At the end of December I had a balance of $124,831.68 in my Interactive Brokers account. On January 3rd I moved $24,831.68 to my TD Ameritrade account and stopped blogging about that account.  I ended January with a balance of $105,764.26.  That gave me a gain of $5,764.26 on paper for January and a realized gain for the month of $5,340.34.  That’s even with a realized loss of $2,000 on my JPM shares and a $1,100.23 realized loss on my UCO shares, both not counting the gains I had from the options that expired in 2011.  I received $50.00 in dividends.  Quicken reported that I have $105,796.28, close to what I actually have.

If all of my naked puts were assigned and my covered calls expired worthless I’d be 80.98% invested in account, slightly above the 75.20% at the prior month’s ending percentage.  I had so many options expire in January that I haven’t been able to catch up to a fully invested account yet.  I’ve held back some because I thought Monday’s slip in the markets was going to be the beginning of a bigger fall.  Today has proven that wrong for now, although I’m still cautious.  If the bears don’t resurface tomorrow I’ll probably add to my exposure, although it won’t be too aggressive.  As a general guideline for the year I’m going to try to stay between 80-120% invested most of the time.  The shift might come from obvious cycle changes in broad based investor sentiment and from current positions falling farther out of the money.  Other than that I’m going to rely on time value to be my friend and continue to work higher probability trades as often as possible.

This is my asset allocation in my IBKR account as of the end of December.

These are my returns according to Quicken through 1/31/12:

At the beginning of December, I charted the S&P 500 index and pointed out how the 50 and 100 day moving averages (dma) crossover tends to foretell the early days of a longer bull market.  So far that prediction has held true.  These moving averages had their bullish crossover on December 1st on the DJIA chart too.  Since then the Dow has pulled away from its 50 dma by more than 500 points.  During this run higher the index has followed a tight trading channel as shown by the three trend lines in the chart below.  Each touch on the upper end of this trading channel’s trend line of higher highs sends it lower for a few days until one of the lower trend lines of higher lows comes back into play.  On Friday the two lower trend lines converged just below the 10 dma and acted as support.

Now the question is – how much longer can this tight trading channel last?  It’s uncommon for stocks to maintain such a narrow trading range for more than a month, if even that long.  It’s been more than 31 days for the DJIA so far.  In all likelihood this collection of 30 large cap stocks won’t maintain its trajectory for much longer.  Another trip to the top end of the channel could be its last move to these elevated levels for weeks.  We might not even see it get back up there before the Dow finally cracks again.

Investors should watch the trend lines of higher lows and the 10 dma to see if any of these technical indicators break support.  The 10 dma has broken support intraday only a few times since mid-December, but always closes above it by the market’s close.  The same thing happened on Friday again.  Closing below it will be the first major red flag for bulls.  The warning goes for the shortest trend line also.  Now that this chart’s longest trend line is moving above the shortest trend line, the space the Dow will be “allowed” to trade within will be increasingly narrower as it chases the upper trend line.  One line will have to give and it tends to be the lower ascending line more often than the upper ascending line.

Once support breaks the next question will be - how far will the DJIA fall?  As I mentioned at the beginning of this analysis, the 50 and 100 dma crossover tends to spell out longer bull market rallies.    That doesn’t mean we won’t witness a few minor corrections along the way.  Investors should expect the DJIA to test its 50 dma multiple times during this extended rally.  A move back down to its 50 dma from Thursday’s intraday high would mark a 5% correction and could be all the market needs as a catalyst to reduce allocations from bonds and into equities.  The first half of 2011 was filled with 4-5% mini-corrections.  2012 is ripe for one.

The first small hint that the move lower is upon us can be seen in the Williams %R indicator.  It fell below the overbought level on the 14 day indicator by the end of the week.  It needs a couple of confirmation days lower along with the 28 day period cracking too for it to show a true sell signal.  At this point, even a single confirmation day could also bring about a close below the three demarcation lines I mentioned above.  It’s time for active traders to be ready to take some profits or add some hedges.  Investors focused on the longer term might not need to panic yet.  The chance of a sell off beyond 5% is low, but could quickly change if the 50 dma doesn’t hold support.  Stay nimble and watch the charts.

