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- Thursday lower, low confidence.
- ES pivot 1685.42.. Holding below is bearish.
- Friday bias uncertain technically.
- Monthly outlook: bias lower.
- ES Fantasy Trader remains short at 1643.00.
Well I'm sure glad I called Wednesday as uncertain, because I certainly wasn't expecting a 113 point drop. Before we move on to Thursday's charts, this seems as good a time as any to introduce a chart I've been mulling over for some time now. So without further ado...
The SPX and the AD line divergence
Hey kids, check out this chart. Here is a six month daily chart of the SPX (fairly smooth risng red and black line) vs. the SPX AD line (jiggly black line). The AD line is considered one of the best early warning signs of the Great Depression in that all through 1929 the AD line was declining while the market was booming. It shows that the market's highs were being sustained by relatively few stocks, hiding the fact that the rest of the market was foundering.
Note that we now have a similar divergence between the two. While the SPX has been moving basically higher all year so far, putting in higher highs and higher lows, the AD line peaked on July 11. Since then it has moved lower, putting in lower highs and lower lows. This is generally a sign of an overbought market that is ready for a correction. Note too the last time this happened - in the first week of May. The Dow peaked on May 22nd and then spent the next month moving lower. The current divergence looks to me like a magnet acting on the SPX to draw it lower. And note further how seasonality plays right into this - we are approaching the historically weakest part of the year for the market. Now whether this amounts to a hill o' beans or not is open to debate. I think it does. I'm not suggesting that we're on the verge of another Depression, but it doesn't look good for the bull case. We'll see.
The technicals (daily)
The Dow: After a promising bullish RTC exit on Tuesday, the Dow tanked 113 points on Wednesday to head right back into the same descending RTC and close 40 points below it slower BB. With the stochastic dead in the water, this chart now looks grimly bearish again and the action of the start of this week nothing more than a fake-out breakout.
The VIX: Well the VIX surprised me again. I though it was going lower, but no, it rose 5.93% on Wednesday with a bullish one white solider pattern. Now that keeps it within its rising RTC, but it also caused a bearish stochastic crossover. Those pretty much cancel out in my book, so unfortunately, this important chart remains opaque for Thursday. I will note though that VVIX did not reverse as expected and though it hit its upper BB on Wednesday, an immediate reversal isn't assured.
Market index futures: Tonight all three futures are lower again at 12:56 AM EDT with ES down by 0.13%. ES took a big drop on Wednesday with a bearish engulfing candle that keeps it inside a descending RTC and totally canceled the two preceding rising hammers. ES getting crushed like this in the face of oversold indicators and potential reversal candles reinforces the bearish gestalt of this chart. With the overnight pin action once again guiding lower, this one seems set for more downside on Thursday.
ES daily pivot: Tonight the pivot drops from 1688.17 to 1685.42. We spent Wednesday below the old number and with the drift lower in the overnight so far, we remain below the new pivot so this indicator remains clearly bearish.
Dollar index: I was looking at the 200 day MA and thinking the dollar could get past it on Wednesday, but it was not to be. Instead we closed 0.07% lower on a dark cloud cover that also took the indicators halfway to overbought. With the 200 MA resistance strengthened now I'm thinking the dollar's going lower on Thursday.
Euro: The euro put in a simple doji on Thursday to remain in its descending RTC but in the overnight it's popping - up 0.25% already in an unusual move for this hour of the night. It also provides us with a bullish RTC setup so now the euro looks like it's going higher on Thursday.
Transportation: And what of the trans? Oh dear, down too, losing 0.81% on Wednesday on a (small) gap-down marubozu. This neatly resolves a week's worth of congestion - to the downside. And all this despite now quite oversold indicators. At 6400, we stopped right on a support line, If that fails on Thursday (and I see no reason why it won't), we're headed for the lower BB at 6352.
Accuracy (daily calls):
Month right wrong no call conditional batting Dow
January 5 7 6 3 0.533 -101
February 3 4 5 6 0.692 131
March 5 7 5 2 0.500 121
April 7 5 5 3 0.667 328
May 3 4 6 4 0.636 85
June 6 5 6 0 0.545 543
July 10 2 4 4 0.875 486
August 8 0 2 0 1.000 410
And the winner is...
We have now entered what is historically the strongest part of August on a weak note. And the indecision apparent in the charts last night seems to be resolving to the bear side tonight. I also note that the SPX NH/NL index which dipped to 90 on August 7 did move higher subsequently but never made it back to 100 as has been the custom this year. In fact it has now begun moving lower again. And then there's that worrisome AD line I showed at the top of this post. So taken altogether, it paints a fairly gloomy picture and therefore I have to call Thursday lower.
ES Fantasy Trader
Portfolio stats: the account remains at $115,000 even after 14 trades (11 for 14 total, 6 for 6 longs, 5 for 8 short) starting from $100,000 on 1/1/13. Tonight we remain short at 1643.00. We've already recovered nearly half of our previous unrealized losses on this trade. While this one may never become a winner, at least we're headed in the right direction now.