Friday, November 10, 2017

Change of Character in Trend - Lower Bollinger Band Probable Target - SPY 11-10-17

Click on Chart to Enlarge

The chart here is SPY on a daily time frame.  It shows several months of the recent uptrend and nicely illustrates simple concept in technical analysis pertaining to Bollinger Bands.

Once the center line is crossed on a closing basis, the idea is that the nearest band becomes a price target.  So in an uptrend, when prices close below the 20 day average center line in this case, the lower band becomes a price target.

In this case we can see the action in June where prices closed below the band in the second half of June, and then tagged the lower band after about 5 days.  In August, there was a wide range break below the mid point that tagged the lower band the same day.

Now notice the current trend up since August.  I have marked with green arrows the 4 days at which price came down to touch the center line.  Each day price reversed to close off its low and above the mid point.

Now when I see something like this, it indicates to me that program trading may be coming in using the center point as a buying trigger.  But here is a more subtle point I have picked up on over the years and have written about here before.

If you look at the last 3 times the mid point was touched (before yesterday), you can see that the next day gapped up.  In fact the next 2 days gapped up in all 3 instances.  Similar comments apply to the March 9 and 14 center line reversals as well as the June 16 center line reversal.  Gaps ups following the center line test, generally indicate "successful" short to intermediate term tests of the center point.
So the norm for a continued trend is the programs kick in to buy at the mid line and then continue the buying into the next session and create the gap ups.

So when the character changes and price does not gap up, PAY ATTENTION.  To me it indicates that the normal trend continuation program buying pattern is not in place. 

In fact a decent size gap down the following day, indicates a failed test of the average and a probable quick test of the lower band.

This morning prices are set to gap down moderately.  Coupled with the clear bearish divergence at the recent highs and the weak/negative breadth as evidenced by the McClellan oscillator being negative for a couple weeks as price rose, I would suggest that this current gap down will likely lead to a quick move to the lower bollinger band.

Currently the near term support on a move down is 254.00.  But I think prices clearly have more risk than this to the downside in the coming couple weeks.

The last time I remember such and extended period of negative McClellan oscillator readings as prices were making higher highs was Sept 2014 before the vertical decline into mid Oct. 2014.


Monday, November 6, 2017

Low VIX Readings - Probable Short Term Weakness

I ran a simple scan over the weekend looking at time when price on SPY made a new 52 week high, and also the VIX closed at or below -1.9 standard deviations from its 20 day average.

That was the simple set-up which occurred Friday.

The stats show about 2. to 1 greater MAX loss than MAX gain over the next 3 and 5 days.  The skew is still notably negative at 1.75:1 at the 1 month mark forward from the signal.

Also I looked at some option today, and noted that the 259 strike put on SPY which expires this Wednesday Nov 8, was trading at a level that only required a 0.39% decline, by close on Wednesday to take the option to a 100% or greater gain.

So I looked at the 27 instances that I filtered from the above scan, and found that 22 out of 27 instances declined at least 0.39% within the next 3 days.  So there is about an 81% chance of a double or more in the option value by this measure, and seems to be a reasonable speculative play.

Wednesday, November 1, 2017

A Few Thoughts on Stocks Here 11-1-17

Today there is an FOMC statement to be released.

Tech stocks have pushed higher the last week, but to me it appear to be an exhaustion type move, as evidenced by the following chart.

Click on Chart to Enlarge

This chart is XLK on a daily time frame.  It is a tech stock ETF.  What I have drawn is an upper channel line which connects the previous price peaks during the uptrend.  A touch or break of such a trend channel line is often an exhaustion point for a move.

Couple that with the fact that the recent gap up from last Friday was the largest gap up in a couple years, it smacks of an exhaustion gap from a charting standpoint.  Is that gap up on the earnings news almost 2 years into a 65% run up in prices a "smart money" gap?  Or is it a "dumb money" type gap after the news is out?  I think more of the later.

Click on Chart to Enlarge

This chart is a weekly chart of the Dow futures contract with associated Commitment of Traders data below the price chart.  When analyzing the CoT data, there are a few common patterns that show up at reversal points on the chart.

One of the key points in CoT is always extreme positioning between the market participants and their historical range of contracts held.  We have seen extremes in the chart for sure as it pushed to new highs in 2016.  Other index contracts are hitting or near extremes on this rally also.

However, an even more notable signal than the extreme position is a "blow off" pattern in the futures where the "smart money" commercial traders hold an extreme position, but then price continues to rise and there is a break from their pattern of selling on price rises.  Instead we see the commercial group decreasing their short position substantially as prices rise.  That indicates a typical finale to a rally where the speculators "won".  They cashed out into a strongly rising prices.

That is what we are seeing on this Dow chart.  The commercial pattern of selling into the price rise was standard until October began.  Then for the last month, price has risen very sharply while commercials have bought and large specs have sold.

Once the run is done, this could result in a substantial decline, even a bear market.

