The triangle resolved

Two days ago I wrote about the symmetrical triangle pattern we were seeing:

 "These triangle patterns are like springs that get compressed more and more as the days go by.  When they pop, they can go big."

Well this one blew up today, big time.  Unfortunately, it went in the opposite direction I thought it would. I knew that these patterns tend to exit in the same direction as they entered. My mistake was in assuming the entry was from the longer term uptrend you can follow from the left edge of this daily Dow chart. However, the triangle wasn't really fully established until March 3rd, and a triangle there comes in from below.

So anyway, the triangle is now resolved and we have now broken below the center of the ascending regression trend channel that goes back to last June (though we still have not broken below it yet, even after today's horrible 228 point dive).

I'm showing the weekly chart here so you can see for yourself. The current situation has happened twice since last June. Once in the first three weeks of last November and before that in the middle of last August. And the distance between each of these was about the same amount of time: 10 weeks from August to November and then 12 weeks from November to the present.

The look of this pattern, plus the look of the weekly stochastic suggests to me that this is not in fact the start of the next Great Depression. That said, I'm not looking for much improvement tomorrow. The futures are all down at ;east half a percent again this evening (1:30 AM EST) and there's more bad economic news out of China, this time about inflation (though it's not clear to me how much one can trust anything the Chinese say). Also, the last two times we broke under the center of the long term RTC, it took about a week to recover.

And even though the VIX finally moved out of the center of its recent range today, it still has more room to go higher tomorrow. It closed at 21.88 today and the upper Bollinger band is at 23.17. The only thing in the way is its 200 day MA at 21.92. That might be key, since five of the last six times the VIX approached the 200 MA from below, it was rejected. The one exception was last May when the whole PIGS/the world is ending thing broke.

If the VIX cannot advance tomorrow, that would suggest that any further market declines will be limited. On the other hand, we did break the 12K support level and the S&P broke it 1300 support today. However, the point we closed at today, 11,985 is in fact another support level from the last week of January. Also, note that we are now further from the daily pivot (at 12,209) than we've been at any time since last December 1st. And we also hit the lower Bollinger band in the Dow today too

However, I'm still not going to put up the red swing trend arrow because even a massive one day drop does not constitute a trend, and the action up til now was anything but a trend. I even tried fitting a regression to the recent action but the Pearson coefficient was too low to be meaningful.

I will say that I just hate this sort of market. 90% of the carnage was over in the first two minutes of trading this morning. And even as of late last night it wasn't at all clear that we were in for this so there was no real way to prepare for it. I though we might go lower, but like the Spanish Inquisition, I wasn't expecting this. I simply don't know how to make money in an environment like this. My only consolation at this point is that I have a lot of cash on the sidelines and I'm ready to go shopping when the all-clear sounds.


Bottom line, look for a small range day tomorrow with limited downside. Watch what the VIX does around that 200 MA - that will be the key to tomorrow.

Squeezing the triangle

Today the Dow put in a classic doji ending just about where it began but not until after a real sawtooth of an intraday chart featuring no fewer than seven distinct tops and bottoms. This is not inconsistent with the developing triangle pattern we're seeing. However, since oil is still the King, we take a look at that daily chart for a clue as to where the market may go tomorrow. The indicators are now all at levels about as oversold as they ever get. Not only that they have peaked and started to roll over.

Of particular interest is that oil has had two consecutive down days, something it has not seen since the middle of last month.  And today's loss brought it out of the rising regression trend channel that begain on March 11st.  That is a bearish trigger for oil.  It has mostly been meandering around in the overnight so far, though in the last few minutes (just before 1:30 AM EST) it suddenly rose.  However, I see no particular reasoon for this on the news wire, so that just may be one of those "who knows" things.

On the other hand, the futures have been guiding down all evening and are all down by about half a percent right now, a number that is definitely non-trivial.  There's again no guidance from the VIX which remains stuck in no-man's land.  There is some news out tonight about Chinese exports, but how and if that affects stocks tomorrow is anybody's guess.

In fact, that about sums it up - I have no idea where the market is going tomorrow.  The inverse oil/market relationship suggests stocks may go higher, but the futures are pointing lower.  And given that we're near the top of the recent trading range, that alone might be cause to imagine we're going lower tomorrow.  But there's really just no clear direction tonight.

About the only thing I can think of is to watch the daily pivot which was12,179 today.  Tomorrow it should be a bit higher.  Watch for a break under that - that would be bearish.

No trades today.  My OMEX trade from yesterday returned all of one penny to me today, but I'm still liking its daily chart.  We'll let this one cook a while longer.

