Toppy indicators point to lower Wednesday

The Hoot

• Wednesday going lower, bull-bear ratio (below) now 1:2.
• ES pivot 1205.67. Going under is bearish.
• Rest of week uncertain, market looking toppy.
• Monthly outlook: bias up, all depends on Fed action in September
• ES Fantasy Trader going short at 1202.50 at 7:54 PM

The technicals

     Recap

Last night I was "weakly bearish" on today's action and that's indeed what things were looking - until the Fed Minutes came out, that is.  Apparently, hearing what he already knew was enough to send Mr. Dow on a 48 point run up that ended putting the index in the black by 21 points.  Anyway, since I was expecting a slight decline today and that didn't happen, we're at an interesting juncture now, as an alert reader so aptly noted in a comment to my previous post.

So let's do our nightly rundown of the bulls vs. the bears and see who comes out on top.  Remember, I'm now assigning numerical points to each item, sort of like counting cards in blackjack.

     The bull case

The Dow today sure looked like it was ready to roll over but didn't.  I'm willing to give it a plus 1 for that, although I think the only reason was the Fed minutes.  The bears came out to play in the last 15 minutes but they still couldn't turn the day negative.

The Dow still remains solidly inside its current rising regression trend channel.  +1.  It has also now cleared resistance at the 11,480 level.  There's no resistance until 11,890.  Another bull point there.

Then the market futures are all higher tonight at 1:45 AM EDT.  ES is up 0.21%.  I went short ES earlier this evening and right now I'm regretting it.  A bull point there.  ES is also holding above its new daily pivot, 1205.67.  That's another +1.

     The bear case

Today's Dow candle was a classic doji star (SPX too), suggesting indecision and a potential reversal.  I give 1 point to the bears for that.  The Dow indicators are all quite overbought now and at the same level or higher than those from which the last decline started.  A bear point there.

Next we have the VIX.  As I thought, the VIX was unable to move below its recent support and in fact did close higher by at bit, forming a doji of its own in the process, signaling a potential reversal.  Two points for those.  The VIX indicators are all oversold, and at levels from which the VIX has subsequently rallied a day later.  A point for that.

Then today the VIX futures had their first day higher in six sessions and their indicators are also now at oversold levels.  This also suggests the VIX may indeed be ready to go higher.  Higher VIX, lower stocks.  +1 for that.

 Next, oil put in a double bottom recently and broke above the end of the "W" today, suggesting it could break out soon.  That would be bad for stocks.  Another +1.

Finally, last night I suggested that the dollar index might go higher today.   It did indeed and tonight looks like it's not done yet, having bounced off its support, suggesting lower stocks.  Another 1 for the bears.

And the winner is ...

The bears.  It was bulls 4, bears  8 for a bull-bear ratio of 1:2.  With the market looking subjectively toppy to me and still running out of steam, I'd be surprised indeed to see us go higher Wednesday.  I'm just a bit antsy waiting for this shoe to drop and I hate going against what the futures are saying right now, but you can't argue with the technicals.  With the VIX oversold and finally turning positive today, we're due for a reversal.

ES Fantasy Trader

Today's trade was up 2.75 points overnight for a $1375 gain.  Total now $122,500.  7 trades, 5 wins, 2 losses since inception.

Here are the details.  Again, I enter a trade any time after the close and exit it at some point the next day before the close trying to capture overnight price movement.

 SLD    10    ES    false    SEP11 Futures     1207.00    USD    GLOBEX    01:09:30
 BOT    10    ES    false    SEP11 Futures     1204.25    USD    GLOBEX    11:25:07

Tuesday weakly bearish

The Hoot

• Weak bias for Tuesday going lower, bull-bear ratio (below) now 1:1.
• ES pivot 1196.33. Going under is bearish.
• Rest of week uncertain, market looking toppy.
• Monthly outlook: bias up, all depends on Fed action in September
• ES Fantasy Trader going short at 1207.00 at 1:10 AM

The technicals

     Recap

Last night I was pretty sure we were going higher and indeed we did with the Dow advancing a healthy 255 points.  I also thought that increased gold margins would weigh on the metal and GLD did fall 2% today.  I was also right about oil going higher, but wrong that that implied lower stocks.  Tonight we look at the bull and bear cases for Tuesday.  And I'm going to try to make this a bit more quantitative from now on by assigning points to each factor I look at.

Daily Dow

     The bull case

The Dow today completed its double bottom, the one that looked off the table just three days ago, by breaking out above 11,530 (upper horizontal blue line).  With today's close at 11,539, there is no more resistance all the way to  11,896.  Extra points for the fact that the second bottom of the "W" is higher than the first.  Total: +3.

The Dow also remains solidly inside its current rising regression trend channel.  +1.

Then we have the VIX futures (the VIX itself is in the Bear Case below).  They gapped down big today without hitting any support level suggesting that there is room for the VIX to run lower on Tuesday.  +1 for that.

