Going higher

The most interesting chart today was this one, the daily VIX. Recall how a few days ago I said that the VIX rarely continues to climb after gapping up to its upper Bollinger band. I was one day early as it turns out. Yesterday the VIX managed one more push higher. Today it made another attempt at its 200 day moving average but that was rejected too. Even more importantly, the resulting candle was a classic dark cloud cover. That is a strong reversal signal.

Now recall my recent post on Monday about how the VIX can predict the market. Today the VIX peaked and started going back down while both the Dow and the S&P continued their declines for the third straight day. I did a cross-covariance on the VIX that seemed to suggest that when the VIX peaks, the market will turn around within a day or two.

So the VIX seems to be saying that the market is ready to go higher either tomorrow or the next day. Supporting this is that the recent downturn has taken all of the indicators off their highly overbought conditions to oversold conditions. In fact, they are all a lot more oversold than they were after the last big dump on January 28th.

Add to all of this that all three futures are up significantly right now (1 AM EST), the ES and YM in particular both being up 0.42% with the NQ even higher, and I'm fairly confident in saying we're due to go higher tomorrow. Of course, the big caveat here has to do with Libya. If Col. K. does something really outrageous (though its hard to imagine him acting any more outrageous than he already is), that will definitely trump the technicals.

Trades
Today I took a speculative flyer in a company called Windstream (WIN). It took a beating recently but seems to have found a bottom and received an analyst upgrade two days ago. Greatly decreased selling volume seems to indicate that we're running out of sellers at this level. Its 8.14% dividend doesn't hurt either. We'll see if this does anything. I'm in at 12.22; it closed at 12.29.

Libya Runs the Market

Well, I guess I might as well cancel my subscription to eSignal now. Charts no longer seem to matter in this market. All anyone seems to care about anymore is the demented rantings of some psychopath on the shores of Tripoli. Bottom line, the market's not going to go up until Kolonel Khadafi Kalls it Kwits.

Technically, we've entered a swing downtrend, since today's further 107 point drop in the Dow provided a bearish signal. Accordingly, I'm putting up the red arrow. I was wrong yesterday about a turn-around today. Call me an eternal optimist, but after today's further rise in the VIX, it would be highly unusual for it to continue higher still tomorrow. The VIX also hit its 200 day moving average today and backed off it. The Dow is also near its very strong support level at 12,000, and the S&P is close it its own 1300 support. All of this is making me leery of going short here. And I note that all three futures are actually up right now (2 AM EST) for a change.

But like I said in the beginning, Wall St., uh I mean Benghazi St. only seems to care about one thing now. Yes, Libya's oil output is in danger. Libya produces all of 2% of the world's oil. A good part of that goes to France and Italy. It's not the end of the world, folks. The real problem now I'm afraid is that the same speculators who brought us $147 oil back in the summer of 2008 are back to the table to stuff their pockets some more, probably with the same eventual results, unfortunately.

In the meantime, we have our Fearless Leader in Washington boldly issuing Stern Warnings to Colonel Klink to the effect that "you ought not do that". Oh gosh, I'm sure he is just shaking in his boots. Mr. President, you are supposedly the leader of this nation. This might be a good time to exhibit some actual leadership, you know what I'm saying?

Recovery possible

Yesterday, in a post entitled "Not looking good for tomorrow", I wrote

"I am definitely reaching for my short hat."

Well the short hat fit quite nicely today, although you certainly didn't need to be Carnac to see this one coming. Today's ugly 178 point dump in the Dow was a market forecaster's lollypop. And while painful, it was probably a good thing as it helped let a bit of air out of the balloon that was pumping up a bit too fast. It makes absolutely no sense for the Dow to be up seven percent after just 35 sessions this year. That sort of gain is obviously unsustainable.

So where next? Today, I bring you the daily chart not of the Dow, but of the YM futures, because I think they hold the key to tomorrow. Since it's already 1 AM, the rightmost candle is Wednesday's. It looks to me like we're replaying the action of January 28th, the last big drop we had in the Dow. And the next day we were up. That looks to be getting ready to happen again. Right now, all three futures are up by about a third of a percent.