Coiling the spring

Sometimes you're wrong, sometimes you're right. Today I was very right. Last night King Oil told me to put on my long hat and today the Dow rose 124 points. The central line of the rising regression trend channel held up nicely too.

And I noticed something interesting today. It looks to me like the Dow is now forming a symmetrical triangle pattern. I've drawn in the other leg of the triangle in this daily Dow chart. If this holds true, then tomorrow we should see a narrower range than today and bounded by both of these lines. It looks like this triangle should resolve itself within the next four days. We'll be watching for increased volume. When the breakout comes, it could be dramatic.

These triangle patterns are like springs that get compressed more and more as the days go by.  When they pop, they can go big.  And since the breakout is most often in the direction of the existing trend, and the existing trend going into this triangle was up, my bets are that we could see a big up day in the next few days.

Tonight, there's not much guidance from the VIX which today continued  its indecisive trip up and down (as led by Puck no doubt) in the middle of its Bollinger band range. And the futures are all meandering pretty much nowhere themselves right now (at 1 AM EST), with all three being down just a hair.

The only real pointer for tomorrow's direction right now seems to come from oil. Oil futures have been in a declining channel all evening. And since we have been in an inverse oil/market correlation since the end of January, this implies higher stock prices tomorrow.  But then we have this upper range limit right around today's close. And there's some significant oil-related economic news coming out tomorrow at 10 AM (crude inventories), so the day traders will want to be vigilant for that. All in all, I'd look for a smaller range day tomorrow than today, possibly starting off lower and ending around today's close or a tad higher.  That's about all I got tonight.

Numbers to watch tomorrow

12,125: Today's daily pivot (tomorrow's not available yet). Today we crossed above this number and never looked back. More of the same is possible tomorrow.

This number is also the lower edge of the symmetrical triangle. I'd expect it to provide support tomorrow.

12,210: The upper edge of the symmetrical triangle. This number is close to last month's resistance area too and has proven to be tough to crack since we dropped below it on February 22nd.

12,125: The lower edge of the symmetrical triangle. I'd expect this number to provide support tomorrow.

Trades

Today, I bought a small amount of my favorite little spec play OMEX, Odyssey Marine, the Treasure Quest guys, at 2.67.  It has pulled back a lot since its high last month and put in a doji on unusually high volume today.

Up and down

"Up and down, up and down,
I will lead them up and down"

Puck, Midsummer Night's Dream, III, 2

Hah, you always thought that impish Puck was talking about Hermia and Lysander, right? Heck no, he was talking about the stock market! Just look at the daily Dow chart. From right to left, two days down, one day up, one day nowhere, one day down, two days up, etc., etc.

Even intraday today, up nicely at the open, then down over 100 points, then back up in the afternoon, then down again into the close. I was down almost 0.9% right after lunch, but managed to finish the day with a loss of just 0.17%.

No rhyme or reason, just up and down, up and down. There is just one thing that makes sense here. Notice how the low of every single one of the last four sessions has bounced off the central line of the regression trend channel. OK, today it was the close, not the low, but we at least are seeing consistently higher lows since March 3rd. And oil was up again today. So that inverse relationship to the market is continuing, as I mentioned in my last post.

Whither oil?

And speaking of oil, while the oil futures continued higher today, I note that the XOI, the companies involved with oil, have put in two fairly large consecutive red candles, something that hasn't happened since last August. Oil itself went lower right after that back then. Also, this evening we have word that Kuwait, the UAE, and Nigeria may bump their output to offset the loss of Libyan oil.

The effect on crude futures was immediate and dramatic, to say the least. Just after midnight, or about an hour ago, the CL futures fell off a cliff. I've never put up a daily chart of CL in 5 minute bars before, but this one is worth looking at. Check it out.In fact, in this one day chart, you can see that CL wasn't feeling too healthy most of the day. And we know what that means, right? That's right, oil down, stocks up tomorrow. Also, CL put in a gravestone doji in regular trading today, a bearish sign.

The other indicators

Now let's check out the market futures. Right now (1:25 AM EST), ES is up nearly half a percent, the largest gain I've seen at the time of night in a while. NQ and YM are also up by almost as much. And they've been moving up pretty steadily all evening. This also looks bullish for tomorrow.

The only non-confirmation is from our friend the VIX, which remains firmly in Puck's grasp and is just bouncing up and down in the middle of its Bollinger band range. I know of no way to tell where it may be headed next. But the other signs tonight look pretty convincing to me.

It's not the start of a trend, but I think there's enough here to warrant reaching for the long hat for Tuesday.

