Yesterday I took a wild guess that we'd be up today on the strength of the overnight futures. Turns out it was a pretty good guess with the Dow advancing a big 187 points. This was significant because today's close at 12,453 puts us right back to the 12,450 resistance level that has bedeviled the market all year with 13 failed attempts to breach it so far. But today's high of 12,475 was the highest we've hit yet.
Can we move higher tomorrow or will this attempt fail like all the others? I actually think we might have a shot at it, because unlike the other times, this time the indicators are not all in significantly overbought territory. Even with today's big gain, the indicators are now actually just coming out of oversold status. And it also took us convincingly out of the descending regression trend channel going back to April 8th.
But I'm putting up the daily ES chart today since at this hour (1 AM EDT) we have a new candle forming, and it's green, with ES now up a very decent 0.43% in the overnight. YM is up too and NQ is up nearly one percent. I've noticed that often resistance levels take three tries to penetrate and if we count February as number one, the beginning of this month as number two, then we're now going after this level for the third time. And we now have to wonder if the third time will be the charm.
Meanwhile the VIX actually broke under its strong long term support intraday today, though it did close at 15.07 on a gap down green candle. Right now, the futures seem to be saying that the VIX is unlikely to recover this level tomorrow.
Meanwhile oil actually went back up today over $111, a fact that the market totally ignored. All of this seems to be pointing to higher prices for stocks again tomorrow. We'll see.
Well, Sunday night I thought the market would be up Monday. It went down. Last night I thought it would be down today, so naturally it went up. At this point I will state right up front, while I still have any hair left that I haven't yet pulled out, that I do not understand what the market is doing right now. It just gets into that state sometimes.
There's no guidance at all from the VIX tonight, which fell right back into its recent consolidation range. And I just don't know what to make of the recent up down up down in the Dow. About the only indicator we have for tomorrow comes from the futures, with the ES, NQ, and YM being up by a healthy 0.55%, 0.69% and 0.34% respectively at 12:40 AM EDT. The ES has recovered nearly all of its S&P induced losses from Monday and its RSI and stochastic look bullish.
Unfortunately, I was away from my desk with other commitments today and wasn't able to spend as much time watching the market as I usually do, so my best guess, and at this point it's only a guess, is that we may be going higher tomorrow, mostly based on the futures and the VIX. We'll see.
Today was one of those days you just cannot see coming from the charts. Everything looked technically like it was set to go up today, at least a little. When I got up this morning and looked at the charts, I thought that reactor in Japan must have exploded in a giant mushroom cloud overnight or something. Instead it was S&P dropping their rating bomb on the market. When all of the action is over in the first 90 seconds of trading like that, I don't see how you can make any money there.
Thankfully, the Dow recovered somewhat as the day went on and I finished being down "only" 0.75% instead of the 1.5% I had lost at the open. But that left us with a problematic candle. Not quite a hammer, not quite a bearish engulfing pattern. I've seen this a few times before and generally the next day is lower. And indeed the futures are all lower now at 1 AM EDT by about a third of a percent.
The only thing I got right today was that the VIX indeed could go no lower and in fact gapped up at the open. Even there though we ended up with this odd case of the VIX closing higher on a red candle. In fact at 16.96, it is now smack back in the middle of its recent consolidation range. But its indicators suggest more upside is possible at least in the short term.
Now that S&P put the kabosh on what should have been a developing upswing, I think another leg lower is not out of the question. Note also that we closed below the 12,250 support level today and are now right back into the descending RTC channel from April 8th. The next support is at 12,070, which is also the lower Bollinger band. After that, there's no support until 11,615, the March 17th reactor/tsunami low. I don't think we're going that low tomorrow, but it's not out of the question eventually. In any event, I'm turning the swing trend arrow back to red.
