Weekly wrap-up

The Good, The Bad and the Ugly

Clint Eastwood, the Good

Well, I for one am glad to see this week end.  Tonight we  turn once again to Clint Eastwood for inspiration.  The Good was clearly my call for today, "we have still lower to go on Friday" which was right on the money with the Dow shedding another 173 points to close at 10,818. I also suggested we were going to retest the Dow's 200 week MA at 10,730

That's still on the table, and we're certainly headed that direction. The Bad was my thinking last Sunday that the week would end higher. It finally proved to be just another bad week on Wall St.  And this steenkin' market of course lately is just plain Ugly.

We're at an interesting juncture right now.  While today's drop was discouraging, the fact that we did not break under the 200 week MA was positive.  The Dow weekly chart is showing definite signs of being oversold now.  However, the last two big red daily candles in and of themselves show no sign of a turnaround on Monday.  I do want to see how the futures act on Sunday night before making any forecasts though.  I'll do a more in-depth analysis then.

Ticker Sense

I am pleased to announce that the Night Owl is now part of the Ticker Sense Blogger Sentiment Poll over at the Ticker Sense web site (now in my blog list in the sidebar). The poll, taken each week, answers the question of where you think the SPX will be in 30 days, either up, down, or neutral.

The latest poll was split pretty evenly in a 3-way tie, reflecting the indecision we've been getting in the charts lately as seen in the frantic yo-yo action of the past two weeks.  It will be interesting to see, given the ugly week we just had, how the numbers shake out when the new poll comes out next week.

The poll is worth watching of course because of the common perception that in the markets, the majority is usually wrong, making it something of a contrarian indicator.  If you look at the historical graph on the site, you can see that this is to a large extent the case - though not always.  In any event, the URL's of the participants are given along with the results and they make for some fascinating reading themselves.

There's lots of great information on Ticker Sense, including graphs, charts, links, and commentary - I highly recommend it and I'm putting it on my daily reading list.  Disclaimer - I have no association with Ticker Sense other than as a poll participant.

More downside Friday - Dow 200 week MA retest likely

 Last night I didn't need to waffle.  I came right out and said "Going lower Thursday".  And did we ever.  Another 420 point  drop for the Dow to close at 10,990.  So tonight, I'm going to make it short (pun intended) and sweet.  The bad news first.  The Dow indicators have all peaked, including the stochastic which did indeed make a bearish crossover today.  We broke 11K support.  There is now no more support until 11,730.  That's where we held last week.

And why there?  It's the Dow's 200 week moving average.  And that's the good news, such as it is.  The 200 week MA is proving to be a tough nut to crack for the bears.  My best guess is that we're going back to take another look at it but that it will hold again.

Ergo, look for another downer tomorrow, followed maybe by a rebound early next week.  I note that the Dow weekly chart is looking much stronger than the daily.  The indicators there are approaching a bullish turnaround.  I don't think we're quite there yet though.  Longer term than that (like on the order of a year), things are looking grim.

The VIX

Last night I noted the bullish engulfing pattern in the VIX futures and called the VIX higher for today.  Sure enough, today the VIX gapped up huge, to close up an amazing 35% in one day to 42.67.  I looked back as far as I could, to 2003, and found five other instances of a big gap-up day that did not take us to the upper Bollinger band.  The next day, incredibly the VIX went still higher two of those times, and lower the other three.  So statistically at least, there's not much to take away from that.

The VIX however does tend to refill gaps, but it usually takes two days.  Meaning that it's not out of the question for the VIX to go still higher tomorrow, at least a bit.  More bad news for the bulls.

And finally tonight, all three market futures are lower at 1:40 AM.  ES is down 0.92%.  The daily pivot is nowhere to be found.  I'd like to make at least some case for the bulls tonight but I just can't find one.  I think we have still lower to go on Friday.