One final note on oil

Much is being made right now about how the unrest in Libya could become a civil war that could last weeks or even months. Well, to me it already looks like a civil war, and it might last years. The big problem is Libya's geography. Rebels control the east, Khadaffi controls the west. In the middle is a vast expanse of nothing. Remember what happened the last time two armies decided to duke it out in northern Africa? Rommel and Montgomery spent the better part of 1941 and 42 chasing each other in and out of Libya.

So unless someone can get to the Infernal Colonel, this mess may go on for quite some time. I don't think oil is done going up just yet, but it looks like some of the speculators may be taking a few profits tomorrow before gearing up for the final push to the blow-off top that is surely coming in a few months.

Numbers to watch tomorrow

12,070: near-term support. A break under this would be bearish. I'm not expecting this.

12,120: this is tomorrow's RTC support level, the one that has been honored the last four sessions in a row.

12,173: the daily pivot. Climbing above this will be a bullish sign. Actually, that's today's pivot. Tomorrow's will be lower. I would not be surprised to see this level taken out early.

12,250: the mini-resistance level established last month.

12,000: the strong psychological support floor.

No trades today. I'm still waiting for the dust to settle.

What fools these mortals be!

Monday Outlook

This market is as hard to read as any I've seen in years. The only good thing I can find right now is that the uptrend that goes all the way back to last July is still completely intact, as you can see in this weekly Dow chart. And although we had some bad daily declines last week, overall the week ended with a small advance, and that came on higher volume than the big decline of the week before.

That said, there's no guidance from the VIX right now which is hovering in the middle of its Bollinger band range. Oil, on the other hand shows no signs of retreat and as I showed in my last post, oil has been in an inverse correlation to the market since the end of January, and that correlation is getting more pronounced. I think a lot will hinge tomorrow on the market's reaction to the announcement this weekend about possibly releasing oil from the Strategic Petroleum Reserve. If that weakens oil, the market should react positively. And historically, we are entering the middle of March, which is the best part of the month historically.

But for the time being, all three futures are down (1 AM EST). ES and NQ are both down by just over a third of a percent, so that's not very encouraging. Beyond that, I admit I was wrong about last Friday and I don't have a real good feel for where we're going tomorrow.

Important numbers to watch for tomorrow

12,100, the center of the RTC. The low for the Dow on Friday was 12,079, exactly that same point on this rising line for that day. A break below this is bearish, above is bullish.

12,203, the Dow daily pivot. If we can get over this, then bullish. Hitting this level and reversing would be bearish.

12,250, the most recent resistance level in the Dow established last month.

And of course, 12,000 on the other end, the prime psychological support.

Performance

Although the Dow gained slightly last week, it was not a good week for me. I lost 1.32%. It was a week that just did not suit my style and my attempts to work around this only made it worse. However, the damage could have been worse I suppose and I'm still up 6.69% year-to-date, compared to the Dow's 5.11%. We'll see what this week brings.

Does rising oil make the market fall?

OK, now that I've gotten my oil rant out of my system, it's time to take a more analytical look at the situation. I'm going to do the same thing I did with the VIX last month - look for correlations between the market and the price of oil. Does rising oil really make the market go down? Let's see. First of all, here's a chart of crude oil futures (the CL M1) in red, for the last 300 days, 12/18/09 through 3/4/11 alongside the Dow (in blue). The Dow values have been divided by 1000 to make them scale nicely. At first glance, it sure looks like there's actually a high positive correlation between the market and the price of oil. Oil up, market up, and vice versa.

Now let's do a cross covariance of oil and the Dow. Yup, pretty much what you'd expect from looking at the raw data. There is actually a strong positive correlation in the sample period between the price of oil and the price of the market. Here's the chart. Recall that the halfway point of the x-axis represents the point in time where both charts are completely lined up.

Now let's do the same thing, but on just this past month of trading. Here are the last 20 days of the Dow vs. CL. Whoa! Almost the exact opposite. Ignoring the slope of the curve for the moment, we see that what we have here is a high negative correlation: oil up, market down, and vice-versa. So sometimes oil and the market correlate but other times they don't. It might be useful to know when this flip-flop happens.

So I ran the 20 day correlation in a loop, testing every 20 day (one trading month) period from 12/28/09 to today, and then plotted the result of each correlation, ie. how well oil and the market correlated for every 20 day period.The results are interesting. We can see that over the course of the last year, oil and the markets have pretty much moved together, though by varying degrees.

The greatest correlation came in the 20 day period beginning 4/30/10. After that, oil started to become generally less correlated with the market but at no time did it exhibit an inverse correlation (except for two dips just below zero). Until just under two months ago: January 21st of this year. After that, oil and the markets started moving in opposite directions, and the trend has been getting constantly larger ever since. Ie., the more oil goes up, the more the market goes down.