As I mentioned last week in my Dow Jones chart, technical analysis can be an art as much as a science when using certain technical indicators.  Three of my go-to indicators are trend lines, moving averages and Willliams %R.  None is telling the story of a major sell off coming yet on a scientific view, but the art behind them might be whispering something different.

The S&P 500 moved to the top of its trading channel again on Thursday and hit resistance at the trend line of higher highs.  Each time it has done this over the past month it was foreshadowing of a few points lower in the coming days for the index.  Lately it’s only been a few points, some sideways days and then another run higher.  As with each pattern, this only works for so long.  So after the third touch to the upper trend line I started to wonder if this is the last time the large cap index will use this same trend line without having a bigger dip.  The science says don’t ditch the rally until the lower trend line has broken.  The art says to be wary after such a long run.

The lower side of the trading channel is approaching 1,300 quickly and would allow for a 15 point drop, barely more than 1%.  1% is hardly worth noting, except that this has been the pattern since mid-December and is due for more of a shake-up.  The lower trend line of higher lows that started in November could easily be a good area of support 40 points lower.  This would allow a 3% step down and allow in more buyers who missed the beginning of the rally, but are scared to get in at the current level.  If it happened quickly enough it would move the S&P close to its horizontal line of support around 1,267.

The science behind the moving averages says ride the rally.  We haven’t seen any bearish crossovers and the SPX is above each time frame I watch.  The art says the SPX has moved so far above its moving averages that if we wait until they have a bearish crossover we will have missed the first 3-4% of the sell off.  Since I’m bullish for the year, I’m not sure how big of a sell off we’re going to get and missing 3-4% could be half, if not most of a sell-off in 2012.  The moving averages certainly don’t call for shorting quite yet, but they do indicate it might be time to take more off the table to see how the next week or so plays out.

Williams %R hit the ceiling of its indicator for overbought on its 14, 28 and 56 day periods.  I always preach the science says don’t sell until the indicator has fallen below the overbought range for more than two days.  The art says going neutral at these extreme levels can be a safer way to work the indicator.  Williams %R can stay in the overbought range of long periods of time, but rarely stays this close to the “-0″ area for long.  Williams %R isn’t showing a sell signal, but it is saying the gains from here should be limited.

Volume is still stuck in the lower side of its average.  Friday’s pop was probably only due to January options expiring.  I’m taking it with a grain of salt, especially with the flat day we ended up with.  Indicators aren’t saying its time to run for the hills yet, but with so little upside available with all of the indicators, there’s not a lot of reason to be heavily invested right now.  The downside appears to be the path of least resistance over the next couple of weeks.  That doesn’t mean it can’t melt up, but any spike seems like it should be sold as a last ditch effort by the bulls.

You can find a trend to almost any point on a chart if you look hard enough.  This is a major risk in using trend lines exclusively to make trade decisions.  That said, I drew four trend lines that all pointed to the low of Friday and I “penciled” in one thin one well below that, closer to the 50 day moving average (dma).

The two major trend lines worth watching are the trend of higher lows and the horizontal line that was previous resistance and has been support multiple times since the index moved above the line.  The other two lines are interesting and maybe not just a coincidence.  Each line shows its own path and the coincidence is just that they all came together on the same day to give a strong floor to a group of stocks that were due for a fill in of the gap higher that started the year.  The second line from the bottom that came to the same point of convergence also followed the path of higher lows, but on a shorter time horizon than the lower line.  It has also been broken a few times and even worked as resistance in the middle of the trend.  All of these together just add to the overall picture and are worth knowing they are there, but without other technical indicators might not be as important to watch.