     The bear case

Exhibit A for the bears has to be the VIX.  Here's the daily chart.  Notice how we have fallen back to a strong support level at  32.27 (blue horizontal line).  The last time we were here, on 8/17, the VIX rocketed higher the next day.  Also note how we are on the right edge of a descending regression trend channel, just as we were on 8/17.  Even the indicators are at the same oversold levels.  This all suggests the VIX going higher in a day or two at the most.  Total: 2 points.

Daily VIX

Also, today's advancing volume in the Dow was significantly lower than Friday's.  One for that.

Not much to add to this from the market futures tonight at 1:10 AM.  ES, NQ, and YM are all essentially flat.  ES indicators are all at oversold levels though, with the stochastic (which is the best of the bunch) at the same level the last two big drops came from.  1 for that.

Finally, the dollar index put in a hammer at the bottom of its recent range suggesting it may go higher tomorrow.  That would be bad for stocks. Another 1.

And the winner is ...

It's a tie! It was bulls 5, bears  5 for a bull-bear ratio of 1:1.  I'm going to call this weakly bearish though, simply because the recent advance looks to me to be running out of steam.  I would not be surprised to see the market teeter on the edge tomorrow before going lower on Wednesday instead.  Either way, I'm not looking for any big gains Tuesday like we saw today but tonight is still a tough call.

Ticker Sense

The latest Ticker Sense blogger sentiment poll (see sidebar) came out today and not unexpectedly, the prevailing sentiment has swung bullish by 43% to 29%.  My guess is that this is due to whatever it was that Bernanke said last Friday.  People are counting on the September Fed meeting to pump up the markets, if not the economy.  I think the SPX will be pretty much marking time until then, possibly drifting slowly higher into that.

ES Fantasy Trader

Today's trade was up 10.25 points overnight for a $5125 gain.  Total now $121,125.  6 trades, 4 wins, 2 losses since inception.

Here are the details.  Again, I enter a trade any time after the close and exit it at some point the next day before the close trying to capture overnight price movement.

BOT    10    ES    false    SEP11 Futures     1187.25    USD    GLOBEX    00:41:05

SLD    10    ES    false    SEP11 Futures     1197.50    USD    GLOBEX    11:46:29

Monday going higher

The Hoot

Remember, if you just want my forecast for the next trading day, you can get it right here, right up front with the Daily Hoot.  Read on though for the reasoning and my take on the markets.

• Monday going higher, see bull & bear case below.
• Rest of the week uncertain due to approaching resistance levels.
• Monthly outlook more promising due to likelihood of Fed action in September.

The Night Owl  went long ES at 1187.25 for the Fantasy Trader account tonight.

The technicals

Being Sunday night I'm looking at the weekly charts of the Dow, the SPX, the SPY and TNA, which gives me a pretty good market cross-section.  And I'm seeing pretty much the same thing all the way around.  Let's check the wild animals and see how they stack up.

     The bull case

All of the weekly indicators are oversold with the stochastic is executing a bullish crossover.  The Dow and SPX are oh so close to having formed a bullish engulfing pattern over the last two days.  In addition, the Dow's up volume last week was higher than the down volume the week before.  And despite three days of essentially sideways action, the Dow remains inside a rising regression trend channel from a week ago.  Those are all bullish signs.

And correspondingly, the daily VIX executed a classic dark cloud cover on Friday, indicating it wants to go lower.  The weekly VIX chart shows highly oversold indicators that have peaked and are going lower.  VIX futures continue lower too.  This all points to a lower VIX, ergo higher stocks.

Next, and this is a big one, all three market futures are up at 12:35 AM EDT.  ES is up nearly a full percent at 1187.75 and has no meaningful resistance until 1200.

And finally, we can pretty much forget about Hurricane Irene, which at least as far as Wall St. goes proved to be the Comet Kohutek of natural disasters.  Overhyped and underforecasted, the surf whipped up by Irene couldn't hold a candle to the frenzy whipped up by the mass media.

     The bear case

The US dollar index took a big dive on Friday down to near its monthly support level.  Though it still has a bit of room to go lower tomorrow, I think it's going to be due for a reversal soon.  Higher dollar implies lower stocks.

Meanwhile, oil seems to have bounced off the bottom of its recent trading range last Thursday.  Friday it went higher and looks like it's got room to run Monday.  Higher oil lately implies lower stocks.

The gold chart looks quite similar to oil. However, I note that my broker on Friday announced that they were going to be raising margins on gold again.  This may put a damper on the metal, at least in the short run.  So this is kind of a toss-up.  The chart suggests gold going higher.  But the influence of higher margins should kick in soon.

     And the winner is ..

The bulls.  Their case is clearly more convincing for Monday.

So Sell in September?

