Sunday, October 5, 2014

Buy Signal In SPY 10-3-14

Everything currently looks just like the significant corrective bottoms in stocks over the last couple years.  The gap up and advance after a buy signal from my bottom spotting algorithm seems like a good start to another move up to new highs for the bull market.

I have discussed the longer term technical set-up as showing multiple time frame bearish divergence and warned that we may be at the end of this bull market.  This current action doesn't really negate that outlook on a longer term status, but it does seem more likely that this current rally could make a new high, at least in some of the major stock averages.

Until the character of corrections (larger size, faster rate of decline, greater time duration) in this bull market, change, I don't feel there is great CONFIRMING evidence that a top has complete.  A failure of last week's low to hold would be a significant sign in my mind for a possible change in character.

Currently, I would suggest that the appropriate strategy for index trading here is to be long currently, but with a stop below last week's low, and to establish short at a close below last week's low for those who look to catch the major downswings as well.

vix 2013-2014 bollinger band analysis
Click on Chart to Enlarge

As has occurred so frequently over the last 2 years at the significant buying opportunities in the indexes, we have seen a typical expansion in the VIX relative to the longer term bollinger bands, now followed by a sharp move back into the bands.  In my opinion from this analytical standpoint another move in the VIX above the current spike would not fit the typical relation of the recent corrections and associated VIX activity.  So again, from a little different angle, last week's low appears important.  And looking out further than that, if there were another spike in the VIX and new buy signal, if it were followed yet again by another higher breakout in the VIX, I believe it could lead to a sharp breakdown in stocks an spike in the VIX.  That is looking out kind of far, but is preparing for contingencies in market action.

One relationship that has occurred at most corrective bottoms in the last couple years is a VIX:VXV ratio closing above 1.0 during the correction.  This did not occur this time around - but that is the only potentially significant disimilarity that I see at this point.

Other measures of intermediate term extremes in selling all seem to have reached the levels that have corresponded to corrective lows over the lat 2 years.  Total put/call ratio, McClellan oscillator, TRIN are notable examples.

I am basically discussing this here to build a case that given the current signals, IF the current bull market is to continue, THEN a corrective low is likely in place already.  That would make any move to lower corrective lows a very notable occurrence, and likely warning of significantly larger price declines in store (in my opinion).


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