Unfortunately, this all seems to raise more questions than it answers. Why should oil suddenly reverse its correlation with the markets around the end of January? I tried poking around the news archives around that time but didn't find anything particuliarly significant. The unrest in Tunisia was already going on at that time, but it was a month later than when it all started. And why the big spike in positive correlation at the end of April 2010? Quite frankly, I have no clue.

It might be worth revisiting this to see what happens when oil and the markets go back into positive correlation. I wish I had a better conclusion than this, but it's still pretty interesting. Perhaps the main lesson here is that rising oil is never necessarily always either good or bad for the market. And whatever relationship it has is subject to change in a non-random fashion.

All Hail King Oil!

Bow to the barrel
All hail the King! King Oil, that is. I thought last week's crazy run-up in oil was due to Middle East politics. But this week's even bigger jump clearly indicates that Mr. Market has left the building and oil is now in the driver's seat. It matters not what candles the market put in last week so there's no point in putting up the weekly Dow chart the way I usually do.

Instead, today, we're going to look at oil, specifically crude oil futures. Here's the weekly chart going all the way back to 2008.You may want to click on the image to view it larger. I don't know about you, but I don't like the looks of this chart. Let's start off on the right-hand edge. Two weeks ago, oil opened at 93.75. It closed last week at 106.63. That's a 14% jump in two weeks.

Are you driving 14% more than you did two weeks ago? Are the airlines flying 14% more planes than they did two weeks ago? No and no. Is Libya a major oil exporter? No. It produces 2% of the world's output. Has it all gone offline? No. And the Saudis, who aren't stupid, have indicated a willingness to make up any shortfall.

So this trend is not being driven by supply and demand, it is pure speculation, exactly the way it was back in May of 2008. In fact, that's where we have to look to find the last comparable situation, which I have conveniently circled for you on the chart.

Historical comparison

Now here's the scary part. After that jump in 2008, it took eight more weeks before we finally hit the crazy blow-off top in the first week of July. And it only gets worse. Draw down from the prices in May 2008 to the indicators below the chart. Then compare that to today. We are right now if anything even less overbought than we were in 2008, implying that oil still has as much steam to go higher now as it did then. And oddly enough, if you follow the horizontal blue line that marks our current price level back to the left, it intersects the chart at the end of April 2008, just before the big two week jump.

On top of that, we're now hearing calls for oil to hit $200, just like back in 2008.

And we all know what happened to the economy in the fall of 2008 after oil had peaked.

Good news/bad news

Now for the good news, such as it is. First of all, I think oil has the same chance of hitting $200 this year that it had in 2008, ie. none. And if anyone tries to tell you that "this time is different", you can be sure that this time is exactly the same as last time. One thing that really is different though is that the economy is in a much different place than it was in early 2008. If your plane crashes from an altitude of 10 feet, your survival odds are a lot better than if you crash from 10,000 feet. Right now, the economy is nowhere near as overheated as it was back then.

Now I suppose that there's some apocalyptic combination of circumstances that could join together this year to throw us into an even worse spot than the Great Recession, and there are some people who still keep their fallout shelters stocked, just in case, but you can't really live your whole life that way. I just find it hard to believe that that's going to happen. Not when all the hard economic news coming out lately is actually good.

Nevertheless, clearly this oil nonsense is bad for the economy. But I don't think it's the end of the world (that comes next December 21st, according to the Mayans). And if history is any guide, it might just end with another collapse of oil prices back down to more reasonable levels. Like last time.

Where to next?

So how much longer? Well here is a weekly chart of the XOI, the Amex oil index, going back the same time period:I've drawn a rising regression trend channel on this starting with the low at the end of last June. Note that the Pearson's coefficient on this one is 0.991, an extraordinarily high number for a market regression. If you extrapolate this trend forward, where does it intersect the all-time high from 2008? June 13, 2011. Call it somewhere in the middle of June. That's when oil will hit $147 a barrel again. And oddly enough, that date is just about the same amount of time it took the last oil spike to top out. Look at the futures chart again. The peak? The last week of June 2008.

Possible outcomes

After that, it can either continue higher or collapse, just like last time. I'd be really surprised to see it go higher because I don't think the world economy can support it at this time. One other possibility is that oil will just spike exponentially and thereby hit the blow-off point before June. But based on what we've seen so far, it sure looks like we're getting ready to play 2008 over again..

So the bad news is that we still have about three more months of teeth gritting every time we fill up our tanks at the pump. But the good news is that it's not too late for you to be an oil speculator too and join in the fun. I don't normally play this sector, specifically because I believe it to be so highly manipulated, but obviously plenty of others do. And that's all she wrote.