Even though the MTT turned down on Friday I didn't go short. Instead I sitting in cash waiting for a MTT buy signal or for the long term outlook to go short.

Mixed Signals

Yesterday provided us with some mixed signals, yet, I think we still have room to head higher. After a great day on Tuesday we should have expected sometime type of pullback or consolidation which is exactly what we got. The question we're all wondering is if buyers were taking a profit or if the sellers know something we don't.

According to the MTT this was only consolidation. The market should bounce back today and continue going up for the next 2 - 3 days. With that said, follow the MTT.

Santa Claus is Coming to Town

We did in fact turn the corner after a very good day yesterday. The MTT outlook is clear sky's and sunny. The only slight concern is we are nearing overbought territory. Even with that we should have at least a few good days ahead of us.

I sold SOXS and NUGT early yesterday morning after it was apparent the market was strong. I was able to get in GASL and ride that for a 3% - 4% gain. I'm still long and feel it could get to $24 and then $26. I'll ride it out as long as I can.

Many people refer to a surge in stock prices in December as a Santa Claus rally. No one knows exactly sure why prices have a tendency to go up at this time of year. Some people assume because of tax reasons, happiness, or work bonuses. In any case, late December has usually been a good time for the market and the hope is this year will be more of the same.

Turning the Corner

Foggy

image courtesy of http://iconka.com

After looking over the MTT and the $BPNYA I decided to go long 50% in my 401k. I was planning on waiting for the fiscal cliff talk to be resolved, but the market looks to be turning the corner. It started in the middle to end of November and has continued in December. We usually look for a big breadth day to turn the corner. This time (really this year) it's been a very methodical move up. If this continues I'll get 100% invested.

I'm still short SOXS and long NUGT. The MTT has switched to foggy after barely turning positive yesterday. I'll be looking to get out of SOXS and into SOXL or RUSL if we stay positive through the morning.

The MTT is sitting it the low 150's. This is a tough area to trade in. There's no momentum in either direction and the smallest factor can move the market either way. This is the spot where you can get whipsawed very easily. Hopefully, we'll see a convincing move up today and continue through the end of the year.

Watching and Waiting

It's an interesting time for the market right now. The Market Timing Tool (MTT) has definitely signaled a short-term top. It fell significantly over the past three days. On the other hand, the $BPNYA signaled a buy earlier in the week for long-term accounts.

A long term trade is triggered when the $BPNYA crosses the EMA30 from below as it did on December 11th. I will usually go long in my 401k when this occurs but held back this time because of the fiscal cliff talk going on. The last thing we want is to go long and then have Congress not get a deal done and have the market crash.

As it stands right now, my 401k is in cash and I'm in SOXS at the moment. For full disclosure I also went against the MTT and bought NUGT on Friday. NUGT is a beast of it's own but I usually still follow the MTT with it. On Friday I decided to take a small piece of it based on it's chart and how it's performed lately. We'll see what happens.

I'll have a follow up post with more detail on how I trade my 401k using the $BPNYA and other charts.

Breadth

Market Breadth is an indicator that tells us how many stocks are going up, how many are going down and how many are unchanged. It gives us an easy way to see how many stocks are participating in the current move.

I'm going to be using the S&P 500 in my examples, but market breadth should be calculated from all stocks -- better yet, all stocks that meet a certain volume criteria. The S&P 500 just makes the examples easier since we're dealing with exactly 500 stocks each time.

Breadth provides a much clearer way of looking at the market than just seeing if the indexes are green or red for the day. For example, the S&P 500 is comprised of 500 stocks. At the end of the day it may be up half a percent. Someone seeing this on the news may think it was a great day for stocks, but let's take a closer look. When we monitor the breadth for the day we notice out of the 500 stocks only 260 finished higher and 240 were lower. It turns out that it wasn't such a great day. Maybe Apple or Pfizer had a great day and skewed the overall index. Breadth will tell you this.

We are looking for a significant breadth move. This is when not much is happening and then all of a sudden 350 out of the 500 S&P stocks are up versus only 150 down. These types of moves usually lead to the start of a bull run. You want to start going long on good setups when you see breadth moves like this.

On the other side when you see only 150 stocks up it could mean the bears have taken control and it's time to get out and watch everyone else lose their money. The market moves in trends so when there's a big move down it will usually continue. This is the time to go short or sit on the sidelines.

Above is an example of a breadth indicator from StockCharts.com. It's a very simple highs vs lows chart. The S&P 500 index is the bottom chart. When highs vs lows is going up there's a good chance we had an up day.

As you can see the beginning of 2012 was a good time to be long. We had a good 4 months of advances but then it got a little shaky. In April you'll notice the bears starting to cause some disruption. At this point you don't need to get out but it should put you on alert. Then in May we experience a sharp drop down.

The great thing about breadth is how consistent it is. For the first four months of 2012 the S&P 500 went up, but even during those four months there were many down days. Yet, the number of advancing stocks kept going up. Following the breadth allows you to stay in the market and not get whipsawed so easily. You are able to ride out those one or two down days so you can take advantage of the three or four bigger up days.

I think we'll stop right here. There's much more to talk about but we'll discuss that in other posts. There's enough here to get everyone started.

Short Term Top

I believe yesterday confirmed that we hit a short term top. We'll have to keep an eye on the indexes to see how long this will last.

The Market Timing Tool took a good step down after being in an extremely tight range for the previous four or five days. There have been times in the past where it would touch the 150's and then bounce back big to the high 160's or low 170's. Although, the majority of time it continued down to at least the low 150's. We'll stay short and reevaluate at the end of the day. 401k Update coming later today.

Change of Direction

The market looks like it may be at a short-term top. Our market timing tool (MTT) has changed directions to the downside. It was a very slight move down so we're looking for a stronger follow through today to confirm the trend.

I bought SOXS during the day yesterday. We'll watch the MTT at the close today and let it tell us what we need to do.

I would have liked to see the MTT get a little higher. Once it reaches the high 160's or low 170's it almost always means we've reached a top and a pullback is in order. That can still happen in the low 160's but it leaves some doubt that we can be in flux. I'll expand on this more at a later time.