Saturday, August 6, 2011

What the heck

Well the best thing I can say about this week is that it's finally over.  A horrible, miserable dive off the cliff fittingly ended with a debt downgrade from the erstwhile S&P, whose managers I'm sure will now all have to get unlisted phone numbers and join the witness protection program.  Thank God the markets are closed on Saturday.  And Sunday too.  At least the Ess-n-Pee  had the decency to drop their debt downgrade bombshell after trading ended on Friday, giving us the whole weekend to reflect on the implications.

And their statement was rather odd too, I thought.  It seemed to be more an indictment of America's admittedly Kafkaesque political system than its economic might.  All that aside from the bizarre question of a minor $2 trillion arithmetic error that may or may not have occurred.  In any case, thank you very much, Emperor Nerobama, Harry Reidboehner, and the rest of you Gang of 435 for tanking America.  We'll remember you all come next Election Day.

So what does this all mean for next week?  Who the heck knows.  I feel like one of those cartoon characters who has a little angel sitting on one shoulder and a little devil on the other.  The angel is saying "it's not so bad, this has already been priced in, all this does is remove some uncertainty from the market".  And the devil is saying "This is it, it's time to panic, you think last week was bad,  the market is going to be decimated come Monday".

I guess the only clue we're going to get is when the futures start trading again tomorrow evening.  Personally, it seems like taking the pessimistic view has been the winner lately.  For now, with the VIX at its current crazy levels, I will continue to stand aside until some semblance of sanity returns to this psychotic market.

Friday, August 5, 2011


Well my cable modem died this evening so I'm using the 3G network on my tablet to connect to the web. It's good for emergency use, but my data plan in limited so tonight's post is going to be short.

There's not much to say tonight anyway after today's horrendous slaughter on Wall St. Last night I was sure that the hammer we saw yesterday would mean we were going higher today. Boy was I ever wrong. Today I had my worst day by far since I started trading. In my defense, I will say that a) I wasn't the only one who got fooled and b) I did say I was going to wait for a confirmation today before declaring a reversal at hand.

That said, today had the feel of capitulation to it, especially by the end of the session and given the extraordinary relative volume and the VIX hitting nearly 32, closing above the level it hit during the Japanese quake/tsunami panic back in March. The best that can be said is that the charts are going exponential now and that generally means a turnaround is near.

But with the VIX at these levels (and I was sure wrong about the VIX going lower today too), all bets are off. I'm going to continue to stand aside until I see a turnaround. This isn't a falling knife, it's a falling guillotine and there's no way I'm going to try catching it.

Good luck to all tomorrow and heaven help us. Oh and a big thanks to Emperor Nerobama for tanking our economy and destroying America.

Thursday, August 4, 2011

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.

Wednesday, August 3, 2011

Dead cat bounce possible Wednesday

Dow daily
Ya gotta love Robbie the Robot. Last night he warned us of the perils of crossing the S&P 200 MA and sure enough today we were treated to some ugly losses across the board, with the Dow taking a 266 point nosedive with a solid red candle.

Take a look at this daily chart - yesterday the S&P crossed the 200 MA, and today the Dow followed suit. No support, no test, just badda-bing, leaving us at 11,867. This not only broke the 200 MA support, but the June support of 11,894 too. From here there's no more support until the March lows around 11,614. That's just 253 points from here. We dropped more than that today alone.

Further support lies at 11,450, 11,200, 11,000, and 10,680. But we don't care what happened, we want to know what's going to happen tomorrow, Wednesday. Let's look at the bull and the bear arguments.

Dow losing streaks

Today put the Dow on an agonizing eight day losing streak. Which brings up the question of how long can this go on? You may recall I addressed the issue of market streaks in this post last year. Today I did the analysis over again, this time using Dow daily closes all the way back to October 1st, 1928 rather than just the last 10 years. And what were the results? Well, in 20,802 sessions, the longest continuous losing streak in the Dow was... drum roll please... ten. And that only happened once

There were three streaks of length 9, and just 4 (make that 5 after today) of length 8. So the odds of this losing streak going longer than 8 tomorrow are just four out of 20,802. As I mentioned in my post just this past June on weekly losing streaks when we were down six straight weeks, this is the kind of number you really want to think about betting against.

And back in June, sure enough, the Dow did not go down an additional week. And those odds were only 5 in 4,264. But historical arguments are like counting cards in blackjack. No matter how high the count swings in your favor, you could still lose the next hand. Still, you have to wonder...

The technical indicators 

Adding to the bullish case is the state of the technical indicators. The Dow's RSI hit zero, yes zero. And it hit that yesterday. It remained there today. It literally doesn't get any more oversold than that. The last time the RSI hit zero was on July 2, 2010, following 10 straight losing days (OK, there was one day in there that closed 5 points higher which prevented the run from truly being 10 long, but the idea is there).

Anyway, what happened next? The Dow took off on a 7 day rally. In fact, July 2, 2010 was the exact day that the longer term uptrend began, lasting all the way until this past May. There is one big difference though. Back then at that point, we had been below the 200 day MA for 7 sessions. Today marked just the first close below it. Still, you have to wonder...

The other indicators are equally oversold. The Dow momentum was -721 today - that's the one there that looks like it's falling off the bottom of the chart. Money flow and the stochastic are also highly oversold.

 The VIX

Meanwhile, there's some possibly significant guidance in VIX land tonight. This VIX rose today to close at 24.79. However, today marked the third day it put in a lower high. The last three VIX intraday highs were: 25.94, 25.63, and 24.79 (today). Just as importantly, today's candle was a textbook bearish hanging man. And today the VIX exited its ascending regression trend channel of July 22nd. That is a bearish setup (remember, bearish for the VIX is bullish for stocks).

