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.

Consumer sentiment - a contrarian indicator?

"A gauge of consumer sentiment tumbled in August to the lowest level since May 1980"

So reads the headline in an article on marketwatch.com today. Wait a minute - 1980? Holy moly - that's a while ago! Before the Japanese tsunami, the PIGS, the Flash Crash, before the Great Recession, before 9/11, and before the panic of 1987. And that sentiment level is low indeed: 54.9.

So just out of curiosity, what happened to the market after May 1980? Well, here's the monthly Dow chart from back then:
As you can see, May that year the Dow opened at 817 and closed at 851. It then went on to rally straight up for the next two months, and then on up to 998 in April of 1981, a 22% gain

Of course a year later, it was right back to the 800 area (but 800 proved to be powerful support), and then in August 1982, the Dow took off on a year long rampage that took it even higher, to 1276 by November 1983.

In fact, if you look at the longer view, 1982 marked the beginning of the multi-year bull market that ended only in 1987 with the Dow at 2663. So that's what happened the last time consumer sentiment was in the toilet.

They say it's always darkest before the dawn (well actually, it's darkest in the middle of the night. Just before the dawn, the sky has begun to lighten noticeably). But anyway, I look at numbers like this and have to wonder purely on a contrarian basis if we may actually be going higher soon.  Hmmm...

Short term bullish, though Friday in question

Wednesday night I wrote "tomorrow the market will be up".  Not bad for a wild guess, eh?  The jobless numbers came in better than expected, but I think the real cause for today's move is simply that today, for the first time in a while, all of the moles in our Whack-a-Crisis game kept their heads down.

Today, Thursday, the Dow handed us a 423 point gain, all but making back yesterday's 500 point loss.  Which wiped out the previous day's 400 point gain.  Which canceled the previous day's 600 point drop.  Etc., etc.  For eight sessions in a row now we have alternated between gains and losses, the last four being huge swings.

Gleaning market cues from TNA

TNA daily

So according to this, tomorrow should be a big down day, right?  Who knows.  Tonight I want to take a look at the daily chart of TNA, the Direxion Daily Small Cap Bull 3X leveraged ETF.  I'm doing this because this is what they trade over in J-Trader's blog (see link in sidebar) where there was some discussion today about some possible downside from here.

Anyway, this chart starts with the shelf around the beginning of August and shows the sickening downhill plunge from there.   The straight lines are the regression trend channel.  This has a Pearson's coefficient of 0.995, about as high as it gets.  As long as we trade inside that channel, the downtrend is in effect.

So the fact that today, TNA traded entirely outside the channel is a bullish setup.  Continuing to stay outside this tomorrow would be a bullish trigger.  And because the channel is so steep, it would take a drop to 32.67 (from today's close of 44.15) to cancel the bullish setup.  In my book, that's a reach, even given the crazy volatility of late.

I'm liking the candle TNA put in today too.  This bullish piercing pattern shows that the bulls effectively wrested control of the stock from the bears today.  The wick on top was formed at the end of the day when the day traders all headed for the exits at 3:45.  In fact the entire Dow lost over 100 points in those final 15 minutes today.

Moving to the TNA weekly chart, it's looking just as strong.  All of those indicators are oversold and volume shows an exponential spike characteristic of capitulation.

The only bear case I can make for TNA today is that today's up volume was lower than yesterday's downside.

Adding to the upside case is the Morningstar  Market Fair Value indicator which today fell to an amazing 0.66, a number not seen since October 2008, at the height of the Lehman crisis.  This seems to be telling us that stocks are very undervalued now and have more upside potential than down.  Note that the all-time low for this indicator is 0.55, in November 2008.  We're not that far from there now.

The VIX

The VIX is still crazy high, but today it closed at 39, down over 9%.  More important, the VIX has been hitting lower highs for the past four sessions, even during the two big down days this week so far.  It looks to me like the VIX is ready to go lower.  Lower VIX, higer stocks.  But - the last time I thought the VIX was going lower, it went higher.  So I'm not really positive on this one.

The futures

That's the good news.  But all three market futures are down by a significant 1% at 1 AM EDT.  Now looking at ES, it  now seems to be in a trading range with some fairly strong resistance around 1170 and corresponding support around 1110-1120.  So this is the bearish case tonight.  Just looking at ES, I suppose tomorrow could be down after all.  And with the crazy world situation lately, I'm sure there are many traders who do not want to stay in the market over the weekend.  I'd feel more comfortable if tomorrow wasn't Friday.

Also, the current price at 1156 is getting pretty close to Friday's daily pivot at 1151.83.  Watch this number closely Friday morning.  Falling through that will be bearish.

The bottom line

I see two scenarios right now.  Earlier today, I was going to say that unless that another mole sticks his head up tomorrow (and personally I'm betting on that pesky French mole) I was going to take another wild guess, go waaay out on a limb and claim that we're in for more upside.  At least the first half of the day.  Then we'd see them sell them off into the close.  Scenario number two is just another big down day for no real reason, like we've been seeing for the past four days in a row.

Things are so insane right now, I'm afraid I don't really have any good way to make a rational prediction for what might happen tomorrow, especially with the VIX still so high.  So I'm going to take a pass tonight.  I'm still not trading right now anyway, so it's pretty much all academic anyway.  I wish my crystal ball wasn't so murky.  We're living in strange times.

Futures point to higher Thursday if no moles

Whack a crisis

Whack!

The problem is bad mortgages! No, the problem is Greece! No, it's Ireland! No, Portugal! No, Greece again! The debt ceiling! Italy! S&P downgrade! Spain! France! Obama makes a speech!  Foo. Every time one of these moles gets whacked, another one pops up in its place

And then they just keep coming back for more. Seems like there's just no getting ahead of them.  It's enough to drive you crazy, which is pretty much the way this market has been acting for some time now.

Oops Dept.

Last night I wrote that I was "cautiously optimistic" for Wednesday. Wow, was I ever wrong.  I'm sure glad I threw the "cautious" part in there, since the Dow ended up giving back all of Tuesday's gains and more to finish down an appalling 520 points.. And the funny thing is that I still don't see anything in the technicals to support this violent move.

I guess it was all due to the French mole popping his head up all of a sudden. Didn't see him coming.  Whack! Thanks a lot, all you mangeurs de quiche, for tanking my IRA today.  At least from what I read and heard today, I wasn't the only one caught (again) by surprise on Wednesday.

Thursday outlook

We're back to (or still in) one of those periods where the market is more news-driven than technical driven so I'm not even putting up a chart tonight.  Where the market goes tomorrow, Thursday, will depend largely on which mole pops up.  At least our populist president is taking it on the lam to hole up in tony Martha's Vineyard for Yet Another Vacation, so hopefully we'll be spared any more of his embarrassing market-tanking speeches for a while.

