Friday lower

The Hoot 
Actionable ideas for the busy trader delivered daily right up front

• Friday lower, high confidence.
• ES pivot 1347.25.  Holding below is bearish.
• Next week bias uncertain technically.
• Monthly outlook: bias up.
• ES Fantasy Trader goes short at 1345.25.

Recap

Last night I was thinking today's action would hang on the news out of Greece.  Well we got some news today, I think, but darned if I can figure out if it was good or bad.  And I guess the market couldn't either, with the Dow ending up just 6.5 points.  What does this all mean for Friday?  Read on, MacDuff...

The technicals

The Dow: For the fourth day in a row, the Dow provided us with another reversal indicator, today a small body star.  But for the first time since January 23rd, the stochastic is forming a bearish crossover.  The 23rd was also a star about the same size as today's.  And the next day then closed lower, down over 100 points in fact from high to low.

Of additional concern is that the SPX Hi-Low index has now spent four days at its extreme level of 100.  The last time this happened was December 7, 2011.  The next day, December 8th, the Dow was down 198 points.

VXX daily

The VIX:  Last night I wrote "I'm thinking the VIX goes higher Thursday" and sure enough, the VIX gained 2.59% today.  But the Chart of the Day is the VIX futures.  Check this out (click the chart to enlarge).  Notice the strong descending RTC with a Pearson's coefficient of 0.984 going back to January 13th.  Then notice how two days ago, the VXX closed just outside the right edge of this channel.

That's the bullish setup.  Then we have the green candle yesterday trading entirely outside the RTC.  That's the trigger.  And then finally today, bang, a gap-up green candle, with the biggest daily gain since last December 28th.  The downtrend in the futures is now definitely over.  Clearly someone thinks the VIX is going up.  This is a very very important move, in my not so humble opinion.  And it is even more significant given that the VIX has a natural tendency to decline on Fridays.  And that's bad for stocks.

I'm not alone in this view either.  The great Rob Hanna in his blog today says, "Implications of the rising VIX and 50-day SPX high appear to be moderately bearish over the next few days, suggesting a pullback."

Market index futures:Right now at 1:17 AM EST, all three futures are in the red, with ES down a significant 0.43%.  It's been a while since we've seen losses of this magnitude at this hour of the night.  Today's action brought us yet another reversal indicator in the form of a small body star but this time, the overnight is providing some confirmation.

Today's candle also fell right on the edge of the rising RTC and now we're trading outside it.  That would be a bearish trigger.  We'd have to rise from 1342, where we are now, to 1355 just to get back in the RTC.  That's not looking likely right now.  The indicators have now all peaked (finally) at overbought levels and the stochastic has completed its bearish crossover.

ES daily pivot: Rose once again tonight from 1344.50 to 1347.25.  But tonight is different.  For the first time in days, we broke under the pivot at 8:20 PM.  Then with ES drifting lower and the pivot rising, we're even further below it now - another bad sign for stocks.

Dollar index: The dollar gave us a doji today warning of a possible move higher on Friday, and that would be bad for stocks.

Morningstar Market Fair Value Index: The index extended its flat streak to four days stuck on 0.96.  The last time we saw a run of four days level like this ended on 11/8./11.  The next day was down 385 points.  Just sayin'.


History: According to The Stock Traders Almanac, Friday is historically just slightly bullish.  But recall that February on the whole is pretty weak and one third of the way through so far we've yet to see any weakness.

     And the winner is...

After a number of days of difficult charts and wishy-washy indicators, tonight we're finally getting some significantly stronger guidance, and it sure looks like it's in a downward direction.  The rise in the VIX futures really rings the alarm bells for me.  I really think the pullback everyone's been waiting for is now on the doorstep.  I even took on a position in DXD (the Dow Ultra Short ETF) this afternoon at 13.62.  So I'm going to call Friday lower.

ES Fantasy Trader

Last night we stood aside from insufficient information to pick a direction.  Tonight though, we're going short at 1345.25.   Portfolio stats: the account remains $108,375 after 11 trades (8 wins, 3 losses) starting from $100,000 on 1/1.