I think part of the problem is that this is a holiday shortened week and also a school break. I'm sure a lot of the Wall St. Byg Wygs are on vacation leaving the market to pretty much careen along on its own for a few days. Right now the daily situation is too tough to call, but the weekly chart I mentioned yesterday is starting to look even worse. I have removed my long hat and I'm putting on my medium term short hat. I'm definitely not liking the market for the next couple of weeks at least.
Last Thursday night, I said we'd go higher on Friday and that's just what we got, with a nice 57 point gain to close at 12,342 in the Dow.
So what's next? Let's look at the daily Dow chart here because that seems to be the most compelling right now. This is actually looking quite bullish to me. Friday's gain took use decisivly out of the descending regression trend channel going back to the peak on April 8th. And it also provided a bullish confirmation of the hammer candle formed on Thursday. And finally, all of the indicators are in oversold territory and have executed a bullish hook, signifying that they have bottomed. We see the same story on the daily ES futures chart. However, ES is actually down by 0.2% at the moment, although it's still early in the evening (8:50 PM EDT).
In any event, note that historically the day after Tax Day is bullish. The Stock Trader's Alamanc was right on the money with a bullish history for Friday. They say that tomorrow is also a good day.
The contrarian contrarian
So what's up with the "contrarian contrarian"? Well it seems to me that everything I've been reading on the web or seeing on the news lately is full of pundits claiming that there's a massive overload of bullish sentiment and that from a contrarian standpoint, this means the market is ready to go down. Well let's take this contrarian thing one step further: if all the analysts are bearish because everyone is bullish, should I then not become bullish because of their bearishness? OK, this is about where my brain starts to hurt, but you have to admit, the daily chart doesn't look bearish in the least right now.
On the other hand, the weekly Dow chart is not looking nearly as good. In fact, on the weekly Dow, we have a doji followed by a hanging man on increasing negative volume. And all the weekly indicators are overbought. Also, the weekly VIX is now down hard against a support level going back a year now around 15.25. Unless it somehow manages to break under that (and I don't think it will), the VIX has nowhere to go but up, and that's bearish for stocks.
Also oil has now regained the 110 "alarm level" after two big down days at the start of last week. I don't think oil is nearly through with its run up. I remain convinced that this is 100% speculation driven, not supply and demand. I give it another two months. That coincides quite nicely with the peak in 2008, which came at the end of June. This will also put the squeeze on stocks.
So right now I'm thinking that tomorrow, Monday, is going to be up, but the rest of the week is in doubt.
I'm not really doing as well as I'd like at this point. My performance has been hurt by the fact that it seems that all of the members of my low price/high yield portfolio (which is part of my trading account) suddenly decided to do secondaries in the last few months, tanking their stock prices. Still I am up 5% year to date, which is just over 27% annually. That's not too bad, although the Dow is now up 6.6% and that's the benchmark I try to beat. And for the week, I was down 0.16%, or a bit worse than the Dow.
Another thing that's limiting my results is that I've been raising cash lately. I think this year I'm going to "sell in May and go away". I didn't do that last year and subsequently regretted it. Right now the monthly chart is looking even weaker to me than the weekly, with a hanging man followed by what is at the moment a doji. We'll see.
Michele is a swing trader, a night owl, and a student of Japanese candlestick charts. She retired from a large tech company at the age of 50 and has now been trading US stocks and occasionally the e-minis on a full-time basis as an independent trader since 2004.
The Night Owl Trader publishes every trading day late at night (or very early in the morning) around 1 or 2 AM, with occasional bonus commentary and analysis thrown in on weekends.
The Night Owl is independent, ad-free, and made freely available to all. Contact me at nightowltrader (at) gmail.com.
BB - Bollinger Bands COT - Commitment of Traders Report DCB - Dead Cat Bounce MA - Moving Average RTC - Regression Trend Channel YTD - Year To Date
(My lawyer made me do it) This blog is not trading or investment advice, account management or direction. All trades listed here are presented only as examples of the author's personal trading style. Investing entails significant risk and trading entails even greater risks. Act accordingly.