Not all of the index contracts are displaying the same pattern, but this one has a classic bull market peak type of look to it, and so I am paying attention.

On a shorter term note, I back tested SPY data looking at opening prices outside the upper bollinger band on a gap up as is occurring today.  I also added various other conditions which are currently present in the market to gauge the short term expectation.

The only real significant finding is for the same day.  There is about 2 to 4 times greater MAX loss than MAX gain on the day of this finding.  The forward returns after the close of the signal day were flat to typical.

So given this tendency for a close below the open, and some of the exhaustion signals occurring, I wonder if the FOMC news will lead to a sell the news response here.

We will see.


Tuesday, October 31, 2017

Coffee Prices on the Brink of a Major Rally - November 2017

Click on Chart to Enlarge

The above chart is a 5 year chart of coffee futures prices, covering the last couple bear market lows and some intervening bullish phases.

Currently prices are retesting a spike low which occurred in June of 2017.  And of note, there is now record net short positioning in the large speculators even as price is stabilizing at a higher bottom than the June low.

This indicates that there is a tremendous amount of short covering possible to be unleashed on a price advance.  The last 2 major bullish phases were 50% and 100% roughly in a year or less after comparable positioning among the major market players.

Not shown on the chart above is that "managed money" category of the positions is record net short basically equaling the level of the June low, at which point a 2 month 30% price rise occurred.

It certainly seems possible that price action will become "sloppy" before a rally occurs. 

But to me it makes sense to take every "buy" signal generated in a daily or weekly time frame from here forward.  And don't underestimate the potential price rise that could occur over the next several months.  From the visible data of the past major rallies, a 30-100% rally over the next 6 months would be reasonable.

I have eyes on purchasing JO, which is an ETN to participate in this potential move.


Sunday, October 29, 2017

High Risk In Stocks Over the Next 2-4 Weeks

The current push to new highs on Friday in the SPY, has created a signal in my analysis which is infrequent and has lead to about a 3 times greater MAX loss than MAX gain over the next 2-4 weeks over the last 22 years of SPY data (this is all I have for testing purposes).

Without getting into the details of what the signal is, it is basically picking up a time when prices are making new highs, but with increasing signs of "fear" in the markets over the short and intermediate term.  So the way I have it flagged, it is saying that the fear over the last 5 days is higher than the fear over the last 3 months on average.  AND the average fear for the last 3 months has turned higher.

After reviewing previous instances in detail, it seems that SPY has high risk of declining to at least 254.00, but very possibly closer to 248.00 or beyond within the next 3 weeks.


Tuesday, October 24, 2017

Social Media Stocks At Intermediate Top 10-24-17

Click Chart to Enlarge

The chart above is a weekly chart of the SOCL etf.  It shows a weekly bearish engulfing pattern last week.  That is a top reversal candlestick.  Also the RSI below the chart shows that price has been in a drawn out bearish divergence for a couple months.

To me this appears to be a classic topping look.  So from my perspective, the stage is set for a multi week decline for the first time this year.

There has been no 1 month+ correction since the 2016 election in November.  So after a year of a leg up with no correction in the markets, the time and price advance is certainly ripe for a top.

Since some of the big name companies are in the SOCL etf, I view this as a barometer of leading stocks and this indicates a topping formation in aggregate.

Also, the Mclellan Oscillator has been negative since Oct 12 even as prices have pushed to new highs.  This suggests that breadth is very thin, and indexes are only pushing higher on relatively few issues.  This forebodes a more sizeable correction to occur in my opinion.

Friday, August 25, 2017

SPY Bounce Possibly Near an End - Projections for Further Decline - 8-25-17

Click on Chart to Enlarge

Currently the strongest portion of the expected rebound based upon recent studies is completing.  The recent volatility spike showed the strongest closing returns at 5 days after the signal.  The time has passed now over the last session or two.

So it is possible that price continues to advance, but the recent 5 day rebound has been relatively weak.  From both price and breadth measures, my take is that the recent rebound is still a counter trend move that is likely to fail and lead to new lows.

Based upon the price action coming down off the highs in SPY, where the "C" move was larger than the "A" move, it is quite possible that the next move down will be larger again than "C".  That would be an expanding pattern.

I have often found the speed line of the A-C points to be a useful approximation of where the next direction move down will find support.  So in this case if price breaks to new lows, I will keep that in mind if we see volatile action or a sizable gap down in the region of the speed line.

I have a green horizontal support/resistance line on the chart as well which has 3 past touch points on the chart, and so it would again be a target on a decline from current levels.  So basically a decline to 240-241 on SPY would be a very reasonable suggestion for a near term move.

That target would also also fit with the past study on put/call sell signals in July/Aug which showed 8 out of 9 had declines of 3% or more in the next 4 months.  SPY has yet to decline 3% from that signal origination in late July.

Lastly here, the VIX historically has an approximate 19-20 day cycle.  And based upon that it appears that the next VIX high could be roughly expected toward mid September or a little earlier.