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Today's Forecast...

Update Thursday August 3, 2012

Hi Everyone,

Our server is having some trouble with the FTP function, so here's the end of day post:

With our server having issues, here's today's end of day graphs:

Here are today's (9/12/2011) closing Market Forecast graphs:

Markets are signaling caution on the intermediate term with the 80 period cycle now topping out. The long term cycle (9-12 month) is also nearing a top, but could help markets continue to climb a little longer. Use stops underneath the 14 and 21 day moving averages.

In the above chart, you can see that the historical 3 month treasuries (blue line) slightly lead the Fed funds rate (red line). That's an important consideration as inflation remains a the single most important fundamental factor that will influence the Fed's decision about where interest rates are heading. And those rates as we have discussed often, will have a direct impact on whether monies flow into or out of the markets.

On that chart, I have also plotted the US unemployment rate (green line -left scale), but inversely. Think of that line representing employment instead of unemployment and it will make more sense the way it is plotted. Notice how that line significantly LEADS both other data when it is rising, but shows no difference when it declines. In other words, as employment improves - back above 6.5% or better range, it won't be long before its inflationary effect is impacting the 3 month treasuries with rising rates which are followed by the Fed funds rates too.

I post that chart to help illustrate that for now, the Fed is pretty much stuck with keeping rates low, hoping for improvement in the economy where job creation vs. job destruction takes over. The slight up tick in employment we're seeing now provides some hope of coming daylight, but the Fed isn't even close to raising rates in any significant way - yet.

In summary, there's a long way to go with these low rates and a continuation of potentially strong markets, before institutional money starts to look at moving into fixed interest investments.

Shorter term cycles are weakening now (which has nothing to do with interest rates), so keep positions safe with stops underneath our layered levels at the 5,14,and 21 day moving averages.

Every time intermediate cycles decline (about every 12 weeks on average), there is always a lot of bad news that follows. The opperative word is follows.

Why?

Because markets are forward looking, where institutional money and traders are anticipating trends, while news is an operation of reporting what happened, not what will happen.

That's why so many investors who get emotionally caught up in the news de jour, lose. They are playing the game from a spectator position, and just like an arm chair quarterback, they are always upset by the calls.

The current intermediate decline for example, really began in early January, at least that's what our cyclical data was telling us at the time. Then, our 80 day intermediate cycle had topped out indicating that the next 4-6 weeks were going to be weakening and even turning down.

Stock Market Prediction

Our 20 day cycles also began to form "lower highs" after that, creating a divergence from what were rising markets at the time. In fact, here were some headlines from January 4-6, 2010:

"December ISM reading shows greater-than-forecast U.S. manufacturing strength"
"Jobs show signs of life - is this a labor market rebound?
"Dow industrials rally 156 points, finish at their highest level since October 2008"
"Ford shares at multi-year high after December sales jump 33%"

If that's the kind of information you were following at the time, it's hard to start thinking in terms of what the forward looking market was really saying. It typically won't appear in the news or the headlines. It was in our analysis though.

From our commentary on January 6, 2010: "We have the 80 period cycle also topping out right now too and even rolling over on the Dow. In the cycle analysis I perform to analyze those longer cycles however, we getting a slight variance on the length of that period, depending on the size of the window we screen. For example, when analyzing the data through a window size of 512 days, it shows that cycle with a period 88 days. When analyzed with a smaller window of 256 days, it identifies the period as 80 days. Either way, both will begin roll over and turning bearish soon. "

From that point forward over the next 4 weeks, markets began to chop and stall, and finally turn bearish on the intermediate trend, shedding about 7%.

The point is, did you lose 7% or turn that 7% into gains? You see, knowing what was coming, you could have moved to cash to protect your accounts, or simply played an inverse ETF like the QID or DXD to actually profit during the decline. Both were up 11-15% over the same time.

That's not daytrading folks, it's a 4-5 week swing trade, and in my book, just plain smart money management.

Market Timing - When Markets Chop

The trend giveth, but the chop taketh away.