September's got a bad rap in the market.  Check out a quote that appeared in this article on marketwatch.com today:

"September has been the worst-performing month of the year for the Dow and the S&P 500 since 1950, according to the Stock Trader’s Almanac."

What they failed to mention was that if you look at the last 10 years, the Dow has been down just 5 times and actually up the other 5.  Three of the down years included the 2001-2003 recession.  One (real big one) came in 2008 during a truly exceptional time.  Then I got to thinking, what about years where August was down big time?  The last time that happened in the Dow was 1997 and 1998.  In both those years, September was up.  Going back to 1987, only one time was a bad August followed by a bad September, 1990.  And that September wasn't nearly as bad as the August drop.

The End of the World Redux

Sorry to keep harping on this but is it just me or am I seeing more and more apocalyptic chatter on the web these days? I know I've done my part by posting my War With China piece, but some of these are really getting out there. Check out just one example, this from Expected Returns:

"This is a crisis in confidence, so things will get very volatile. Everything will occur in an accelerated timeline, including the rise of a third party in America (finally). Gold is going to explode with stocks. Civil unrest will appear, perhaps leading into 2012. We are very close to approaching the tipping point where confidence just falls off a cliff. This is just the warm up. People still don’t believe how bad things can get."

As Count Floyd used to say on SCTV, "Scary stuff, eh kids?" Personally, I believe that 2012 is going to be a letdown but let's see what happens tomorrow first.

Weekend ramblings

Weekend reading

If you're just a tad confused about what Uncle Ben was talking about yesterday, so am I. The absolute best explanation I've read of what Bernanke said (or more to the point, didn't say) on Friday is this piece by Bruce Krasting over on zerohedge.com.  It's right on the money and the Night Owl give it four hoots up.  As they say down at the Public Library, check it out.

Last Sunday, August 21st, I wrote a piece called War With China that was fairly well read.  Three days later, a piece appeared over on marketwatch.com called Is the market forecasting war?  Hmmm...

Google Trends

And speaking of World War III take a look at this search term graph from Google Trends:  And what term did I search for?  "War with China"!  This term wasn't even on the radar until 2008.  It began perking in 2009 and has been running at about 5 times the average level ever since, with one big spike to over 10x normal in mid-2010 that Google chose not to annotate for some reason.

Know your enemy

And while we're at it, does anyone remember this iconic image?  At first glance, it looks like nothing more than a wallpaper pattern.  It isn't.  It was those 2,008 Chinese drummers pounding away in perfect clockwork synchronization during the opening ceremonies of the 2008 Olympics in Peking.

No doubt meant to be an "oooh, ahhh" moment by the organizers (or maybe it wasn't), but it just gave me the willies.  None of those guys looked  happy.  What do you think?

Two more interesting articles for the student of history: this one seems to have been forgotten in today's Short Attention Span society but it's important: China shoots down satellite.  Way back in 2007, China demonstrated to the world its ability to shoot down satellites orbiting the earth.  Gosh, I wonder why they'd need to be able to do that?

And this item is just a few weeks old: China's first aircraft carrier 'starts sea trials' That's right, the Peoples' Liberation Army (or I guess in this case, Navy) needs an aircraft carrier to, to, um, just why do they need an aircraft carrier?

So do I think WWIII is really coming?  Gosh, I hope not.  Maybe, eventually.  I don't think it will involve duking it out with nukes though.  It will be more of a cyber-socio-economic kind of war.  Every new great war differs substantially from its predecessor.  This one should be no different.

Executive Summary

From world war we move on to class war.  Not rich vs. poor.  This one is workers vs. management (which I guess amounts to the same thing).  Actually, this is just a funny story, not an executive summary  Back in the days when I worked for a big tech company, management decided to install a  fancy new video projector for the conference room.  They left the actual setup of this device to us techie types.

We carefully opened the box and unpacked it.  The first thing we pulled out was a remote control.  This looked like it had once been part of the console for a nuclear reactor or perhaps the space shuttle, had the space shuttle been invented back then.  It just bristled with buttons of various sizes, colors and shapes.  Suffice it to say we were mightily impressed.  Then someone said, "Hey wait, there's another remote in here".  We all took a look but this time we were just puzzled.

This other remote had only two buttons on it.  On for power, and the other for volume up and down.  We roundly scorned this useless sad button-impoverished excuse for a remote and wondered what kind of idiot would want to use it.  Then we came across the installation manual.  And right there in the parts list, under "master remote control", we got our answer.

The kiddie remote was called the "Executive Remote Control".  I kid you not.  We laughed about that for months.  It became something of a standing joke.  And the funny part is that the executives loved it.  Fortunately, I was never called on to hand over the "Executive Remote" to a visiting executive before his presentation.  I don't think I could have done it with a straight face.  So that's why I don't call my "quick overview" the "Executive Summary".  Ain't that a hoot?

Have a great weekend and stay out of Irene's way.

