Consumer sentiment - a contrarian indicator?

"A gauge of consumer sentiment tumbled in August to the lowest level since May 1980"

So reads the headline in an article on marketwatch.com today. Wait a minute - 1980? Holy moly - that's a while ago! Before the Japanese tsunami, the PIGS, the Flash Crash, before the Great Recession, before 9/11, and before the panic of 1987. And that sentiment level is low indeed: 54.9.

So just out of curiosity, what happened to the market after May 1980? Well, here's the monthly Dow chart from back then:
As you can see, May that year the Dow opened at 817 and closed at 851. It then went on to rally straight up for the next two months, and then on up to 998 in April of 1981, a 22% gain

Of course a year later, it was right back to the 800 area (but 800 proved to be powerful support), and then in August 1982, the Dow took off on a year long rampage that took it even higher, to 1276 by November 1983.

In fact, if you look at the longer view, 1982 marked the beginning of the multi-year bull market that ended only in 1987 with the Dow at 2663. So that's what happened the last time consumer sentiment was in the toilet.

They say it's always darkest before the dawn (well actually, it's darkest in the middle of the night. Just before the dawn, the sky has begun to lighten noticeably). But anyway, I look at numbers like this and have to wonder purely on a contrarian basis if we may actually be going higher soon.  Hmmm...

Short term bullish, though Friday in question

Wednesday night I wrote "tomorrow the market will be up".  Not bad for a wild guess, eh?  The jobless numbers came in better than expected, but I think the real cause for today's move is simply that today, for the first time in a while, all of the moles in our Whack-a-Crisis game kept their heads down.

Today, Thursday, the Dow handed us a 423 point gain, all but making back yesterday's 500 point loss.  Which wiped out the previous day's 400 point gain.  Which canceled the previous day's 600 point drop.  Etc., etc.  For eight sessions in a row now we have alternated between gains and losses, the last four being huge swings.

Gleaning market cues from TNA

TNA daily

So according to this, tomorrow should be a big down day, right?  Who knows.  Tonight I want to take a look at the daily chart of TNA, the Direxion Daily Small Cap Bull 3X leveraged ETF.  I'm doing this because this is what they trade over in J-Trader's blog (see link in sidebar) where there was some discussion today about some possible downside from here.

Anyway, this chart starts with the shelf around the beginning of August and shows the sickening downhill plunge from there.   The straight lines are the regression trend channel.  This has a Pearson's coefficient of 0.995, about as high as it gets.  As long as we trade inside that channel, the downtrend is in effect.

So the fact that today, TNA traded entirely outside the channel is a bullish setup.  Continuing to stay outside this tomorrow would be a bullish trigger.  And because the channel is so steep, it would take a drop to 32.67 (from today's close of 44.15) to cancel the bullish setup.  In my book, that's a reach, even given the crazy volatility of late.

I'm liking the candle TNA put in today too.  This bullish piercing pattern shows that the bulls effectively wrested control of the stock from the bears today.  The wick on top was formed at the end of the day when the day traders all headed for the exits at 3:45.  In fact the entire Dow lost over 100 points in those final 15 minutes today.

Moving to the TNA weekly chart, it's looking just as strong.  All of those indicators are oversold and volume shows an exponential spike characteristic of capitulation.

The only bear case I can make for TNA today is that today's up volume was lower than yesterday's downside.

Adding to the upside case is the Morningstar  Market Fair Value indicator which today fell to an amazing 0.66, a number not seen since October 2008, at the height of the Lehman crisis.  This seems to be telling us that stocks are very undervalued now and have more upside potential than down.  Note that the all-time low for this indicator is 0.55, in November 2008.  We're not that far from there now.

The VIX

The VIX is still crazy high, but today it closed at 39, down over 9%.  More important, the VIX has been hitting lower highs for the past four sessions, even during the two big down days this week so far.  It looks to me like the VIX is ready to go lower.  Lower VIX, higer stocks.  But - the last time I thought the VIX was going lower, it went higher.  So I'm not really positive on this one.

The futures

That's the good news.  But all three market futures are down by a significant 1% at 1 AM EDT.  Now looking at ES, it  now seems to be in a trading range with some fairly strong resistance around 1170 and corresponding support around 1110-1120.  So this is the bearish case tonight.  Just looking at ES, I suppose tomorrow could be down after all.  And with the crazy world situation lately, I'm sure there are many traders who do not want to stay in the market over the weekend.  I'd feel more comfortable if tomorrow wasn't Friday.

