Thursday, July 31, 2014

VIX/VXV Ratio Closes Above 1.00

With today's big spike in the VIX, the VIX/VXV ratio has closed above 1.0.  I have discussed this a number of times over the last few years.  It often marks price level that leads to a rebound in an uptrend.  In this case, the typical bull market pattern would be a probable gap up tomorrow morning followed by a morning sell off, and then a rebound to close in the upper half of the daily range.  If that action occurs it would look like a typical bull market pattern and would be a buy type signal.

However, there certainly have been periods during the major corrections of the bull market where the ratio went even higher as volatility really increased.  So I don't advise buying into the weakness without at least a 1 day reversal.

As I have suggested at here recently, my opinion based on the multiple time frame set up, is that the current top could be a major one, so I am not expecting this to be a typical buy set-up.

If a meaningful buy signal is generated over the near term I will update here, but for now, be warned that this may be a shot across the bow of a bigger directional change.

Interestingly the technical analysis on bonds here looks toppish.  So it seems that both stocks and bonds could fall in tandem which is different than the dominant bear market pattern during 2007-2009.  I don't read too much into this at this point, but it will be interesting from an intermarket analysis standpoint to see what occurs.

Drop a comment if there are any specific questions regarding specific stocks, indexes, or stop loss placements.


Tuesday, July 22, 2014

Get Out of The Market I Think

I hope to have time for a video on Thursday to review some data and charts.  But currently the volatility and put/call ratio bearish divergences are very sharp and are concurrent with multiple time frame bearish technical analysis (weekly, daily, and hourly bearish divergence on the MACD).

Additionally, it seems odd but today is a new all time high in the S&P 500 and the McClellan Oscillator is actually negative on the day.  And it has not mustard any strong readings in a couple months.  Certainly the argument can be made that breadth is not healthy for a sustained advance here.

Based on multiple factors, I really don't expect new market highs to be made beyond the second week of August.  And I think this week or next could be a very significant high.

I think for speculating on index shorts, I would suggest watching each day for top reversal daily price action with potential entry on any classic reversal candlestick pattern.  Also if watching the weekly time frame, I would again keep watching for top reversal weekly price action and the possibility of a modest to strong close this week followed by a gap up and then sell off next week.

As always, use some objective indicator to signal or price pattern to take entry and have contingency plans for exits if prices go against your trade as well as if they go with your trade.


Monday, July 14, 2014

VIX:VXV Ratio Pointing to a Near Term Market High?

Click on Chart to Enlarge

This chart of the VIX:VXV ratio goes back 3 years, and represent 1 month implied volatility over 3 month implied volatility.  If you have no back ground in this ratio, then search this blog for the VIX/VXV label to get past interpretive info.

What I want to point out here is that when the ratio spikes to a LOW level - meaning below the lower bollinger band - that event has consistently NOT been right a market high.  I discussed this briefly several weeks ago at the end of May.  Looking back over the lats 3 years of chart history, we see that the low in VIX:VXV occurred 6, 4, 8, and 6 weeks before the most significant market corrections, though in March 2012 it was only about 2 weeks until the high, but 6 weeks until a small double top before the correction really occurred.

So averaging those out we see that it has been about 6 weeks after the low VIX:VXV that prices made a high and corrected for several weeks.  Interestingly, we are currently right at 6 weeks from the most recent low in the VIX:VXV.  So based upon this very simple analysis, it gives us a heads up from volatility analysis of real money data in the options market, that we may be in the time frame for the market to peak and correct here.  Additionally, as of today we have a very sharp bearish divergence on the daily time frame in QQQ and other than the Dow managing to poke up to a slight new high, the other indexes like Russell 2000, S&P 500, Nasdaq Composite, Wilshire 5000 are not making new highs, so we have some non-confirmations and technical bearish divergences present.

Also recently we saw a extremely low equity put/call ratio average.  Similar comments apply there as to the VIX/VXV.  The low point in the equity put/call ratio has been a couple weeks to a couple months prior to the price peaks before the major corrections.  Currently we have a June 19th low in the 10 day average of the equity put/call and are nearly 4 weeks removed and price pushing to higher highs.

Taken together, my opinion is that the market is set-up virtually identically to the sentiment backdrop that has occurred right at the highs before recent market corrections.  So, only time and market action will tell whether the recently consistent tendencies will follow here, my vote is that there is unlikely to be any appreciable price rise from this level over the next several weeks, and we could very well experience another broad based correction in stocks.

Tuesday, July 8, 2014

More Selling Likely Ahead?

As of this afternoon 2:00 ET, it appear likely that stocks will have at least a modest continuation to lower lows over the next few days.

While the VIX has popped up here, it is not at a statistical level that typically coincides with short term bottoms yet.

When I have time to update I would like to go over some other charts which I believe suggest caution here for those who are still long.  Put/call ratios are at an interesting point here, where they are possibly indicating relative fear in the market compared to the recent trend.  However, given we were only 1 day off an all time high yesterday, I think a better interpretation is that this is a "shot across the bow" after a significant divergence period, which suggests we could see fear rise further, and stocks to fall further.  I suggest waiting for at least short term sentiment divergences to consider taking any new longs from this point.  Extremes can get more extreme.  So we want to see extremes first, then divergence, then price reversal confirming a possible change in trend.  That will be the low risk point to possibly enter for a continuation of a bull market trend.

Monday, July 7, 2014

MS Sept 33 Puts

I bought Sept 33 put options for 1.57 this morning on Morgan Stanley, symbol MS.

The set-up here is a dual time frame overbought at a slightly lower high compared to the last weekly over bought stochastics peak.  Daily time frame is showing strong bearish divergence and a shooting star reversal candlestick.

Also the VIX is showing a cluster of low readings with a couple closes below the lower bollinger band.  Based on my analysis of real money market sentiment and price, I view this current phase of the market to be a continuing bearish divergence that is probably very mature and likely to turn into a significant price decline for the time frame of this trade, even if for only 1-2 weeks.