Mr. Market likes Ben, Friday to close higher

Hey Mikey, he likes it!

Mikey Market

That was about my reaction to the market's reaction to Ben Bernanke's eagerly awaited speech from Jackson Hole this morning. Never before have I seen the can so artfully and expertly kicked down the road, one month until the next Fed meeting, to be precise. In any case, the market definitely seemed to like it for some unfathomable reason.  My best guess is that since Bernanke didn't say anything awful, it was presumed to be good.

So much for my theory last night that Mr. Market was going to hate it because "he hates everything". Bzzzt - wrong.  In any event, you can't argue with the Dow up 135 points at 1 PM EDT. And since this rally took us above today's daily pivot at 11,221, it looks like we should end the day (and the week) on a positive note after all.

The Swing Trend

An alert reader took me to task over my putting up the "who knows" swing trend icon yesterday and I've got to admit he has a valid point.  So this seemed like a good time to review how I decide what the trend is.

First off, "swing trend" isn't precisely defined.  I think of a swing trade as something longer than a day trade but shorter than an investment - usually on the order of a few days to a few weeks.  Nonetheless I try to be analytical about it.  The "swing trend", as I define it, is based on the regression trend channel fitted to the daily Dow chart from the most recent high or low.

Dow daily

So for example, there was a rising RTC from 8/10 to 8/16.  I put up the green arrow after two days, on the theory that any move shorter than that can't really be considered a "trend".  Once the candles leave the RTC, the "X" trend-end icon goes up.  Then usually a new trend begins but sometimes I just get confused, and that's when the question-mark curly track icon goes up.

So for example. here's the most recent dozen daily Dow candles.  There's the 8/10 RTC I mentioned (the low in the center of the chart), the one we're in now, and the end of a descending weekly one providing something of a cross-current.  After last night, even though we were still inside the current RTC, it looked to me like the trend wasn't developing the way it should, so I took the liberty of changing the arrow.  In retrospect, I should probably stick to the objective system and will do so from now on.

Now, there's one more icon I use, the "channeling" zig-zag, and I may bring that one up if Monday's action remains inside the range of the last three days.  But for now, we're going back to the up-arrow, because, as you can see, we're still inside the rising RTC.

The Hoot

The same alert reader pointed out that having the "Bottom Line" up on top was kind of odd, and suggested I rename it to something more catchy, like "The Hoot".  Well, the Night Owl has to agree and gives that idea four hoots up.  Thanks Daniel and a tip of the Hatlo hat.  Starting next week, my actionable market call or the next day will still appear right up front but will be called "The Hoot".

Bias lower but way too uncertain to call Friday

The bottom line

Remember, I'm giving a quick "executive summary" right up front in each post now. If you want to know why I'm making these calls, read on.  Hey, read on anyway - it's fun.  Otherwise, here's all you need to know:

The technicals strongly suggest a lower close on Friday. But everything will depend on what Uncle Ben says.  There's really no way to make an informed call tonight.

Things are looking a bit more optimistic for next week.  The monthly outlook remains poor.

Recommendation: Do not trade ahead of Bernanke.  We want to ride on the bus, not lie down in front of it.

Why calculus is harder than the market

Back when I took calculus (about a million years ago), it was not enough to get the right answer on a test.  You had to have the right reason too.  In fact you got more credit for having the right reason and the wrong answer than the other way around. Fortunately, the stock market works exactly the opposite.  In the market, there is no credit for your reasoning, all that matters is having the right answer.

And so it was last night.  I thought we'd be down today because Steve Jobs quit.  Well we were indeed down, but it had more to do with rotten jobless numbers and fresh shenanigans on the Dax over in Europe.  Which explains why my other idea, that we'd recover as the day wore on, was wrong.  I'll bet also that people were pricing in disappointment over Uncle Ben's not-yet-issued pronouncement tomorrow.

To QE3 or not QE3, that is a heck of a question

I've actually rarely seen such widespread disagreement over an upcoming event.  I read a bunch of blogs and it seems that everyone has a different opinion of what Bernanke will say tomorrow.  So I might as well join in the fray.  Is QE3 coming?  I'm pretty sure Ben will announce something to prop up the market, in the form of QE or otherwise.  Considering that we seem to be teetering on the brink again, he doesn't have the luxury of sitting back and hoping things will just work themselves out.

But I don't think he'll announce it tomorrow.  And whatever he does say tomorrow, I'm willing to bet the markets aren't going to like it, given the nervous mood on the Street lately.  Unless perhaps he brings out President Obama who will tender his resignation on the spot.  And I'm pretty sure that isn't happening either.

The charts

Technically, all the charts look the same tonight.  I checked the Dow, the Nasdaq, the SPX and the SPY and at least they do all agree.  They all have a bearish engulfing pattern going on.  This is one of the strongest bearish patterns in the candlestick lexicon.

