Hammering out some gains on Thursday?

Well last night I called for a dead cat bounce today.  I was right about theDow breaking its 8 day losing streak, but it wasn't a DCB.  It was something a lot better - a great big bullish hammer.  So tonight we once again check out the bear and bull arguments for a clue as to where we're headed tomorrow.

The bearish view

The hammer is usually a pretty good reversal indicator.  However, we need to see confirmation the following day, so I'm not going to call this a bottom just yet.  The recent market action is one knife I have no desire to try catching and it's not out of the question that we could resume lower tomorrow..  We also remain under the Dow's 200 day MA and well inside the July 22nd descending regression trend channel.  The economic news continues to be pretty gloomy and there's more unemployment numbers coming out tomorrow, and they're likely to be pretty awful.  So that's the bear case.

On the other hand, we still have a set of technical indicators that are now about as oversold as they ever get.  Let's look at the RSI in particular.

 How long can the RSI stay this oversold?

Once again, this morning the Dow's daily RSI was zero (though it did mange to end the day barely above 0).  That makes three days in a row.  It struck me as being highly unusual so I decided to check on how often that happens.  I looked at Dow daily data from November 3rd, 1980 to today.  That's 7,759 sessions.  In that time the Dow RSI has hit zero just 22 times.

And the longest run of RSI's at 0 was 5 consecutive days.  That only happened once, way back at the end of January 1984 when the Dow was in one of its six week losing streaks.  There were no other zero-RSI streaks of length greater than two.  We are truly in exceptional conditions.  The RSI starting to come back to life is bullish.

A brand new indicator: meet the MIX

We've got the VIX, right?  Well tonight I unveil a brand new proprietary indicator: the MIX.  That's Michele's VIX.  It consists very simply of the daily traffic to this blog.  I've noticed over the past year that traffic tends to increase when the market is down, and vice versa.  The great Brett Steenbarger was the first I know of to observe this phenomenon, and by golly, it works.  Well anyway, today the Nightowl Trader got an all-time record high number of individual page hits.  That is a reversal indicator, according to the MIX.

From MIX to VIX

And speaking of the VIX, last night I said that it looked to have peaked and would head lower today and that's just what it did, dropping 5.7%.  Lower VIX, higher stocks.  As I showed in my post on the predictive power of the VIX, when the VIX peaks, the market will usually reverse course either the next day or one day later.  Today's Dow hammer bears this out.

And I think the VIX will move lower again tomorrow.  We now have a hanging man followed by a lower doji.  The VIX also fell below its daily pivot this morning and that level (24.07) acted as resistance that it tested twice later in the day and failed to break above.  All these factors point to a lower VIX.

Back to the futures

Finally, all three market futures are up at 1:10 AM.  In particular the ES, my go-to chart, is up a good 0.3%.  And ES broke over today's pivot at 9 PM this evening.  Tomorrow's pivot (ie. Thursday) becomes 1247.58 and we're now well above that at 1257.75.  Holding above this number will be bullish, falling through it, bearish.

Oh, and the Morningstar Market Fair Value indicator dropped again today, to 0.91.  That's almost exactly to where it went last year around this time just before the sell-off ended.  A number like that tends to point to a reversal.

Oh, and another good sign - those doofusses in Congress have finally hit the road to give us all a welcome month long respite from their endless infantile bickering.  Not having to see Harry Reid's face in the news every 5 minutes can only improve traders' dispositions.

The bottom line

While the monthy charts remain pretty ugly, they don't look quite so bad now as they did before this 8 day losing streak.  And today's hammer (which was mirrored in both the SPX and the Nasdaq), coupled with the  higher close that finally broke the 8 day curse should lend some positive momentum to the market.  And with the VIX looking more likely to go down than up, and the MIX  at a record high, I'd say that tonight the bulls hold the better hand for tomorrow's game.  I'd not be shorting this market tomorrow and I do think we'll close higher Thursday.  We'll see.