Monday higher

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

• Monday higher, low confidence.
• ES pivot 1796.67.  Holding below is bearish.
• Rest of week bias uncertain.
• Monthly outlook: bias lower.
• ES Fantasy Trader standing aside

Recap

Several times a year, the stock market holds a sale.  Last Friday was one of those times as the Dow cratered 318 points.  I'm awfully glad I called Friday lower as that erased all of my January prediction losses in just two days.  Now we get to the tricky part - calling the bottom.  Is it over yet?  The charts now speak.

The technicals (daily)

Dow daily

The Dow: OK, this one is definitely worth a picture.  Friday's big 2% drop is a classic, and I do mean classic example of an exponential run, and in this case a run-down.  Just the way bubbles end in explosive exponential run-ups, the opposite direction moves also finish the same way.  Just look at how these accelerating daily losses absolutely fall off the cliff.  Friday's move crashed through the 16K level like it wasn't there, it began lower than the upper BB and closed way under the lower BB.  You don't see that very often.

The three parallel lines are the rising and then descending RTC's.  The green bar at the bottom  shows how RSI is now oversold and the lowest chart is the stochastic which is now down to levels from which reversals come.  I think Friday's sell-off was way overdone and we can expect a DCB on Monday, if not the inevitable end of the exponential breakdown.


The VIX:  Wow, this is the night for charts.  Check out this one of the daily VIX (and by the way I called this one wrong in a big way last Thursday).  On Friday the VIX blasted up for a 31.74% moonshot, gapping right up past its 200 day MA (dotted orange line), then on through its upper BB (narrow blue line), and then through resistance at 16.66 for its biggest one day gain since last April.  Holy moly!

VIX daily

That was enough to drive RSI (first chart below the VIX) to nearly 100 and bring the stochastic to overbought levels (though not yet a bearish crossover).  As I always say, the VIX rarely spends more than a day or two above its upper BB, and we're there now in a big way.  The last eight times the VIX went on a one-day gap-up rampage (that's where I stopped counting), it went lower the next day.  Eight for eight.  So I'm looking for a lower VIX on Monday.

Market index futures: Tonight all three futures are higher at 12:30 AM EST with ES up by 0.20%.  ES of course got crushed on Friday like everything else, crashing through multiple levels of support at 1820, then 1813, then the lower BB at 1804, then the 1800 level itself, then 1787 before finally coming to rest at 1782.  That was enough to send RSI very oversold and bring the stochastic down to levels from which reversals have come in the past.  The new overnight candle is forming as a decent hammer, so that's encouraging for Monday.

ES daily pivot: Tonight the pivot dives from 1827.33  to 1796.67.  Friday's dump was so big we're still below the new pivot and by a good 10 points so this indicator has to be considered bearish.

Dollar index: Somewhat surprisingly, the dollar moved hardly at all on Friday, up just 0.02% on a little doji.  The stochastic is turning around for a bullish crossover so I'd be looking for a move higher in the next day or two..

Euro: And the euro of course had its big upward move last Thursday, giving us on Friday a small inverted hammer at the higher end of that run.  Indicators are near, but not yet overbought so there's at least a suggestion here of a move lower on Monday.

Transportation: On Friday the trans got absolutely crushed, down a breath-taking 4.11% and traveling almost the entire way from upper BB to lower BB in just one day.  But even at that, the stochastic only just began a bearish crossover, though this may be more a case of being slow to react.  In any event, the trans are usually pretty good at recovering from sharp one-day sell-offs so I'd not be surprised to see at least modest gains here on Monday.

Accuracy (daily calls): 

Month    right  wrong  no call  conditional  batting   Dow
                                             average  points
January    3      8      5           0       0.273      94

     And the winner is...

It's easy to get spooked when you see the Dow down 318 in one day but the technicals are actually looking somewhat encouraging at the moment.  The SPX Hi-Lo index took a big spike down to 45 on Friday.  Whenever you see that, that's usually a good sign a reversal is near.  Also, the NYSE A/D line hit -2252, its lowest level in six months.  Extreme low reading here are also bullish.  Then we have the Dow going pure negative exponential and we know how those always end.  And we have a classic VIX blow-off top that augers a move lower in a day or two.  And finally the futures aren't continuing to sell off in the overnight so all things considered as spooky as it may feel, I'm going to call Monday higher.

ES Fantasy Trader

Portfolio stats:  the account remains at $100,000 as we wait for the right moment to enter our first trade of the year.  While I do think we're going lower on Friday, I still don't have a good enough edge to warrant going short just yet, so we'll just stand aside again.  There's no rush.