SPY Technical Analysis

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This post is kind of a technical follow-up to the trade recommendation earlier today. The chart above is a 10 minute chart of SPY which is an equity/ETF that mirrors the performance of the S&P 500.

The chart shows a bearish divergence on the MACD indicator during this afternoon's highs. Looking back at the chart, other bearish divergences above the zero line have resulted in significant pullbacks. This technical situation coupled with the overbought short-term model, indicate a pullback is likely soon. Another factor supporting a bearish short-term move is that this overbought signal is under resistance at 92.50 from highs earlier this month, so this is essentially a "lower high" indicating a potential downtrend.

In choppy overlapping corrections like the market is presently in, I find that the 127.2% and 141.4% extensions of the most recent move are often a solid resistance zone. Those levels would put SPY in the 83.00-84.00 range. If we get an oversold signal near those levels, I think it could be a good bullish trading opportunity.

Pete

New SDS Trade

As of this morning the short-term S&P 500 model is overbought. This is occuring at a lower level than the last true overbought signals which gives a high probability of success for bearish trades in the form of inverse ETFs (SH, SDS, BGZ, etc). Also volatility has declined so much that it is not taking huge moves to get these short-term signals now. Without further commentary......

Trade Recommendation:

Buy SDS today 12/31/08 with a market order. The current price is 71.68 which I will use to track the trade results.

Also, the last trade on QLD was stopped out if following the stop on this blog. However, I always try to post the exit purely according to the indicator as well for comparison. I would take this signal as an exit for that trade.

Pete

Gold, Grains, and General blah

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The chart above is of GLD which is an equity/ETF tracking gold prices. Today gold prices made new highs for the month modestly exceeding the highs from several sessions ago. However, the closing price was below those prior highs. For those wanting to see a continued advance in gold, this is a warning sign that buying interest at new short-term highs may be waning. Also, there is a strong RSI bearish divergence in the recent peaks. Watch the trendline of the RSI indicator over the next several sessions. Most times this trendline will break in advance of prices breaking the same trendline and can give another early warning that the trend is ending. I checked the continuous futures chart of gold prices and the analysis is the same as on the ETF. Also the MACD indicator is in a historically overbought region.

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This chart is DBA which is an ETF that is composed of soybeans, corn, sugar, and wheat. Like most commodities, it has fallen sharply this year. I have looked at the most recent commitment of traders data and the configuration for the underlying commodities is similar across the board and it shows the commercial traders (typically smart guys) buying these commodities to an extreme level. Also, speculators have greatly reduced their positions which is good from a contrarian point of view. I would interpret this as a bullish set-up for a trade on DBA. The problem now is that the short term technicals are overbought. Interested traders may be wise to wait for a pullback on short-term indicators before considering a trade.

Short-term models for the S&P and Nasdaq are basically neutral currently. It would be nice to get both those models to an extreme one way or another soon to set-up another index ETF trade. I am almost equally willing to take bullish or bearish trades at this juncture, with a slight bias toward bearish short-term trades due to many factors discussed in recent posts.

Pete

Sentiment Surveys and the VIX

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In recent posts, I have noted how put/call ratios, the VIX and VXV, and blogger opinions are getting to ranges that have had bearish implications in the past when looking ahead a couple months.

One piece of the sentiment puzzle that I have not mentioned here in a while is related to investor sentiment surveys, which can be extremely useful contrary indicators. There are several classic surveys followed by investors, but if I had to pick a favorite it would probably be the American Association of Individual Investors (AAII) survey. This survey tends to fluctuate quickly enough to make it very useful for intermediate term trading.

I find this survey to be most useful as a contrarian indicator used to trade in the direction of the 200 day moving average. Since the 200 day moving average is pointing lower now, this basically means that I would use a statistically high bullish % in the survey to initiate bearish trades. Since October the bullish opinion has been rising but us still not even 1.5 standard deviations away from the 1 year average. However another 1-2 weeks of rising prices and a break above the 920 level of the S&P 500 would likely raise this bullish % to statistically meaningful levels in my opinion. Most other surveys are still very neutral or are near pessimistic extremes, so I feel that there may not be enough of a sentiment shift back to the optimistic side to push the market lower just yet.