ES Fantasy Trader

Today I'm starting something new.  Every night, I will buy or short 10 ES contracts in my paper account (hey, I'm not totally crazy) and then post the results here.  Last night I started with $100,000 in worthless Obamallars.  I went short at 2:20 AM at 1181.50.  Here's the trades:

SLD    10    ES    false    SEP11 Futures     1181.50    USD    GLOBEX    02:20:05

BOT    10    ES    false    SEP11 Futures     1144.25    USD    GLOBEX    12:02:35

That one was good for 37.25 ES points, x $50 x 10 contracts = $18,625 profit.  To keep things simple, commissions are not included in the results.  If it matters, I use Interactive Brokers, which charges $2 a contract.  Account total now $118,625, up 18.6% since inception (today).  Ka-ching!  Too bad I didn't do it for real, eh?

Tonight, I'm going short again, this time at  1133.25:

SLD    10    ES    false    SEP11 Futures     1133.25    USD    GLOBEX    01:44:08   

We'll see how that works out.

Going lower Thursday

Last night I ordered another helping of waffles and I'm glad I did. The Dow just barely eked out a 4 point gain and the SPX was down 12 points on Wednesday. This sort of waffling, excuse me, consolidation, is indicative of a market wracked by indecision.

That's what happens when the bulls and bears are as evenly matched as they were last night  There aren't many clues on the Dow daily chart so tonight we're going back to the future, or more precisely the futures for some guidance.

The futures

ES daily

In a post yesterday on DanErics, he (or they, I'm not sure if "DanEric" is one guy or two) draws two lines in the sand: support at 1173 and resistance at 1220. I can't disagree with that, though personally I'd be happy to see ES just break over today's high of 1206.50.

Things were looking good in the wee hours early Wednesday morning until ES dipped below the daily pivot, 1190.42, right at noon.  Support held just below that but we were unable to make any further headway the rest of the day.

Unfortunately, it's looking like ES is headed lower. Here's the very interesting daily ES chart.  We have two completely different things going on. First, the candles are forming a classic symmetrical triangle (blue lines). The conventional wisdom is that 75% of the time, these things resolve in the direction of the trend, in this case, up.

But now look at the indicators. RSI (second row) is oversold and has actually peaked. The short stochastic (bottom row) is just about to execute a bearish crossover. And triangles do resolve to the opposite direction 25% of the time.

Either way, the resolution will come soon, possibly tomorrow (Thursday) or Friday. So which is it?  My inclination right now is that the break will be to the downside, based on two things: first, the fact that the real bodies of the candles in the triangle are in a downtrend, and second, the indicators are looking like they're ready to roll over.  In fact right now at 1:50 AM, ES has sunken to 1180.25, which is down a rather worrisome 0.8%.

The VIX

The VIX meanwhile has now entered oversold territory and even though it declined a bit to 31.58 today, that still leaves it right around its recent support line of 31.66.  And tonight I've started watching the VIX futures.  If the VIX holds a clue to market movement (and I believe it does), then the VIX futures hold the key to VIX movement.  And right now the VIX futures (VM V1-CF in eSignal) just put in a great big bullish engulfing pattern.  VIX futures up implies VIX up implies market down.

The bottom line

In a post today in Cobra's Market View (See blog list in sidebar), Cobra says "I don’t feel good about today’s market.".  I'm afraid I have to agree.  Today the Dow exited its ascending regression trend channel.  That's a bearish setup.  So given all of the above, it now appears that the bears' hand has suddenly gotten much stronger.  Consequently, I am putting on my short hat for Thursday.

Tough call, slight bear bias Wednesday, rest of week less certain

Up or down?  We waffle. (Yum!)

OK, so clearly last night I was waffling over the direction the market would take today. We were adrift in the Twilight Zone (between Bollinger bands) and with Nicky and Angela going out on a date today (Tuesday) it wasn't at all clear which way the market would go.

Well, turns out the market pretty much waffled all day too. First it was down, then it went up, then back down, then up, down, up, down, pass the maple syrup. Unfortunately, all this breakfast food didn't provide us with much more clarity tonight for Wednesday than we had last night. So let's line 'em up and see who salutes.

The bull case

1. After wandering about the daily Dow pivot of 11,412, we closed just under at 11,406 after a peek above that. I count that as support. 11,400 is also support from earlier this month.

2. Even with today's 77 point loss, the Dow remains clearly inside a new rising regression trend channel. No bearish setup here.

3. Today's volume on a down day was even lower than yesterday's up day. If this is a tide running out, it's not very persuasive.