I think today's decline was really overblown, driven more by angry mobs in Libya than any real economic basis. Indeed, the two pieces of economic news that came out today were better than expected, but the market was having none of it. I'm guessing that tomorrow, cooler heads will prevail.

I also want to show you this picture of the daily VIX, since I was just talking about it yesterday, and also because this chart is so dramatic:It's not often you see the VIX gap up in a big way from the center of its Bollinger band range, actually opening at the upper BB and then closing even higher. Looking back through the history, it appears that every time that happens (and it isn't often), the next day the VIX goes lower. And that of course means the market turns higher.

So if we do go lower tomorrow, I'll have to start a new descending RTC and put up the red swing trend arrow. Otherwise, I'm taking my short hat off and reaching for my long hat now.

Trades

No trades today. I'm kicking myself for once again failing to capitalize on the short side, but the carnage was mostly over in the first two minutes of trading right out of the gate, and that's just not my style. So I just had to take the heat and wait for things to improve, which there is no doubt will happen. However, I think I'm going to start experimenting with taking a short position in ES the night before the next time this sort of situation presents itself.

Not looking good for tomorrow

The Stock Traders Alamanc has two warnings for us right now: "End of February Miserable in Recent Years" and "Dow Down 9 of Last 12" for the coming week.

And right now, that sure seems to be the way it's shaping up. The futures are all down by more than I've seen in a while. The ES and NQ are both down over one and a quarter percent right now (1:20 AM EST), a very significant drop. The last time they were this bad was on January 28th, the day we took a 160 point dump in the Dow. And we have extra guidance from the futures since they've been trading for one day longer than usual with the markets being closed for a holiday. They were also down in yesterday's trading.

And with renewed unrest in the Middle East, this time Libya, things are not looking good for tomorrow morning. However, until we see a new trend develop in the Dow, the "X" trend end symbol stays in place. But I am definitely reaching for my short hat.

Trading Goals for 2011

Well I guess I might as well post my trading goals for 2011 before 2011 is over. It's hard to believe it's almost the end of February already. Like I always say, time flies whether you're having fun or not.

Every serious trader needs goals. If you don't have any goals, you're just not serious. But they have to be good goals. Bad goals are worse than none. When I first started trading, I had some really awful goals. The worst one was probably the one where I was going to make money every single day. Of course, that's just not feasible. Naturally, I failed to meet that goal, which resulted in frustration, which negativelt affected my performance, blah blah vicious circle etc.

I think I've gotten better at it. So here without further ado, is what I hope to accomplish this year.

1. Performance: I'd like to at least match the results I've posted the last two years, being at least a 30% annual return on capital.

2. Size: I want to increase my trading size. This is the only way to get richer without taking on additional risk (meaning the risk associated with investment type).

3. Strategy: I want to make fewer Stupid Trades. These are generally caused by lousy entry points. I need to analyze my entires more closely before pulling the trigger.

4. Diversification: No, not investing in different sectors. I want to explore different types of trading. Arbitrage is one thing I'd particularly like to learn more about this year.

That's about it. That's enough. I'm doing well on some of my earlier goals, which at one point or another included simpler things like "not losing money", "beating the Dow", "keeping a trading journal", and "not beating myself up for not meeting goals".

Can the VIX Really Predict the Market?

The VIX as a market predictor?

There was an interesting article in www.seekingalpha.com a few days ago, here: http://seekingalpha.com/article/252838-4-reasons-the-stock-market-has-doubled?source=tracking_email#comment-1481460. Although the main theme was on why the market's been on such a tear lately, there was an interesting digression in the comments about the VIX and whether or not it has any predictive powers as far as the market is concerned.

Now many people, myself included, do use the VIX to try to get a handle on future market moves. And I've found it to be quite useful, but I thought it was time to put the issue to the test, Mythbusters-style. So I decided to crank up Matlab and do a little math.

The Experiment

I started by collecting closing daily values of the Dow, the S&P, and the VIX, going back to 12/11/09. That's 300 sessions. I chose that number because that was all I could get eSignal to cough up. There's no obvious way I can see to tell it I want more data.

