Monday, April 13, 2009

More Objective Signs That Price is Stretched to the Upside

Click on Chart to Enlarge

I am posting several charts tonight, and they have notes on them, so I won't repeat those notes in the text here. In recent weeks I have been expecting the market to form a top soon. As the S&P 500 pushes toward the 880 level, the scenario I proposed from a pattern standpoint looks less likely. However, I feel it is important to remain objective and stick to quantifiable facts for determining likely market direction. From the broad spectrum of indicators out there that I follow, the indicators at optimistic extremes are growing, with a notable jump today despite muted market movement.

The chart above is the equity put/call ratio with 21 and 34 day moving averages in blue and red. Again, read the notes on the chart for detail. I would like to see the averages turn up in the next couple weeks to confirm a bearish outlook.

Click on Chart to Enlarge

The chart above is the sum of the volume of SDS, QID, and DXD which are the 2x inverse ETF's for the S&P, Nasdaq, and Dow. I have discussed this indicator before and it is used in the same way as put/call ratios. You can see from the chart that trading volume in these funds has dropped considerably the last few weeks and the recent levels are below the 2 standard deviation band. This is interpretted as complacency and lack of leveraged hedging which is typically bearish in the intermediate term.

Click on Chart to Enlarge

This chart is the VIX/VXV ratio with bollinger bands overlaid. Read the notes on the chart for detail. This indicator has been perfect so far this bear market in that it has given a signal at every important top, and every signal has worked like a charm. I am not implying that any indicator will work all the time, but as I always say, if it doesn't end up working this time, then maybe the market is changing character (aka a bull market).

I didn't post the chart of the VIX itself, but the VIX closed below its lower bollinger band Thursday. This does not happen very often. It has been an outstanding contrary signal during this bear market, but it has only happened 3 times before this time. The dates were 12/21/07, 2/26/08, and 5/15/08. All were basically 1 day from a significant high and great selling opportunity. Again, if the VIX falls below Thursday's low or closes below the bollinger band again, then that would be a warning that maybe things are changing.

The contrarian set-up here seems to be on par with past intermediate highs in this bear market, so the next couple weeks (even few days) should be important to watch for price confirmation. If the markets don't drop a good bit by next week I will be backing off on trying to pick this top for blog trades and will focus mainly on bullish trades if the market remains above the 20 day moving average.


1 comment:

  1. As a short side note, the highlighted stock, CAM, that I mentioned a couple days ago just formed a shooting star reversal candle on the 30 min chart right in the ideal resistance zone mentioned in the post. Also, this was at a new high with a divergent MACD indicator. It could be entered short immediately with a stop at 25.60 or 24.85.

    The short-term model is almost overbought this morning and cumulative intraday TICK levels on the Nasdaq are on par with recent short-term tops, so for short-term traders, today may be a good day to look for set-ups like CAM mentioned above.