Tuesday, November 30, 2010

Channeling action continues

Last Friday I wrote:
It looks to me like we're in for some continued weakness for at least a few more days, possibly a week.
and sure enough, the Dow ended down 39.5 today. But look at how that played out. I also said we'd get more clarity after today's action and so we did. Today, I'm a bit more optimistic because there are two telling points in this chart. First is the shape of the candle. This is as classic a hammer as I've seen and that's always bullish. If you consider the range-bound sideways channeling action of the last 10 sessions now as lumped together into a consolidation, then we have a potential resolution here and may see some upside later on this week.

The second thing to note is that the bottom end of the channel, the psychologically important 11,000 level was tested today but finally held in the end. The bears tried to knock 'em down but were finally unable to hold 'em down. (That's basically the rationale behind the hammer).

I note also that the channeling has now gone three days outside of the right edge of the descending RTC trend that began on November 5th. This is also bullish.

And finally, let's take a peak at the daily VIX. I've zoomed in on the last couple of weeks here.What an interesting chart. The VIX today ran right up to its 200 day MA (23.19) and was stopped cold, closing at 21.53. Strike one. It also hit its upper Bollinger band. Strike two. And look at the two day pattern - a classical dark cloud cover, and that's an excellent bearish predictor. Strike three. The VIX is out. (Oh and the VIX today got as far extended from its pivot point as it's been in weeks. Never underestimate the attractive power of the pivot. It will always return there sooner or later).

On that basis, it would not surprise me to see the VIX lower tomorrow and therefore by implication, the market higher. We're nearer the bottom end of the 10 day Dow channel now than the top and we know the bottom held support. And of course, tomorrow is the last day of the month, so there may be some window dressing going on (though that seems to be less in vogue lately than in the past).

In any case I'm removing my short hat and reaching for my long hat, but I'm keeping the channeling icon up since there is no real uptrend developing just yet.


I deep-sixed my OMEX today at 2.02 and took a small profit. It closed a few cents higher but after last weeks big gain, I think it now has more risk than reward, at least from a swing trade viewpoint and that's what we do here.

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