In any case, I thought that doing a cross-covariance of the VIX with the Dow or S&P might prove revealing. Let's start off with the raw data. Here's the S&P (in blue) and the Dow (in red) from 12/11/09 to 2/18/11. I divided the Dow numbers by 10 so both plots would display nicely on the same graph. (Click on the image for a larger version)They look pretty similar, right? Basically what you'd expect.

Now let's do a simple cross-covariance on these two datasets just to get a feel of what the xcov function looks like. Recall that the cross-covariance is just the cross-correlation function of two sequences with their means removed. Imagine having both graphs printed on transparencies and sliding one past the other looking for points where they either line up or don't. That's what the x-axis shows here - how far away from their starting position the two graphs are.Pretty much what you'd expect, right? There's maximum correlation between the Dow and the S&P right in the middle, which represents the zero-lag point. As you slide one past the other in either direction, the correlation decreases, and it does it symmetrically. So - nothing to see here. The Dow cannot predict the S&P, and vice-versa.

Right about here, I'm having nightmares about some savant working for Goldman Sachs in a big room surrounded by racks of massively parallel supercomputers laughing at my puny efforts, but bear with me. It's new to me, at least.

Now let's take a look at the VIX for the same period:Kind of looks like an inverse of the markets, right? Which it should. When the VIX is up, the market is down and vice-versa.

The $64,000 question is, how often, if ever, does the VIX go up the day before the market goes down? So let's do the cross-covariance of the VIX with the market.

Here's the result using the S&P:Hmmm, very interesting. First of all, as expected, the zero lag spot (the middle of the x axis), has a big spike downward, illustrating how the VIX is highly negatively correlated with the market (VIX up, market down & vice versa). But now, focus both left and right of the center line. Notice how, unlike the xcor of the Dow with the S&P, here the left and right halves to the graph are decidedly asymmetrical. There is predictive power here.

To make this a bit more clear, let's try an example with two really simple data sets. a is just [1 2 3 4 5 6 7 8 9 10 9 8 7 6 5 4 3 2 1]. b is [2 3 4 5 6 7 8 9 10 9 8 7 6 5 4 3 2 1 2]. Ie. b is the same thing as a, but it peaks one position sooner (one day if you will). This means that b can be used as a predictor for a. When b peaks, you know a will peak the next day. Here they are in a graph.Now let's plot the cross-covariance of a and b.If a and b were identical, ie. completely correlated, they would have no predictive power and the graph would be symmetrical about the center of the y-axis. Not so here. Note that a and b are identical except that b peaks one day earlier. From day 9 to 10, b is falling while a is still rising. In every other spot, both a and b rise and fall together. This one discrepancy can be seen as the asymmetry in the curve. This is exactly what we see in the VIX cross-correlation. Let's zoom in on it.Note that the slope of every day to the right of the center of the graph (point 300) is lower than that on the left. This represents places where the VIX has changed direction before the S&P.

Let's check this on the actual data. Here's the last 11 days of the S&P, with the corresponding VIX overlaid in red. The y-axis numbers are S&P prices. The VIX values have been scaled to look nice.Here we see that the VIX rose from the 4th to the 8th where it peaked. Meanwhile the S&P was also rising, but it peaked on the 8th, then declined on the 9th. The VIX peaked one day before the S&P!

Then the VIX bottomed on the 11th and started rising. Meanwhile the S&P peaked on the 14th, one day later! It certainly appears that there's something to this.

Which brings us to the dreaded right-hand edge of the chart. We see that the VIX peaked on last Wednesday, the 16th. It fell Thursday and Friday. Meanwhile the S&P has been rising since the 15th. Watch for the next VIX bottom. Let's see what the S&P does the next day.

Conclusion

Of course, this is just a tiny sample, but it sure looks promising. So what's the bottom line? It definitely appears that the VIX can be used to predict the short-term movement of the market. This leaves the questions of how much, how well, and what other outside influences might exist, but this post is long enough. That will have to wait for Part Two.

Happy Birthday!

Happy Birthday - the Night Owl Trader is one year old today. I really can't believe it's been a year already. It's been work putting together at least a little bit every night, but it's also fun and serves as my trading diary. If anyone else out there gets something out of it, so much the better. And I know I do have some folks out there reading, so I do appreciate that too.

