The end is near!

No, not the end of the world, but the end of the recent sell-off on Wall St.  Last night I was reluctant to go out on a limb for today because I couldn't get a real good read on the charts and because I felt that the market was being largely driven by short term economic news.  I guess the results we saw today proved no one else had a very good handle on which way the market was going either.  The Dow was down 42, the Nasdaq was up a few points and the S&P was essentially flat.

What I find interesting about the Dow in the last few days is the volume.  Volume on Wednesday, the day of the Dump, was actually lower than on Tuesday, when we had a decent advance.  And today's volume at 156M shares was lower still.  This suggests that the sellers are getting tired.  Also note that the Morningstar Market Fair Value indicator dropped today back to 1.0, fair value, for the first time since May 26th.  So it's looking like some of the froth that existed at Dow 12,569 a few days ago has been wrung out at Dow 12,249.

Also, today's trading formed a hammer.  However, I'm a bit cautious about this one and want to see some positive action tomorrow before calling this latest decline over.  This hammer may or may not be a bottom.  I want some confirmation.  Note that at least the Dow has some support at 12,200, a spot that was tested today and held.

Turning to the futures, ES, NQ, and YM are all lower at 1 AM EDT, but only by a bit over 0.1%.  And that's been in a kind of directionless meandering over the course of the evening.  As I write this, ES is actually headed higher.  So we get a bit of guidance, but only to tell us that another big drop tomorrow is unlikely.

Oil, meanwhile is back up over $100, amid allegations that some Swedish oil tanker baron is manipulating the futures market, news that should come as a complete surprise to absolutely no one.  But as long as oil and the market remain positively correlated, this is bullish for stocks.

And last but not least, the VIX today hit a high of 18.72, right at the upper end of its monthly range, before falling back to close just over 18.  And its short stochastic is now at the level from which the VIX has gone lower on its last two peaks.  All this suggests that if the VIX isn't going lower tomorrow, it at least has more downside than upside potential at this point.

So put it all together and I'm going to guess that any further market downside tomorrow will be limited.  Note that we're now pretty far extended from the Dow daily pivot at 12,380.  We remain, of course, firmly entrenched in the descending RTC channel that goes back to the start of May, so it's too early to call for a trend change, but I would not be surprised to see at least a small advance tomorrow, particularly if the non-farm payrolls and unemployment numbers come in better than expected (though I'm not counting on that).

Like a bolt from the blue

Wow - last night I really thought the Dow would go higher today.  All the signs seemed to be pointing in that direction.  I guess when I'm wrong, I'm really wrong, to the tune of a screaming 280 point dive that left the entire Dow in the red, along with nearly everything else on my watchlist, and an A/D line of worse than 1 to 5..  And aside from the magnitude of the decline, it had a few other really nasty features.

First, unlike recent big drops, most of the action did not occur in the first 2 minutes of trading.  This was just a steady downhill drumbeat all day long.  Second, just as we cut above the 12,450 resistance level yesterday, today we not only crashed right back through it, but also support at 12,350 before finally coming to rest right at the lower Bollinger band at 12,290.  And third, we're not only right back in the descending RTC channle that I thought we had escaped yesterday, but we're all the way down to its lower edge.

And the amazing thing is that even after today's sharp drop, the indicators are still not particularly oversold.  Indeed, I checked out the Morningstar Market Fair Value Indicator and while it came down a bit today, it still stands somewhat overvalued at 1.02, where fair value is 1.0.  And the Dow daily short stochastic went right back into a bearish crossover.

So we're now left with the third rally attempt in May ending in dismal failure.  So where does this leave us?  Looking at the bright side (if there is one), today's action was welcome because it lets us exercise the Golden Rule of trading: buy low, sell high.  It's been tough finding decent buying opportunities lately.  Today's sale on stocks should help a lot.  But I'm not sure the discounting is even over yet.