Also, the current price at 1156 is getting pretty close to Friday's daily pivot at 1151.83.  Watch this number closely Friday morning.  Falling through that will be bearish.

The bottom line

I see two scenarios right now.  Earlier today, I was going to say that unless that another mole sticks his head up tomorrow (and personally I'm betting on that pesky French mole) I was going to take another wild guess, go waaay out on a limb and claim that we're in for more upside.  At least the first half of the day.  Then we'd see them sell them off into the close.  Scenario number two is just another big down day for no real reason, like we've been seeing for the past four days in a row.

Things are so insane right now, I'm afraid I don't really have any good way to make a rational prediction for what might happen tomorrow, especially with the VIX still so high.  So I'm going to take a pass tonight.  I'm still not trading right now anyway, so it's pretty much all academic anyway.  I wish my crystal ball wasn't so murky.  We're living in strange times.

Futures point to higher Thursday if no moles

Whack a crisis

Whack!

The problem is bad mortgages! No, the problem is Greece! No, it's Ireland! No, Portugal! No, Greece again! The debt ceiling! Italy! S&P downgrade! Spain! France! Obama makes a speech!  Foo. Every time one of these moles gets whacked, another one pops up in its place

And then they just keep coming back for more. Seems like there's just no getting ahead of them.  It's enough to drive you crazy, which is pretty much the way this market has been acting for some time now.

Oops Dept.

Last night I wrote that I was "cautiously optimistic" for Wednesday. Wow, was I ever wrong.  I'm sure glad I threw the "cautious" part in there, since the Dow ended up giving back all of Tuesday's gains and more to finish down an appalling 520 points.. And the funny thing is that I still don't see anything in the technicals to support this violent move.

I guess it was all due to the French mole popping his head up all of a sudden. Didn't see him coming.  Whack! Thanks a lot, all you mangeurs de quiche, for tanking my IRA today.  At least from what I read and heard today, I wasn't the only one caught (again) by surprise on Wednesday.

Thursday outlook

We're back to (or still in) one of those periods where the market is more news-driven than technical driven so I'm not even putting up a chart tonight.  Where the market goes tomorrow, Thursday, will depend largely on which mole pops up.  At least our populist president is taking it on the lam to hole up in tony Martha's Vineyard for Yet Another Vacation, so hopefully we'll be spared any more of his embarrassing market-tanking speeches for a while.

Technically, we've been oversold for days, but with this crazy whipsaw down 600, up 400, down 500 type of action, it's giving me vertigo.  It's all academic at this point for me anyway since I don't trade when the VIX is at 43 (or 33 for that matter).  I've been spending my time working on my program trading algorithm.

But just for laughs, with the market futures up nearly 1.5% at 1:30 AM EDT, I'm going to go waaay out on a limb and guess that tomorrow the market will be up.  Will it be 10 points, 100 points, or 1000 points?  I have no clue.  It's anybody's guess.  Do you feel lucky?  This is one roulette wheel I refuse to spin until a measure of sanity returns to the casino.

VIX foretells cautious optimism for Wednesday

That's what I'm talking about

Yesterday evening (Monday) I wrote

"...the VIX is going lower tomorrow. That should provide the juice to run the market higher."

Well holy moly!  What we got today was more like rocket fuel than mere juice.  And if you recall, yesterday afternoon I wrote about how the pattern the VIX was forming was historically reliably followed by a big market push higher the next day. Well today the VIX crashed 27% and the Dow exploded for an astounding 430 point gain.  Never discount the predictive power of the VIX.

Actually, while Monday was scary bad, today was scary good. Today I had by far my biggest gain since I started trading in 2003.  I made a full 7%.  In one day.  I had to blink and look twice at my trading platform  to make sure I was reading the P&L line right.  Of course that was all merely erasing my horrible unrealized losses from Monday, but still it made me glad for not following all the lemmings over the cliff.

ES daily with retracements

The technicals

So is there any gas in the tank left after today's monster move to continue higher tomorrow?  Let's look at the daily ES chart.  I've added the Fibonacci retracements from the July 22nd high.  You can see how we retraced just short of the 0.382 retracement on Tuesday and just about touched it in the evening session.  With such a big move down, I think it's not too much to expect at least a 50% retracement.  That would be to 1214.  Since we're only at 1166.25 at 1:30 AM EDT, there's still considerable upside available there.

Then candlestick-wise, we see that Tuesday's action formed something of a hybrid between a hammer and a piercing pattern, both bullish patterns.

