Tech stocks have pushed higher the last week, but to me it appear to be an exhaustion type move, as evidenced by the following chart.
Click on Chart to Enlarge
This chart is XLK on a daily time frame. It is a tech stock ETF. What I have drawn is an upper channel line which connects the previous price peaks during the uptrend. A touch or break of such a trend channel line is often an exhaustion point for a move.
Couple that with the fact that the recent gap up from last Friday was the largest gap up in a couple years, it smacks of an exhaustion gap from a charting standpoint. Is that gap up on the earnings news almost 2 years into a 65% run up in prices a "smart money" gap? Or is it a "dumb money" type gap after the news is out? I think more of the later.
Click on Chart to Enlarge
This chart is a weekly chart of the Dow futures contract with associated Commitment of Traders data below the price chart. When analyzing the CoT data, there are a few common patterns that show up at reversal points on the chart.
One of the key points in CoT is always extreme positioning between the market participants and their historical range of contracts held. We have seen extremes in the chart for sure as it pushed to new highs in 2016. Other index contracts are hitting or near extremes on this rally also.
However, an even more notable signal than the extreme position is a "blow off" pattern in the futures where the "smart money" commercial traders hold an extreme position, but then price continues to rise and there is a break from their pattern of selling on price rises. Instead we see the commercial group decreasing their short position substantially as prices rise. That indicates a typical finale to a rally where the speculators "won". They cashed out into a strongly rising prices.
That is what we are seeing on this Dow chart. The commercial pattern of selling into the price rise was standard until October began. Then for the last month, price has risen very sharply while commercials have bought and large specs have sold.
Once the run is done, this could result in a substantial decline, even a bear market.
Not all of the index contracts are displaying the same pattern, but this one has a classic bull market peak type of look to it, and so I am paying attention.
On a shorter term note, I back tested SPY data looking at opening prices outside the upper bollinger band on a gap up as is occurring today. I also added various other conditions which are currently present in the market to gauge the short term expectation.
The only real significant finding is for the same day. There is about 2 to 4 times greater MAX loss than MAX gain on the day of this finding. The forward returns after the close of the signal day were flat to typical.
So given this tendency for a close below the open, and some of the exhaustion signals occurring, I wonder if the FOMC news will lead to a sell the news response here.
We will see.
Pete
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