Bull Market Correction or Start of Bear Market?

Most of time, market participants (hedge funds, prop desks) like to hide their hands as they don't like followers in the early stage of a market turning point.  S&P rebounded from Tuesday low and closed fractionally above 200EMA on Thursday, but failed to close above 200EMA on Friday.  The key question now remains: are we at a bull market correction or start of bear market?  I'd like to use VIX, one of my favorite leading indicators and my favorite PPO divergence analysis tool to dissect early signs of future market direction

As you can see in the chart (click to enlarge), VIX dropped this week to a level that's higher than the level in the week when "European TARP" was announced, however, the PPO has dropped to a level lower than that week, this divergence is indicating that fear is subsiding as of now, and it is a slim of evidence that the market is under bulls' control despite the Friday's failed test of 200 EMA.

Euro Index made a new low last week, however comparing with the low it made in mid-May, the PPO is picking up, this divergence is suggesting a trend change is potentially forming.

Similar but contrary to Euro Index, US Dollar ETF (UUP) is showing a divergence between price move and PPO.

Shanghai Index Chart Analysis

In my previous post, I tried to predict the low end  target of this round of Shanghai's bear market / bull market consolidation.  Recently, Shanghai rose for 2 consecutive trading days, now the index is above 10 day EMA with higher than normal volume.

The chart above indicates Shanghai index is indeed at potential turning point:
1. two sets of Fibonacci scales, 1st from 2007 high to 2008 low, 2nd from 2008 low to 2009 high
2. the 2009 bull market ends at 38% level of 1st Fibonacci scale
3. we are now at 50% level of 2nd Fibonacci scale

If the scenario of consolidation ending soon turns out to be true, then the target of this market would be 61.8% of 1st Fibonacci scale, or 4400 level which is about 76% upside, and consider what will happen to Crude (USO) and Morgan Stanley China A Share Fund (CAF)

However, potential risk to this scenario is that rate hike hasn't happened yet.  If it does, does it have potential to kill the possible rally?  I would keep an eye on moving averages as trigger to enter.

Chart Indicators Glossary and Calculation Methodologies

This post summarizes major chart indicators calculation methodology and their main usage from the perspective of market timing.

McClellan Oscillator, a short- to intermediate-term momentum breadth indicator, It's calculated each day by taking the difference between the 39-day and 19-day exponential moving averages of the number of net advances on the NYSE/NASDAQ.  This indicator is best used to time bottom of a market when there are positive divergence between the index and oscillator's negative readings, for more details, see here

Over-extended Ratio, this indicator can be used to identify potential market tops

Coppock Guide, this indicator can be best used to identify long-term market bottom

S&P 500 Chart Analysis

The S&P 500 neck line of March 09 head and shoulder bottom was 950, indicating the price target being 1233, the market's intermediate top on April 26th was 1219.8, just a few points below the target.  Then we know the market violently crashed about 10% in next 2 weeks ended on 1110.88 on May 7th.  The question is whether this is end of rally or is it a deep correction? 

Signs supporting correction include:

• The rally started last March didn't experience any correction deeper than 10%, which opens up possibility of a 10%+ correction
• This correction may be similar to Jan correction in the fashion that it breaks rising wedge formation and forms a less upward sloping new rising wedge.  
• April 26th market top was very close to, but has not reached price target of inverse head and shoulder pattern
• VIX spiked too fast (almost 200% increase in 2 weeks) which is comparable to what market experienced in late 2008, however, US economy now is in much better form than that of late 2008
• As of April 27, Bull/Bear spread (Investor Intelligence bullish sentiment minus bearish sentiment) is reaching towards 40 danger zone, but has not yet arrived there yet. For more details, see here.

Today's Markets Do Feels Like Bottom

Black Swan event happened today on the markets, when DOW, NASDAQ and S&P 500 all falling from a cliff in the afternoon.  People are blaming machine trading and erroneous trader as the culprit of the massive tumble, Mark Fisher blamed HFT for today's event (http://www.cnbc.com/id/37002752), however, I don't agree.  If it is really caused by error, then why the market turned at the points they turned?  When the market turned, why they turned in that speed rather than slowly claw back, I do feel the markets act in its own mysterious way and logic, and what happened today is not accidental, far from an error.  I agree with Mark's comment, it is a warning and a signal of great danger ahead.  Program Trading may accelerated the fall, but I believe without machine trading, the market will do the same thing under this same circumstances.

Today's markets do remind me how they did in last March.  Their accelerating drop look very much like a left side of a giant head.  Volume was huge, for example, S&P's volume was 8.14B.  It's obvious that investors are fleeing the market, panic overwhelms, which means today is very likely capitulation day of this correction started on Apr 16th.  These are characteristics of a bottom.

If today's action is truly the head of reverse head and shoulder  formation, then price targets for the major markets are signaled:
NASDAQ's neck line is at 2420, head was at 2185, and price target after breakout would be 2670
S&P 500's neck line is at 1174, head was at 1066, and price target after breakout would be 1282
DOW's neck line is at 10941, head was at 9869, and price target after breakout would be 12013

For record of today's historical event, here are charts of today's markets
NASDAQ

S&P 500

DOW JONES

S&P 500 and NASDAQ Chart Analysis

S&P 500 is forming a viscious head and shoulder top pattern, with downward sloping neck line, and price target at around 1140.  We do see volume zoom up at the right side of the right shoulder which serves a confirmation of this formation.

Similarly NASDAQ is forming a head and shoulder pattern as well, different from S&P, its neck line is slightly upward sloping.  Its near term price target is around 2365 which is close to my price target of 2320 level.

Stillwater Mining (SWC) Chart Analysis

SWC is considered the best palladium play, above is its 2 year weekly chart (click to enlarge).

I spot two ascending triangles.  The first one was broken in late 2009, the second one was broken in March.  Drop on May 5th is clearly a return to breakout, as stock managed to close right at breakout level of $14.5.  Expect upward movement to $20 level in near term.

Morgan Stanley China A Share Fund (CAF) Chart Analysis

2 Year weekly chart of CAF, click the chart above to view larger picture.
Stock is trading in a range for a little more than a year already, current drop seems not done yet, near term price target: $24

Pfizer (PFE) Chart Analysis

Pfizer staged a surprising rebound when market tumbled more than 2% on 5/4.  What triggered this rebound then? 

The above chart shows that $16.82 is the 50% Fibonacci retracement from October 2007 high to March 2009 low (click to enlarge). 

If we look at the time frame from March 2009 low to Jan 2010 high, then approximately the same level $16.75 is the 38% retracement from Jan 2010 high, according to chart above (click to enlarge)

We should use $16.75 as stop loss.