Technically, we've been oversold for days, but with this crazy whipsaw down 600, up 400, down 500 type of action, it's giving me vertigo.  It's all academic at this point for me anyway since I don't trade when the VIX is at 43 (or 33 for that matter).  I've been spending my time working on my program trading algorithm.

But just for laughs, with the market futures up nearly 1.5% at 1:30 AM EDT, I'm going to go waaay out on a limb and guess that tomorrow the market will be up.  Will it be 10 points, 100 points, or 1000 points?  I have no clue.  It's anybody's guess.  Do you feel lucky?  This is one roulette wheel I refuse to spin until a measure of sanity returns to the casino.

VIX foretells cautious optimism for Wednesday

That's what I'm talking about

Yesterday evening (Monday) I wrote

"...the VIX is going lower tomorrow. That should provide the juice to run the market higher."

Well holy moly!  What we got today was more like rocket fuel than mere juice.  And if you recall, yesterday afternoon I wrote about how the pattern the VIX was forming was historically reliably followed by a big market push higher the next day. Well today the VIX crashed 27% and the Dow exploded for an astounding 430 point gain.  Never discount the predictive power of the VIX.

Actually, while Monday was scary bad, today was scary good. Today I had by far my biggest gain since I started trading in 2003.  I made a full 7%.  In one day.  I had to blink and look twice at my trading platform  to make sure I was reading the P&L line right.  Of course that was all merely erasing my horrible unrealized losses from Monday, but still it made me glad for not following all the lemmings over the cliff.

ES daily with retracements

The technicals

So is there any gas in the tank left after today's monster move to continue higher tomorrow?  Let's look at the daily ES chart.  I've added the Fibonacci retracements from the July 22nd high.  You can see how we retraced just short of the 0.382 retracement on Tuesday and just about touched it in the evening session.  With such a big move down, I think it's not too much to expect at least a 50% retracement.  That would be to 1214.  Since we're only at 1166.25 at 1:30 AM EDT, there's still considerable upside available there.

Then candlestick-wise, we see that Tuesday's action formed something of a hybrid between a hammer and a piercing pattern, both bullish patterns.

Also, the indicators which had all been lying panting on the floor oversold for days now have come back to life and are starting to rise again.  That's also a bullish sign.

The VIX

Meanwhile, the all-important VIX tumbled a monster 27% today to close at 35.06.  I was expecting a decline but was surprised at the extent of it.  And the candlestick it put in is telling.  This is a black closing marubozu and is quite bearish, suggesting the VIX has lower to go on Wednesday.  Historically, when the VIX takes a big drop off its upper Bollinger band, the next day tends to continue at least a bit lower.  That would imply higher stocks.

The bottom line

Amazingly, it has now been over a month since the Dow managed to go up for more than a single day in a row.  This alone would suggest that tomorrow is more likely to be down than up.  And although I expect an eventual upward retracement of the recent giant crash, common practice suggests a downward retracement of Tuesday's 430 point gain would come first.

And indeed all three market futures are running lower by about 0.25% at 1:30 AM.  That's the bearish case.  So with these mixed messages, which one is the most convincing?  I'm going to have to go with the VIX and make a call for higher stocks again Wednesday, though I'm not expecting anywhere near the move we saw today and I'm not nearly as confident as I was last night.  When the VIX is at these levels, anything can happen.

Trades

Today I dipped my toe in the water, not for my trading account, but for my IRA.  With the VIX still at a crazy high 35, it is too hard for me to find good swing trading entries and exits and I continue to stand aside.  However, for my much longer horizon IRA, today I bought some high quality dividend paying Dow stocks that have taken quite a beating recently: GE at 15.37, Intel (INTC) at 20.08, Home Depot (HD) at 29.45.  I also picked up some AK Steel (AKS) at 8.13, mostly because it was just too cheap to pass up.  AKS ended at 8.60, GE at 16.04, INTC at 20.62, and HD at 30.25.  So that's not too bad for an afternoon's work.

New Comment Policy

When I first started this blog, I elected to enable comment moderation out of concern for spam.  However, that has not really turned out to be a problem.  Therefore, in an attempt to encourage more interaction I am now allowing comments to appear immediately without waiting for my review.  I believe this is also in line with what Dr. Brett Steenbarger was pushing for towards the end of his great Traderfeed blog (although I recall he did have comment moderation enabled).

As always, I encourage comments (both positive and negative) on anything I post.  I've gotten some really great ideas that way.  We'll see how this works out.  Enjoy!

Obama to America: Let them eat cake; rally still possible Tuesday

Credit where credit is due dept.

It seems hard to believe that it was just a week ago when we stood at Dow 12,657 that I wrote:

"I think we're much more likely to see 11K this month before we see 13K."

That sure didn't take long, did it?  Today's close: 10,810.

 O-bomber, Ax Murderer of the Dow

This afternoon, when the VIX had reached the incredible level of 39, I posted that it could possibly be telegraphing a peak and therefore an end to the slaughter on the Street  Then Emperor Nerobama went on TV.

The Empty Suit delivered an Empty Speech.  The Dow responded by nearly doubling its losses on the day and the VIX rose another 9 points to close at a beyond incredible 48.  If you missed this rhetorical masterpiece, let me quickly summarize what he said: "Blah blah blah blah blah."  I think that's pretty much the gist of it.  I may have one of the blah's in the wrong order, but yes, that's it in a nutshell.

Marie Antoinette, playing fantasy games

Let's see.  Um, he blamed pretty much everybody except himself for the mess we're in.  He somehow managed to call for both lower taxes and higher taxes.  Then, in a truly astounding display of arrogance and contempt, he assessed the current disaster in the stock market by saying "Markets go up and markets go down".  I was waiting for him to follow this up with, "Let them eat cake" ("Qu'ils mangent du gâteau").

Marie Antoinette would be proud.  About all that's left is for him to go prancing about the White House lawn in a hoop skirt with a crook tending a flock of sheep.  That would be about as effective as anything else he's done since taking office.

Let me be perfectly clear: Mr. Obama, you have demonstrated time and time again that you are simply not up to this job.  If you really want to help the country and be remembered as a hero instead of just another self-serving hypocritical politician, then kindly resign.  Now.  Go away.  Thank you.

The VIX revisited

OK, so back to the VIX.  It's 1 AM Tuesday now and incredibly, ES is continuing its relentless march to the lower reaches of Hades, down another 1.3% in the overnight as I write.  NQ and YM are both down again too.  But, ES stands at 1096.75 right now.  At 10 PM, just three hours ago, it was at 1077.   There's still plenty of time between now and Tuesday's open to make a move higher.

Now looking at that huge green candle the VIX put in today and the palpable level of fear on the Street, I'm almost scared to say that the VIX will go lower Tuesday.  And it's entirely possible that it will in fact go higher.  After all, we were at this level on October 6th, 2008 and in just two more weeks back then, the VIX skyrocketed to 89.53.  And after the last two weeks, clearly the market is never going to go up again, right?  It's headed for zero, right?