There could be some more downside left, judging by the VIX which took a big pop today but did not reach either its upper Bollinger band or particularly overbought levels on its indicators.  However, the futures are all pretty much flatlining right now at 1:45 AM, indicating that the worst may be over for now.  We might even see something of either a relief rally or a dead cat bounce tomorrow, depending on your point of view.

Either way, when Mr. Market goes off his meds like the last few days, my reaction is to generally stand aside and wait for him to calm down.  There's no point in trying to reason with the old guy when he gets like this.  I console myself that while the Dow lost 2.22% today, my losses were exactly half that.  Not that I'm ever happy to have a 1.1% down day, but taking heat is just a necessary part of playing this game.

I think tomorrow's action is going to be largely news-driven based on the economic news coming out in the morning, so there's no point in trying to call it tonight based on the technicals.  At this point, it could go either way.  Much as I'd like to sound the all-clear, it looks like there's still a chance for some further downside.  We'll just have to wait and see.

Looking good for tomorrow

Sunday night I was sure the market would go higher today and it sure did, giving us an excellent 128 point advance in the Dow to close at 12,570.  This is important because it definitely broke us out of the descending regression trend channel begun on May 2nd.  That is a bullish trigger.  It's also the first time we've had a four day winning streak since late April.  Can we make it five?  Let's see.

All three futures are up right now at 1:50 AM EDT by 0.18% to 0.26%.  Though not as good as the gains we were looking at last night, that's still non-trivial.  The action in ES in particular today was important because we blasted right through the 1338 resistance level.  And in the after hours, we've gained even more.  The ES is now at 1346.25, and that's just above the May 19th high of 1345.50.  If this holds, that will be very bullish as it will mark the first time ES has put in a higher high in over a month.

Meanwhile oil continues to hold above $100 and as long as it remains in positive correlation wit the market, that's bullish too.  The dollar meanwhile continues the fall that began on May 23rd.  We have now begun retracing the huge jump it took on May 9th.  I think the dollar has at least two more days of decline ahead and that is also bullish for stocks.

And our old friend the VIX did indeed move lower again today as I thought.  It just about touched its lower Bollinger band at 15.15 before closing at 15.45.  That means the VIX is now knocking on the oversold door.  However, tomorrow is the first trading day of a new month and that's historically bullish.  Also, I'd expect it to take a day before any turnaround in the VIX is reflected in the market.

So all in all, it looks like we've got the green light for more gains in the Dow tomorrow.  So far this week, I am 1 for 1 on market calls.

Trades

Today I dumped my AKS at 15.22.  It put in a classic hanging man and its daily indicators are all overbought.  Time to give it a rest.  I then used part of that cash to buy some TWO, Two Harbors Investment Corp., a REIT that's yielding a juicy 14.9%.  At 10.65, it barely misses getting into my low price/high yield portfolio, but I'll give it an honorary position there based on its yield alone.  It closed at 10.74.

Further gains likely to wrap up May

Tomorrow is not only the last day of the month, but also the first trading day after Memorial Day, and a Tuesday.  That's a historically bullish triple play.  And the futures seem to be agreeing.  Right now at 2:30 AM EDT all three (ES, NQ, and YM) are up by about two thirds of a percent, one of the highest overnight readings I've seen in quite some time.  And equally important, this move brings ES above the top of a month long descending regression trend channel.  That is a bullish setup.

Also, oil continues to move in tandem with the market and it is inching higher, back over $100, in the overnight.

The only dissenter is the VIX which put in a hammer last Friday to close at 15.98.  However, I do not attach as much importance to this as I usually might, since last Friday's action was distorted by the upcoming holiday weekend.  All said and done, I'm pretty confident we're going higher tomorrow.

Memorial Day

Today is Memorial Day, the day on which we honor and pay tribute to all those who have served in our armed forces to preserve our cherished rights and liberties, and defend out country from its enemies, who never seem to be in short supply.

To all the brave men and women serving and sacrificing today at home and around the globe, I salute you. Your courage, honor, and dedication are greatly appreciated. I am humbled and grateful.