The reason we look at charts is to try to find a pattern in the past that could reflect the direction to come in the future.  We’ve all read the disclaimers that read, past performance is not indicative of future results, but we keep looking back anyway.  Of course, I believe charts can help predict future results or I wouldn’t be so dependent on charts for my trades.  I also realize that indicators might work the majority of the time, but all fail at some point.  That’s what keeps the “novice investors” at bay.

Many of the indicators in the current chart are bearish.  I didn’t even include the 10 and 20 day moving averages (dma) in this week’s chart, but I can mention they are still showing a bearish signal with the 10 dma below the 20 dma.  The shortest trend line of lower highs from March through mid-May broke support last week too.  That leaves few trend lines to watch until some potential horizontal support comes back into play.  The first of those lines is about 30 SPX points away (2%+) and is just below the 200 dma.  The 200 dma is a major moving average to watch.  If it breaks and doesn’t find support immediately at the horizontal line shown below, the market could quickly drop another 5-8% as computer models initiate sell orders without another level of support close by.  The October and November intraday lows are likely the best areas to expect the computer models to start pumping in new buy orders.  The December low would be an 18% correction from March high.  A retest of the October intraday low would be a correction of almost 25% and have the market in deep bear territory, but close to average bear market correction levels.  Buying in here would be a relatively safe long term investment and buyers should be ready to storm in for above average future returns.

Before those depths can be reached, the SPX has to deal with an anomaly in the Williams %R indicator seen at the end of the week.  I always point out that Williams %R is a great indicator to use after a bottom has been reached, not to pick the actual bottom.  It’s when the indicator moves out of the oversold (0r overbought) area that the next good trade signal is issued.  But is this time different?  In late November the 14 and 28 day indicators ran off the page as both time periods hit -100.  Within two days the market was on to a new rally.  On Thursday the 14, 28 and 56 day periods all hit -100 on the Williams %R indicator.  This is the first time I’ve seen all three periods at that level (I only went back a few years to double check).  In November it helped to trigger such a strong rally that I started watching for it again.  Based on the proximity to the 200 dma, the longer trend line of higher lows and the extreme negative bias in the markets, this could be another signal to buy right now or at least cover shorts.

With the valid reasons for pessimism coming out of Europe, a bounce could be short lived for the S&P 500.  At the same time, stock valuations are going to be hard for value investors to ignore for long.  The rest of the summer is going to be interesting, but don’t be shocked if stocks do not retest their 2011 lows.  Are any investors out there really surprised that Greece’s debt issues are still a concern and will lead to further trouble for the EU?  Isn’t a lot of that built into stocks prices?  Isn’t that part of the reason the SPX’s P/E multiple is so low when compared to historical levels?

I went back six months on this chart so I could point out where the DJIA had its 50/100 day moving average (dma) bullish crossover at the beginning of December.  I pointed out this majorly bullish technical indicator on the S&P 500 on the December 2nd chart.  Following that call, the Dow and SPX had nearly four months of bullish trading.  The reverse crossover has not happened yet, but the Dow chart has traded below its 50 dma for more than a week and has dipped below its 100 day a few times recently, including Friday’s close that was slightly below it.  These are all warning signals, but aren’t necessarily sell signals yet.  The true sell signal will come when the crossover actually happens.

The sell signal that I missed (but am not stressed about yet) was from the Williams %R indicator.  When it broke below the overbought range I didn’t react right away because I think it tends to give false positives sometimes and needs one or two confirmation days before I generally trade on it.  In this case it broke and by the time it got the confirmation days it found support.  I might be playing with fire by not adhering to the indicator’s signal, but the 100 dma will be important to watch for real support.  In addition, the trend line of slightly lower lows that started in February is still holding support.  I’m in the mindset that we’re in a trading range right now and this past week’s intraday lows are just testing the bottom of the trading channel.  I’d like to say this is a good buying opportunity, but want to see more than just support.  I want to see a bounce before I get bullish too much.

The 10/20 dma crossover (not shown) favored the bulls just a couple of weeks ago, but that ended up being one of those devilish false positives.  Now the tables have turned and the 10 and 20 dma are close to having another crossover, but in favor of the bears.  If the bears truly gain control for more than half a session, the Dow could fall all of the way down to its 200 dma, around 12,150 now, but edging higher every day.  That would be close to a 9% decline from the intraday high seen recently.  Unless Europe falls apart quicker and more severely than expected, falling more than a 10% correction is unlikely in the near-term.