Since starting the blog a year ago, I've added a few features, like the at-a-glance swing trend arrow and little chart snapshots, plus occasional features like the Chart of the Week and Weekend reading. Finding the time to do this on a regular basis is the hard part. I don't know how Dr. Brett Steenbarger managed to do his Trader Feed blog every day.

Anyway, let's move on to tonight's installment. Yesterday I noted that the Dow had put in a bullish engulfing pattern candlestick. This is generally a very high probability pattern, and so it was today with the Dow closing up 30 points despite the fact that most of the economic news today missed expectations. Tomorrow should be interesting, being options expiration Friday.

Modulo that, I quote the Stock Trader's Almanac:

"Day Before President's Day Weekend, S&P Down 16 of Last 19; February Expiration Day, Dow Down 7 of Last 11"

Ouch! That doesn't sound too promising. However, remember that the last few years have featured the worst market since the Depression so that certainly skews the numbers. And judging by the futures, all three of which are up nearly 0.1% right now (at 1:20 AM EST) I'm just not getting any serious negative waves from the market at the moment.

Also, the closes from last Friday through Tuesday formed a support line around 12,275 which you can see in the daily chart here. Yesterday closed above that level and today both opened and closed above it. The VIX meanwhile bumped up against its 40 day MA and retreated. Its own indicators are looking overbought. So all in all, despite tomorrow's historical reputation, I don't see much to be negative about. If we do in fact go higher, I will start a new up trend then.

Trades

Today, I sold my entire position in AMD at 9.34 for a small profit. It closed at 9.44. It's had quite a run recently and this was one of my trades that turned into an investment. I was just tired of this name and think I can do better elsewhere. I think it may be pulling back tomorrow anyway.

I also unloaded my AUY at 12.31 for break-even. It closed at 12.36 but put in a hanging man and is looking at least short term overbought to me right here. This trade just wasn't a good entry. I'll be looking to buy it back lower. Meanwhile the gold index $HUI is looking toppy too.

And finally I added a bit more HIMX at 2.55 and ZTR at 3.53 to my low price/high yield portfolio.

Moving higher

There seems to be something wrong with the Blogspot editor this evening. It's not showing the image upload icons for me. And that's a shame, because the Dow today put in a classic bullish engulfing pattern suggesting that there's still more room to run even after today's nice 61 point advance. And that advance took us back over the daily pivot. It would have been a nice chart to show.

Todays positive economic news evidently canceled out the RTC warning signal. I think the only thing that could hold us back now is the fact that the day before options expiration is historically not a good one. Now the thing about the bullish engulfing pattern is that the day after it appears is typically not that good, but a day or two after that is often higher. So I don't think we'll see a major move in either direction tomorrow. The futures, meanwhile are just slightly lower right now (1:30 AM), so there's a bit of a negative bias there. Friday, being expiration day could be interesting.

No trades today,

Mixed Signals

Yesterday's small doji in the Dow indicated indecision in the market's ongoing advance and also brought us to the lower edge of an RTC channel going back to the end of last month. That was a bearish setup. Then today's 42 point decline was the trigger. According to this system one should be expecting lower prices tomorrow. I also note that the Dow broke below its daily pivot today on a red candle, also a bearish sign.

And finally, Monday's top exactly hit the upper end of a longer RTC going all the way back to last July. The last time that happened was 11/4/10. What followed then was nine straight days of decline. Accordingly I'm taking the green swing trend arrow down and declaring the shorter uptrend over.

However, there are no fewer than nine pieces of economic news coming out tomorrow and all three futures are up about a quarter of a percent right now (1 AM EST). This is a very tough call. I think if the news comes out better than expected, the market could ignore the RTC and continue higher. And I note that the YM futures have not given a bearish trigger and remain within the rising channel.

In any case, on a purely technical basis, the Dow chart looks poised to go lower. This is just one of those situations where you really do have to wait and see. I think tomorrow is going to be more news-driven than technically driven. Right now, I'm just planning on sitting on the sidelines until I see which way the wind blows.

No trades today.

