Technical Analysis | Stock Market Timing Signals | Top Stock Picks

The current excuse is concern about the White House’s bank plan, Fed chief Bernanke’s future, and China’s lending practices.

Stocks lost almost 250 points today, or a little over 2% of value.  Trading volume was not quite as high as yesterdays, but still elevated from average.  This is likely to spell the death knoll for a resumption of this rally, at least in the near future.

So what are we doing now?  Right now we are sitting this slide out until the market moves up on a bounce, and then we’ll likely take short positions.

Let’s take a look at the charts for some more analysis.

Trading in January now shows a net loss of about 200 points.  It appears that the so-called  “January” effect – documented in many media outlets – may not be a valid justification for new long positions.

On the weekly chart, prices have fallen and closed well below the lower trend line, and also below the PSAR indicator, so the weekly chart is appearing to be entering a down trend.  The CCI is close to dropping below the zero line – and we really need these two events to occur for a confirmation of a new downtrend on the weekly time frame.

The daily stock chart is a disaster.  After a week of ratcheting back and forth at the top, prices have finally broken down and closed solidly below the prior low set in December.  On their way past the prior highs of Nov and Dec, the price action didn’t even pause.

Our momentum indicators are clearly bearish.

On the 30 minute chart, prices tried to hold a little below even for most of the day.  However, when traders returned from lunch it’s obvious that selling was the object of the day.  Prices fell sharply for the remainder of trading with the last hour of trading closing near the lows of the day

Trading Strategy:

If you were following the trading strategies described here then you probably managed to get out of profitable positions with most of the profit intact.  Any tightened stops were likely stopped out over the last few days of trading.

Next week I anticipate we’ll be watching for an opportunity to take short positions in this market.  Aggressive short traders may consider new short positions if the market continues down on Monday, however, the market is extremely extended to the downside so a prudent strategy would be to wait for a bounce back up to overhead resistance.

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Our cautious strategy towards this market for the last week or two seems to have paid off as the broad market loses over 116 points in the last hour of trading this year. 

It remains to be seen if more profit taking will occur on Monday, or if the bulls will return to push this market higher.  Right now it seems that Thursday’s sharp loss could be an early indication of additional profit taking that may occur at least during the early part of January.  Technical analysis of the stock charts will yield additional market timing insights.

On the monthly time frame, price growth still continued through December, but at a slower pace than earlier in the year.  Two momentum indicators, the stochastic, and the MACD are pointing towards increasing upward momentum.  However, the CCI is not which is a worrying sign.

Trading volume on the monthly basis has also been moving down even after accounting for the end-of-year holidays – which points out how low November’s volume was.  December’s candlestick finished with a topping tail and the PSAR getting closer to tripping to a bearish condition.

Prices on the weekly time-frame are looking a little top heavy, but the daily chart is where all the real damage was done during Thursdays trading.  I mentioned a few days ago the daily chart was looking a little top-heavy.  Regular readers will recognize the strategy of trading when the weekly time frame matches the daily time frame, and right now both the weekly and daily are looking down.

The CCI and the stochastic on the daily chart are both sharply negative, moving sharply in the same direction that was observed earlier in the week so there really wasn’t any surprise that we had a meaningful drop in prices.  The MACD has not gone negative yet, however, the MACD usually follows the stochastic and the CCI so that isn’t a surprise.  What is notable about the MACD during December is how flat it was.

On the 30 minute chart you can see the drop in the morning hours, the flattening during the mid-part of the day, and then the sharp drop during the last hour of trading where the market gave up 80 points in 30 minutes – not a good sign.

Looking to the last chart in the series, SH, which is a Contra ETF, is starting to look positive.  This is another indicator of the increasing potential for a downward move in stock prices. 

Trading Strategy:

If you don’t already have stops in place to protect profits and your overall portfolio from large losses, now is the time to do so.  Traders should hold off from taking new long positions until we see how far this down move will go.

Weak global markets, a rising dollar, falling oil and gold prices, and some disappointing profit news from 3M, McDonalds, and Kroger, all contributed to a sharp drop in stock prices today.  Also in the background is a drop in consumer optimism regarding the future of the economy and President Obama’s lowest approval rating so far in his presidency.

I’ve discussed the weak technicals many times during the last 2 or 3 weeks, are we seeing the start of a meaningful trend reversal? 

Let’s take a look at the charts for an in-depth technical analysis and market timing strategy.

On the weekly stock chart I mentioned yesterday that the upward momentum was continuing to decrease.  That trend continued today.  All three indicators are moving to the bearish side with the Stochastic already significantly bearish, the MACD just starting to roll over, and the CCI dropping well below the 100 level.

My favorite indicator though, the price of the broad market itself, is still above the 11,000 level and in reality has not shown the type of downward move I would like to see on the weekly time-frame to call a solid reversal at this point.  Still, the week is young yet with only 2/5 of the trading week in the history books, stock prices could easily fall at a faster rate.  I’d expect a close below the 11,000 level will really get the bears to come out from hibernation though.