The biggest change on Friday from a technical perspective was the intraday break of the 10 dma.  This was the first time this moving average broke support since December 20th.  Such a break could be the first hint of a larger decline on the horizon.  The Dow did recover by the end of the day to finish above its 10 dma, but seeing the change is the first real sign of weakness in a while.  The next big test will be to see if it can retain its move back above the 10 dma.  If not, the 20 dma is close by and if it fails intraday we could be in store for a much bigger decline in the very near term.  The 50 dma is only 3% below Friday’s closing level 4% below last week’s intraday high.  That’s a fairly shallow correction and would be in line with many of last year’s min-dips.

Volume picked up some on Friday and made it to its average level for the first time in more than a month.  That doesn’t mean as much to me as it used to.  We’ve seen too many moves in both directions on light volume over the past five months to think low volume doesn’t make the gains or losses real.  More importantly, the Williams %R indicator hasn’t rolled over yet.  This shows momentum is still in favor of the bulls.  The 14 day period is starting to break, but is so close to the overbought range still that it could be seen as a rounding error for now.  Either way, I always like to see a confirmation of the shift in sentiment last for two-three days before I really consider the markets to be rolling over.  This causes me to miss absolute tops and bottoms, but avoids some whipsawing when the indexes are going through normal fluctuations and consolidation periods.

A move below Friday’s low will bring about another leg lower in the Williams %R indicator, another break of the 10 dma, maybe a kiss up against the 20 dma and a break of all of four of the bold trend lines I drew below.  This is the new crucial area of support to watch.  Three of the trend lines will move past it soon, but the horizontal line is going to be the one to stick with longer term, until the 20 dma moves above it.  Stay tuned.  We’re getting past the easy end of the year and beginning of the year periods where investors are giddy from the holidays still.  Now we’re all ready to get back to work and make some more rational thoughts and trades to work through the year in an attempt to beat the indexes.

The S&P 500 is approaching resistance at its October 27th intraday high of 1,292.66 and volume will likely stay light until the large cap index can move past this key technical level.  The bulls have the advantage going into this challenge based on several technical indicators.  These indicators include a bullish chart pattern, bullish moving averages and momentum as seen through the Williams %R indicator.

SPX has two ascending triangles within this chart.  The smaller one has a horizontal line around 1267 and an ascending trend line of higher lows that converged with it on Friday.  Using this bullish pattern alone indicates a break out is due that should take the index another leg higher during the current rally.  The larger ascending triangle started with the October 27th intraday high and has an ascending trend line of higher lows that is moving higher at a lower angle.  These two lines still have weeks remaining before they converge.  As happened with the smaller triangle, a period of consolidation is expected at the horizontal line.  If the line of resistance breaks and stocks are allowed to move higher, then volume should surge above its average and stocks should leap higher.

The moving averages support this bullish outlook.  The 200 day moving average (dma) has been a strong point of resistance for months.  The index moved back and forth across this moving target during the last week of December and finally started to use the line as support rather than resistance.  Technicians expect one more test of support on the line before the SPX can move higher freely.  This retest could come at the same time the longer trend line of higher lows reaches the same point to offer further support.  In addition to the 200 dma, the 20 dma had a bullish crossover above the 50 dma in the second half of December.  By the end of December the 10 dma (not shown) moved above the 20 dma for further emphasis of the trend.

After the bears failed to push the S&P 500 to new lows after December 19th, the bulls regained momentum.  Although volume did not accompany the move, Williams %R showed the clear momentum shift.  Technically, stocks are currently shown as “overbought” in the Williams %R indicator.  As history has shown, being overbought is not as important as when it stops being overbought (a move below -20).  Indexes can stay elevated for weeks if not months.  Waiting for the break in momentum is the time to sell, not while momentum is still bullish.

