Market Waking Up Now

Last post I noted how the market was lulling the crowd to sleep.  Now we obviously see it waking up.  But what direction will it go longer term?

On 6/23/15 the dual time frame VIX bollinger band set up which I have showed many times gave a sell set up.  But now a few days later the set up is reversed back to a buy set-up.  So short term I would guess stocks have a couple more days of lower lows, and then prices attempt to rebound.

Beyond that, I don't have a firm opinion at this point.  With the non-confirmation of the SP500, Dow 30, and NYSE not making new highs while the Nasdaq and Russell 2000 did, it seems sensible that stocks will experience an outright correction off the recent highs.

Today's gap down broke many trendlines with a significant gap.  That makes it hard to get in the new trend at a "good" price.  But I would say that that also increased the probability that the new trend is going to be substantial.  So if I had to pick here, I would pick that the trend will be down out of this consolidation.

However, I will alert you of buy set-ups from my trading algorithm as they unfold here on the way down.  If you are short, you could use them as scale out signals.  If you are awaiting a long opportunity, you could use it to get better timing on a potential bottom inflection point.


Pete

Market Lulling The Crowd Before a Trending Move

For the last 4 months, the SP 500 has oscillated about 1.5% above and below its highest point last year on 12/29/14.  

That is an extremely tight range and is likely wearing down both camps by clearing out nearby stops, filling upside breakout orders only to reverse and again clear out nearby sell stops.  So understand what is happening in terms of market dynamics.  Weak holders are being cleared out, and then the big money will be left to drive a new strong trend.

Long consolidations precede major directional moves.  That is a truism of markets.  So we will see a major directional move after this is complete.

I think it is sensible to continue to buy upside breakouts but to exit on classic candlestick reversal with bearish divergence.  

Just stay alert here with underlying strategies for both upside or downside potential breakouts in mind.  If the market shoots up, will you participate?  What type of order and stop will you use to get in and protect the position?

If stocks break lower what signal would lead to a short entry?  What level would the protective stop be at?  What order type is used for entry?

I still view this current upwards drift as a possible ending diagonal in stocks which would likely conclude with a little push higher and a final top.  But if that is not what happens, will I miss a potential big move up to follow this consolidation?  Those are questions that need solidified answers before the action unfolds.

Pete

1 Month Low Signal

After reviewing past similar signals to today's bottom reversal signal in the S&P 500 there is not enough of a positive forward skew for me to suggest speculating on the long side at this point. 

During the 2009-2015 bull market these signals did produce a positive skew in forward return compared to random.  These are the stats for the current bull market.

The first 3 days after the signal showed only a tiny positive skew in max gain versus max loss.

The first 2 weeks after the signal showed a ~1.5:1 max gain to max loss.

At 1 and 2 months out from the signal, the max gain was 1.7 and 1.8 times the max loss, respectively.  Given that some signals that my system flags may show or 3 times greater max gains than losses in the trade direction, there are much better opportunities to wait for.

At this point, I think a probable scenario would be for a 1-3 day rebound followed by a move to new corrective lows.  Most signals that failed to produce substantial rallies had 3 day or less rallies before topping.

Such a rebound may back test the underside of the lower boundary of the rising wedge.

These are just ideas, without a clear cut trading indication here.


Pete

Possible Bottom Reversal Day Today In Stocks - More to Follow on This

Today is likely to be flagged as a bottom reversal day in my bottom spotting system.

It is both a nice spot for a bullish reversal on the break of a trendline which ends up being a false break, but also is in a risky spot for unprotected longs with daily and weekly technical indicators down trending and the lower boundary of a rising wedge being broken.  Basically if today's low is broken to the downside, it could be a significant downside washout ahead.

I would like to do some signal performance testing on this later tonight and offer further insight for trading opportunities here.

Pete

Commitment of Traders Update - Stocks and Crude Oil

I have been following the CoT data on a number of markets closely for several years.  I spend most of my analysis effort on US stocks in general, and that is no different for CoT data.

Recently as the US stocks have traded in very tight range for months, there have not been major extremes in positioning long or short.  Currently as prices have recently made new all time highs, there has not been any major sell signal or accumulation of shorts by the "smart money". 

Generally the pattern is that smart money will sell heavily at the highs, sometimes with some divergence as is typical in markets, and sometimes after forced short covering.  But at our recent highs, the situation is either that they are NOT ready to sell en masse yet, OR there is a massive divergence period which would imply that the bull market is ending.  As always price action is the final answer.

I did want to alert readers here to what could be a very telling pattern and trade set-up in crude oil.  Coming off the March low in crude there has been a massive short-covering rally in crude oil.  The underlying position data is interesting and probably should be alarming for the bulls.  There has been NO increase in long speculative positions in the entire 49% rally off the lows.  In aggregate ALL the buying has been short covering.  This is occurring in a downtrend.  Short-covering in a downtrend with no new interest on the long side is NOT a healthy bull pattern.  And yet it gets WORSE for the bulls........

 At the March low the large speculators - which normally are most long at TOPS and which normally buy increasingly as price rises in an uptrend - had actually bought on the way down from November to March, to the point that their long position was basically equal to their all time high in net long at the June 2014 top before the massive decline.

And as already stated, they have not increased their long positions at all during the rally since March.  So here is the question........Is this because the CAN'T increase their long position?  There is a limit to the amount of funds they have, and certainly historical numbers can give floors and ceilings to the probable max capacity of $ deployment available. 

If the answer is that they can't buy more, then once this rally fizzles out, crude will certainly plummet again before the bear market ends.  The seasonal trends in crude are positive into the end of summer.  So it may be that oil holds up or sideways for a while before that happens.

The alternate possibility is that the funds have a "stash" of cash that they have yet to commit to the long side of the market, but given the way these things work, that seems like a very unlikely possibility.

So my suggestion here is to take all crude oil sell signals that develop according to your system or technique moving forward from this point.  I don't know how easy it will be to catch a top of this rally or if it already occurred.  But it may take a few attempts to get a position that sticks for a major decline.  I plan to speculate with put options at key points or signals moving forward.

Pete

VIX and Bollinger Bands Suggest Stocks May Be Forming a Tradeable Bottom Here

Click on Chart to Enlarge

I have shown this chart set-up several times in recent months, highlighting times when the short-term standard deviation of the VIX is  excessive relative the the longer term.  In this case we have the VIX outside its longer term deviation bands and its upper Bollinger band has risen above the upper longer term band as well which implies that the short term volatility movements are extreme relative to the trend.  This set-up has given many timely signals of impending reversal higher in stocks.  I don't have great reason to believe it won't happen again here.

There is also a hourly MACD bullish divergence on SPY at this morning's lows, suggesting that stocks may be set to move higher next week (and possibly beyond).

So I simply look for this set up relative to support/resistance and moving trend.  This alerts me that a bullish reversal day (new low in a trend with a close at least above mid point of the range) may be a legitimate buy point with a stop just below the reversal day.  Depending on how the market ends up today, this set-up may be in effect.



Pete

Some Stocks For Bullish Set-Ups

Here is a quick list of some stocks I have been tracking for a while and that seem like they are ripe for action:

NOV
AMAT
GPS
APA
TCK
ADSK
WDC

These are long side set-ups and it particularly seems like oil related stock are setting up bullish patterns.  I already took a position in NOV. 

In any case, if you know what to look for it a nice bullish pattern like these, I feel like they are offering nice set-ups for you to look at.

Pete