Thursday, October 23, 2014

First Signs of Divergence on This Rally - SPY 10-23-14

Click on Charts to Enlarge

These are hourly charts of SPY and the VIX.  They are actually now showing a reasonable divergence pattern to set up a short trade.  However there are relatively mixed currents of momentum on the different time frames which suggests to me that we are likely to see continued trading mostly within the range of the last 6 trading days for probably a few weeks to come.

Of note on the charts are the divergence in the momentum indicator relative to SPY.  And on the lower chart, the VIX did not confirm a lower low this afternoon as SPY made a higher high.  These VIX non-confirmations are often leading indicators of a reversal attempt.

Not shown is the hourly total put/call ratio chart which nearly touched the bottom bollinger band this afternoon and is further indication that this move is now stretched to the upside for the short term.

That being said there is no downside breakout on this hourly chart to suggest that a significant move is underway.

After similar sell-offs to the recent October plunge, the sharpest portion of the rebounds have occurred in the first few days, likely as short-covering rallies.  Once that initial short-covering is exhausted, we will likely see at least a 1-2 day pullback, possibly quite sharp.  However, a subsequent move to yet higher closing highs, would be indicative of legitimate market interest on the long side in my estimation.

Tuesday, October 21, 2014

Bought SPXU @ 48.63

Just for FYI and disclosure, I bought SPXU shortly after the open at a price of 48.63.

This effectively is shorting at this mornings gap up opening.  The gap open occurred above the 191.00 level which I thought may be resistance here, and price is also testing the 10 period moving average of the daily highs.  Given that the weekly MACD is down, and the daily momentum is below its moving averages and without divergence, I view this as a high probability set-up for a pullback to occur in SPY.

I don't have a stop on the position, so if you are using this info for trading decisions you need to determine your stops and position sizing, etc.  I find that when trading mean reversion type strategies like this, the overall profitability is higher without using a stop.  So you control risk through position sizing/ capital exposure rather than via the stop price.

If the hourly time trade chart generates an effective sell signal on price action, then I will place a stop on the position and await a short-term extreme pessimism to exit the position at.

Start a comment dialogue below if you desire more information or assistance here.


SPY Short Trade Set-up

Click on Charts to Enlarge

The top chart here is a 30 min chart of SPY.  The MACD is elevated as price is reaching the 191 area that I have highlighted in recent posts.  I view this level as a shorting set-up and may track some trades here based upon short term technicals and real money sentiment.

The second chart is the VIX on an hourly time frame.  The set-up here would be for the VIX to touch the lower 20 period bollinger band which would be an indication of a potential short term extreme to act upon in contrarian fashion, assuming the larger trend is down, or that a retest of the recent low will occur.  The best set-ups occur when price pushes higher but the VIX fails at least in a very minor way to continue lower as price moves higher.

The bottom chart is the total put/call ratio on an hourly time frame.  Again a move outside the lower bollinger band here would be a possible short term topping signal, though it won't necessarily mark the precise high.

Prices are set to gap up here, and in my opinion a short position at the open would be a reasonable play.  If I go in here it will likely be with SPXU and without a stop on the position.  I will wait for an opposite extreme to develop and exit or place stops when that occurs.

Saturday, October 18, 2014

SPY Price Projection for The Rest of 2014

2014 SPY Price Projection
Click on Chart to Enlarge

Over the last couple days I have created what I believe would be a relatively close projection of upcoming market activity  IF...... the bull market high has completed in September here in the S&P 500.

Without spending a lot of time covering everything that I've looked at other than the few posts I've recently made about the subject, I will give a few key summary points.