Another thing I watch closely for timing major market moves is the VIX. I look at the VIX in several different ways from oscillators to trendlines to bollinger bands to retracement % to Elliot Wave patterns and even a rather unique (I think) running tally of higher highs or higher lows since a significant market top or bottom.

Since the November market lows the VIX has made 8 lower lows. Anything beyond 12 and flags go up for a potential reversal. Based off this system, I think the VIX could drop a bit more and the market could rise more before we get into the danger zone.

Also I have noticed an almost uncanny tendency since the 2006 VIX lows for the VIX to retrace 78.6% (roughly 80%) of any major VIX advance. The chart at the top of the page shows the VIX with several retracements of this nature. A 78.6% retracement of the VIX advance from August 2008 lows to October 2008 highs would place the VIX at roughly 35. This happens to be the VIX level that repeatedly capped VIX advances in 2007 and early 2008. So we could have a case where old resistance becomes new support.

Peace, Love, and Merry Christmas to all!

Pete

A Number of Reliable Indicators Giving Warnings

In the last informational post I noted that the VIX (expectations for volatility the next 30 days) had dropped below the VXV (expectations for volatility the next 93 days) by about 10% as indicated by the VIX/VXV ratio dropping to about 0.90. That has been a reliable indicator of near term stock declines during this bear market. Because of the time frames of these volatility indexes, I would expect the next 1-3 months showing further stock declines. This might be a good time frame to look at for option traders (that is, Feb. or March expiration).

Now after this past week, a whole bunch of indicators are starting to give warnings that stocks are overextended to the upside. This is all occurring without the classic type of buying thrust that typically indicates a bear market is over.

In months past I have mentioned that a 10 day simple moving average of put/call ratio data is one of the most trustworthy yet simple ways to gauge market sentiment. Recently the total put/call ratio showed a reading that was stretched relative to standard deviation bands. Now after this week, the 21 day moving average is looking similarly stretched. This is a ratio that does not get stretched often, but when it does, it pays to pay attention. The last comparable readings were October of 2007 and May of 2008, both being major tops.

I won't go into every measure that is showing bearish warnings, because the tried and true ones (in my book) are telling enough. But there is another interesting piece of info that I thought I'd mention. The link below shows a chart and graph quantifying the outlook of the blog world's view on market expectations for the next 30 days.

http://tickersense.typepad.com/ticker_sense/

The interesting thing is that the data suggest a more prolonged period of net bullish blogger opinion than any time since the poll's inception a couple years ago. These blogs are well respected and influential blogs. Bloggers took a major bullish consenus the week of the crash into Oct. 10. Despite the blog world remaining very bullish since that time, stock prices have continued to basically drift sideways to down in volatile fashion since then. In my opinion, this bullish sentiment is out of sync with the reality of prices. This survey is not one that has been around for years, and it is something I only occasionally look at, but I would assume that it would be useful as a contrary indicator in the same manner of classic investment advisor surverys.

For longer term investors, I would think that waiting for a major break of the 2002 bear market lows in the Dow and S&P would be wise before making longer term purchases. Maybe the 5000 level on the Dow and 500 level on the S&P would be times to make major multi-year or multi-decade investments (assuming things actually fall that far).

Pete

QLD Trade Update - Stop Placement

Based off of the price pattern in QLD right now and due to the info in the last post, I suggest a stop placement on QLD which will allow it to move higher if it does, but for any one in it by my earlier recommendations, the potential loss will be minimal.

Recommendation:

Place a "stop loss" order of 26.30 on the open QLD trade.

Pete

Volatility Signaling that this Rally Is Running Out of Steam?

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The chart above is a chart of the VIX with standard Bollinger Bands around it. Also below the chart is a 10 period RSI of the VIX. I don't know how many people use traditional technical analysis on the VIX, but I have found some basic indicators to give timely warnings.

First, note that the VIX has touched its lower bollinger band. Since the VIX and the markets have strong inverse correlations, low VIX readings tend to correspond with market tops. The RSI is indicating a level of oversold VIX more so than any time since early May before the steady crush lower from mid May to mid July. I have a simple system for looking for VIX extremes that I have posted about before. That system is still a few lower VIX days away from really being in the danger zone, but I would heed the current VIX levels as a warning that this rally is long in the tooth.