That's an aphorsim I came up with after watching profits I had earned in previously strong markets, frustratingly frittered away once markets began and continued to pull back or move sideways afterwards.

I've seen this scenario play out with most traders and investors, over and over again. The reason it's so common, is because markets almost ALWAYS go through a period of retreat or chop AFTER a strong trend.

Since March 2009 for example, though the bigger trend has been bullishly strong, markets have pulled back every 17-20 days like clockwork. On the Dow, each"counter-trend" retreat has represented declines somewhere between 200-500 points, or a 2-5% giveback (with the Dow at 10K).

(You can learn more about that 20 day cycle here: Market Timing )

The important thing traders should understand, is that same cycle also advances half the time.

If for that reason, traders will buy (I buy double beta ETF's like the DDM, QLD, and SSO) at the 20 day cyclical low (which often occurs near the 30 or 50 day moving average, and then mechanically take profits (or some profits) off the table at the 20 day cyclical high, which occurs some 10-12 day later, they won't have to live through the drawdowns and frustration that come with 10 days of decline that will inevitably follow.

This of course is a very simple, straight forward strategy anyone can follow, remembering that rarely, if ever, do we short the 20 day cycle in a bull market. But once our longer term trend (also another cycle we follow) begins to decline, we'll reverse that strategy, and start making money in a bear market too.

Stock Market Today

Stock markets are approaching the time once more when the intermediate cycle will top out. It happened after 9/19/2009, 10/19/2009, and apparently 11/18/2009. Instead of the 4-6 week bull market advances that we normally see in less agressive long term bullish trends, we are now getting the faster 10-14 day cyclical advances, similar to what we saw in 2003.

The important thing to keep an eye on, is whether the decline periods continue to form that confirming bullish pattern of "higher lows" on the indices price charts. As long as that happens, it's an indication that the longer term trend remains intact.

In 2003, that intermediate cycle bullish trend didn't end -www.themarketforecast.com/HowItWorks.html - for nearly a year after the long term and intermediate cycles formed a cluster in March 2003. We could easily a continuation of this longer term bullish trend last just as long.

Successful Trading In the Stock Market - One Thing

I have been helping people learn to trade/invest for nearly two decades, mostly by showing them when the “time” is right to be owning stocks or funds, and alternatively, when to be short or move to cash.

Those who stick around and take some time to learn, generally get it and do very well, what's puzzling however, are those who stay stuck, and would rather just keep watching.

It seems to me that they are also people who have learned to be “afraid” of taking action in other areas of life too. I can tell by their emails and excuses. Perhaps that's due to unreasonable expectations, or fear from costly past mistakes.

Consequently, they wait, and wait, and wait. They wait until the one time they feel it's perfectly safe to get in.

Unfortunately, that secure “feeling” couldn’t be more wrong. Their waiting has brought them to the precise time when smart money has begun selling their profitable positions to all late comers.

Rather than take responsibilty and USE methods that could really help them take powerful control of their future, many instead will ask if I would just go ahead and handle their money for them. No wonder fund managers make millions.

The amazing thing here too, is that fund managers tell me, as long as they don’t LOSE too much of the clients money, their clients will stay put, year after year, all the while managers keep making their 1-3% on accounts that aren't even growing. It’s crazy.

But it does point out pretty clearly to me, that desire isn’t enough. Learning isn’t enough. Believing in the outcome isn’t enough. Being prodded isn’t enough…

I think successful investing/trading boils down to this one thing: You've got to do “it” as if you had no choice. Do it for real, or die, perhaps.

Maybe like a new skydiver, who was just nudged out of a plane…

Pulling the ripchord to the chute isn’t an option, or something to “think about”, or to learn to do anymore. You just do it. If all goes well, it’s going to be a lot easier next time…

Trading Online

As I stated in this morning's commentary, when short term (yellow line) and momentum cycles (cyan line) are deep in the lower reversal zone (-80 to -100), it's usually a good time to enter a long position.