Bearish setup but no trigger yet

I really thought we'd see more out of the Dow today, but today's meager 5 point drop brought us right to the lower edge of the ascending daily RTC. Accordingly, I have to treat this as a bearish setup. If we go lower tomorrow, the trend is broken. I'm also going to refrain from making daily calls this week. Being options expiration week, I should know better. So the swing trend arrow remains green but that's subject to change tomorrow.

Trades
Today I added to my position in HIMX at 2.55 and ZTR at 3.53 for my low price/high yield portfolio. HIMX has strong support at 2.50 and ZTR looks to be reversing on the stochastic.

Uptrend resumed

Last Thursday I was totally convinced the market was going lower on Friday. All of the technical indicators seemed to be lined up in that direction. That proved to be the worst call I've made in the six years I've been watching the markets closely. I can only assume that it was our good friend Egyptian former president Mubarek who came to the rescue saved the day for Wall St. by taking a powder at the last minute. Sometimes news just trumps technicals. We just have to live with that.

Anyway, the coming week could be interesting because it's an options expiration week. And historically, the expiration before President's Day is particularly bad. But we're not there yet. Right now I see all three futures up (at 1:30 AM EST) and trending higher, and the VIX unable to make any headway. So I have to take my short hat off and guess that we're going higher tomorrow.

And I also have to put the green trend arrow back up. That will teach me to jump the gun. Last Thursday didn't even give us a true bearish setup, much less a sell signal. When you have a system, you have to follow it.

Performance Update

Despite my dead wrong call for last Friday, I still ended the week up 1.16%, putting me now up 5.99% year to date just about dead even with the Dow's 6.01%. One of my annual goals is to outperform the Dow, but5 I'm not too concerned at this point since the Dow has performed spectacularly so far this year. That 6% gain so far corresponds to an equivalent of nearly 46% per year.

There is no way the Dow can keep that rate up all year long. However, I hope to be able to come in near my past two years return of just over 30%. It's still early in the race, so we'll see how things develop.

Going down

Yesterday I wrote

"it would not surprise me to see the Dow decline tomorrow."

Sure enough, the Dow dropped 10.6 points today. And oddly enough, while yesterday the Dow was up and the Nasdaq and S&P were down, today it was exactly the reverse. Anyway, of more concern than the slight drop today is the fact that a host of technical items are all lining up bearishly right now:

First is the shape of the candle: definitely a hanging man. A hanging man with a long tail at the top of a big rally is always a bad sighn.

Secondly, the VIX did not in fact break its support and closed higher today. In fact, it clearly looks to have bottomed now and is poised to go higher.

Thirdly, the unrest in Egypt is cranking up again.

Fourthly, the Dow indicators which you can see on the chart here look to have topped and are rolling over from very overbought levels.

Fifthly, the Dow closed today at 12,229, just a hair's breadth above the daily pivot of 12,227.4. If the Dow falls below this level tomorrow, it will serve as resistance and then look out below.

Sixthly, look at how this week seems to be replaying two weeks ago. It was exactly two weeks ago Friday that we had that big 166 point plunge.

And finally, the ES futures are down a significant 0.53% right now (1:30 AM EST). NQ and YM are down almost as much. The ES in fact has already broken down out of its rising RTC and given a bearish trigger. That uptrend is already over and replaced by a downtrend.

None of this bodes well for tomorrow. Accordingly, I am declaring the current swing trend over, even though we did not get a true RTC bearish trigger today from the Dow. And I'm putting my short hat on for tomorrow. I'd love to be more optimistic, but I just don't see this market going higher on Friday. And I'll bet it loses more than 10 points.

No trades today

Looking toppy

Yesterday I thought the Dow might go lower today. Turns out that while the Nasdaq and the S&P did in fact go lower (a bit), the Dow actually rose (a bit). And as you can see in the Dow daily chart here, it formed a dojiish almost hanging man sort of candle. Anyway, this all indicates general uncertainty as to the market direction.

Right now, we're getting some guidance from the futures which are all down at 2 AM EST, with the ES down 0.13% and the NQ a bit over half a percent. Also, the VIX today dropped right back to its support level just under 16 but did not break below. This all looks to me like part of the topping process whenever stocks go exponential.