The VIX meanwhile put in a huge bullish engulfing pattern.  This coupled with a hammer the VIX futures put in strongly suggests the VIX going higher Friday.  Another point for the bear case.

The only factor in favor of the bulls right now at 1:35 AM is that all three market futures are now up around half a percent.  But ES is bobbing around like a cork in a hurricane - quite unusual for this normally sleepy time of night.  So I'm not even sure how much to read into it.

But again, none of this will matter a hoot (a Night Owl specialty) if Bernanke delivers some sort of Christmas in August surprise.  So tonight it's all pretty much just hunker down in your hurricane shelter and wait and see.  That's all she wrote.


News Flash: Bill Clinton Becomes a Vegan

Wait - that's not quite all she wrote.  Wonderful news tonight.  I just heard on TV that Bill Clinton has become a Vegan.  I know it's hard to believe, but if that's what it takes to get rid of this guy, then that's fine with me.  Vega, of course is the second brightest star in the northern hemisphere and a mere 25 light years from Earth.  I wish him well on his journey and hope they have dry cleaners in the Vegan solar system.  Oh and say, could you please take Obama with you?  Hasta la vista, ba-by.

ES Fantasy Trader

Oh, and another thing.  I'm not touching this one with a 25 light year pole.  Tonight I'm taking my own advice and I'm not even betting Obamabux on tomorrow's action.  See ya!

Jobs quits, look for reflex drop Thursday, then recovery

The bottom line

Starting today, I'm going to try something new.  I know how all too well the overwhelming deluge of information that's out on the web.  And I know that as much as I love explaining how I come to my conclusions, many people just want to get to the bottom line right away.  And I also realize that I seem to be going into more and more detail with my analyses as time goes by.

So from now on, I'm going to put the Bottom Line on top.  You'll be able to get my prediction for the next day (and sometimes week or month) right away.  Of course if you want to dig deeper I'm always delighted, but from now on the actionable news is right up front.

So what's the bottom line tonight?  The Steve Jobs resignation is going to weigh on the markets Thursday with the Nasdaq (obviously) taking the brunt of it.  Look for a lower open followed by a retracement.  I'm not looking for a big advance after this news.  The ES daily pivot of 1163.75 will be key.  Above, bullish, below bearish.  Plan your trades accordingly.

Now for the gory details.

The details

Dow daily

Last night I had some mixed messages and couldn't really come up with a convincing case for either the bulls or the bears.  I had a vague feeling we might go lower today (Wednesday), mainly because I found Tuesday's rally to be less than convincing.  However, I did point out that the ES daily pivot would hold the key to today's action, and so it did.

ES briefly dipped below 1145.92 twice around 3 to 4 AM, and then it was up up and away from there.  The Dow finished up a nice 144 points.  And so here's the chart.  The double bottom is progressing nicely.  Note one of the important points for a powerful indicator is already in place - the second leg of the "W" has a higher low than the first.

The breakout (and resistance level) is 11,450 (horizontal blue line).  With a close of 11,321 today, we're within easy striking distance of that tomorrow.  Can we do it?

Technically, I think we can.  Notice how all of the indicators have now bottomed and are headed higher.  The stochastic in particular (bottom row) just finished a bullish crossover.  And once again, the regression trend channel worked to perfection.  Yesterday I noted that the Dow's action, outside the RTC was a bullish trigger.  And so today was the payoff.

Meanwhile, the VIX sagged lower today by 1% and I see nothing there to indicate a possible reversal just yet.  And the VIX futures were lower again for the second day on increasing volume.  That's all positive for stocks.

However, Steve Jobs threw a big money wrench in the works by announcing he's packing it in this evening.  Although I have never particularly liked Apple products, Jobs' influence is undeniable.  And tonight the futures are telling the tale.  NQ is now down just about a full percent at 1 AM EDT.  And that's weighing on both ES and YM, both down about a third of a percent.

So my best guess is that we're going to be in for a sell-off at the opening bell on Thursday, followed by a retracement, maybe back to break-even.  Once again, the daily pivot will be key.  Tonight watch the 1163.75 level.  Holding above or bouncing off that is bullish, breaking under and staying under is bearish.

And I do wish Steve Jobs all the best and hope he pulls through.

ES Fantasy Trader

Well last night I went short despite a gut feeling that it might be better not to.  Turns out I should have paid attention to that.  I ended up covering at 1162.25 for a 14.25 loss.  Ouch.  That's 7125 Obamabucks down the drain.  But we're still in a tidy profit position with $116,000 after five trades (3 winners, 2 losers).

SLD    10    ES    false    SEP11 Futures     1148.00   USD    GLOBEX    01:56:37

BOT    10    ES    false    SEP11 Futures     1162.25   USD    GLOBEX    11:34:37 

Tonight I'm going to take a pass.  Withe the Jobs news, there's too much uncertainty to take out an overnight ES position.