And today the VIX broke away from its upper Bollinger band. Finally, all of the VIX indicators are as oversold as they've gotten on past VIX peaks. The short stochastic in particular executed a bearish crossover today. This is looking to me like not a bad entry spot for a position in XIV, the inverse VIX tracking ETF.  And it implies that if the VIX is truly poised to go lower, the market will perforce go higher.

Morningstar Market Fair Value, 3 year
Finally, let's check out the Morningstar Market Fair Value graph (which you can see on their web site here).  Yesterday's ratio was 0.93.  I expect today's number (not out yet) was lower.  And remember July 2nd, 2010?  Well that was the day the Morningstar ratio hit its low during last summer's ugly spot.  The value? 0.90.  We're getting pretty close to that now.

The Bear Case

So that's the bull case.  The bear case?  Well, it seems to consist entirely of the fact that in the last two days all three major indices (Dow, SPX, and Nasdaq) crossed below their 200 day moving averages.  But the thing to remember, is that while this is bad, very bad, it's not instantly fatal.  Look back at May 20th last year.  That was the last time the Dow took a real dive straight through its 200 MA.  The next day was up.  Of course it then went on to put in further lows, but the day after the plunge was up.

The bottom line

I'm kind of expecting this same scenario for tomorrow.  At the moment, the market futures are essentially flat.  The ES is actually up by a scant 0.08% at 1:50 AM EDT.  Which doesn't mean there isn't more downside to follow.  I think there is.  But I also think that we're in for a short bounce, dead cat style, most likely tomorrow (Wednesday) and possibly extending into Thursday.  That's all she wrote (whew, that's enough!)

Tuesday, August 2, 2011

Danger Will Robinson: S&P hits 200 MA

Danger, Will Robinson!
Remember Robbie the Robot on TV's Lost in Space, perpetually warning Will Robinson of impending doom every week? Well, he's paying the market a visit tonight in the form of a double-barreled alert, so pay attention.

The Dow Monthly

Last night I looked at the huge pop in the market futures and decided we were in for a big relief rally today. And that's just what we got - until 10 AM when the ISM numbers came out and rained on the parade. After that, it was all over.  Up 100 points, then down 200, then back up again to finish barely down 11 points on the day. More than one person commented on what a strange day it was. And totally untradeable, for me at least. These sorts of violent intraday swings may be great for the day traders, but they do nothing for me as a swing trader besides making it impossible to choose decent entries or exits.

Dow monthy chart
But tonight, being the start of a new month, we look at the monthly Dow chart here, and it's not looking good. You can see the rising regression trend channel of July 2010. We exited that in June - that was a bearish setup. And stayed outside last month - that was the bearish trigger. And look at the indicators. They all peaked at overbought levels in May and are now headed back down, also bearish. May was also when we peeled away decisively from the upper Bollinger band.

The Dow has no monthly support until 11,555. Then there's slightly better support at 11,000. On the upside, there's resistance at 12,850 and 13,950. But I think we're much more likely to see 11K this month before we see 13K.

On the other hand, the short term picture is looking pretty good. Today's wide-range doji at the bottom of a seven session downtrend indicates at least the possibility of a reversal. And the daily indicators are all now quite oversold. And since this latest downtrend was apparently entirely motivated by the shameful antics in Washington over the debt ceiling, now that that issue is resolved, absent any new crisis the selling pressure should abate somewhat. Indeed, today's selling volume was lower than Friday's.

Crossing the 200 day MA

The picture over in S&P land is a bit different though. Today the S&P actually dipped below its 200 day moving average but managed to close back above it, just barely. With today's close of 1287 and the MA at 1285, a close below this number tomorrow will be very bearish. And that's not out of the question.

All three market futures are down by a quarter to a third of a percent at 1:50 AM EDT. And ES is also sitting right on its 200 day MA at 1274.93. Staying above this is bullish, a break below, bearish.

So once again we have a night that's too tough to call. The indicators are suggesting bullish, but we're right at the 200 MA crossroads so we need to see what the market does with that before putting on any bets. So I'm still standing aside, though if I had to guess, I'd say we could see further downside tomorrow (Tuesday).. Oddly enough though, I had my best trading day of the year today, up 1.71% on a day the Dow lost 0.1%. And that was welcome indeed because I've taken a lot of heat over the past week.

Is the next recession here?

And in case you haven't had enough doom and gloom yet, here's an article you must read from Signs The Double-Dip Recession Has Begun. I have to admit, they make an excellent point that the next recession is not just imminent, but already here. All the more reason to exercise caution over the next few months.

Monday, August 1, 2011

Relief rally coming Monday

Well what do you know - according to tonight's news it seems that the clowns down at the Reedling Brothers, Boehnum and Obamley circus have finally concluded their act.  And as I mentioned last week, the market would not turn around until that happened.  Now that it has, we're going higher.  At 1 AM all three market futures have gapped up by about 1.5%, an amazing number that I have never seen in my eight years of trading.

Even without this, the Dow, S&P, and ES daily charts were all looking quite bullish on a purely technical basis for Monday anyway.  So tonight is one of those no-brainer calls.  I am pulling my long hat firmly in place.  We're going higher tomorrow.

That said, the monthly Dow chart is looking very poor.  I'm planning to use any gains tomorrow to start scaling out of some long positions.  I'm currently about 1/3 in cash but I want to go more like 60 - 70% cash over the next few weeks.