The DJIA went through a period like this last summer and fall where my favorite indicators toyed with me.  What I learned was that when stuck in a trading channel these shorter-term indicators don’t work as well.  Of course the trick is knowing when it’s a trading channel and when it’s an actual change in longer term sentiment.  For now, I’m banking on it being a trading channel that will hold support, but I do have a finger on the sell button, just in case the trend line at the bottom fails.

Happy Mothers’ Day!

I’m trying to stick with my mantra of avoiding stupidity in trading this year and at the same time want to grab opportunities when they present themselves.  The opportunity came up a couple of weeks ago and I sold enough to bring in a lot of premiums.  I’ve eased up some since then to make sure my current puts finish with a profit.  Before long I’ll be back at it though and in each 3-5% dip I’ll add more exposure when I see the turn happen.  If the summer makes it through without a 10% correction, money managers will have to do their annual chase for performance through the fall and stocks should rally again.  That’s if Spain doesn’t blow up like Greece did last year and if we don’t have any major natural or man made disasters that wreak havoc on consumer spending or manufacturing.

I ended April with a balance of $109,687.56 after finishing March with a balance of $108,988.28.   That gave me a gain of $699.28 on paper for April and a realized gain for the month of $796.66.  I received no dividends in April.  Quicken reported that I have $109,676.32, fairly close to what I actually have.  The best part about my monthly gain is that stocks actually lost value as a whole so I gained back a little ground on my year to date returns.  I pulled ahead of the Dow, but I’m still trailing the S&P 500 for now.

In recent month end summaries I’ve run the numbers on what it would take me to reach a 20% return in 2012.  I picked that number basically because it’s a round number that looks nice and is better than the averages.  I might get to 20% in 2012, but I actually need close to 18% or $1,500 per month.  That $1,500 will help cover my expenses after my w-2 job is gone after April.  The rest of our expenses are covered by my Advisor business and my wife’s income.  With every client I add, my dependency for investment gains is reduced since business income, rather than investment income, covers expenses.

As my account value grows the percentage required drops each month.  $1,500 is 1.37% of my balance as of April 30th.  At the start of 2012, $1,500 was 1.5% of my account.  Steady growth makes the goal that much easier each month.  I brought in $1,469.73 in net premiums in April, but took a $700 loss on an underlying stock so it knocked me back.  One of my new goals is to try to reduce such stock losses and focus on bringing in more premiums, even if I need to take on some margin risk.  Because of the great start to the year, I only need to average $1,289.06 for the next eight months to reach my original 20% goal.

If all of my naked puts were assigned and my covered calls expired worthless I’d be 105.32% invested in this account.  This is my asset allocation in my IB account as of the end of April.

These are my returns according to Quicken through 4/30/12:

The DJIA hit its 2012 closing high intraday on Friday after nearly three weeks of being in rally mode.  The rally cooled at that point, as is typical when an index or stock reaches its previous high.  This was only a handful of points below the intraday high for 2012 too.  Now it gets tricky.  The large cap index is at the top of its horizontal trading range for the past couple of months after a strong rally, but technical indicators are still saying there’s more upside in this rally.  The 10, 20 and 50 day moving averages (dma) all converged at the end of this past week and the momentum is clearly leaning towards the bulls.  As shorter moving averages overtake longer ones it shows momentum favors higher days still ahead.  This is particularly true with the 10 and 20 dma which cross each other more often.  However, after such a quick pop higher, a short retracement back to the 10 dma can be fairly common.  This will be another buying opportunity (if it even happens) once the moving average shows support again.

Before the moving averages caught up to the change in sentiment, the Williams %R indicator gave a good heads up that this move was coming.  Both the 14 and 28 day periods hit a low of -99.08 and then popped higher as momentum quickly changed.  Now, all three periods (14, 28 and 56 day) are all comfortably in the overbought range.  The rally can last weeks or even months while “overbought”.  Keep watching this indicator to see a change in sentiment marked by a confirmed move below overbought.

I charted the three month view because I consider the moving averages important enough right now and wanted to make sure they were visible.  It’s worth noting that the six month and one year charts show the market is in the middle of its longer ascending trading channel and the bull market doesn’t have stiff resistance at the current levels.  Actually, the Dow is only hitting a small speed bump on the longer charts at a line that was support and has since been occasional resistance.  The top of the longest trend line of higher highs points above Dow 14,000.  Oh, but it’s almost May.  Should we sell and go away or is that too much of what’s expected now and therefore won’t happen?

The moving averages have been the story lately for the large cap index.  Last week I pointed out the S&P 500 was headed for the 10/20 day moving average (dma) bearish crossover.  The Dow followed the same path too.  I didn’t show it on this chart, but it happened on Monday, the day after the index closed below the 20 dma.  That sent the DJIA below previous the horizontal support line around 13,000 and opened the flood gates.  The real technical trigger for the big sell off on Tuesday came from Monday’s close below the 50 dma.  This was the demarcation line for many traders and when the Dow couldn’t climb back above it by the end of trading Monday, nothing was left to do, but to sell.