Click on Chart to Enlarge

The chart above is a chart of closing VIX/VXV ratios with standard bollinger bands overlaid. Please follow the link below to the VixAndMore blog as that is where this indicator ratio originates.

http://vixandmore.blogspot.com/search/label/VIX%3AVXV

The chart above does not show intraday lows, but I wanted to show a smooth view of the data that is easy to identify extremes. This ratio is nearing the 0.90 level and its lower bollinger band which have proved outstanding warning signals for soon to be market declines.

Taken together these data certainly should tell us to be on the defensive, or start to get aggressive with bearish trades.

Because this data is raising red flags, I may arbitrarily suggest exiting the QLD trade initiated yesterday before any signal comes from the indicator, or I may suggest a stop loss to use to exit the trade if the market turns south. In the past, trusting the indicator has proven the best strategy, but for real life trading, risk management is the most important part of successful trading.

Pete

New QLD Trade

The short-term model of the Nasdaq is just a hair's width from oversold as I type. Based off of a few post-FOMC meeting studies and the gap support from Tuesday, I think this oversold signal has a good chance to work well.

Trade Recommendation:

Buy QLD before the close today or tomorrow morning with a limit order of 27.00. Current price is 26.74 which I will use to track the trade.

Pete

QLD Trade Exit

The short-term model for the S&P 500 just became overbought and I suggest exiting immediately the open QLD trade. The current price is 28.10 which I will use to track results. The was another nice trade.

Pete

New QLD Trade

The short-term model for the Nasdaq hit oversold levels yesterday, and with today's gap down in the markets, a bullish divergence was created. So I am going to recommend bullish ETF trade here.

Trade Recommendation:

Buy QLD today before the close. Current price is 26.75 which I will use to track the track results.

Pete

I Expect a Continued Trading Range Until Dec. Expiration

There are many ways that traders traditionally look at support and resistance in the markets. As I have mentioned in past posts, one of the main things I look at are gaps in the major index ETF's like SPY or QQQQ. As we stand today there are unfilled gap ups at 79.50, 88.00, and 89.50. These gaps I view as a support cushion below current prices. There are unfilled gap downs at 92.50 and 96.00 which are above current market prices and could be viewed as a short-term ceiling on a market advance. There is a large unfilled gap down at 110.00 from back in October in the midst of the dramatic waterfall decline in the first two weeks of that months. That gap did not get filled at all and should act as a longer term ceiling on prices should the market "breakout" of the current trading range.

Another concept that is more advanced in analyzing the market from both a technical and sentiment perspective is evaluating the open interest in option strikes in the index ETF's SPY and QQQQ. Options are typically used as hedging instruments and that will result in many puts held at strike prices below current market prices. Options can also be used for speculation in both directions. Call options above market prices can be a sign of speculation/expectation that prices will advance beyond those levels by expiration. Additionally there are complex option trading strategies that involve the purchase or sale of both put and call options simultaneously and may take advantage of range trading.

That is a very elementary view of options. The open interest is basically the amount of contracts held in that particular option. So how do you use this data? Looking at front month (current month) options can tell a lot, as that is where the heaviest open interest is.

Right now the peak call open interest for Dec 08 is at 90.00 on SPY. Peak put open interest is at 80.00 and a slightly lesser peak at 85.00. I would view these levels as market support for the rest of the month. It gets more interesting with the QQQQ options. Peak call open interest is at 35.00 in Dec 08. The amount of open interest here blows away the amount in any other strike price. Seeing as 35.00 is well above current prices, I view this level as a level of great speculation and anticipation for prices to move quickly higher in the next week and a half. History will tell us that usually these options will expire worthless. I would doubt that we make much progress to or beyond those levels by expiration.

Peak put open interest in Dec 08 QQQQ options is at 27.00, with heavy cumulative open interest from 27.00 to 29.00. According to the "maximum pain theory" areas of heavy open interest are often where the price will end up at expiration. This will make those options worth little or nothing typically and will inflict great pain on the holders.

Taking the front month data together, I believe it indicates a continued trading range until expiration. Also, I would place my bet on prices of SPY and QQQQ being near the current level or probably a bit lower at expiration. After expiration, when all those contracts are history, I think we will be likely (or more likely) to see a price breakout of the range.

One last interesting point comes up when looking at Jan 09 SPY open interest. There is huge call open interest at the 100.00 strike and is greater than corresponding put open interest by a 6 to 1 ratio. It seems that options players have an optimistic expectation for the beginning of the new year as SPY would have to rise well above 100 to really cash in on those options.