Leaning bearish Wednesday, ES pivot is key

Last night's post was titled "Larger rally likely Tuesday" and that's exactly what we got today, a broad-based market advance that featured a big 322 point jump in the Dow with all 30 components up.  It was good to see but I'm afraid it was also too much of a good thing.  We have now retraced half of the latest big drop from the August 16th high and although the indicators are still oversold, volume has been lagging the past two days, indicating a lack of conviction to this buying.

However, the VIX, as I expected did drop an impressive 14.5% today on a solid red candle and the VIX futures have now peaked, also as I predicted.  But will the VIX continue to fall tomorrow?  I'm not so sure.  I think today's rally was based more on pre-Bernanke Jackson Hole enthusiasm that may or may not pan out on Friday.  When people wake up Wednesday morning and say to themselves, "I bought what yesterday?" they may have a change of heart.

Unfortunately, the Dow just barely exited its descending regression trend channel today and that is a bullish trigger.   So we sort of have a tie between bulls and bears tonight.  There is no clear direction here.

The bottom line

Therefore the deciding vote goes to the market futures, though there's mixed signals here too.  At 2:10 AM, they're voting thumbs down, being all in the red.  ES is now down three quarters of a percent.  However, the new ES daily pivot is 1145.92 and ES just bounced off that.  That's bullish.  So tonight I'm just going to punt and claim that if ES stays above its pivot between now and the open, we'll go higher on Wednesday.  If we fall through it, we'll close lower.  Watch the pivot - it is the key to Wednesday.

ES Fantasy Trader

I exited today's trade at 1143.25 after buying last night at 1123.00.

BOT    10    ES    false    SEP11 Futures     1123.00    USD    GLOBEX    AUG 22 20:32:13

SLD    10    ES    false    SEP11 Futures     1143.25    USD    GLOBEX    11:47:23

That's  20.25 points x $50 x 10 contracts = $10,125.  After four trades, the fasntasy account now stands at $123,125 with three wins and one loss.

Tonight (Tuesday night) I'm going short ES at 1148, but not feeling all that confident about it.

SLD    10    ES    false    SEP11 Futures     1148.00    USD    GLOBEX    01:56:37   

Larger rally likely Tuesday, 30 day view bearish

Monthly SPX

Why I went bearish

Last night I wrote that we were overdue for a rally either today (Monday) or Tuesday. Turns out we got it Monday, though it was essentially all over in the first two minutes of trading. It was all downhill from there, and after the "Libya effect" subsided were were left with a puny 37 point gain in the Dow. But I'll take 37 points up over 600 down any day.

But tonight I bring you the SPX monthly chart, because today the weekly Ticker Sense Blogger Sentiment Poll came out. This represents peoples' opinions on where the SPX will be in 30 days. I voted "bearish" but it was a very difficult decision.

Looking at this monthly SPX chart we see first how the SPX fell off a cliff as soon as it exited the rising regression trend channel in July. Lesson one: do not underestimate the predictive power of the RTC. But note also how this month we dove and dove with nothing to stop us, until we hit... the 200 month moving average. The 200 MA is now 1102.55. The August low (so far) is 1101.54. Coincidence? I don't think so.  Lesson two: do not underestimate the 200 month MA.

The 200 month MA is powerful support. It marked the lows of 2010, where the bears tried to break it for four months in a row, unsuccessfully. But in October 2008, we broke under it and then went on to drop another 33%. So the question is: is now more like 2010 or 2008? And that's the crux of the problem. In some ways, now is not like 2008. In other ways, it's worse.

Here I give you what I'm calling the Chart of the Month:

This comes courtesy of the absolutely excellent daily newsletter from the Wells Fargo Economic Group (see http://www.wellsfargo.com/economicsemail to subscribe).

Today's topic was "Philadelphia Fed Index: Can It Predict a Recession?" and looking at this chart of GDP growth vs. the Philly Fed with recessions highlighted, I've got to say the answer is yes.  Out of the last seven recessions, every single time the PFI went under zero, we had a recession.  Seven out of seven.  The latest number?  Negative 30.7.  QED.  The next recession is coming, if it's not already here.

So unless Uncle Ben can pull a miracle out of his hat at Jackson Hole or soon after, things are looking very not so good.  Also I note that while the number of bears in the latest Ticker Sense poll increased, they're still not so plentiful as to constitute a bullish contrarian indicator.

The short run

So that's my longer view.  But what of tomorrow, Tuesday?  My pessimism does not extend to tomorrow.  In fact, things are looking not so bad right now.  The Dow put in an inverted hammer which is bullish.  And unless tomorrow's action is spectacularly bad (which as we've seen enough of lately it certainly could be) we could easily exit the four day descending regression channel the Dow is in now.  That would be a bullish setup

Meanwhile, the VIX today did come down as expected, although it did it in odd fashion on a gap down green candle.  It's a bit hard to tell much from that so we look next at the VIX futures.  The VM had another gap up day, even bigger than Friday's.  I'm looking for this gap to fill in, probably tomorrow.  Lower VM -> lower VIX -> higher stocks.