  1. While the current market decline is larger and faster than anything we've seen since 2013 began, it is not larger than the May-June 2012 decline and certainly not larger or faster than the August 2011 decline.  So it is unlikely from a logical standpoint, that the bull market psychology is complete - EVEN IF the price high has already been made.  This makes it more likely that price may consolidate to a lower high before a much larger and faster downward price move occurs which creates logical confirmation of a new bear market.
  2. Seasonal tendencies are for market lows to occur in October and to experience rebounds.  Also seasonal tendencies are for markets to rally or hold up well into the Christmas/New Year's time frame.
  3. Real money sentiment is clearly stretched to a statistical extreme of pessimism given the bull market trend.  And since the price psychology has not clearly turned down, it seems likely to me that the market will rebound, but the rebound may now take on a more corrective/overlapping character rather than a V-bottom or sustained directional rally off the low.
  4. The move down off the September high appear to have an expanding bias, and tops or bottoms are more likely to end with a contraction (like an ending diagonal, etc).  Expanding activity is more indicative of a new pattern or trend.  So I think it is likely that the recent low will be retested or slightly undercut before a more lasting rally occurs.
  5. There is not yet daily time frame bullish divergence on this decline, making it more likely that prices will retest the low or remain rather range bound for several weeks as opposed to a V-bottom.
  6. The VIX/VXV ratio has been above 1.00 for several days which suggests to me based on past behaviors that prices are likely to stabilize.  The ratio has not tended to stay above 1.00 for weeks, and even if volatility remains higher, it would make more sense here that the initial directional move is largely done and some decline in the ratio is expected.
Click on Chart of LQD/JNK to Enlarge

This chart is the LQD fund divided by the JNK fund.  LQD is a lower interest "safer" fund.  JNK is a higher interest "riskier" junk bond type fund.  The chart has a few notes, and maybe I should have made the chart of JNK/LQD for easier comparison with price, but the obvious point here is that at the September price peak in stocks, the risk behavior did not increase.  In fact there was the most pronounced divergence in several years.  That has now created the largest rise in the ration in 3 years.  If there is a consolidation followed by a new high for this LQD/JNK ratio, we would have added confirmation of a new dominant trend in market psychology and interest rate behavior towards risk aversion and a flight to safety.  This would make sense if stock prices have peaked and headed lower in coming months.

Click on Chart to Enlarge

This chart is similar to the last one but shows the risk behavior divided by the safety behavior.  This chart is the XLY consumer discretionary fund, divided by the XLP consumer staples fund.  From the chart, it is evident that the ratio has expanded as the bull market has progressed.  Then, at the summer highs, the ratio peaked sharply lower than in the spring.  This has now been followed by a break lower in the ratio.  Again, this is a simple measure of risk versus safety investing, with the indication that a new trend towards safety and away from risk is likely at hand.

Now another chart that looks essentially the same but I won't reproduce here, is the Nasdaq volume/NYSE volume which again shows an element of growth versus safety.  That chart also did not make higher highs this summer compared to this spring.  So here again, there is some indication of waning activity in the more risk/growth oriented stocks versus the more stable, lower risk stocks.

All of these indications suggest to me that the shift towards bear market behavior is on and prices have likely peaked.  We currently have an initial price burst to the downside suggesting a top may be in place as well.  So I will move forward under this outlook, with the major goal of identifying high quality times to short the market or purchase put options in anticipation of a major move to the downside in stocks.

Friday, October 17, 2014

Current Action in Market Compares to January 2008

The last 2 trading sessions in SPY were kind of unique in that both saw sizable gap downs of greater than 1% and both rallied to close above the open and above the mid range for the session.  And Wednesday made a 3 month price low.

The only other instance of this I can find going back 10 years is the Jan 22 and Jan 23 of 2008 instance.  That decline really was the kick off of the bear market and made a larger and faster type of decline and undercut existing support from the bull market.  Our market is similar in that regard right now as well.

So based upon that precedent, my last post still is my best projection here.  The specifics of the price action following the Jan 2008 waterfall decline were an initial 7 day rally (after the two gap and reverse days) followed by a month and a half to retest the Jan 22 low.  Then a 2 month rally occurred and gave a great shorting opportunity.

Given our market today has experienced less time since the high and the pattern structure seems different, I think that we are less likely to see a drawn out consolidation at this level and more likely to see a 1-3 week rally followed by substantially lower lows.