While I don't want to read too much into a single piece of data like that, I believe history would tell us to bet against points of optimistic or pessimistic extreme like that.

Pete

Stocks to Watch -- Bearish Trades

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Today's post is really an educational post that will cover a number of concepts relating to the kinds of patterns to look for in bear markets that will provide excellent short sale candidates or put option trades allowing you to make money as stocks decline in value.

The chart above is Verizon, ticker VZ.

The long term view is that the stock is below its 200 day moving average (MA), and the 200 day MA (red line) is pointed down. Also, the 50 day MA (green line) is below the 200 day MA. Since the October low, the stock has touched or crossed above the 50 day MA only to fall back below it 4 times. Now in the most recent advance the stock has moved back above the 50 day MA. Multiple failed rallies at the 50 day MA are classic for bear market rallies. A high volume close back below the 50 day MA would be very bearish.

Another key to look for on rally attempts is the volume. Notice how the peak volume on up days (the black bars at the bottom of the chart) was highest in October after the lows, then lower at the last week in November, and lower yet the last few days. Also today marked a new high coming off the October low, yet volume is not impressive. These are signs of waning demand at higher prices.

The stock has been somewhat range bound forming a rising wedge/triangle type pattern since the October lows. The bollinger bands overlaying the chart are the blue lines, and they provide a statistical range around price and should contain about 95% of all price on a closing basis. These bands tend to be a ceiling on rangebound market rallies. Price is pennies below the upper band right now, and the 200 day MA hovers in the same area. The 200 day MA is a typical resistance point for bear market rallies. A downtrendline is present at that level also.

An advanced concept to understand in technical analysis, particularly pertaining to short-selling is the idea of overhead supply. Basically, areas of previous consolidation or support that the stock has moved below provide a point where many shares were aquired by institutional investors (large funds, etc.). Since these investors are now at a loss, they will want to sell and "breakeven" when the stock comes back to that level from lower prices. Such is human nature. So any advance into prior consolidation levels will meet a plethora of sellers and keep pushing prices down. In reference to this chart, VZ traded in an extremely tight range from mid-June to mid September of this year. It is not often you see such a tight range. This occurred almost entirely between 33.00 and 35.00. Not totally visible on the chart is that there is a horizontal support line around 32.00 from prior significant lows. Price finally broke that level in September and is now coming back to that level. There is a saying that old support will become new resistance, and I have found that to be very true in a situation like this. Price is now just above 33.00 and should be meeting anxious sellers soon.

I did not include any technical indicators on this chart, but there is a major bearish divergence in momentum on this advance compared to the November advance. Also, the %K slow stochastics is overbought which tends to occur at significant price peaks both shorter and longer term.

Now the last and most key ingredient for a successful short sale is the state of the stock market in general. The market will need to show further declines to really drive this stock down. I believe that this will occur over the next several months, but any move below the November 20 market low will be good confirmation that the bear's appetite has not been fulfilled.

Now, I won't go into any detail on other stocks now, but I want to give a few stocks from different sectors that I think are going to go down for people to check out on their own.

The oil refiner group (XOM, CVX, SUN, SNP) look ripe to short-sell. Other stocks are GG (gold stock), WMT and PG (refer to prior posts).

If anyone wants more analysis on any of those stocks, please post a question or comment.

Pete

Levels to Watch on SPY

In the shortened week last week, the short-term model became extremely overbought. I was away visiting family and did not make any posts. I did not feel in a huge rush to suggest a bearish trade at that overbought signal because the market was able to hold up for a day or two after it became overbought. That can be a sign of underlying strength. We were also far enough off the lows of the previous week, that the market could become oversold above those lows. That is one thing I look for to determine what direction to trade--Is the market above or below the prices that it was at when the last signal registered? So I think the next signal here will be the one to act on.

Right now there is a large unfilled gap down overhead at 90.00ish on SPY. I view that as a major area of resistance. If the market is able to push through that level, then I think there is a good shot it makes it up to the 96.00ish level where there is another gap left unfilled.

If the market fails the next day or so, and goes below Monday's lows, then the next area of major support is an unfilled gap up at 79.65. If we get down to that level this week, then I think that would be a good short-term bullish trade entry point. If accompanied by an oversold reading, I would definitely consider recommending a trade there on SSO.

Pete