So it would not surprise me to see the Dow decline tomorrow. It's too early to declare the current upward swing trend over since we're still well in the upper half of the ascending RTC but I'd call today's action a bearish warning signal. We'll have to see how tomorrow plays out to see if it is in fact time to go short. In any case, I'm seeing more short term upside risk than reward right now.

No trades today.

Dow going exponential? Maybe lower.

Yesterday I wrote "looking for higher" and we got it today, to the tune of a 71.5 point advance in the Dow. In fact, not only was this the fourth straight day of gains, but the gains got bigger with each passing day. Now looking at this daily chart, to me at least it almost looks like the Dow is going exponential here. You sometimes see that in stocks, but it's unusual to see an entire average do this. And it makes me a bit concerned. As we all know, this is one of the most classic signs that a top is coming.

The VIX formed a classic hammer today to close back at its support level just under 16. This implies a rise in the VIX soon, and thereby lower stock prices. Add to this that today's volume was lower than yesterday's and that all three futures are non-trivially lower tonight (at 2 AM EST), with the ES in particular being down now by 0.23%, and I'm taking my long hat off at this point. I'm not taking the green swing trend arrow down as I've yet to see an indication that a top has been put in, but I do think we may be in for a day of lower prices tomorrow. We'll see.

No trades today. I'm watching the stocks in my low price/high yield portfolio closely now because they have run up so much since I bought them last summer, I've made more in capital gains than from their yield, which was the original objective. Therefore, it makes little sense to sacrifice that profit should they start back down. Yielding on average over 10%, this particular party can't go on forever.

Looking for higher

As I thought it might, today the VIX respected its support level and closed higher. Oddly enough, stocks closed higher too, with the Dow gaining an impressive 69 points. This is certainly unusual. I think right now we're in one of those situations where the operative motto is "don't fight the tape".

With all three futures up right now at 2:10 AM EST by just over 0.1%, no meaningful near-term overhead resistance in the Dow, no decline in volume today, no big economic news coming out tomorrow, no new global calamities in the news (at least right now), mostly good earnings being reported, and the Dow still running near the top of its rising regression trend channel, I just have to leave my long hat on for tomorrow.

Trades

I used some of the proceeds from yesterday's sale of SPIL to get back into HIMX today at 2.58. It closed at 2.62 and looks to be going higher. We'll see.

No "correction" in sight

After last week's big run-up in the market, many have been wondering when the big correction might be coming. I'm afraid I don't see it, not on the charts anyway. I simply do not see any sign of a reversal right now on the Dow daily chart, or even the weekly chart. In addition, the second week in February tends to be the best of the month, historically.

My one concern for tomorrow rests with the daily VIX which you see here. Note that right now it is at exactly the same level that has provided support the last three times we were here, just under 16. The only thing is that it still hasn't reached its lower Bollinger band yet. However, as you can see on January 27th, the VIX reversed course without ever reaching the lower BB. That said, the VIX remains in a primary downtrend going all the way back to last August. However, tomorrow will be key. There is little guidance from the futures tonight, with the ES up just 0.02% and the NQ down by the same amount at 1 AM EST.

So I'm going to leave the green swing trend arrow in place, but I'm not making any call for tomorrow. I'd like to see the market higher, but the market doesn't care what I like. There's no big economic news coming out tomorrow and Egypt seems to be calming down, so that's a good thing. My best guess is that if the VIX does go lower tomorrow, that only increases the chances that it will reverse on Tuesday, implying stocks lower then. We'll just have to wait and see on this one.

Weekly Review

Hey, when you're right, you're right. Yesterday I wrote:

"tomorrow I'm looking for at least a gain comparable to today's, maybe more."

So yesterday we gained 21 points and today we gained 30. In fact, we had quite a week, with the Dow posting its biggest gain in 10 weeks, as you can see in this weekly Dow chart.

The Dow ended the week up 2.2% and is now up 3.61% year to date. Also, the famous First Five Days of January closed higher as did the entire month. And now we have the first week of February, which is historically not as strong as January, also closing higher and by a good amount. So far, it appears that 2011 is living up to the pre-presidential year historical effect mentioned in The Stock Traders Almanac: the year before an election, the market is up an average of 10.5%, almost as much as the other three years in the four year election cycle put together.