I will update as appropriate when action unfolds, but for now it looks like we should be ready to short the market next week for an expected retest of this week's low.

Waterfall decline in SPY and following rebound
Click on Chart to Enlarge

Here is the chart of the 2007 bull market top and the decline into Jan 2008 and the following retest and rally.

Wednesday, October 15, 2014

Projections for SPY Based Upon Recent Price Action

SPY decline and expected rebound
Click on Chart to Enlarge

My post earlier today appear to have been timely for the short term trade, as stocks reversed most of the day's losses after this morning's sell off.  It likely will prove to be a short term low that holds for a little while.

However, the current explosion in volatility and persistent downside price action that has repeatedly closed below the lower bands, with sharply increasing volatility, has led to rather predictable price action in the past.  I would encourage you to go back through this post I made in August 2011 during that waterfall decline, because I accurately forecasted price action based upon prior instances of similar action.  And that forecast being spot on just adds further weight to the likely outcomes here, with history as a guide.  So the implication here is that if today's is a bottom of this initial plunge, but the correction does make a lower low, then we may see prices rally back to the region of Monday's high and find resistance there.  Interestingly that area is exactly 61.8% of the retracement of the last 5 days action since the high of point "d" as I have labeled it on recent charts - the 10-8-14 high.

This post shows the trade set-up I mentioned at that time as the initial rebound unfolded.

Here is a follow up post from the action as it unfolded in August 2011 and led to a new low for the correction which ended up being a major buy signal.

The chart above shows a projection similar to the ones linked here, and is based upon a rally to the high of the second candlestick before today's reversal.  In the past when no divergence is present, the market has routinely retested the low before rallying again.  So in this case we may expect a similar outcome.  Each rally here would be a short-term short trade set-up.  And if the bull market has topped, then the next break of support may be significant and lead to much further losses.  But the technical indicators and underlying sentiment will be our guide as we move forward assuming this forecast is roughly accurate again.

The initial rebounds after a sharp decline like this tend to be swift.  I would expect a short-term short sale opportunity to develop by next week.

As a side note, there is perfect hourly time frame bullish divergence on IWM currently and a bearish engulfing pattern on the daily chart just below support.  So it would be logical to go long IWM if one were to believe the bull case here.  You can always treat it like a short term trade and exit part at the first sign of hourly time frame overbought levels.  Then maintain a portion of the trade for a potentially larger advance if the market does put in a lasting low here today.  In these scenarios I go in with the expectation that I may only breakeven most times, but I will be in the market for the times when it does put in a lasting low,

Again, comment or question below if you need further assistance in navigating here based upon your trading time frame, etc.


Expanding Pattern Now At An Extreme - Short Term Cover Point

If you followed my posts the last couple weeks or took advantage of an option play to profit on the last several days of decline, then my suggestion at this point is that price has now declined to the declining speed line of the expanding pattern boundary and has occurred with a sizable gap.  There is no bullish divergence present at this point to suggest the decline has bottomed, however, I would suggest that this may be a quality point to cover part of a short position or put option, depending on time to expiration, etc.

Click on Chart to Enlarge

So again, I am not saying that today is a price bottom and I am not suggesting going long here.  I am saying that when the crowd is panicking and prices are making an extreme, those are the most contrarian points at which to act opposite the crowd.  In this case that means to cover or exit as they are capitulating.

In this specific case, I believe any rebound will be another shorting opportunity, but I will obviously be better informed as more price and time action unfold.  If a major decline is infolding, I don't expect any rebound to go back to the "d" wave high.  So if a rebound occurs and gives a sell type signal below that level, then I would suggest to short/sell.

For now a sell and hold strategy may be rewarded, but I have a feeling from years of close market observation that the short term downside is likely mostly done.  I could always be wrong.  and that is why I typically stress using a trailing type stop mechanism on part of positions that have major price potential.  I think that would be advisable here, but for options you may not have that luxury due to time decay.

Let me know if you have any questions regarding how to navigate here.