In 2012 I plan to avoid such panic selling by not using ultra-ETFs as often and reducing my mistakes when we do see a sell-off.  I’m going to aim for more market timing trades and will take some profits early on occasion when I see a turn in the markets from where I was planning them to move.  I also don’t plan to sell such long dated ETFs.  The time value just doesn’t melt away fast enough outside of the final two months and any spike in volatility makes it hard (or at least expensive) to exit the positions, especially with such wide spreads.  If I worked them all like I did with UWM and let them last until expiration it wouldn’t matter as much, but I think being more nimble with shorted dated options will give me much better opportunities to profit.  Last year I planned for targeting bigger chunks of premiums with fewer trades.

In 2o12 I plan to revert back to my old winning ways of trading more often. A volatile market should be an advantage to those of us trading more frequently, but it wasn’t for me last year.  I say this even after my more passive AMTD account beat my more active IBKR account.  My IBKR side lost 5.13% and my AMTD account gained 16.31%.  This difference plays into why I’m moving more into that account too.  I’ll be more patient and take fewer risks there while I don’t have to worry about any withdrawals in my IB account for a few years at least, probably a lot longer – hopefully a couple of decades.

This is the breakdown of the numbers for me:

• I ended December with a combined balance of $154,931.43
• $124,831.68 with Interactive Brokers in equities
• $30,099.75 with TD Ameritrade in bonds and index options  (includes $3,000 deposit)

After ending November with a combined balance of $148,046.98, I gained $3,884.45 on paper for December and had a realized loss for the month of $2,221.37 due to finally dumping my 200 shares of MVV at a $3,900.19 loss, not including premiums received.  I received $72.30 in dividends and interest. Quicken reported that I have $124,762.38 with IBKR, close to what I actually have.  My AMTD balance in Quicken was $30,099.75, exactly what AMTD listed.  If all of my naked puts were assigned and my covered calls expired worthless I’d be 75.20% invested in my IBKR account, much lower than the 102.28% at the prior month’s ending percentage.  Part of the difference is that I was setting myself up for more available cash to be removed.

I sent in my request today to withdraw $24,831.68 from my IBKR account and will move it to my AMTD account this week.  As I’ve mentioned a few times, I’ll only be blogging about my IBKR account from now on.  I think it’ll be more interesting to see the more active account in action and not see the deposits in the first part of the year and the monthly withdrawals by the end of the year.  My plan is to start each year with $100k in the IBKR account, but if I go lower I won’t add to it.  This will keep me from throwing more deposits on an account that isn’t producing like I’m attempting.  My longer history is better with my IBKR account, but that’s because it doesn’t include the beating I took in 2008.

This is my asset allocation in my IBKR account as of the end of December.

These are my returns according to Quicken through 12/30/11:

The Dow lurched higher during the few days leading up to the Christmas holiday only to reach the area of previous resistance by the time the closing bell rang.  Without this line of resistance having such a powerful track record, the other technical indicators would lead technicians to believe the index was ready to move higher still.  Those other indicators such as trend lines and moving averages have proven to be false positives in the past few months.  A move to new recent highs all hinges on breaking this resistance.  (That’s kind of obvious, a move higher depends on stocks moving higher, but you know what I mean when you look at this chart.)

If resistance wasn’t looming like it is, we’d be able to rely on two trend lines of higher lows drawing in closer to the DJIA’s current levels.  Typically that would mean support was nearby and we’d expect another leg higher.  The crossover of the 10 day moving average (dma) over the 20 dma was a reliable bullish indicator before late August.  Lately the crossover has indicated a good place to take profits.  The reverse crossover appears to be close to occurring again, but the index moved north of this crossover and could foil it as it pulls the 10 dma higher again.  Sometimes, like any technical indicator, it doesn’t pan out so easily.  If it did everyone would use it without fail.  When I’ve seen it fail in the past, the crossover typically works on the second occurrence soon after.

Last week’s run higher kind of felt like traders were trying to game the “Santa Claus” rally that typically hits the week between Christmas and New Year’s Day.  Based on the expectation that a rally was due this coming week, traders bought in early and maybe pulled it forward a week so that we won’t see follow through worth much now.  You can also see this in the Williams %R indicator based on it being very close to the extreme top end of the overbought range.  This shows momentum might have topped out and is now due for a breather, even if it’s for a short period.