Also, the indicators which had all been lying panting on the floor oversold for days now have come back to life and are starting to rise again.  That's also a bullish sign.

The VIX

Meanwhile, the all-important VIX tumbled a monster 27% today to close at 35.06.  I was expecting a decline but was surprised at the extent of it.  And the candlestick it put in is telling.  This is a black closing marubozu and is quite bearish, suggesting the VIX has lower to go on Wednesday.  Historically, when the VIX takes a big drop off its upper Bollinger band, the next day tends to continue at least a bit lower.  That would imply higher stocks.

The bottom line

Amazingly, it has now been over a month since the Dow managed to go up for more than a single day in a row.  This alone would suggest that tomorrow is more likely to be down than up.  And although I expect an eventual upward retracement of the recent giant crash, common practice suggests a downward retracement of Tuesday's 430 point gain would come first.

And indeed all three market futures are running lower by about 0.25% at 1:30 AM.  That's the bearish case.  So with these mixed messages, which one is the most convincing?  I'm going to have to go with the VIX and make a call for higher stocks again Wednesday, though I'm not expecting anywhere near the move we saw today and I'm not nearly as confident as I was last night.  When the VIX is at these levels, anything can happen.

Trades

Today I dipped my toe in the water, not for my trading account, but for my IRA.  With the VIX still at a crazy high 35, it is too hard for me to find good swing trading entries and exits and I continue to stand aside.  However, for my much longer horizon IRA, today I bought some high quality dividend paying Dow stocks that have taken quite a beating recently: GE at 15.37, Intel (INTC) at 20.08, Home Depot (HD) at 29.45.  I also picked up some AK Steel (AKS) at 8.13, mostly because it was just too cheap to pass up.  AKS ended at 8.60, GE at 16.04, INTC at 20.62, and HD at 30.25.  So that's not too bad for an afternoon's work.

New Comment Policy

When I first started this blog, I elected to enable comment moderation out of concern for spam.  However, that has not really turned out to be a problem.  Therefore, in an attempt to encourage more interaction I am now allowing comments to appear immediately without waiting for my review.  I believe this is also in line with what Dr. Brett Steenbarger was pushing for towards the end of his great Traderfeed blog (although I recall he did have comment moderation enabled).

As always, I encourage comments (both positive and negative) on anything I post.  I've gotten some really great ideas that way.  We'll see how this works out.  Enjoy!

Obama to America: Let them eat cake; rally still possible Tuesday

Credit where credit is due dept.

It seems hard to believe that it was just a week ago when we stood at Dow 12,657 that I wrote:

"I think we're much more likely to see 11K this month before we see 13K."

That sure didn't take long, did it?  Today's close: 10,810.

 O-bomber, Ax Murderer of the Dow

This afternoon, when the VIX had reached the incredible level of 39, I posted that it could possibly be telegraphing a peak and therefore an end to the slaughter on the Street  Then Emperor Nerobama went on TV.

The Empty Suit delivered an Empty Speech.  The Dow responded by nearly doubling its losses on the day and the VIX rose another 9 points to close at a beyond incredible 48.  If you missed this rhetorical masterpiece, let me quickly summarize what he said: "Blah blah blah blah blah."  I think that's pretty much the gist of it.  I may have one of the blah's in the wrong order, but yes, that's it in a nutshell.

Marie Antoinette, playing fantasy games

Let's see.  Um, he blamed pretty much everybody except himself for the mess we're in.  He somehow managed to call for both lower taxes and higher taxes.  Then, in a truly astounding display of arrogance and contempt, he assessed the current disaster in the stock market by saying "Markets go up and markets go down".  I was waiting for him to follow this up with, "Let them eat cake" ("Qu'ils mangent du gâteau").

Marie Antoinette would be proud.  About all that's left is for him to go prancing about the White House lawn in a hoop skirt with a crook tending a flock of sheep.  That would be about as effective as anything else he's done since taking office.

Let me be perfectly clear: Mr. Obama, you have demonstrated time and time again that you are simply not up to this job.  If you really want to help the country and be remembered as a hero instead of just another self-serving hypocritical politician, then kindly resign.  Now.  Go away.  Thank you.

The VIX revisited

OK, so back to the VIX.  It's 1 AM Tuesday now and incredibly, ES is continuing its relentless march to the lower reaches of Hades, down another 1.3% in the overnight as I write.  NQ and YM are both down again too.  But, ES stands at 1096.75 right now.  At 10 PM, just three hours ago, it was at 1077.   There's still plenty of time between now and Tuesday's open to make a move higher.