A +200 point up day on the Dow and +38 points on the NASDAQ's a good reason why we like play these "mini-cluster" bottoms when the appear on the Market Forecast charts:

If you bought the QLD or DDM at yesterday's close, or early in the session today, you've got some nice profits to lock in with stop loss protection. Consider using the Donchian channel center line on a 30 minute chart as a first tier stop (39.52), and the bottom of the channel as a second level stop (39.10).

If you haven't subscribed to our service yet, get a 30 day free trial and learn to how to trade the stock market with daily forecasts and trading advice from it's author - Stephen Swanson.

Visit us at: www.themarketforecast.com and www.themarketforecast.com/Video1.html for an introductory video on some very cool stock trading techniques.

History Remembered

Financial Historian on ‘29: ‘Great Crash’ Vs. ‘Break in the Market’

Raising Cash 1929 Style (Everett Digital)

From The Wall Street Journal's MarketBeat, October 28, 2009

By Matt Phillips

[This week] marks 80 years since the best known part of the 1929 stock market collapse, a two-day rout on Oct. 28 and Oct. 29 of that year. The equities crash brought a painful close to the period of unbridled financial optimism that was the 1920s.

To mark the occasion, MarketBeat has been asking financial historians for their thoughts — mini-essays if you will — on how the Great Crash informs the way we think about the current market recovery. Today’s offering comes from Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets at New York University:

Because their teachers and their history books said so, most people know that the Great Crash of 1929 caused the Great Depression of the early 1930s. I am not one of these people.

What I know is that the Dow Jones Industrial Average closed at 306 the day before Black Thursday, October 24, 1929, and at 199 on November 13, three weeks later. That drop of 35 percent was the Great Crash. I also know that on April 17, 1930, the day before Good Friday, the Dow closed at 294, or 96 percent of its level before Black Thursday. In other words, almost all of the decline of the crash proper had been undone by a recovery of 48 percent in the Dow between Halloween ‘29 and Easter ‘30. Most people don’t know that, or if they ever did they forgot it.

On Good Friday ‘30, the New York Times referred not to the Great Crash, but to “the break in the market last Fall.” The Times that day also noted that the day before, April 17, “average prices worked higher and a few outstanding issues shot up smartly to new high prices for the year to date,” and that “British interests were investing heavily in these issues.”

The Great Depression began sometime after the spring of 1930, most likely when a lot of banks failed late that year. But the so-called Great Crash a year earlier had almost nothing to do with those bank failures, the first of thousands of bank failures that occurred from late 1930 to March 1933.

What’s interesting from the perspective of 2009 is that from September 12, 2008, the Friday before Lehman, to the low of March 9, 2009, the Dow lost 44 percent. The Great Crash of 2008-09 was actually a greater crash than the Great Crash of 1929. And half a year after the crash lows of last March, the Dow again is up about 50 percent, as it was half a year after October 1929.

Is the market’s recovery since March now giving us a better forecast of what lies ahead than it did in April 1930? Let’s hope so. Let’s hope, too, that people stop exaggerating the effects of “the break in the market” in October ‘29.

Indices rose on the day with momentum and short term cycles that expectedly began turning up. They ended the day right at their resistive 30 day averages (for the Dow it was also its 5 DMA), but based on the lack of selling into the close, we are likely to see some follow through with that line of resistance surpassed today.

That would correlate with the still rising shorter term cycles. Both the 6.5 and 10 day are starting to rise on our Filtered charts, and our regular Forecast charts both show they are in their advancing phase.

From here, it becomes important to see whether the move is going to be joined by a rising intermediate cycle, or whether we'll have a few days where the intermediate cycle simply moves sideways.

If so, that could be a signal of a further intermediate drop, similar to what we had after the 6/25 - 7/1 sideways move. Then, indices found support at their 50 day moving averages but never gained enough strength to vault above their 30 DMA on a closing basis.

Since so many technicians watch that 30 DMA, it's critical that it be reclaimed quickly or traders tend to start selling into the stalled action.

I am still long on this short term up trend.