Maybe not.  Since that time in '08, the current level of 48 has become a resistance line.  The VIX spent most of early 2009 trying to rise above it without success, and last May's peak during the European PIGS crisis v. 1.0, it topped off at exactly 48.  So I'm going way out on a limb tonight and claim that the VIX is going lower tomorrow.  That should provide the juice to run the market higher.  This despite the fact that the S&P ominously broke under its 200 week MA today, also as I predicted yesterday.  Note however that the Dow did not.

And don't forget that tomorrow is a Fed day.  I'm sure Uncle Ben was watching Obama's idiotic speech and has no desire to follow (empty) suit.  While much has been made about the Fed running low on ammo, don't discount the potential psychological impact of encouraging words, kind of like telling a dying man he's going to be alright.  (OK, maybe that's not the best analogy, but you get the idea).

Bottom line

Tomorrow's absolutely critical number: Dow 10,740, the 200 week MA (just 70 points from here).  Going below this virtually ensures more pain.  Shying away or bouncing off it and we're going higher.

VIX gap up foretells a fall, rally possible Tuesday

Today I took a look back for times where the VIX had a big gap up day after hitting its upper Bollinger band the day or two before.  I found three of these in recent memory, all from the Great Recession:11/12/07, 1/22/08, and 3/17/08.  I found six more cases going back a total of 10 years.  That's a total of nine times.  In every one of these cases, the VIX was down hard the next day.  And checking the last three times, we see that the next day, the Dow rallied hard.  The Dow was up over 300 points on 11/13/07, 300 points on 1/23/08, and a whopping 416 points on 3/18/08.  And remember, these numbers came in a similar period as now, as the US was just entering a recession, a few months after a big market peak.

And today's VIX gap up is huge.  Right now, at 1:35 PM the VIX stands just over 39.  Thirty nine!  That's up a whopping 22%.  In one day.  Because one rating agency downgraded US debt from AAA to AA+?  Not even AA, but AA+?  Does any of this strike you as just a little overdone?

Now you might say, "but this time it's different".  Well, one of my rules is that whenever someone says that, you can be sure that this time it's the same as every other time.  We'll see how the rest of the day plays out.  Right now, I'm not even looking at my trading account.  It's just too awful to contemplate.

Looking bad for Monday, very bad

Well it's 1:17 AM on Wall St. Do you know where your money is? I know where mine is. Down the toilet is where it is. ES futures opened for trading on Sunday evening with a gap down that's usually reserved for events like the outbreak of a world war, a giant asteroid heading for Earth, or Martians landing on Wall St.

I generally like to look back in the past for historical precedents for clues as to how the market may move the next day. But there has never been a situation like this. I have no idea what's going to happen. About all I'm willing to guess is that we're going to see some wild swings over the course of the day. Normally ES trading is pretty sleepy on a Sunday evening. Tonight, it was bouncing around like a Piper Cub in a thunderstorm, up and down as much as a point in mere seconds.

Weekly E

Just look at this chart.

This is the weekly ES chart because when I put up the daily chart, I couldn't find any support going all the way back across it. Here we can see that we've fallen clear back down to a support shelf beck from December of last year, well before the current contract began active trading.

Words fail me. I've never seen anything like this. This is worse than the fall of 2008. And it's puzzling too because a credit downgrade from S&P from AAA to AA+ doesn't really seem to be in the same league of disaster as the collapse of Lehman Bros.

It sure looks like the little devil on my shoulder from yesterday, the one predicting impending doom, is having the last laugh. Right now all three market futures are trading down an incredible 2.5%. And this coming after last week's exponential collapse. The only good thing here is that Monday's action may provide the washout low we need to start crawling back from the abyss.

But I'm afraid there's not even much to cheer there.  From the looks of it, tomorrow the SPX is going to cross under its 200 week moving average.  And that will be as bad as when we crossed under the 200 day MA.  Amazingly, that was just three sessions ago.  If the 1170 ES level gives way, we're in for even more losses, as amazing as that may sound.

One thing's for sure - tomorrow's going to be a day to remember.  Fasten your seat belts...

What the heck

Well the best thing I can say about this week is that it's finally over.  A horrible, miserable dive off the cliff fittingly ended with a debt downgrade from the erstwhile S&P, whose managers I'm sure will now all have to get unlisted phone numbers and join the witness protection program.  Thank God the markets are closed on Saturday.  And Sunday too.  At least the Ess-n-Pee  had the decency to drop their debt downgrade bombshell after trading ended on Friday, giving us the whole weekend to reflect on the implications.

And their statement was rather odd too, I thought.  It seemed to be more an indictment of America's admittedly Kafkaesque political system than its economic might.  All that aside from the bizarre question of a minor $2 trillion arithmetic error that may or may not have occurred.  In any case, thank you very much, Emperor Nerobama, Harry Reidboehner, and the rest of you Gang of 435 for tanking America.  We'll remember you all come next Election Day.

So what does this all mean for next week?  Who the heck knows.  I feel like one of those cartoon characters who has a little angel sitting on one shoulder and a little devil on the other.  The angel is saying "it's not so bad, this has already been priced in, all this does is remove some uncertainty from the market".  And the devil is saying "This is it, it's time to panic, you think last week was bad,  the market is going to be decimated come Monday".

I guess the only clue we're going to get is when the futures start trading again tomorrow evening.  Personally, it seems like taking the pessimistic view has been the winner lately.  For now, with the VIX at its current crazy levels, I will continue to stand aside until some semblance of sanity returns to this psychotic market.

Capitulation?

Well my cable modem died this evening so I'm using the 3G network on my tablet to connect to the web. It's good for emergency use, but my data plan in limited so tonight's post is going to be short.

There's not much to say tonight anyway after today's horrendous slaughter on Wall St. Last night I was sure that the hammer we saw yesterday would mean we were going higher today. Boy was I ever wrong. Today I had my worst day by far since I started trading. In my defense, I will say that a) I wasn't the only one who got fooled and b) I did say I was going to wait for a confirmation today before declaring a reversal at hand.

That said, today had the feel of capitulation to it, especially by the end of the session and given the extraordinary relative volume and the VIX hitting nearly 32, closing above the level it hit during the Japanese quake/tsunami panic back in March. The best that can be said is that the charts are going exponential now and that generally means a turnaround is near.

But with the VIX at these levels (and I was sure wrong about the VIX going lower today too), all bets are off. I'm going to continue to stand aside until I see a turnaround. This isn't a falling knife, it's a falling guillotine and there's no way I'm going to try catching it.

Good luck to all tomorrow and heaven help us. Oh and a big thanks to Emperor Nerobama for tanking our economy and destroying America.

Hammering out some gains on Thursday?