But the piece de resistance tonight has to be the market futures, all of which are up solidly at 1 AM EDT.  ES is now up 0.89% and has been trending higher since 8 PM.  More importantly, at 1133.25 it is now above its new daily pivot of 1127.  Tuesday this number is key.  Holding above it or bouncing off will be bullish.  Falling though it, bearish.  Also, ES has some pretty good support not far from here in the 1110-1120 area but very little resistance up to 1170.  Tonight the risk/reward favors the upside.

Personally, I think we're going higher tomorrow.

ES Fantasy Trader

Given all of this, tonight it seemed appropriate to go long again, so I picked up 10 more ES at 8:32 PM at 1123:

BOT    10    ES    false    SEP11 Futures     1,123.000    USD    GLOBEX    AUG 22 20:32:13

Right now, it's looking good.

ES fantasy portfolio doing well - rally on tomorrow?

ES Fantasy Trader

I closed out last night's long trade at 1:10 PM today for a nice 10.5 point gain.  Why then?  Well after 6 consecutive 5-minute up candles, this was the first down one.  And also, I happened to be sitting in front of my monitor at the time.  It just looked like a good time not to be too greedy.

With 10 contracts, that's 5,250 Obama-bucks.  The ES paper trading account, after three sessions now stands at $123,125.  Dang - too bad I didn't do it for real, eh?

BOT    10    ES    false    SEP11 Futures     1121.75    USD    GLOBEX    02:27:11 
SLD    10    ES    false    SEP11 Futures     1132.25    USD    GLOBEX    13:10:00

I'm now watching the evening futures trading and will have my forecast for tomorrow later tonight, around 1 or 2 AM EDT.  I've got to say though that right now, at 7:50 PM, I'm not feeling the love.

War With China

Kick 'em when they're down

 Coming soon to a basketball court near you

The headline over on marketwatch.com a few weeks ago screamed "China rips U.S. on debt-rating downgrade". Apparently, the Chinese, as the US's largest single creditor, now feel that gives them the right to hector us to the effect that we must slash "gigantic military expenditure and bloated social welfare costs” and accept international supervision over U.S. dollar issues." Of all the unmitigated gall.

And just this past weekend we get an absolutely iconic image right here that's worth a lot more than 10,000 words: a Chinese basketball player putting the boot to an American lying on the ground.  You couldn't have posed anything nearly so telling.

Communist China, the country that stole all our jobs, sends us deadly dog food, defective drywlla, toxic toothpaste, dangerous drugs, and cheap garbagy electronics that break the first time you try to use them, suddenly has the nerve to tell us how to run our country? Communist China, the country with the worst human rights record on the planet with the possible exception of their puppet client state of North Korea, the country that is so afraid of freedom of expression that they kicked out Google, the country that mowed down its own citizens in Tienamin Square for having the audacity to conduct peaceful protests, this antisocial rogue nation has the temerity to tell the US what to do? This is simply beyond outrage.

Now the great irony of course is that they're absolutely right. We are wasting tremendous sums of money on all sorts of stuff we obviously simply can't afford.  This can't go on forever.  But gosh darn it all, we don't want to hear it from them.

The lessons of history

In the meantime, I'm going to go waaay out on a limb and at the risk of sounding like a crackpot, predict that World War III is already on the distant horizon.  It's not entirely clear where the lines will be drawn but I'm pretty sure that this time it will go something like this: the US, plus her traditional allies like Britain, the British Commonwealth nations (Canada, etc.), and France, plus our former enemies, now great allies, Germany and Japan, versus Russia, Iran, China, and their hangers-on, ie. North Korea, Pakistan, and Venezuala.

In some sense, the war's already on.  Just look at the picture again.  Then consider all the recent episodes of cyber-hacking against the US originating freom China.  China knows they cannot defeat us militarily (yet) so they are concentrating on other less obvious means.  Just as Sun Tzu advocated a few thousand years ago.  Dodgy exports and computer hacking are the least of it.  China's shameful currency manipulation shenanigans don't get nearly the blame they deserve.

Basically, the Chinese have been cased for the West since the advent of the 19th century missionaries who thought it would be a good idea for them to all become Christians.  That's what the Boxer Rebellion was all about - to kick out the "white devils".  Then America had the misfortune to back the wrong side in World War II.  China has never forgiven us for supporting Chiang Kai Shek and his nationalists instead of Chairman Mao.  Now they're out for revenge.

What can we do?

Not a whole heck of a lot, I'm afraid.  Personally, I've got *.cn blocked at my router.  I also check the tags now of everything I buy for the "Made in China" warning label.  Admittedly,  it's sometimes hard to find an alternative, but I'd rather buy jeans from Mexico or Thailand than anything from China.  Beyond that, God help us.