The convergence of the horizontal line of resistance with the two trend lines of higher lows should force a decent sized move (up or down 5% or more) within the next couple of weeks.  Without my typical go-to indicators being as reliable these days I’ll have to stay more to the sidelines until there’s a better move higher.  The path of least resistance looks to be to the downside, in spite of the higher trend line of higher lows.  The lower trend line is probably the better one to watch, especially as it converges with the lower horizontal line that has acted as resistance and then support for months.

The technical indicators aren’t all in agreement this week which makes traders more skittish going into the lower volume last two weeks of the year.  When the picture isn’t as clear traders tend to sell or at least not buy.  At some point the price action will change and one side will have a clearer picture to work from and that’s the time to trade.  This might be a better time to stick with a wait and see approach, but while ready to make a move in either direction quickly.

The trend lines show severe resistance just above the 1250 area.  One trend line of lower highs has been the major ceiling for the past two months and continues to fall and hold stocks back.  Another line (that I had to stop drawing all of the way through because it blocked other lines) was support until the end of the summer, but is now acting as resistance too and adds to the size of the hurdle the bulls have to get over.  The other two trend lines go together and form the trading channel since the market first sold off in August.  It shows the trading range with a few exceptions and puts the current $SPX level almost at the midpoint of upside potential and downside risk.

That leaves the moving averages and Williams %R for this chart.  The moving averages show a very bullish 10/20 week moving average crossover that started three weeks ago.  Since then the index hasn’t followed through on the technical event that usually indicates the beginning of a strong rally.  However, the same fake came to the downside in July when the reverse crossover occurred and the 10 week moving average moved below the 20 week moving average.  The 10/20 indicator worked then and leads me to believe the bulls still have a good fight left in them.  Williams %R isn’t crystal clear since the 28 and 56 week indicators never made it to overbought.  The 14 week indicator did nudge into the overbought area barely and then faltered.  For now, I’m taking it with a grain of salt, but still include it as an indicator that shows all arrows do not point higher yet.  It also reminds me that any new push into higher territory might not last too long and could be sold after taking some profits at a higher point.

There’s always the Santa Claus rally that often kicks in during the last week of the year.  That might be the biggest hope for the bulls while the chart’s technical indicators play battle for which one is stronger this time around.

After the Willliams %R indicator fell off the bottom of the Dow chart for the first time I can remember ever the index came shooting back like there was no issue in Europe and all worries were for nothing.  Just seven trading days after hitting a recent intraday low the Dow added nearly 10% before hitting resistance around the highs of late October.  The fallout from not moving past this previous high only lasted a day and then the bulls came back in to resume their buying efforts.

The bump on the head from resistance shouldn’t have come as a huge surprise.  The previous trend line of support had been acting as resistance for the prior week’s ascent and just gave the horizontal line extra fire power.  Now that the Dow took a breather for a big down day on Thursday it can return to its bullish ways.  The horizontal resistance area around 12,255 – 12,285 still poses a threat, but the ascending trend line of higher lows has moved on and gives space for the DJIA to advance.

The moving averages are playing their roll for the bulls’ case too.  The 200 day moving average (dma) acted as crucial support on Thursday which is a strong buy signal.  At the same time the 10 and 20 dma had a bullish crossover which is one of my favorite indicators to promote a reason to buy, along with Williams %R.  That said, volume probably won’t have more than a single day above the moving average until the horizontal line breaks and the index has fewer technical headwinds.

However, the downside risk isn’t small from here.  A retest of the October lows is still on the table, just as is another bounce off the trend line of higher lows.  Keep an eye on the moving averages.  Each one could act as support and every time one gives in to selling pressure the more likely a much bigger sell-off is in the cards.  For now, the bulls have the momentum and could carry it through the end of the year, but that could spell out a nasty quick correction in January if the buyers get too far ahead of themselves while chasing performance.