Now looking at that huge green candle the VIX put in today and the palpable level of fear on the Street, I'm almost scared to say that the VIX will go lower Tuesday.  And it's entirely possible that it will in fact go higher.  After all, we were at this level on October 6th, 2008 and in just two more weeks back then, the VIX skyrocketed to 89.53.  And after the last two weeks, clearly the market is never going to go up again, right?  It's headed for zero, right?

Maybe not.  Since that time in '08, the current level of 48 has become a resistance line.  The VIX spent most of early 2009 trying to rise above it without success, and last May's peak during the European PIGS crisis v. 1.0, it topped off at exactly 48.  So I'm going way out on a limb tonight and claim that the VIX is going lower tomorrow.  That should provide the juice to run the market higher.  This despite the fact that the S&P ominously broke under its 200 week MA today, also as I predicted yesterday.  Note however that the Dow did not.

And don't forget that tomorrow is a Fed day.  I'm sure Uncle Ben was watching Obama's idiotic speech and has no desire to follow (empty) suit.  While much has been made about the Fed running low on ammo, don't discount the potential psychological impact of encouraging words, kind of like telling a dying man he's going to be alright.  (OK, maybe that's not the best analogy, but you get the idea).

Bottom line

Tomorrow's absolutely critical number: Dow 10,740, the 200 week MA (just 70 points from here).  Going below this virtually ensures more pain.  Shying away or bouncing off it and we're going higher.

VIX gap up foretells a fall, rally possible Tuesday

Today I took a look back for times where the VIX had a big gap up day after hitting its upper Bollinger band the day or two before.  I found three of these in recent memory, all from the Great Recession:11/12/07, 1/22/08, and 3/17/08.  I found six more cases going back a total of 10 years.  That's a total of nine times.  In every one of these cases, the VIX was down hard the next day.  And checking the last three times, we see that the next day, the Dow rallied hard.  The Dow was up over 300 points on 11/13/07, 300 points on 1/23/08, and a whopping 416 points on 3/18/08.  And remember, these numbers came in a similar period as now, as the US was just entering a recession, a few months after a big market peak.

And today's VIX gap up is huge.  Right now, at 1:35 PM the VIX stands just over 39.  Thirty nine!  That's up a whopping 22%.  In one day.  Because one rating agency downgraded US debt from AAA to AA+?  Not even AA, but AA+?  Does any of this strike you as just a little overdone?

Now you might say, "but this time it's different".  Well, one of my rules is that whenever someone says that, you can be sure that this time it's the same as every other time.  We'll see how the rest of the day plays out.  Right now, I'm not even looking at my trading account.  It's just too awful to contemplate.

Looking bad for Monday, very bad

Well it's 1:17 AM on Wall St. Do you know where your money is? I know where mine is. Down the toilet is where it is. ES futures opened for trading on Sunday evening with a gap down that's usually reserved for events like the outbreak of a world war, a giant asteroid heading for Earth, or Martians landing on Wall St.

I generally like to look back in the past for historical precedents for clues as to how the market may move the next day. But there has never been a situation like this. I have no idea what's going to happen. About all I'm willing to guess is that we're going to see some wild swings over the course of the day. Normally ES trading is pretty sleepy on a Sunday evening. Tonight, it was bouncing around like a Piper Cub in a thunderstorm, up and down as much as a point in mere seconds.

Weekly E

Just look at this chart.

This is the weekly ES chart because when I put up the daily chart, I couldn't find any support going all the way back across it. Here we can see that we've fallen clear back down to a support shelf beck from December of last year, well before the current contract began active trading.

Words fail me. I've never seen anything like this. This is worse than the fall of 2008. And it's puzzling too because a credit downgrade from S&P from AAA to AA+ doesn't really seem to be in the same league of disaster as the collapse of Lehman Bros.

It sure looks like the little devil on my shoulder from yesterday, the one predicting impending doom, is having the last laugh. Right now all three market futures are trading down an incredible 2.5%. And this coming after last week's exponential collapse. The only good thing here is that Monday's action may provide the washout low we need to start crawling back from the abyss.

But I'm afraid there's not even much to cheer there.  From the looks of it, tomorrow the SPX is going to cross under its 200 week moving average.  And that will be as bad as when we crossed under the 200 day MA.  Amazingly, that was just three sessions ago.  If the 1170 ES level gives way, we're in for even more losses, as amazing as that may sound.

One thing's for sure - tomorrow's going to be a day to remember.  Fasten your seat belts...