4. Both ES and YM are now up in the overnight at 1:25 AM EDT, though admittedly not by much. ES, at 1194 has broken above its new daily pivot of 1192.17. That is key.

5. The Morningstar Market Fair Value index rose again today to 0.88, up for the fourth day in a row. A rising index corresponding to the expectation of rising stocks.

The bear case

1. Tomorrow, Wednesday is a funny day for the VIX and it's not looking good for the bulls.  I've given this its own section below.

2. The Dow put in a  hanging man candle.  Due to its small size, I'd want to wait for confirmation on Wednesday that this is in fact a reversal, but it is on the face of it, bearish.

3. Seems that Nicky and Angela's date didn't go so well.  I don't know if he didn't like the dinner or she didn't like the movie, but the markets sure didn't like the results.  Zut alors!

4. The Dow's indicators are nearing overbought levels.  RSI and the short stochastic in particular actually look to have topped.

5. J-Trader's model, which correctly went short for today, is holding short.  After hitting something of a rough spot for the past few weeks, the model seems to be getting its bearings again (no pun intended - OK, well maybe a little one).

The VIX

There was an extremely interesting article last Friday in VIX and More here:VIX and More: The Convergence of VIX and VIX Futures at Expiration.

I quote in particular:

"Right now the market’s best guess is that the VIX will fall 1.90 points by Wednesday’s SOQ, but of course the final settlement could be between the two current values and quite possible above 36.40 or below 34.50."

Now today (Tuesday) the VIX closed at 32.85. I will readily admit I'm still a beginner in the mechanics of VIX futures, but Wednesday is a VIX options and futures expiration day. So it's possible that much of the drop we saw in the VIX over the last three days was more a function of the VIX needing to get realigned with the futures than any underlying market strength. With the VIX putting in a doji today, there exists the possibility of it going higher tomorrow. Higher VIX, lower stocks.

In any case, the VIX bounced off its support just above 31.5 today, just as it did yesterday.  And the VIX indicators are approaching oversold status.

The bottom line

Gosh, I think I'm going to have to have a second helping of waffles tonight.  The bulls and bears seem pretty evenly matched right now.  What I will say is that this is one of those nights where the pivots will be crucial.

On Wednesday morning, watch closely the ES pivot at 1190.42 and the Dow pivot (today's was 11,412, tomorrow's isn't out yet but should be close to this).  Staying above these two numbers will be good for a higher close.  Any decisive breach will bring out the bears. 

If I had to take a wild guess right now, I'd reach for my short hat for Wednesday, but I really want to see those pivots first.  If we are down tomorrow, that brings into question my earlier call for a higher close to the week.  That's all, she wrote.

A pause possible Tuesday but weekly gain looking good

OK, last night I called today's Bulls vs. Bears game a clear win for the bulls.  And so it was, with a 214 point gain in the Dow.  While not as big as last week's Dow gains, I actually prefer to see this sort of day than that schizophrenic sort of action we got last week.

The regression trend channel method worked perfectly.  Last Thursday was the setup, leaving the channel, Friday was the trigger, trading entirely outside it, and today was the payoff.  Actually, there were so many factors in favor of the bulls last night, it wasn't hard to predict today's results.

Tonight though, things get a bit trickier.  First, there is nothing in the Dow daily chart to suggest that we've hit a wall or anything.  Today's solid green candle simply suggests continuation.  We also passed through the 11,450 resistance level, just, closing at 11,483.  And from here, there's no resistance until 11,614.  That's tonight's bull case.

The futures 

The bear case comes from the market futures which are all trading lower at 1:30 AM EDT.  ES in particular is down nearly half a percent.  And if you remember, last night I said that ES had no resistance until 1200?  Well guess where we peaked today?  1201.75, just before the close.  It's been headed lower ever since, now at 1192.75.  And that's the part that's got me a bit worried.

It's possible that the buying energy that went into the last three sessions is becoming exhausted and we may find it tough to advance further tomorrow (Tuesday).

The VIX

The VIX fell again today and has now filled the upside gap it formed last week.  Its close today at 31.87 leaves it right at a support level.  VIX no go lower, stocks no go higher.