Well last night I called for a dead cat bounce today.  I was right about theDow breaking its 8 day losing streak, but it wasn't a DCB.  It was something a lot better - a great big bullish hammer.  So tonight we once again check out the bear and bull arguments for a clue as to where we're headed tomorrow.

The bearish view

The hammer is usually a pretty good reversal indicator.  However, we need to see confirmation the following day, so I'm not going to call this a bottom just yet.  The recent market action is one knife I have no desire to try catching and it's not out of the question that we could resume lower tomorrow..  We also remain under the Dow's 200 day MA and well inside the July 22nd descending regression trend channel.  The economic news continues to be pretty gloomy and there's more unemployment numbers coming out tomorrow, and they're likely to be pretty awful.  So that's the bear case.

On the other hand, we still have a set of technical indicators that are now about as oversold as they ever get.  Let's look at the RSI in particular.

 How long can the RSI stay this oversold?

Once again, this morning the Dow's daily RSI was zero (though it did mange to end the day barely above 0).  That makes three days in a row.  It struck me as being highly unusual so I decided to check on how often that happens.  I looked at Dow daily data from November 3rd, 1980 to today.  That's 7,759 sessions.  In that time the Dow RSI has hit zero just 22 times.

And the longest run of RSI's at 0 was 5 consecutive days.  That only happened once, way back at the end of January 1984 when the Dow was in one of its six week losing streaks.  There were no other zero-RSI streaks of length greater than two.  We are truly in exceptional conditions.  The RSI starting to come back to life is bullish.

A brand new indicator: meet the MIX

We've got the VIX, right?  Well tonight I unveil a brand new proprietary indicator: the MIX.  That's Michele's VIX.  It consists very simply of the daily traffic to this blog.  I've noticed over the past year that traffic tends to increase when the market is down, and vice versa.  The great Brett Steenbarger was the first I know of to observe this phenomenon, and by golly, it works.  Well anyway, today the Nightowl Trader got an all-time record high number of individual page hits.  That is a reversal indicator, according to the MIX.

From MIX to VIX

And speaking of the VIX, last night I said that it looked to have peaked and would head lower today and that's just what it did, dropping 5.7%.  Lower VIX, higher stocks.  As I showed in my post on the predictive power of the VIX, when the VIX peaks, the market will usually reverse course either the next day or one day later.  Today's Dow hammer bears this out.

And I think the VIX will move lower again tomorrow.  We now have a hanging man followed by a lower doji.  The VIX also fell below its daily pivot this morning and that level (24.07) acted as resistance that it tested twice later in the day and failed to break above.  All these factors point to a lower VIX.

Back to the futures

Finally, all three market futures are up at 1:10 AM.  In particular the ES, my go-to chart, is up a good 0.3%.  And ES broke over today's pivot at 9 PM this evening.  Tomorrow's pivot (ie. Thursday) becomes 1247.58 and we're now well above that at 1257.75.  Holding above this number will be bullish, falling through it, bearish.

Oh, and the Morningstar Market Fair Value indicator dropped again today, to 0.91.  That's almost exactly to where it went last year around this time just before the sell-off ended.  A number like that tends to point to a reversal.

Oh, and another good sign - those doofusses in Congress have finally hit the road to give us all a welcome month long respite from their endless infantile bickering.  Not having to see Harry Reid's face in the news every 5 minutes can only improve traders' dispositions.

The bottom line

While the monthy charts remain pretty ugly, they don't look quite so bad now as they did before this 8 day losing streak.  And today's hammer (which was mirrored in both the SPX and the Nasdaq), coupled with the  higher close that finally broke the 8 day curse should lend some positive momentum to the market.  And with the VIX looking more likely to go down than up, and the MIX  at a record high, I'd say that tonight the bulls hold the better hand for tomorrow's game.  I'd not be shorting this market tomorrow and I do think we'll close higher Thursday.  We'll see.

Dead cat bounce possible Wednesday

Dow daily

Ya gotta love Robbie the Robot. Last night he warned us of the perils of crossing the S&P 200 MA and sure enough today we were treated to some ugly losses across the board, with the Dow taking a 266 point nosedive with a solid red candle.

Take a look at this daily chart - yesterday the S&P crossed the 200 MA, and today the Dow followed suit. No support, no test, just badda-bing, leaving us at 11,867. This not only broke the 200 MA support, but the June support of 11,894 too. From here there's no more support until the March lows around 11,614. That's just 253 points from here. We dropped more than that today alone.

Further support lies at 11,450, 11,200, 11,000, and 10,680. But we don't care what happened, we want to know what's going to happen tomorrow, Wednesday. Let's look at the bull and the bear arguments.

Dow losing streaks

Today put the Dow on an agonizing eight day losing streak. Which brings up the question of how long can this go on? You may recall I addressed the issue of market streaks in this post last year. Today I did the analysis over again, this time using Dow daily closes all the way back to October 1st, 1928 rather than just the last 10 years. And what were the results? Well, in 20,802 sessions, the longest continuous losing streak in the Dow was... drum roll please... ten. And that only happened once

There were three streaks of length 9, and just 4 (make that 5 after today) of length 8. So the odds of this losing streak going longer than 8 tomorrow are just four out of 20,802. As I mentioned in my post just this past June on weekly losing streaks when we were down six straight weeks, this is the kind of number you really want to think about betting against.

And back in June, sure enough, the Dow did not go down an additional week. And those odds were only 5 in 4,264. But historical arguments are like counting cards in blackjack. No matter how high the count swings in your favor, you could still lose the next hand. Still, you have to wonder...

The technical indicators 

Adding to the bullish case is the state of the technical indicators. The Dow's RSI hit zero, yes zero. And it hit that yesterday. It remained there today. It literally doesn't get any more oversold than that. The last time the RSI hit zero was on July 2, 2010, following 10 straight losing days (OK, there was one day in there that closed 5 points higher which prevented the run from truly being 10 long, but the idea is there).

Anyway, what happened next? The Dow took off on a 7 day rally. In fact, July 2, 2010 was the exact day that the longer term uptrend began, lasting all the way until this past May. There is one big difference though. Back then at that point, we had been below the 200 day MA for 7 sessions. Today marked just the first close below it. Still, you have to wonder...

The other indicators are equally oversold. The Dow momentum was -721 today - that's the one there that looks like it's falling off the bottom of the chart. Money flow and the stochastic are also highly oversold.

 The VIX

Meanwhile, there's some possibly significant guidance in VIX land tonight. This VIX rose today to close at 24.79. However, today marked the third day it put in a lower high. The last three VIX intraday highs were: 25.94, 25.63, and 24.79 (today). Just as importantly, today's candle was a textbook bearish hanging man. And today the VIX exited its ascending regression trend channel of July 22nd. That is a bearish setup (remember, bearish for the VIX is bullish for stocks).

