Wednesday small gain possible

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

• Wednesday higher, low confidence.
• ES pivot 1348.75  Breaking above is bullish..
• Rest of week bias uncertain technically.
• Monthly outlook: bias up.
• ES Fantasy Trader standing aside.

Recap

Well so much for the rubber duckie I spoke of last night.  Today out of nowhere emerged a Greek submarine to torpedo the poor guy sending him down 204 points, the Dow's biggest loss since last November.  Every single stock on my watchlist of over 150 names was red today.  At least my call "Tuesday could go lower" was correct, if somewhat of an understatement.

Those freakin' Greeks.  Just when you thought it was safe to go back in the market, here we go again.  Would you please just go bankrupt and get it over with so we can all get on with our lives?  It's really absurd - for four months now Greece simply disappeared off the radar, now all of a sudden, like some horror flick, they're baaack...

At least they finally got the Dow out of its recent trading range - too bad it was to the downside.  Now let's see where we go from here.

And a quick note in passing - I got so involved I completely overlooked the fact that the Night Owl Trader had its second anniversary last month, on February 17th.  I look forward to many more and thank all my readers for coming along for the ride.

The technicals

The Dow: After just meandering aimlessly for ten straight days, the Dow finally broke to the downside today, with a giant red candle that took us clear to the lower BB in one fell swoop.  The RSI also went oversold.  Interestingly though, volume was not particularly high, as you might expect in a drop of this magnitude.  This indicates a lack of panic and makes me question if this decline wasn't just a one day wonder.

VIX daily

The VIX:  And would you just take a look at the VIX today!  This is the chart du jour.  We haven't seen a pop like thsi since last November 1st, up 15.62% on a huge gap-up star.  As I've noted here often, the VIX rarely spends more than one day, (or occasionally two) at its upper BB without going lower.  Note also how the RSI has now moved to overbought (red bar below).

I'd say this chart is much more likely to go lower than higher on Wednesday, which would be good for stocks.  And if it does go lower, then that makes an evening star, which should be good for still lower later.

Market index futures: Whenever you see a big dump on a chart like this, the first thing you think of is "dead cat bounce".  This is especially true when the VIX isn't at crazy levels in the 30's or higher.  And the overnight futures seem to be suggesting that might just be a possibility, with all three up at 1:26 AM EST.  ES is up 0.28%.  Recall last summer when we'd have a terrible down day, it wasn't unusual to see the overnight ES simply continue lower.  We're not seeing that right now.

In addition, today's fall brought us nearly to the lower BB at 1335.90 and brought all the indicators very near to oversold.

ES daily pivot: Tonight, the pivot drops all the way  from 1364.00 to 1348.75.  This brings us within easy striking distance, with ES just three points under that now.  This is going to be one of those times when the pivot is, uh, pivotal.  If we run up to it and bounce off, that's bad.  If ES can break through decisively, that's good.  That will set the tone for the day.

Dollar index: Like the other charts, the dollar today made a big move, in this case gapping up like the VIX to its upper BB and dragging its indicators into overbought territory.  And like the VIX, the dollar has been reluctant to spend much time in the company of its upper BB lately.  I'd say we're more likely to see it go lower in the next day or two than continue higher.

Morningstar Market Fair Value Index: Yesterday the index went right back to 0.96, though I imagine that today's number is going to show a drop.  Looking at the longer view of this chart, I'm finding the failure of the index to climb back to 1.0 after spending time in the 0.8's to be worrisome.  Not good for the bullish case.


History: According to The Stock Traders Almanac, Wednesday is historically just slightly bullish.

     And the winner is...

Tonight, I'm going to go with the dead-cat bounce theory.  The follow-up to big declines is usually small.  Right now the futures seem to be suggesting a move upward, and idea supported by the dramatic move in the VIX.  We've gone from a market just waiting to roll over to an overdone one day sell-off.  The behavior of ES relative to the pivot around the opening will be important.  My best guess is that we'll see a positive close Wednesday.  While I do think there may be more downside to come, as we are now in a new downtrend, it won't necessarily come on Wednesday.

And of course I apparently once again need to throw in the caveat I used so often last summer, that any bad news out of Europe can change this all in an instant.  We're back to the news-driven market, folks.

ES Fantasy Trader

Wow, I'm sure glad I listened to my Owl intuition last night.  That short paid off nicely, realizing 16 points.  Because of the uncertainty surrounding follow-ups to big down moves, we're just going to stand aside again tonight.  Sometimes the best trade is no trade.

The account is now $109,500 after 18 trades (13 wins, 5 losses) starting from $100,000 on 1/1.

BOT    10    ES    false    MAR12 Futures     1344.25    USD    GLOBEX    11:38:12    

SLD    10    ES    false    MAR12 Futures     1360.25    USD    GLOBEX    01:41:46