And speaking of the VIX, I'd like to mention a new blog I'm now following: http://vixandmore.blogspot.com/.  I talk about the VIX a lot here, so this one is a natural for me.  Well worth taking a look for the aspiring Vixologist, I'd say.

The bottom line

We're now entering the Twilight Zone (cue spooky music), that spot about halfway between the Bollinger bands where forecasting becomes more difficult than at the extremes.  I've been saying for a few days now over on J-Trader's blog that TNA will hit 50 by Wednesday.  Today's close of 48.84 puts it within easy striking distance of that number.  However, now I've got two theories.  One, it may decline a bit tomorrow before coming back Wednesday, or my preferred view at the moment, it will hit 50 intraday Tuesday and then retreat.

Overall, the weekly Dow chart is looking better than the daily right now.  If I had to guess, I'd say the week will end up, but I'm undecided about tomorrow.  A lot may depend on the outcome of the upcoming love fest between Angela Merkel and Nicky Sarkozy.  So I'm taking my long hat off but still holding onto it.

Bull case looking good for Monday and the week ahead

Dow weekly

Bulls vs. Bears

Last  Thursday night I was of two minds on the market's direction for Friday.  Given the crazy swings up til then, there was a chance that having been up big on Thursday, it would be down big on Friday.  That obviously didn't happen.  My other idea was that we'd see early gains evaporate as traders left for the sidelines not wanting to be long the market over the weekend.  Oddly enough that didn't happen either.

Friday we rallied 126 points and they did not knock 'em down into the close.  On a Friday afternoon?  Hmmm... That's one point for the bulls.  And this being the start of a new week, I brought up the Dow weekly chart here for your amusement.  Note the giant hammer formed last week  That's about as bullish as they get.  Score two for the bulls.  Note also the weekly volume going exponential as the Dow went down.  A classic sign of a washout low.  Bulls now up 3.

OK, so then I looked at the Dow weekly chart all the way back to 1987 for times where we had a big hammer that extended down from the lower Bollinger band and found 10 of these.  In all ten cases, the Dow was higher a week later.  Wow, another point for the bulls.

Incidentally, the weekly chart for the SPX is pretty much the same.  Even more significantly, SPX tested its 200 week moving average last week and the weekly support held.  Bulls 5, bears 0.

Also, all of the classical indicators for the Dow, ES, and SPX (RSI, momentum, stochastic, etc.) have now finally gotten up off the floor indicating that a bottom has been put in.  The bulls shoot, they scoooore.

The VIX

The VIX is such a great indicator, we have to check it out.  And here we see that the weekly VIX is just about the inverse of the Dow.  A bearish inverted hammerish gravestone doji there seems to portend a lower VIX this coming week. And this candle comes after an exponential run-up in the VIX that was more hyperbolic than parabolic.  And we all know how exponential moves always end in the market, right?

Lower VIX, higher stocks.  The bull case is on a rampage here, score now 7-zip.

The futures

By this point, I'm looking hard for a reason to get the bears back in the game and I'm not finding one.  The ES weekly hammer was even more impressive than the Dow's or the SPX's.  And I also note that ES traded entirely outside its descending regression trend channel on Friday, a bullish setup.  It would have to be down huge tomorrow, even more than any day last week, to go back in.  And right now at 12:45 AM EDT, ES is up three quarters of a percent at 1185.75.  NQ and YM are up about the same.  Indeed ES has no resistance from here clear to 1200.

So it's looking pretty good that tomorrow will provide the bullish trigger to Friday's setup.  (The Dow is in the same situation).  It's a blow-out for the bulls.

The bottom line

Add to this BTE news this evening out of Australia and Japan, plus a few bits and pieces of encouraging US economic news, plus the CME putting the kabosh on commodity margins, plus Obama keeping his yap shut about the market for a few days, plus the extreme negative consumer sentiment numbers I mentioned in my last post and it's sure looking to me like we have the makings of an up week ahead.

In fact, there's nothing here to suggest that tomorrow will be anything but up.  So on this Sunday night, I am pulling my long hat firmly down on my head.  The bulls throw a no-hitter.  That's all she wrote.