Support surfaced when the short trend line of lower lows came back into play.  This equaled a 4.4% drop from the intraday highs seen just a week earlier.  I had called for a 5% correction, but this was close.  The rub is that I’m not so sure that the descent is over yet.  The 50 dma acted as resistance on Thursday and Friday.  Spain’s worrisome story is growing in the minds of investors.  May’s selling season is just a couple of weeks away and the mood has already shifted on Wall Street.

Williams %R, which tracts technical sentiment shifts, started signaling the downturn more than a week ago.  Outside of the one day move above the oversold area, Williams %R is still signaling that the bears are in control as it trends lower on the 14, 28 and 56 day indicators.  The next areas of potential support could come from a retest of Tuesday and Wednesday’s lows or the trend line of lower lows as it converges with the 100 dma.  12,600 could be where these lines meet and support really holds. That would be at a 5.2% mini-correction from the recent intraday high.  We’ll see if the bulls remain timid at that point, but it seems a reasonable area to add a little exposure while we keep some cash reserved if the dip goes towards 10%.

If the selling stops soon and the DJIA rallies over its 50 dma, the next major hurdle will be March’s intraday highs near 13,300.  This week coming up includes April’s options expiration Friday.  Expect volatility to continue as traders adjust their positions throughout the week.

Thursday’s close left the SPX in a precarious position.  It remained above its four month trend line of higher lows, but closed below its 10 and 20 day moving averages (dma).  A the same time the Williams %R indicator fell below the overbought area for the 14 and 28 day periods.  The 50 dma and the Williams %R 56 day indicator have not given in yet.  That could change as early as Monday when stocks resume trading after a disappointing employment report on Friday when US markets were closed for the holiday.

Futures traded for an hour after the data was released and indicate a much lower open after the weekend.  Such a lower open will pull the 10 dma lower quicker than the 20 dma falls.  Short based moving averages move quicker than longer ones and will lead the SPX chart to show a bearish 10/20 dma crossover within days if stocks don’t snap back quickly.  This is often a signal of the beginning of multiple days or weeks lower for an index or stock.  The first possible area of support for a declining market will be at the 50 dma which is currently around 1,370 and moving higher.  If support surfaces this early, the market will have only corrected 3.6% from its recent intraday high.

The Williams %R indicates a bigger fall could be coming.  As mentioned above, the 14 and 28 day periods already show a change in momentum.  A lower close on Monday will give the 14 day indicator a key third confirmation day and a second confirmation day on the 28 day indicator.  The 56 day period has not registered a day below the overbought area in 2012.  Monday’s open is likely to push it below overbought and will show a true momentum shift is underway.

Volume trailed off going in to the holiday weekend and should see a spike on Monday as anxious traders return to their desks ready to pare losses or profit from the decline.  In the past two years, spring has been the time to exit stocks temporarily and the market has lived up to its mantra, “Sell in May and go away”.  The changes in these technical indicators could be an early warning that the selling season has started a month early and taking profits in April might be a safer trade than waiting until May this year.

I ended March with a balance of $108,988.28 after finishing February with a balance of $108,103.65.   That gave me a gain of $884.63 on paper for March and a realized gain for the month of $254.04.  That gain is not so bad considering I took a realized loss on my DSX shares of $1,200.04.  I received only $1.12 dividends in March.  Quicken reported that I have $108,965.70, close to what I actually have.

For the past couple of months I’ve run the numbers on what it would take me to reach a 20% return in 2012.  With such a fantastic first quarter in the books, the 20% goal seems much more achievable.  I need 10.1% ($11,011.72) more from here or the equivalent of 1.12% ($1,223.52) a month for the next 9 months.  I eased off my riskier trades too early and could’ve had an even better start to the year.  I still don’t have to take big chances and want to be sure to miss the majority of any downward pressure the market gets at some point this year.  It’s nearly impossible each month will post a gain for the entire year, so I need to continue pushing towards my 20% goal with a few months to spare.  If I include three months of break even months (hopefully not big losses), I need to make $1,835.29 or the equivalent of 1.68% per positive month.  I think the biggest change I’ll have to make is allocating more towards equities and less towards cash/safety.  I’ll probably start running above 100% invested if we get any decent correction month.