I have a first level stop on the DDM at the center line of the Donchian channel on a 30 minute chart, and at the center channel line on the 60 minute chart. Should we see some extended upside on the short term today, where the 5 DMA is exceeded and starts to rise, I will begin to watch that as a third level for my stops.

In essence, whichever of those lines is highest is my first stop level, and whichever is lowest is my last.

As you can see, short term (yellow) and momentum (cyan) lines are pointing up today. Play it long with stops as described.

How bad was the 2007-2008 bear market?

"When equities bottomed in November 2008, the MSCI World index had fallen 55% –– a global loss of USD 21 trillion, or USD 21,000 for every individual in the developed world. This statement appears in the Credit Suisse Global Investment Returns Yearbook 2009. The Yearbook is a comprehensive and authoritative analysis of total returns since 1900 for stocks, bonds, cash, foreign exchange and inflation in 17 national stock markets and three worldwide indexes, covering Europe, North America, Asia, and Africa.

"In the Yearbook, the authors, Elroy Dimson, Paul Marsh and Mike Staunton, of London Business School point out that the last decade has been the lost decade for equity investors. Since 2000, the MSCI World index has lost a third of its value in real (inflation-adjusted) terms, while the major markets all gave negative returns of an annualized 

–4% to –6%."

Of course, the November 2008 low of about 7,450 wasn't the U.S. market low of the last two years--by March 9, 2009 the Dow Jones Industrial Average had dropped another 1,000 points to around 6,470. 

Read the entire articled at: 

http://docs.google.com/gview?a=v&q=cache:mxzWh0CxOJUJ:www.london.edu/newsandevents/pressreleases/pressreleases.do%3Fsection%3DEditRelease%26mode%3DgetAttachment%26releaseId%3D62%26attachmentID%3D54+worldwide+stock+market+losses&hl=en&gl=us&sig=AFQjCNHUAWkzCKkeJwKC_UUoceZUeEzChw

Many of you have been getting better results than those quoted here. Email us at support@TheMarketForecast.com and tell us how you did during the downturn.

Once more, something happening to our server... so I'll post end of day results here.

Thanks for your patience,
Steve

Server's are still down. Here's the end of day charts.

Steve

With servers down right now, I'll up date the main INDU chart here for now...

Steve

Morning Webinar

For those of you attending the morning webinars, Steve didn't record this morning's session. He has decided to give you an additional session on the Monday following the last scheduled webinar, so although we don't have access to today's information, we will have another opportunity to learn.

Recognition goes to Dick in this afternoon's advanced training webinar--great trade today!

Avoid Overtrading

Steve has mentioned this before and reiterated it in yesterday's afternoon webinar. Overtrading in the middle of the day during choppy markets, or during low volume periods, will hurt your profits. (See my post from yesterday--I had to get back in the market during the late afternoon in order to make back what I gave up in two bad trades during the chop.)

Here are the 4 trades from this morning's session in the S&P 500 e-minis.

					Net Profit
#	Type	Date/Time	Symbol	Price	Cum Net Prof
1	Buy	8/11/2009 8:33	ESU09	$1,000.75	$101.00
	Sell	8/11/2009 8:35	ESU09	$1,001.00
2	Sell	8/11/2009 8:38	ESU09	$1,000.50	$476.00
	Buy	8/11/2009 8:40	ESU09	$999.50
3	Sell	8/11/2009 8:44	ESU09	$998.75	$851.00
	Buy	8/11/2009 8:48	ESU09	$997.00
4	Sell	8/11/2009 9:00	ESU09	$996.25	$351.00
	Buy	8/11/2009 9:01	ESU09	$995.50
					$1,779.00

Were there more trades I could have taken? Probably one or two; but it's much more enjoyable and profitable to be patient, wait out the midday chop, then take a look at what may be setting up in the afternoon session.

After the market close:

I didn't take any other trades today. Steve and I spent some time discussing the webinars and video we are putting together, then I got busy shooting a couple of new airsoft guns with my 11-year-old son and just didn't spend much time watching the market. (By the way, having a friendly impromptu airsoft battle with a bunch of the neighborhood kids is a great way to have fun and bond with your own kids.)