Rally coming if not Monday then Tuesday

Daily VIX

 My weekend reading of the blogosphere leads me to conclude that opinion is still pretty well evenly divided between the bulls and the bears, as borne out in last week's Ticker Sense Blogger Sentiment Poll. 

The VIX

For my money (or at least what's left of it), the most interesting chart last week was the VIX. Here's the VIX daily chart. Although the VIX closed on Friday just a hair above the day before, it formed a pretty good bearish hanging man candle in the process.

While one should wait for confirmation of a hanging man the following day, I do find this development encouraging. The other interesting thing is that the VIX appears to be putting in a double top. Bill Luby in Vix and More nicely points it out in his latest post. The gist is that if this is in fact a top, then we should be looking for the VIX to decline this coming week. And as we know, lower VIX implies higher stocks.

And although the daily indicators on the VIX are not oversold, the indicators for the weekly VIX definitely are.  We also note that for two weeks now, the VIX has found resistance around 45, corresponding to the highs of May of last year, when the Greece hit the fan (the first time).  Tomorrow will tell the tale, but it's sure looking like the VIX is ready to go lower.

The futures

The market futures, however, aren't buying it, at least not just yet.  ES, for example, enjoys some pretty good support around 1110.  Right now, at 8 PM EDT Sunday night we are running at 1117.50, down just over half a percent.  With the daily pivot at 1153.92 completely out of the running, it's not at all clear that a rally is in the cards for Monday.

I'm not even going to try to call the entire upcoming week this time.  There's just too much global uncertainty and a whole bunch of fundamental newsmakers out there coming up, from Jackson's Hole to Libya.

ES Fantasy Trader

I lost my nerve and covered Thursday night's short at 1138.50 on Friday just before noon for a 1.5 point loss.  As it turns out, had I closed either earlier or later, I would have turned a profit.  But that's how it goes.  We lost 750 Obamabucks on that one but that still leaves the account at a respectable $117,875 after two sessions, not too shabby. I'll post tonight's trade in my late-nite update (below).

The bottom line

It's looking like we're overdue for some sort of rally, if not tomorrow, then even more likely Tuesday.  Watch here for my late-nite update.  The longer term picture is a bit more complex - we'll get into that tomorrow night.

The late-nite update

At 2:30 AM EDT it appears that the futures are slowly gaining ground.  Therefore, given the current state of the VIX and the fact that both the Dow and SPX are very near some good support levels, I am going to gingerly put on my long hat for Monday.  If that doesn't pan out, I expect it will on Tuesday.  And accordingly I just went long ES.  Here's the trade:

BOT    10    ES    false    SEP11 Futures     1,121.750    USD    GLOBEX    02:27:11

Weekly wrap-up

The Good, The Bad and the Ugly

Clint Eastwood, the Good

Well, I for one am glad to see this week end.  Tonight we  turn once again to Clint Eastwood for inspiration.  The Good was clearly my call for today, "we have still lower to go on Friday" which was right on the money with the Dow shedding another 173 points to close at 10,818. I also suggested we were going to retest the Dow's 200 week MA at 10,730

That's still on the table, and we're certainly headed that direction. The Bad was my thinking last Sunday that the week would end higher. It finally proved to be just another bad week on Wall St.  And this steenkin' market of course lately is just plain Ugly.

We're at an interesting juncture right now.  While today's drop was discouraging, the fact that we did not break under the 200 week MA was positive.  The Dow weekly chart is showing definite signs of being oversold now.  However, the last two big red daily candles in and of themselves show no sign of a turnaround on Monday.  I do want to see how the futures act on Sunday night before making any forecasts though.  I'll do a more in-depth analysis then.

Ticker Sense

I am pleased to announce that the Night Owl is now part of the Ticker Sense Blogger Sentiment Poll over at the Ticker Sense web site (now in my blog list in the sidebar). The poll, taken each week, answers the question of where you think the SPX will be in 30 days, either up, down, or neutral.

The latest poll was split pretty evenly in a 3-way tie, reflecting the indecision we've been getting in the charts lately as seen in the frantic yo-yo action of the past two weeks.  It will be interesting to see, given the ugly week we just had, how the numbers shake out when the new poll comes out next week.

The poll is worth watching of course because of the common perception that in the markets, the majority is usually wrong, making it something of a contrarian indicator.  If you look at the historical graph on the site, you can see that this is to a large extent the case - though not always.  In any event, the URL's of the participants are given along with the results and they make for some fascinating reading themselves.

There's lots of great information on Ticker Sense, including graphs, charts, links, and commentary - I highly recommend it and I'm putting it on my daily reading list.  Disclaimer - I have no association with Ticker Sense other than as a poll participant.

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!