With the looming end to my salaried job at the end of the summer I think I’m still just being too conservative even though I’ve segregated my funds into two accounts.  This IB account I blog about is for longer term needs (and can accept more risk) and the other account might be used for funding living expenses if I don’t get my Advisor business cranked up enough by the time I need the cash.  I think I can crank out enough cash from investments to make up the gap between our spending and after tax income.  As the months roll on, I’ll shrink that gap with more clients and an increase in assets under management.

This is my asset allocation in my IB account as of the end of March.

These are my returns according to Quicken through 2/29/12:

The trend lines of support and resistance that have been in place for the past six months are still holding true, but are inching their way towards a convergence within the next couple of months.  When that happens one side is forced to give in and it is usually the trend line of higher lows.  This means the Dow is at an interesting place again as the springtime selling season is knocking at our doors.

The Dow is at an interesting place right now.  It just bounced off of its lower trend line and is on a path towards the upper trend line again, but stopped on Friday at a new little line that could end up being resistance.  Friday was the first real test of this line, so next week will show if it was a coincidence or not.  This descending line comes from high seen in mid-March and touched again with the lower high at the beginning of this past week.  Keep an eye on it.  The break between it and the long trend line of higher lows won’t take long to show.

The Williams % R indicator has been somewhat jumpy during March.  The 14 day indicator broke below overbought weekly and the 28 day indicator even gave in three times.  Outside of the first break in the 14 day, the rest of the breaks didn’t have multiple confirmation days.  This means they never actually triggered sell signals.  The smoother 56 day indicator hasn’t broken below overbought in 2012 yet.  It will lag behind the first few percent of a decline, but will be a better indicator for more serious corrections to come.

The blue 50 day moving average (dma) is barely visible behind the straight trend line of higher lows, but it’s there.  The 50 dma has stayed below the index for three and a half months, but is getting closer and closer again.  The green 20 dma held for two months and then saw three breaks during March, all with quick recoveries.  The 50 dma might not be as forgiving, especially if these two get to the point of a bearish crossover.

A lot of technicals are drawing closer lately and the DJIA seems to be on a tipping point, but for now it is still within its upward trend and it’s hard to want to sell a bull market without a clearer indicator.  The only short term trade coming up could be to dump DJIA stocks (or DIA) when the index returns to its upper trend line.  Eventually the Dow will rollover for a bigger correction.

The S&P 500 made yet another trip to the top of its trading range, but found resistance at the trend line of higher highs.  As has been the case since this trading channel began, hitting this trend line has triggered a break in buying.  The trick every time is seeing if that is the last touch to the line before a real correction begins or if it is just another breather before the bulls catch another wind.

A couple of weeks ago the middle trend line I drew that marks the line of higher lows broke.  That looked like the start of a bigger correction, but buyers resurfaced after the 20 day moving average (dma) broke support for a single day.  The index took only one more day after that to make it back above the 20 dma again.  That bounce took the collection of 500 stocks back to the upper trend line.  On Thursday, the middle trend line broke again, so we have to see if the lower trend line is the new line to watch or if the long standing trading channel is finally ready to end its reign.

The 20 dma is going to be key to watch again.  It’s close enough to the trend line of higher lows that they could both break support in the same day.  As was the case a couple of weeks ago, one day doesn’t equal a sell signal.  It is more important to see how the one and two days after behave.  Continued selling begets more selling and a new leg lower is quickly in motion.  The 50 dma isn’t much below that break and could offer another area of support.  A 5% correction (which was often the magic area last year before the bigger fall) would take the SPX down to 1,343.  That’s close enough to the 50 dma that they could work together.

Unless another major macro event hits from Europe (maybe Spain or Portugal?) in the next few months a correction beyond 5% isn’t terribly likely.  The more likely case is that a 4-5% correction is all the market needs to refresh itself a little better and keep the bulls “honest”.  Beyond the 50 dma is the 200 dma.  A fall that low (which will happen again one day) is 10+-% below the recent SPX high.  A fall to that range has the double potential of support like the 50 dma.  One is the round 10% retreat which is common for a correction and the other is the 200 dma which is always key to watch.  Any fall below that should be fairly brief and wouldn’t be too risky for longer term investors.

Before any of that can happen, chart watchers will be able to see a good warning from the Williams %R indicator.  I included three time frames in this week’s chart, 14, 28 and 56 days.  The 14 and 28 day charts gave false signals a couple of weeks ago, but only if you didn’t wait for the confirmation day on the 28 day indicator.  By the second full day of declines the 28 day was recovering.  Waiting that extra day can save an itchy trigger finger from selling too quickly.  The 56 day period hasn’t rollover yet this year.  This has become the real line to watch for a sell signal.  The first two will be good to put us on guard, but the 56 day indicator will be the best fortune teller for a true correction beginning.