And today the VIX broke away from its upper Bollinger band. Finally, all of the VIX indicators are as oversold as they've gotten on past VIX peaks. The short stochastic in particular executed a bearish crossover today. This is looking to me like not a bad entry spot for a position in XIV, the inverse VIX tracking ETF.  And it implies that if the VIX is truly poised to go lower, the market will perforce go higher.

Morningstar Market Fair Value, 3 year

Finally, let's check out the Morningstar Market Fair Value graph (which you can see on their web site here).  Yesterday's ratio was 0.93.  I expect today's number (not out yet) was lower.  And remember July 2nd, 2010?  Well that was the day the Morningstar ratio hit its low during last summer's ugly spot.  The value? 0.90.  We're getting pretty close to that now.

The Bear Case

So that's the bull case.  The bear case?  Well, it seems to consist entirely of the fact that in the last two days all three major indices (Dow, SPX, and Nasdaq) crossed below their 200 day moving averages.  But the thing to remember, is that while this is bad, very bad, it's not instantly fatal.  Look back at May 20th last year.  That was the last time the Dow took a real dive straight through its 200 MA.  The next day was up.  Of course it then went on to put in further lows, but the day after the plunge was up.

The bottom line

I'm kind of expecting this same scenario for tomorrow.  At the moment, the market futures are essentially flat.  The ES is actually up by a scant 0.08% at 1:50 AM EDT.  Which doesn't mean there isn't more downside to follow.  I think there is.  But I also think that we're in for a short bounce, dead cat style, most likely tomorrow (Wednesday) and possibly extending into Thursday.  That's all she wrote (whew, that's enough!)

Danger Will Robinson: S&P hits 200 MA

Danger, Will Robinson!

Remember Robbie the Robot on TV's Lost in Space, perpetually warning Will Robinson of impending doom every week? Well, he's paying the market a visit tonight in the form of a double-barreled alert, so pay attention.

The Dow Monthly

Last night I looked at the huge pop in the market futures and decided we were in for a big relief rally today. And that's just what we got - until 10 AM when the ISM numbers came out and rained on the parade. After that, it was all over.  Up 100 points, then down 200, then back up again to finish barely down 11 points on the day. More than one person commented on what a strange day it was. And totally untradeable, for me at least. These sorts of violent intraday swings may be great for the day traders, but they do nothing for me as a swing trader besides making it impossible to choose decent entries or exits.

Dow monthy chart

But tonight, being the start of a new month, we look at the monthly Dow chart here, and it's not looking good. You can see the rising regression trend channel of July 2010. We exited that in June - that was a bearish setup. And stayed outside last month - that was the bearish trigger. And look at the indicators. They all peaked at overbought levels in May and are now headed back down, also bearish. May was also when we peeled away decisively from the upper Bollinger band.

The Dow has no monthly support until 11,555. Then there's slightly better support at 11,000. On the upside, there's resistance at 12,850 and 13,950. But I think we're much more likely to see 11K this month before we see 13K.

On the other hand, the short term picture is looking pretty good. Today's wide-range doji at the bottom of a seven session downtrend indicates at least the possibility of a reversal. And the daily indicators are all now quite oversold. And since this latest downtrend was apparently entirely motivated by the shameful antics in Washington over the debt ceiling, now that that issue is resolved, absent any new crisis the selling pressure should abate somewhat. Indeed, today's selling volume was lower than Friday's.

Crossing the 200 day MA

The picture over in S&P land is a bit different though. Today the S&P actually dipped below its 200 day moving average but managed to close back above it, just barely. With today's close of 1287 and the MA at 1285, a close below this number tomorrow will be very bearish. And that's not out of the question.

All three market futures are down by a quarter to a third of a percent at 1:50 AM EDT. And ES is also sitting right on its 200 day MA at 1274.93. Staying above this is bullish, a break below, bearish.

So once again we have a night that's too tough to call. The indicators are suggesting bullish, but we're right at the 200 MA crossroads so we need to see what the market does with that before putting on any bets. So I'm still standing aside, though if I had to guess, I'd say we could see further downside tomorrow (Tuesday).. Oddly enough though, I had my best trading day of the year today, up 1.71% on a day the Dow lost 0.1%. And that was welcome indeed because I've taken a lot of heat over the past week.

Is the next recession here?

And in case you haven't had enough doom and gloom yet, here's an article you must read from 247wallst.com:Ten Signs The Double-Dip Recession Has Begun. I have to admit, they make an excellent point that the next recession is not just imminent, but already here. All the more reason to exercise caution over the next few months.

Relief rally coming Monday

Well what do you know - according to tonight's news it seems that the clowns down at the Reedling Brothers, Boehnum and Obamley circus have finally concluded their act.  And as I mentioned last week, the market would not turn around until that happened.  Now that it has, we're going higher.  At 1 AM all three market futures have gapped up by about 1.5%, an amazing number that I have never seen in my eight years of trading.

Even without this, the Dow, S&P, and ES daily charts were all looking quite bullish on a purely technical basis for Monday anyway.  So tonight is one of those no-brainer calls.  I am pulling my long hat firmly in place.  We're going higher tomorrow.

That said, the monthly Dow chart is looking very poor.  I'm planning to use any gains tomorrow to start scaling out of some long positions.  I'm currently about 1/3 in cash but I want to go more like 60 - 70% cash over the next few weeks.

Oversold but going lower Friday

With the continuing stupid pigheaded obstinacy emanating from our so-called leaders in Washington, there is no point whatsoever in bothering with any technicals tonight since everything now hinges on the debt ceiling debacle..  This sort of leaves me at a loss, since what I do is technical analysis.

Technically, we're now at oversold levels and due for a rally in a day or two, but practically speaking until these suicidal egomaniacs hell-bent on destroying the United States can get off their collective butts to do something constructive, the market will simply continue lower.


As I stated earlier this week, I am now out of the game until after Doomsday next week.  I've never seen anything like this and I am completely disgusted.

Foofie

Foofie

May 30, 2003 - July 27, 2011

Today, after a long illness going back more than seven months during which we tried everything possible, we finally had to admit defeat. Foofie, our beloved German Shepherd is no longer with us. She was only 8 and we had her less than seven years.

Somehow, tonight I simply do not care whether the market goes up or down. Foofie, we miss you something fierce.  We are simply devastated.

Losses may extend into Wednesday on weak technicals

Where's Cromwell when you need him?

In April 1653, Oliver Cromwell delivered a memorable address to Parliament, to wit:

“You have been sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!”

That about sums up the way I feel about our own "Parliament". It's really a pity we can't be done with this collection of clowns and other assorted Twelfth Night characters as easily as Cromwell was 358 years ago.  Mr. President, Harry Reid, Nancy Pelosi, John Boehner, in the name of God, go!

