John Bougearel
This was excerpted from my afternoon Update on SP 500 following the Better-than-Expected Sept 15 Retail Sales report for August-please email me at jb2@strucutrallogic for the full report).
Usually, when I start sending multiple reports out and frequent updates to clients, it is generally a signal that the financial markets are close to a turning point. We are at such a juncture today. I am on pins and needles, waiting with baited breath for a bearish signal to show up on the SP500 either today or tomorrow. I am going to make several more observations that are critical to “getting” this anticipated market turn just right. I have sat for a solid month patiently waiting for this Sept 15 retail sales report before worrying much about the stock market. The bullish print from this retail sales report was just too well telegraphed not to be patient for this day before getting too excited about a stock market correction. It was the behavioral models that showed the best stock market corrections in June and August both followed retail sales reports. It just made sense to sit on our hands patiently and wait this day out. Now, I am not so patient. Hence, the frequency of my stock market updates has shot up dramatically in recent days.
There is one more lesson to be learned from the chart above. (For readers who wish a copy of this particular newsletter, please email me at jb2@structurallogic. The newsletter has the charts I am referencing attached).
The stock market sold off hard on the day of the June 11 retail sales report. However, the day of the August 13 retail sales report was a high close. Given that we are well into the afternoon of this Sept 15 retail sales session, we have to acknowledge that the likelihood of a high close is far greater than the low close option. Now, if we get the high close option like on August 13, then I suspect that tomorrow could be the actual turn date. (we have to give an orb of a trading day or two when high or low closes indicate trend continuation could spill into the following session). The short term high in August came on Friday August 14, one day after the high close retail sales report of August 13. Friday August 14 was a bearish outside down day. The break was sharp and sudden, but not sustained The high of Friday August 14 was only 50 cents higher than the retail sales high, indicating a false auction above the Aug 13 retail sales high on the morning of Aug 14 and a strong reversal to the downside ensued.
So, that is a clue as to what to look for if the market is not red from the git-go tomorrow morning following today’s Sept 15 retail sales report. Market participants should be keenly aware that there was just too much of a tailwind from the cash-for-clunkers program for the August pullback off the August 13-14 retail sales high to be of any significance. There is no such cash-for-clunkers program to cushion the stock market after the Sept 15 retail sales report. And that is precisely one of the reasons the downside risks are so much greater now than after the August retail sales report.
The EP 120 Dec 2009 chart shows of that the 1.41 target (my favorite external ratio for the SP500) is 1051-1052. This chart also shows that the Sept 2 rally is highly correlated in time and price to the Aug 14 rally. The symmetrical time and price target called for the Dec 2009 E-mini’s to reach 1051-1052 by this afternoon. It has reached 1050 thus far.
Merging Price Data
Now, I wish to merge the price info and data on the Dec 2009 contract with that of the continuation contract because on Friday the Dec 2009 contract will roll over onto the continuation contract. This is going to be quite useful to us, or I would not be taking the time out to say so. Notably, last week’s high’s on the continuation contract was 1048.25. This morning’s retail sales high on the Dec 09 contract was 1048. What we are seeing on the Dec 2009 contract this afternoon is what I believe is going to turn into a (false auction) above 1048-1049. Evidence that this will be the case is that the stock market will leave a tail on the intraday candlesticks above 1048. (please review my summer report on false auctions and candlestick tails, if you do not have the report and would like it, please email me so I can send you one). Intriguingly the August high on the continuation contract is 1038 handle. Today’s retail sales low on the December 2009 contract is 1038. Confirmation that a correction is underway will be when the SP500 takes out the Sept 15 retail sales low at 1038 and starts trading back inside the August range.
A close below the August high at 1038 and the August daily high close at 1029 are further confirmations a correction is underway. The 21 day one-month average is sloping into 1018, two points above the early August highs at 1016. A close below 1016 is another confirmation a correction is underway and will indicate the Sept 2 lows at 991 will be in jeopardy, and that a test of the August 17 low at 971 should be anticipated. As I mentioned in yesterday’s report, if the stock market gave us a high close yesterday, that a new high would likely be set on the Sept 15 retail sales report. Not a terribly hard observation to make.
Counter-trend Trading or Trading “Outside the Box”
When considering counter-trend trades, you have to give thought to whether the market will set a high or a low daily close by the end of day. In this instance, at cycle highs we are specifically looking for new move highs to be followed by mid-range or low closes to confirm the analysis is right, and that the short positions or short hedges that we have established “above” or “outside” the range are going to ok. If the market does not “sit back down” inside the previous range, the greater the probability that your established position will get chased out of the market. Not a big deal, you just have to be a nimble trader, and adjust or tweak your trades a bit.
All analysis and risk management strategies have to leave room for a small margin of error and adjust accordingly. In this case, we have to be mindful of whether today is going to be a high close or a low close. A high close today means a nominal new high could be seen tomorrow, and prepare to manage that risk accordingly. If today is a low close, the positions that you established around 1048-ish or higher should be sitting pretty. Generally, when identifying countertrend trades, you want to do so “outside the range” which in this case is above the range. On the daily bars, we are looking for countertrend trades above the August highs at 1038. When the stock market finally sits back down below 1038, we would expect the stock market to round trip the August range down to the 970s at a minimum.
Counter-trend trading requires a completely different approach to trend-trading. It is what I like to call “trading outside the box” that is, trading outside the range when and where pattern recognition and behavioral models indicate that buying or selling climax or a change in trend is near at hand. We are at such a junction right now, during this retail sales week, which came in better than expected. Today’s bullish data point should be as good as going to get on the economic calendar for about a month. Hence, we are approaching a buying climax in the stock market. You should all be able to feel this. A month from now, we will be looking for market’s selling climax. I expect we will be able to feel that too.
T
