Short Trade Set Up

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The 10 day equity put/call average has dropped below the 63 day average and is nearing the 252 day average.  This is in the context of rising 63 and 252 day averages which are indicative of a price downtrend in many cases.

The momentum set-up is mixed with the weekly stochastics still up and recently out of oversold territory.  The daily is down and the hourly is overbought which makes a potentially very nice short-term set up but a questionable intermediate term set-up.

The large gap down from Monday is basically filled now on SPY which is another potential overhead resistance on the chart.  The stop level is the 6/20/12 high on a short position.

Rebound Likely Complete

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The daily chart on the Russell 2000 shows a possible completed upwards abc pattern that has retraced 50% of the April-June decline.  This looks very nice from a traditional Elliott Wave perspective, and potentially sets up a wave 3 or C down that has just begun.  This would imply a major decline over the coming weeks.  Notice the daily stochastics has crossed down from overbought territory marking a potential short entry signal with a stop above this week's high.  The only problem at this point is that the hourly stochastics is oversold as of the close.  It would be ideal to see it recycle back up to overbought after a mild consolidation into next week before a short entry.  Those ideal set-ups don't always come, and given the wave pattern, the risk to reward is still solid using just the daily chart signal.
 

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This chart shows that break of the rising wedge type formation I had noted.  This is a different system of pattern labeling based off of price logic.  Again this would imply either a large continuation down, or a couple days rebound after last week's lows are taken out, and then a likely major price break down.

In any case, I had expected a 2-4 week rebound and we are on week 3 this week.  The daily chart price touched the upper bollinger band as well.  So this would be a nearly ideal time for a top to occur, though some further upside to next week would be nice as well if it created some stronger technical divergence.

Nearing Counter Trend Pattern Completion?

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It is unclear to me at this time exactly what the best pattern structure forming here is, but I have drawn contracting trendlines forming a rising wedge type of triangle starting at the May 18th low which was the momentum trough of the recent decline.  The ideal projection for the end of this upward pattern would be mid to late this week with a high around 137.00 on SPY.  That would also coincide with the filling of a couple overhead gaps and a 61.8% retracement of the May decline and also with old support at around 136.  A basic tenant of technical analysis is that old support becomes resistance once broken.  So a move back to the March and April lows may be a resistance level and is right in the same zone.

On an objective basis the daily stochastics is back to nearly overbought and the hourly charts are showing overbought technicals with some signs of bearish divergence showing up.

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For those unfamiliar with the VIX:VXV ratio you can search my blog for "vix/vxv" and find prior mentions of it.  But it is a mean reverting sentiment indicator of sorts showing when near term and longer term volatility are out of balance.  Very low readings suggest that volatility may rise in the near term.  Very high readings suggest a market panic and that a rebound is imminent.  Currently, the VIX dropped a lot today, and sent the ratio to a moderate extreme suggest a market price high is upcoming.  I would use this as corroborating evidence that technical sell signals could be taken and put options could be purchased at a potentially favorable premium.  Of note is that the ratio did NOT rise above 1.00 on the recent decline.  That level is often the level showing that things are way out of balance on a downside move.  So, basically the decline did not show much fear (either in absolute VIX or in the VIX/VXV ratio), so it is less likely that the recent bottom will be of major significance.  In short, I expect it to fail to hold prices.

Breadth has rebounded significantly with the 10 day average of the advance-decline rebounding to counter trend high levels and the McClellan oscillator is also back at a high level near prior rebound peaks.  So it may be best to see a little bearish divergence develop on those before a short trade is ripe, but again it is a red flag for rally continuation.

Brief Notes

Not much new to update from the recent videos.  I think the odds favor a continued rebound attempt here though the hourly charts may need to pullback toward oversold to prepare for a continuation of the move.

In the US stock indexes the recent swing move down was NOT retraced completely by Friday, leaving the price pattern logic in a down trend.  Some foreign markets moved up sharply shifting their shorter term logic to UP.  So again I think that favors the overall tide turning up, but it may be wise to await a higher swing low on the US stock index daily charts before taking long side shorter term trades.

Put/call ratios are still working down from elevated levels, and need a little further pullback in order to present an ideal short trade set-up.  Also, the VIX is working down from above its bollinger band and I would look for it to touch/test the lower bollinger band to potentially find a support area before possibly leaning toward the bearish side on stocks again.

SPY Update

SPY 6-6-12

Today was a follow-through type day in stocks was very high breadth and major price gains.  Coming off a technical divergence it appears this rally has some legs behind it.

The best short term trade set-up I see is to wait for the hourly stochastics to pullback down to oversold to potentially initiate a long trade targeting unfilled gap downs overhead.

Long Term Bonds, Interest Rates, and Implications

Bonds and Rates 6-3-12

Long term US bonds are likely nearing an major top.  Technical analysis, pattern analysis, and CoT data are suggestive that this current rally may be the final leg up of this bull market.  Wait for daily chart technical divergence to develop before considering short entries.

World Stock Market ETF Analysis

World Market Outlook 6-3-12

World stock markets are showing bearish patterns and major non-confirmations across the board.  The most vertical portion of the decline may be upcoming after a 2-4 week likely rebound attempt.

Stock Market Update 6-3-12

Weekend Market Update 6-3-12

This video is a comprehensive look at multiple times frames of the US equity market.  It appears probable that a 2-4 week rebound will occur, followed by what could be a tremendous declining phase.  Larger scale patterns suggest this bear market will take stocks below the 2009 lows.