S&P Update

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I have put several notes on the chart above. Basically the S&P is short-term overbought in an unclear larger trend. As of the end of this week, the hourly technicals were overbought with mild divergence. Also, cumulative intraday TICK readings are showing bearish divergence as of week's end.

The daily chart is at very mild overbought levels that will typically give back gains in a downtrend. If this is a move to new highs, expect it to just chop or explode higher with no multi-day declines. The price move up has retraced to 61.8% of the decline since January. I use that retracement level as a general guideline for whether a move is counter trend or not. If the retracement gets more than 61.8%, then it seems that most often it will end up retracing the whole prior move.

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The chart above is the VIX/VXV ratio which gauges short-term versus longer term volatility expectations. Right now the ratio has pulled back to the lower bollinger band after a sharp spike higher. I have highlighted a couple similar instances over the past couple years. Those both led to further declines over the next few weeks at least.

Part of the reason I am showing this is because it gives a mean reverting way to look at the VIX right now. Another way to look at it is the common method of seeing how far the VIX closes above or below its 10 day average. As of week's end, the VIX is about 15% below its 10 day average. More than 10% is used as a level to expect reversion to the mean. So, both of these suggest the VIX may be due to pop up a bit which would mean the market give should give back some gains almost immediately. Again, if it doesn't, then that would support the idea that the market will be moving to new highs.

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On a side note, in November I went into detail about how the US dollar versus other currencies may unfold moving forward. I noted the potential for a dramatic "short-covering"/carry trade unwinding rally on top of historically super bearish sentiment. Well, that has obviously unfolded since then. Based on how much potential unwinding is still left, I would say that the gains in the USD index are not over. However, Friday was a major news announcement with the FED raising discount rates. The USD index made a big gap up (expected), but then sold off the rest of the day. This is a belt hold candlestick. And these types of things often occur in conjunction with news event. So for daily time frame traders/holders of US dollar bull funds (UUP, EUO, etc), I would suggest that this is an exit point, unless you have a big profit cushion (you got in around Oct/Nov and believe this is a new major trend). I do believe it is most likely a major new trend up in the US dollar, but a few weeks worth of gains can disappear quickly if that is all you have to cushion yourself.

These cross currents make for an interesting and a little confusing situation right now as we have to wonder whether the major intermarket correlations the last couple years will continue to hold or decouple.