The technicals

Meanwhile, back here in what's left of America, the market did not hold up today (Tuesday). The pivot proved to be the deciding factor. We were above it in the wee hours, survived a test around 5:30 AM, but then sliced decisively below right at the open and it was all over. I let myself be guardedly optimistic based on the futures last night and in retrospect that was a mistake. The candlesticks and the indicators were decidedly more negative than positive.

And I hate to say it, but we've got more of the same tonight. Only now at 1 AM EDT, ES isn't even above its new daily pivot of 1330.50. Today's ES action also took us completely out of the short rising regression trend channel from July 19th and that is a bearish trigger.

I also took a look at the chart of TNA, the preferred vehicle of J-Trader's Buy/Sell model. JT's system remains stubbornly long and I have to say I'm just not seeing it. After a doji peak two days ago, a second lower doji yesterday and a longer red candle on increased selling volume today, this does not look like a stock that's going higher tomorrow. The stochastic in particular executed a bearish crossover yesterday. Not good. And to the extent that TNA is a proxy for the broader market, I think we have lower to go before we go higher.

In addition, the Dow's daily chart is even more grim with a bearish three black crows pattern. You don't see the TBC too often but it's never good. The Dow also has no support from its close today of 12,501 down to 12,385, the support level from earlier this month.  And if that wasn't enough, the Dow has now clearly formed a double top, another bearish sign.

Then the VIX is back above 20 but still far from its upper Bollinger band at 21.68. And its indicators, though now rising, are still nowhere near overbought levels. I see no reason for the VIX to fall tomorrow. VIX no fall, market no rise. So all in all, I'm going to reach for my short hat but as I mentioned, with the current outbreak of total lunacy in Washington over the debt ceiling, I'm sitting this one out until some measure of sanity returns down there.

Of course, if by some miracle, Emperor Nerobama should somehow trade in his fiddle for a fire extinguisher tomorrow, look for the markets to go up. Absent that, I'm just not feeling the love from the technicals tonight.

Slight positive bias but news trump technicals

Moe-bama, Nancy Curl-osi, "Larry" Reid

Nyuk nyuk nyuk

Definitely no wise guys here. I'm appalled beyond belief over the antics coming out of Washington the past week from Bo, Larry, and Nancy. It's just too bad there weren't four Stooges though, because Boehner deserves a spot in there too. Not to mention the rest of the 535 clowns down there who have the affrontery to call themselves "representatives".  Have these people no shame?

Memo to Emperor Nerobama: stop fiddling around and start being a leader. It's just disgusting beyond words.

Meanwhile on Wall St.

The market ended lower today pretty much as I expected with the Dow down 88 points after a big gap down at the open. The carnage was all over in the first 60 seconds of trading. There was no way to profit from this unless you had gone short last Friday. I suppose the subsequent retracement off the lows provided some opportunity for the day traders, but I saw none of that.

ES daily, 7/25/11

For tomorrow, I think the clues come from the S&P futures. ES is up almost a quarter percent right now at 1 AM EDT.Two things are evident in this daily chart: first, today's sad action did not take us outside the ascending regression trend channel from July 18th. Second, today's candle formed a hammer. These are both bullish signs. And tonight's action (ie. Monday evening's overnight into Tuesday) is also forming a hammer.  For tomorrow, watch the daily pivot, now at 1331.92.  We're now above that level, thanks to a combination of a minor late evening rally and the fact that the pivot is now lower.  Staying above this number will be bullish.

Meanwhile the VIX put in a big gap-up doji that's looking a lot like a bearish evening star. And J-Trader's Buy/Sell model is stubbornly hanging on to its bullish bias. That didn't work out so well today, but the market is firmly in news driven mode now and will remain so until we get past this latest comedy routine coming from the Three Washington Stooges.

Although my personal bias is to the up side for tomorrow (Tuesday), I am simply standing aside until all this debt ceiling nonsense is resolved. I hereby declare summer vacation until August 3rd. Anyone for Pina Colada?  That's all, she wrote.

Going down

With the collapse of the debt ceiling talks and the passing of Boehner's 4 PM Sunday deadline with nothing to show for it, the futures expressed their displeasure in no uncertain terms, opening this evening with the biggest gap down I've seen since I started trading in 2003.  Right now at 1:20 AM EDT, all three market futures (ES, NQ, and YM) are down just over a full percent.  That's huge.

And totally unplayable.  All the action was over in seconds.  And it will be the same story tomorrow when Wall St. opens for business.  Unless you happened to go short on Friday afternoon, forget it.  The only bright side is that it might be time to go bargain hunting when the dust settles.

Anyway, there's no point in even talking technicals tonight.  The market's going down on Monday and that's that.  Thanks a lot, Obama, Boehner, Reid, Pelosi, and all the rest of you other venal amoral ignorant egomaniacs who make me embarrassed to be an American.

More gains possible Friday

Well the indecision reflected in yesterday's doji was resolved today in no uncertain terms with an awesome 152 point gain in the Dow on increased volume.  I clearly erred by taking my XIV play off the table yesterday.  Today it gained more than I realized the day before.  Oh well.

I guess I let my thinking be influenced by the previous run of short rallies we had back in May and early June where they'd get cut short just when things started looking good.  I'm still net long, so I did make some decent money today.  I bought a bit of Ford (F) at 13.23 this afternoon; it ended at 13.33.  We'll see how far I can drive this one.

Anyway, today's rally brought us to 12,724 which happens to be a resistance level from earlier this month.  If we can clear that, then the next stop is the upper Bollinger band at 12,879 and then the 12,990 region representing the YTD high at the start of May.  So there's some decent room to run between today's close and the next resistance.  Can we get there?

The ES futures tonight would seem to suggest so.  All three market futures are up nearly a quarter percent at 1:40 AM EDT.  ES at 1346 is now well above its daily pivot of 1333.67 and it has no resistance until 1353.  It's beginning to show overbought on RSI, but that always seems to cut in early.  There's no topping sign from either momentum, money flow, or the short stochastic just yet.

Finally, the VIX sliced down through its 200 day MA today like buttah and its indicators are still not at oversold levels.  The most recent two times this happened, it went lower still the next day.  And it's still only in the middle of its Bollinger bands.  Since I'm out of my XIV trade, I'm now going to wait for the VIX to bottom, then I'll take a TVIX position.  That should be sometime early next week.

But until then, I'm keeping my long hat on.  J-Trader's system is also holding long tonight and it's been turning in quite a stellar performance lately.

Failure to follow through worrisome

Last night I was thinking that we'd get more upside action today largely based on the technicals.  Today's 15 point drop in the Dow formed a spinning top indicating indecision in the market.  The failure to follow through today on yesterday's big gains has me worried.

I've gone back to 2008 in the Dow looking for instances where a big up day was followed by a tiny range day.  Most often, the next day is also a small range day.  The fact that we are nowhere near the upper Bollinger band of the Dow is somewhat encouraging.  And the indicators are also all somewhere in the middle of their cycle from oversold to overbought.  So there's nothing particularly bearish there.