There were a couple of trades I might have taken, but I missed them entirely or took a look at the market after the move was well underway. I refused to chase profits; I've done that one too many times before.

I'd rather walk away with my gains and wait until the session tomorrow morning, so I traded a total of only 35 minutes this morning, then spent a few minutes glancing at the market this afternoon. About 3-1/2 to 4 points in less than an hour of trading today--I really enjoy using Steve's methods.

I will not be posting my trades every day. I don't day trade every day. But I promise that when I do choose to post them, I will post the good, the bad and the ugly--winners and losers. No holding back, because the point is to help everyone learn something from the experience.

The lessons from yesterday and today?
1. Steer clear of midday choppiness.
2. Avoid overtrading.
3. Be patient.
4. Have fun!

Today's Trades

Steve suggested I post the trades I did in the S&P 500 e-mini contracts today. You will notice that I was up about 3 points in the morning, then got impatient and gave it away during the light volume chop. In two trades I was stopped out with a 1-1/2 point loss each time.

I made it up in the afternoon to end the day up more than 6 points net of commissions. This is a report you can generate in TradeStation. If you want assistance finding and generating it, send Steve the request via email and he will cover it in the next webinar.

					Net Profit &
#	Type	Date/Time	Symbol	Price	Cum Net Prof
1	Sell	8/10/2009 8:47	ESU09	$1,004.75	$726.00
	Buy	8/10/2009 8:48	ESU09	$1,003.25
2	Buy	8/10/2009 8:52	ESU09	$1,004.75	$351.00
	Sell	8/10/2009 8:56	ESU09	$1,005.50
3	Sell	8/10/2009 9:00	ESU09	$1,004.50	$226.00
	Buy	8/10/2009 9:00	ESU09	$1,004.00
4	Buy	8/10/2009 9:22	ESU09	$1,004.75	$226.00
	Sell	8/10/2009 9:25	ESU09	$1,005.25
5	Sell	8/10/2009 9:33	ESU09	$1,006.25	$101.00
	Buy	8/10/2009 9:37	ESU09	$1,006.00
6	Sell	8/10/2009 9:56	ESU09	$1,005.75	($774.00)
	Buy	8/10/2009 10:04	ESU09	$1,007.25
7	Buy	8/10/2009 10:04	ESU09	$1,007.25	($774.00)
	Sell	8/10/2009 10:18	ESU09	$1,005.75
8	Sell	8/10/2009 10:18	ESU09	$1,005.75	$1,226.00
	Buy	8/10/2009 11:30	ESU09	$1,003.25
9	Sell	8/10/2009 12:56	ESU09	$1,001.50	$1,101.00
	Buy	8/10/2009 13:22	ESU09	$999.25
10	Buy	8/10/2009 13:56	ESU09	$1,001.50	$726.00
	Sell	8/10/2009 14:03	ESU09	$1,003.00
					$3,135.00

Some quick notes from the training session this morning:

Use the 5-day Moving Average on your daily charts for clear exit signals. Set your stops below the 5-day MA.

Use the 8/8 crossover on daily and intraday charts to do the same thing.

Use stop-loss orders; stopping out is your pay day. The 5-period Moving Average is valid for all time frames, but for more flexibility on intraday charts use the Donchian channel to avoid getting stopped out too quickly.

Use stop-losses instead of taking profits quickly. Ride the bull as long as you can, because he will try to buck you off. The market maker is doing that: he'll take the price back down to stop you out before he takes the price up.

In addition to intraday trades for short-term profits, be sure to trade the intermediate chart. This will prevent you from missing nice trending trades, even when you can't sit and watch the market intraday.

Keep in mind that our double-beta ETFs are leveraged plays, up and down. Leverage is great when it's going your way, but set your stops and get out when reversals come.

Your position size should never put you in a situation to lose more than 1% of your portfolio. Plan your trade size and stop-loss orders accordingly.

Use an intraday chart even if you can’t get real-time data--the 8/8 crossover will give you nice signals on getting back into a trend.