Possible Bear Flag

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The following is an excerpt from the November 13, 2012 blog for Decision Point subscribers.

Stocks opened lower, and while losses were recouped before lunch, prices finished the day falling and closed down.

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We had two more signal changes on our Decision Point Alert Daily Report as the 20-EMA crossed below 50-EMA on both the S&P 500 equal-weighted ETF (RSP) and S&P 400 charts. Both switches were to NEUTRAL rather than a SELL because the 50-EMAs were above the 200-EMAs on both charts.

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Stocks: Based upon a 11/08/2012 Thrust/Trend Model NEUTRAL signal, our current intermediate-term market posture for the S&P 500 is neutral. The long-term component of the Trend Model is on a BUY signal as of 1/5/2012, so our long-term posture is bullish.

Price closed slightly below the 200-EMA on average volume. Price is digesting the large drop from last week and once this pause is over, a continuation of the decline seems the likely conclusion. One could argue that we are looking at a possible bear flag on the daily bar chart right now. If it is a reverse flag and it were to execute, the minimum downside target would be around 1325, however I think strongest support would be found at the June low.

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Indicators are bearish in all three time frames.

Ultra-short-term we see the CVI top below zero and % PMO Rising also topping.

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Short-term indicators continue to fall and while they are getting oversold, they still have not gotten close to the extremes we've previously seen. The bright side is that these indicators have managed to unwind and get oversold during a consolidation rather than a decline, but that is a very thin slice of optimism.

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The ITBM and ITVM continue to fall and have spent the majority of this decline below their EMAs. They are also far from being oversold.

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Momentum has been failing even before the market finished topping. The PMO negative crossover was the first flag, followed by the PBI negative crossover its EMA and finally the Trend Model NEUTRAL signal with the 20-EMA crossing below the 50-EMA.


Conclusion: There is little to grab onto that is bullish in the charts or indicators. Even some positive earnings reports by some big name retailers like Home Depot, TJ Maxx and Dick's Sporting Goods weren't enough to stop the slide. The headlines will continue to be filled with 'fiscal cliff' fears, so we're not sure what positive possibilities are even out there that might spur a rally, it all seems negative. This negativity that is settling over the business world is translating into investor fear and probably more market decline.

Dollar: As of 8/22/2012 the US Dollar Index ETF (UUP) is on a Trend Model NEUTRAL signal.

The dollar continues is persistent but slow rise since the breakout from the September/October trading range. Our Trend Model is nearing a signal change to a BUY as the 20-EMA approaches a positive crossover the 50-EMA. The concern would be whether the signal is coming too late.  If we look at the PMO, it is still rising strongly and has some room before it becomes overbought.  A change in direction for the PMO would be a good warning flag.

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Gold: As of 8/8/2012 Gold is on a Trend Model BUY signal.

Gold is continuing the technical pullback from the recent breakout. The dollar chart looking stronger is a concern for gold and while the PMO is rising and approaching a positive crossover its EMA, it is slowing its ascent. Price remains above the 20-EMA, but if the decline gets deeper and price falls below it, we could be looking at a failed breakout rather than a simple pullback. We are concerned that the PMO will top below its EMA, which would be extremely negative.

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Crude Oil (USO): As of 10/02/2012 United States Oil Fund (USO) is on a Trend Model SELL signal.

USO has basically been in a holding pattern for weeks. The decline has not reached the strongest support level at about 29, but a rally out of this "almost island" of consolidation isn't out of the question. Momenutum has stalled, but isn't overly negative as the PMO has flattened moving up and down during this period of indecision. However, the trend is clearly negative right now with price staying below the 20/50-EMAs.

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Bonds (TLT): As of 11/9/2012 The 20+ Year T-Bonds ETF (TLT) is on a Trend Model BUY signal.

Bonds, like the dollar have been rising since last week's breakout. The PMO is rising steeply and price remains well above the 20/50-EMAs after the recent Trend Model BUY signal was triggered with the 20-EMA crossing above the 50-EMA. Overhead resistance might be found very soon at the September high or slightly higher at the July high.

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About Erin Heim