Turning to the VIX, we see that it took a gap down day but ended by putting in a green candle, close to its 200 day MA.  Since the VIX is now in the middle of its Bollinger bands, I decided to take my profits on my XIV play this afternoon.  I know I'm risking leaving money on the table, but I'd rather do that than see my profits evaporate should the VIX turn higher tomorrow.  And we've seen it do that from a similar position a number of times this year so far.

Meanwhile, both ES and YM are higher by about 0.2% tonight at 1 AM EDT, but NQ is off by about the same amount.  So all in all, the crystal ball is a bit cloudy tonight.  There are some more jobs numbers coming out tomorrow morning and they may move the market.  J-Trader seems to believe that this may be just a consolidation and is remaining 100% long even though the issue he tracks, TNA, declined 0.63% today.

I'm not so sure.  I think once again the pivots will be key.  ES just now broke over its new daily pivot at 1323.42.  We will need to stay above this number to send the market higher tomorrow.  Similarly, the Dow closed at 12,572, just over its own pivot of 12,527.  Tomorrow's pivot should be higher.  Watch for any cross below that as a bearish signal.My best guess is that we'll see another small range day in the Dow, possibly weakly bullish.  But that assumes no real negative jobs numbers come out.  We'll just have to wait and see.

Let it ride

Yesterday I called for a higher close today and boy we sure got it, to the tune of a monster 202 point jump in the Dow.  The technicals all worked to perfection, Colin Twiggs' money flow hit a bull's eye, J-Trader's Buy/Sell model buy call was spot on, and my XIV trade panned out nicely with a 5.4% gain today.

And I don't think it's over yet.  Even after today's big gain, the indicators are still only just coming off oversold levels.  We're now well above both the Dow daily pivot at 12,386 and the ES daily pivot which for Wednesday is 1315.25.  Today ES ended outside its July 8th descending regression trend channel and that's a bullish setup.  With another 0.15% gain right now at 1:45 AM EDT, that will be a bullish trigger unless we fall below 1308, something that's not looking too likely right now.

And the VIX dove 8.3% today with a gap-down red candle, completing a bearish shooting star.  That is a powerful reversal pattern.  I think the VIX still has lower to go on Wednesday.  It's just now coming off highly overbought levels and it has no meaningful support until its 200 day MA at 18.44.  Today's drop also brings the VIX out of its ascending RTC which is a bearish trigger.  Lower VIX, higher stocks.  I intend to let my XIV trade (which profits from a drop in the VIX) ride tomorrow.

Finally, I note that J-Trader "expects more upside" on Wednesday and I completely agree.  His system has been working amazingly well in a choppy environment.   So tonight I'm seeing lots of reasons to hold 'em and no reasons to fold 'em.  That's all she wrote.

Gains likely Tuesday

Last night I said we might see some higher action today, but I was concerned about the futures being lower.  I also noted that any gains today hinged on the ES pivot and the Dow pivot.  As it turns out, we never got near either one and the results were predictable with the Dow losing 95 points.

So with the Dow in yo-yo mode, alternating between up and down for the last five sessions, which way tomorrow (Tuesday)?

Let's take a look at the Dow daily chart, but tonight it's not mine. Here is the chart from Colin Twiggs' Trading Diary weekly email newsletter (click the chart for a larger version). The interesting thing about this chart is his "Twiggs Money Flow" oscillator, which is his own version of money flow.

While I use money flow as one of the indicators on my charts, I find that Mr. Twiggs' oscillator is much more informative. And tonight it bounced off the 0% level. While it is still early to call tomorrow higher on that basis alone, this version of MF seems to be announcing at least the possibility.

You can learn more about this at http://www.incrediblecharts.com.  This site is well worth a look and Twiggs' newsletter is great - I highly recommend it.  Many thanks to Mr. Twiggs for kindly allowing me to reprint this chart here.

Another bullish sign is that despite today's losses, the Dow has now exited the July 7th descending regression trend channel. In addition, J-Trader's Buy/Sell model gave another buy signal today and is now 100% long.

Meanwhile, all three market futures (ES, NQ, and YM) are up at 1:20 AM by about a third of a percent and have actually been trending higher since 1 o'clock this afternoon. In addition, ES at 1304.25 is now above its new daily pivot of 1302.17. And both the ES daily RSI and momentum have now bottomed from oversold levels and hooked upwards. Those are all bullish signs.

Finally we come to the VIX, which today put in something between en evening star and a gravestone doji, both of which are bearish reversal patterns. And this candle just missed touching the VIX's upper Bollinger band.  Lower VIX, higher stocks.

So all in all, I'm not seeing much in the way of warning signs for tomorrow and I am seeing enough positive indications to have me putting on my long hat. I don't know if this will start a new trend, but at least things are looking up for Tuesday.

Playing the VIX

I talk a lot about the VIX here. Well I recently discovered that you can play the VIX just like a stock using TVIX, VelocityShares Daily 2x VIX Short Term ETN and its inverse, XIV VelocityShares Daily Inverse VIX Short Term ETN.

TVIX ("Trade the VIX") tracks the movement of the VIX and XIV ("VIX" spelled backwards, get it?) tracks the inverse of the VIX. If you believe the VIX is going up, you can buy TVIX. If you think it's going lower, buy XIV. Today I picked up some XIV at the end of the day at 16.10.  We'll see if this trade pans out tomorrow.

Monday higher possible, rest of week uncertain

Last Thursday night, I was weakly bearish on the market for Friday.  Turns out the Dow posted a 43 point gain after wandering around the flat line most of the day.  So I was wrong and J-Trader was right by sticking with his buy signal from the day before.

Now we're at an interesting juncture.  Friday's gain came on significantly increased volume and the Dow is now rather oversold.  The VIX also fell on Friday for the first time in five sessions and its indicators have now peaked from overbought levels.  The VIX looks ready to go lower still tomorrow (Monday) which would imply higher stocks.

However, the weekly Dow chart doesn't look good at all.  In fact, it's almost the opposite of the daily chart.  On the weekly, the indicators are looking overbought and last week's big loss formed a nasty looking bearish engulfing pattern.

So all in all, I'd say that an advance might be possible tomorrow but the rest of the week's not looking so hot.  For that matter, all three market futures are actually lower right now by nearly half a percent.  That's the main negative point I'm seeing right now and it's worth keeping in mind.

Key numbers to watch on Monday: 1310.33, the ES daily pivot.  At 1:30 AM EDT we're sitting just below that at 1309.50.  If we can break above this before the open, that strengthens the outlook for the day considerably.  If not, look for a lower close.  Friday's Dow daily pivot was 12,478 (I don't have Monday's number yet but it should be pretty close to this).  We closed just barely above that at 12,480.  If the Dow opens up and stays above its pivot, again that would be bullish.  It's not guaranteed by any means though.  We'll see.