The daily chart is where you can really start to see the damage accumulating.  Prices dropped almost 110 points on the day; most of the drop came at the opening which we’ll see on the hourly chart.  Stock prices dropped below the PSAR indicator today which would normally be a sign to consider new short positions IF the weekly chart was confirming the same weakness.  So until the weekly chart and the daily chart agree, shorting this market should be left to aggressive or very active traders.  Prudent investors should remain on the sidelines.

The daily chart clearly shows the drop in stock prices from the opening bell.  Prices tried to recover through the morning hours, but gave up the ghost right before lunch, and then fell throughout the day.  Prices firmed a little in the last hour of trading which might create a bounce in tomorrow’s action.  But don’t expect any bounce to last long.

Trading Strategy:

Prudent investors should not take any new long positions.  Until the weekly trend and the daily trend agree it would be wise to sit and watch from the sidelines.  Don’t worry about missing a downward move, this market appears to be sufficiently overbought that safe profits will be made on the way down.

Aggressive and active traders should consider shorting the market with the Contra-ETF’s that are sent to subscribers of the stock picks email.  Only consider new short positions if the market is lower than the low made in the first 30 minutes of trading, moving lower, and prior to 1pm market time. 

Remember – Contra ETF’s are purchased long to take advantage of a downward move.  Prices on Contra ETF’s go up when the market goes down.

A surprise dip in new home sales reported today sent stock prices into a tailspin, losing over 2% of value by the close of the market today.

Once again our market timing strategy was right on the money by suggesting you stand aside with your profits safely in your pocket while the market shows us the line of least resistance.  Based on today’s price action it appears the line of least resistance is down – at least for now.

Our model portfolio has strict sell rules and the portfolio sold out and went into cash at this mornings opening price.  Visit our blog on how to get more information about the model portfolio.  Before we closed out today the model portfolio was up 44% while the DJIA was down 14% over the same time period.

Let’s take a look at the market charts for a technical analysis of today’s market action.

With a little more than half of the weeks trading in the history book, the bullish condition of the weekly time frame looks vulnerable.  With only a little more downward movement in prices during Thursday and Fridays trading, our market timing signal on the weekly basis is likely to move to “Caution”.  It would take a lot of price reduction for both the CCI(20) and the PSAR indicator to move into a bearish position or “Down” prior to the end of the week. 

On the daily stock chart, prices are below the PSAR indicator and the confirming CCI(20) is now firmly bearish.  Whether or not we get a bounce from here remains to be seen.  However, we are now providing contra-etf’s for selection to our subscribers in preparation for an extended downturn.

On the hourly chart prices dropped like a stone from the opening bell.  The only break in price reductions was in the early afternoon.

Trading Strategy:

If you don’t want to trade short or don’t want to take positions in contra-etf’s then just sit and watch until market strength returns.  For now it appears that profits are going to be easier on the downside.

Subscribers are now getting suggestions for contra-etf’s.  Contra-etf’s are designed to increase in price as the stock market falls. 

If the market shows some strength, new positions in contra-etf’s should be considered once the hourly chart goes from strength to weakness.  It’s likely we’ll get a bounce up to maybe 10,650 or so but if the market returns to weakness after that then pick new positions from the contra-etf list.  

In a highly volatile – but relatively news free day, with the exception of banks that are still bleeding – stocks prices swing from being up over 100 points to being down over 100 points. 

Earnings news from companies today was generally good, so is this a situation of buy on the earnings rumor and sell on the news?

At the end of last weeks trading we suggested to subscribers that they maintain the current cautious approach to taking new long positions until the market can break through the overhead resistance at 11,250.  We also mentioned that the current environment may be setting up for positions on contra-etf’s. 

Contra-etf’s are market trading funds that allow you to take short positions in funds that go up in price when the market falls.  Contra-etf’s are excellent vehicle for earning profits in retirement accounts that are prohibited from short selling.

How close are we to suggesting positions in contra-etf’s?

As usual, let’s take a look at the stock charts of today’s action for an in-depth technical analysis.

The monthly stock chart shows October is likely to finish the month creating an indecision candlestick.  In addition, buying interest is certainly tapering off as shown by the trading volume.  However, we have 5 days of trading remaining in October and we don’t trade on the monthly basis so this chart is only used as for background reference.

On the weekly stock chart the CCI(20) is now below the 100 line and although still technically bullish it’s losing momentum which will be needed to breathe new life into this rally.  Stock prices on the weekly chart remain above the PSAR indicator, at least for now.

On the daily chart prices retested the downward sloping overhead resistance in early trading but quickly gave up and reversed sharply to the downside.  Prices stayed below the PSAR indicator and our confirming indicator, the CCI(20) has fallen almost to the zero line. 

Today’s action centered around the 11,000 support level and now that same level is going to act as overhead resistance once again.

Another day’s action like this would likely create a sell recommendation in our model portfolio.

On the hourly chart prices shot out of the gate in an opening move and quickly reversed to the downside.  This type of action is sometimes created by professionals selling into the remaining strength of a rally.  The CCI(20) has been firmly in bearish territory for the last 3 days.

Trading Strategy:

Watching from the sidelines is the suggested strategy while the market decides to indicate whether it is safe for new long positions or new positions in contra-etf’s.