And therein lies the immediate question. With the rally having gone on so long now, I have to wonder if it isn't about time for the correction everyone is calling for to finally kick in. Although I'm pretty confident the year will end higher, it's pretty obvious that it won't move up in a straight line. We'll address that in my next post.

Performance

Although the Dow was up 0.25% today, I somehow managed to lose 0.29%. Oh well - that happens sometimes. In any case, I ended the week up 2.38% thanks to strong performance earlier this week. I am now up 4.77% year to date which puts me easily on track to match my 32% return of last year. My Sharpe ratio stands at 0.33.

Trades

Today I closed out my position in SPIL at 7.00 for a 1 3/4 point gain and removed it from my low price/high yield portfolio. SPIL has had a nice run and its current yield of 5.77% puts it at the bottom of the list anyway. I will be looking for another tech name to replace it with and put that money back to work.

Selling pressure abated

Well apparently the declining VIX today trumped history and the weak overnight futures. I was expecting a flat to lower close today. Instead we got a modest 20 point advance. Although that wasn't much, it makes me a bit more optimistic about tomorrow. Right now (1:05 AM EST) all three futures are up by about 0.1% and the VIX still has room to go lower tomorrow. Never underestimate the power of the VIX as a predictor.

In addition, we stopped the steady daily decline in volume from the past four days. Also, all the indicators have come off their overbought levels that we saw just before last Friday's 166 point dump. And on the history side, we note that the fifth trading day of February tends to be positive.

Note also that we had a bunch of economic news out today and most of it was actually above expectations, but the market reaction wasn't as positive as I might have expected. Tomorrow we've got some payroll numbers and the all-important unemployment rate coming out. I think any positive news there should send stocks higher, particularly since we've crossed the 12K level convincingly now. So tomorrow I'm looking for at least a gain comparable to today's, maybe more. We'll see.

No trades today.

Sideways to lower

I find it interesting how much the action of the last three days looks like the action from January 24-26th: an up day, followed by a big up day, followed by a flat day. According to this pattern, tomorrow should be like January 27th, or another flat to slightly lower day. This theory is supported by the volume bars. Look at how the volume has been declining steadily for the last three days, suggesting we're running out of buyers at these levels. Also, tomorrow is Thursday, generally a weak day in the weekly cycle. And the third trading session of February is historically worse than the first two days too.

In addition, all three futures are lower right now (1:15 AM EST). The one counter I can find is the VIX. It did go lower today as I was expecting, but it has room to go still lower tomorrow. This should mitigate against a large drop in stocks. Plus we now have the 12K level to act as support. This is mirrored in the S&P, which though it closed slightly lower today, also held its psychological even number at 1300.

So all in all, I'm looking for a flat to somewhat lower day tomorrow. The market may spend a few days at these levels recharging its batteries before continuing the march upward. We remain in the upward swing trend going back to December.

No trades today. The TIE I dumped yesterday did in fact move lower today, so I was correct on that one.

Uptrend resumes

Yesterday I thought we had a good shot at moving higher, but I sure wasn't expecting the nice 148 point pop we got in the Dow and I really didn't think we'd break the 12K barrier today. But we did, closing at 12,040. Notably, the S&P also closed above its own psychological level of 1300. Both of these numbers now become support. But because we've now gotten fairly extended again from the daily Dow pivot at 11,867, I'm not looking for another big gain tomorrow. However, I do think we can still end tomorrow up a bit from here. There is no significant resistance now between here and 13,000, that being the spring highs of 2008.

There's not much guidance from the futures right now. After climbing most of the evening, they're all down just slightly at this point (1:30 AM). But the VIX, which peaked on Friday did in fact fall considerably since then, as I expected. Once again, as I mentioned, when the VIX hits its upper Bollinger band, look for higher stock prices in a day or two. Right now, the VIX is still less than halfway back down to its lower Bollinger band, or even the point it was at before last Friday (just under 16). So that implies that stocks still have room to run higher tomorrow. And finally, we note that the second trading day of February is historically a good one (though not as good as the first day). We'll see.

Trades

Today I added to my position in DHY at 3.04 for my low price/high yield portfolio. I sold my TIE at 19.28; it closed at 19.37. And I bought a bit of C at 4.87.