Rally possible next week, not necessarily tomorrow

Slim Pickens riding the bomb in Dr. Strangelove

 Yeeee hah!

As I read the latest shenanigans emanating from Washington regarding the debt ceiling, I am reminded of nothing so much as Slim Pickens riding his atomic bomb to oblivion in Dr. Strangelove.

This headlong rush to national suicide by what embarrassingly passes for our government these days is nothing short of appalling. And if the reports are to be believed, we now have the spectacle of Emperor Nerobama, the Empty Suit, walking out on negotiations today, late no doubt for his daily fiddle lesson. Note to all involved, both the Demicans and the Republicrats: grow up.

I am fed up with this and just about at the point where I simply want to sit entirely in cash until Doomsday on August 2nd. There is no way to make money in this sort of toxic, psychotic market environment.

That said, last night I was weakly bullish on today. It was looking pretty good for a while there, but the day ended up being a carbon copy of yesterday, with early gains evaporating, ending with a 54 point loss for the Dow. If there's anything positive about this, it's that it brought us closed to oversold than yesterday, with the short stochastic in particular very close to bottoming.

The VIX meanwhile is close to its recent upper range, though its upper Bollinger band at 22.93 is still over 2 points away. It's starting to look oversold, but there's no reversal pattern in the candles just yet.

And the dollar put in a doji suggesting the possibility that it might go higher tomorrow, which would be bearish for stocks.

On the other hand,  the pace of the decline in ES has been decelerating over the past three days and appears to be stopping right at the 50% Fibonacci retracement from the June bottom to the early July top.  This suggests a technical bottoming process in progress.

Finally, I note with great interest that J-Trader's buy/sell model has now given a "strong buy signal". His time frame appears to be on the order of a few days to two weeks. I'm a little surprised, but I'm not going to argue with that, given his trading record since I've been following it.

It does look like we're nearly oversold levels from which a rally is certainly possible, but I don't see the reversal on my charts for tomorrow. Maybe on Monday. But with the current insanity in the market, I guess anything's possible. As I said before, I'm getting ready to head for the exits if the clowns in Washington can't start acting like grown ups real soon.  It's just shameful.

Indecisive, but weakly bullish for Thursday

Yesterday's post was titled "Rally possible on Wednesday" and that's just what we got today.  It wasn't pretty though, with all the gains over by 10:30 AM and the rest of the day dribbling downhill.  But it was still good for 45 Dow points and I'll take 'em any way I can get 'em.

Tonight's call is a little harder.  We're between Bollinger bands and have no real clear guidance from the candlesticks right now.  One positive note is that the Dow respected its daily pivot at 12,544 this afternoon.  In addition, our friend the VIX was unable to make any headway above yesterday's high and ended making another hammer.  Also, the VIX indicators are now even more overbought than yesterday.  And the Dow indicators are approaching oversold levels, though not quite there yet.

The dollar meanwhile did indeed go lower today, as I called for last night.  While it too is in the middle of its Bollinger bands, its short stochastic suggests it still has room to fall some more tomorrow.  All of these factors are bullish for stocks, but not overwhelmingly so.

And while all three market futures are lower right now at 1:45 AM EDT, the ES indicators are now oversold.  We're at one of these points where the ES pivot will be critical tomorrow.  It's now at 1315.75, a bit more than 7 points above the current level.  If ES can break above that level in the rest of the overnight, or in early trading on Thursday, then we have a good chance to close higher.  Otherwise, look for lower.Same goes for the Dow daily pivot.

Interestingly, J-Trader's Buy/Sell model came close to going long this afternoon but not quite.  That pretty much sums up my feelings about the market for tomorrow.  I've still got my long hat on, but only because I can't find a real good reason to remove it right now.

Rally possible on Wednesday

Well for a while there I thought my call for a lower close today was going to go awry, but Ireland came to the rescue and they knocked 'em down into the close and saved my call for a down day.

So now what? I think the clue to tomorrow is in today's chart du jour: the daily VIX. After another gap up day that took us over the 200 MA, the VIX finished at 19.87 after topping just over 20 to form a hanging man. That is a reversal signal. Interestingly, I heard some talking head on CNBC a few days ago say that the market wasn't going higher until the VIX hit 20.  Today it hit 20 and backed off.

Supporting the idea of a lower VIX is its RSI, which entered overbought territory today. The RSI on the VIX is a pretty reliable indicator. Once it turns red, the VIX goes lower either the next day or the day after. Lower VIX, higher stocks.

I also note that J-Trader's buy-sell system issued a short cover today. J-Trader clearly has the hot hand lately and I'm loathe to call for a downside continuation in the face of this.

Then we note that the dollar index put in a classic dark cloud cover today, with all its indicators it overbought levels implying that it's going lower tomorrow. And we know that lately, lower dollar equals higher stocks.

Finally, all three market futures (ES, NQ, and YM) are up nearly a third of a percent at 1:20 AM EDT. And ES in particular is now above its daily pivot, now at 1309.75. Admittedly that happened because the pivot went lower, not because ES went higher. However, any time ES is above its pivot, that number becomes support.

The red trend arrow remains in place until I actually see a reversal, but the upshot is that I'm taking off my short hat and reaching for my long hat for tomorrow.

Sell-off not done yet

Last night was one of those no-brainer calls.  The market telegraphed today's 151 point plunge from a mile away.  And you know what?  It's not done yet.  All of the factors that were in play last night are still there: oversold indicators that have (finally) peaked, a hanging man confirmed by a long red candle, lower futures, renewed rumblings out of Europe about Greece, or now it's Italy, heck it's Greetaly, mama mia, rhe whole deal.

And the VIX, which I did not mention last night, has come alive, with a big gap up green candle to close at 18.39, bumping right up against its 200 day MA.  That puts it right in the middle of its Bollinger bands and with its indicators all still just coming off highly oversold levels, it's still got plenty of room to run.  Higher VIX, lower stocks.

I don't know where this one is stopping but I'm pretty sure the market tomorrow is going lower again.  I took out some SDS again today to hedge my long positions.

Going lower on Monday

Well my forecast last Thursday night for Friday proved wrong, although I still don't think there was much of a clue in the technicals that night to Friday's 62 point Dow decline.

But tonight, the picture seems a lot clearer.  With the both the Dow and the ES putting in hanging man candles last Friday and the Dow falling out of its 8 day long ascending regression trend channel, and all three futures down by around half a percent right now at 1:30 AM EDT, ES having fallen below its daily pivot, now at 1346.75, and J-Trader's system still holding a short signal, it's looking like a pretty good bet that we're going lower tomorrow.  Also, the indicators have now peaked and fallen out of the "overbought broken" status.  This indicates a trend end too.