Initial Rebound Probably Near Complete - 2-14-18

I have looked at the market action of the last couple days a few different ways with the idea of what has happened in the past after sizable sell-offs and then the subsequent rebounds.

Today marks 4 days up in a row, and yet price is still below the mid line of the bollinger bands.  So we a have strong rebound after a sharp sell off with wide standard deviation bands.  I have looked at some slight variations of this theme, looking at VIX bollinger bands, and also at multiple up days with the daily MACD still in a down position, and the results are mild to moderately bearish for 1-2 weeks.

One of the scans that was more bearish was 4 days up in a row with today being up 1% or more.  That had a notable bearish skew in forward returns for a couple weeks based on past similar instances.

I also took some time yesterday to compare the most similar past sell offs which then resulted in a failed rally and lower lows for the move.  And the retracement levels were 50-75% of the preceding sell off.  Today hit 50% on the retracement, so we are already in the lower end of the range where past rallies have peaked. 

In follow up to yesterday's post, the VIX/VXV ratio fell back just below 1.0 today.  The past few comparisons of periods of the ratio spiking above 1.0 with a waterfall decline, show that the ratio dropped back to below 1.0 for a few days here and there near the top of short term rallies as prices worked into a retest of the waterfall lows.  So that is still my best idea here, we are near the short term peak of a rebound which is expected to challenge the recent lows.

The VIX also fell 22% today.  I scanned for times when the VIX fell over 20% in a day, and 9 out of 13 had notably greater MAX losses over the next 5 days than MAX gains.  The few instances that did not have greater declines than gains, basically just kept on going up in the context of the recent bull market.  So this suggest we are very near to a point of recognition - either we have had a spike low and price is likely to march higher, or the rally will quickly fail and the next several sessions (1-2 weeks) will have a markedly bearish skew as stocks retest the lows.

As a side note, but somewhat relevant.  I have stated this before on the blog, but price bars with very long tails, like that from last Friday 2-9-18, have a tendency to have retests of the "tail".  I have observed this personally that very wide range bars with long tails are likely to have price come down and tests the lows.

I have heard Steve Nison of candlestick fame, state that on their studies of candlesticks, a successful  "hammer" candlestick bottom reversal has ~60% chance of having price come back to, or below, the mid point of the tail.  So even if a lower low does NOT occur relative to the reversal bar, there may be ~60% chance of price coming back to the mid point of the tail.  That would be ~258 on SPY.

Now the 2-9-18 candlestick is not really a classic hammer candlestick, but in my estimation, a very long tailed reversal with a close towards the upper end of the range, probably has a similar profile.

So my best idea of the odds from this point are for price to come back down to test that 258 region on SPY within the next 2 weeks.  I would not be surprised to see a rally attempt kick in again from those levels.

As another side note, since much of trading is automated computer algos which incorporate key technical indicators and moving averages, I have noticed tendencies for key moving averages like the 200 day moving average to trigger buying programs.  That did occur on 2-9-18.  And if the average is touched again on a retest of the 2-9-18 low, I think it would be reasonable that the buying kicks in again.  BUT, the more times the average is touched without subsequent gap ups and closes above the open, the more that indicates a possible failed rally. 

THEN, if after a couple rally attempts off the average occur, and price is able to break lower and make a lower low, there may be some freefall below where the programs have spent their buying around the 200 day average, and now price rapidly declines to the area of the next significant prior low/high from the uptrend.

In this case, while there are minor lows and highs during the uptrend over the last year+, the last real basing and significant highs/lows were Sept-Nov 2016 in the 208-220 region on SPY.  That seems like a long shot, but if price chops at the 200 day MA and ultimately fails in coming weeks or months, I would not really be surprised to see those 2016 levels be retested on the next move down.

That is looking a long way ahead, but I think it is important to have some view of the risk present at key break points in a market that has been as one sided and speculatively run up as stocks have been in the recent bullish run. 


Pete

Interesting Overnight Action In Stock Futures

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The short term reversal signal I highlighted Wednesday, did not amount to much.  And yet the set-up remains here that there is divergence in sentiment (also divergence in short term price action/technicals) as prices are making lower lows.

Last night the futures ran down nearly a percent on a headline "negative" news item with US ordering air strikes on Iraq and further conflict news out of Europe.  But here we are in the morning with the overnight losses recovered and a possible hammer candlestick (at least as it appears now).

So stocks look set-up to actually make a small gap up today.  But given the over night lower lows in the futures and yesterday's weak close, I would suggest that we are likely to see price move below yesterday's session low after a gap opening, but with a reasonably good chance that a rally occurs after breaking yesterday's low in the cash session.

This set-up may be most useful for day traders, to try to time a bottom reversal off a 1 or 5 min chart, with the possibility of a rally to close in the upper end of the daily range.

AAPL Chart Analysis - Probable Rebound Attempt Coming

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As I have detailed repeatedly in recent posts, the initial target for AAPL on this move down off the fall high was the low of the previous base around the $525 level.  On Friday we saw a big swoon below that level on high volume followed by a reversal to close above the old base low.

The candlestick was a very high volume and wide ranging hammer type candlestick.  It is not uncommon for an immediate reversal higher after a break of a major low like that.  Understand what is going on in the market at that point......Obviously many standing sell stop orders would be placed below that low based on chart support for the major uptrend.  So the market will typically push through those points where many orders accumulate to "wash out" the stops before reversing.  And obviously there will be some smart money placing orders to buy just under or at where those last ditch stop orders were placed.

So the bulls took control and pushed the stock higher.  Given that the markets are oversold on the daily chart time frame, I think we may see a multi day rally attempt from this point in the general market averages.

But in the case of AAPL, if the stock does rally from here but later fails and breaks to new lows, that would be a major failure for the stock and may lead to a continuation down.  On a short-term note, those wide range hammer candlesticks have about a 60% probability of future prices moving BELOW the mid point of the tail on the hammer even if the reversal holds.  Given the possibility of a significant rebound attempt in the stock, a set up like that can be followed intraday as prices move back into the tail region and then any upside reversal signals can be taken as long trades and often create an outstanding reward/risk opportunity.

When stocks that are heavily owed by institutions (as AAPL obviously is) top out, they can lead to some sloppy price action and volatile, choppy price moves as the topping process unfolds.

The general markets are not yet showing the typical bullish divergence on a daily frame that is typical of most corrective bottoms.  So I think we may be in store for a rally attempt for several days, followed by new corrective lows before a possible more sustained advance or rally attempt.

If you would like to learn more about the market forecasting techniques that I use to consistently pinpoint market turns and trend changes, then fill out the form on the right side of the page to receive my free stock trading video course, or click on the link above.

What Might Happen Today.....

The VIX rose by more than 20% yesterday. When this has happened it has consistently led to short-term market rallies with the peak gain coming around 4 days later.

In looking back at the past instances of these VIX spikes over the last year, I have seen a tendency for the markets to gap up the next day, which occurred today. However, it was far from smooth sailing after the open. In several instances the markets fell hard during the day to actually undercut the prior day's low significantly, and then stage a very large rebound before the close to end up in positive territory.

SPY is appoaching yesterday's low as I type, so we are halfway into that pattern again. I would be more inclined to try to pick a bottom reversal today than on most days. I would follow the 15, 30, and 60 min charts today to look for a hammer reversal type of candlestick occurring on heavy volume after the markets break yesterday's lows.

Also, I have mentioned several times on this blog that filling and reversal at key gaps is a key part of my methodology for selecting good trade entry points at short-term extremes. The large gap up at 79.50ish from the day after the Nov 21 bottom is not yet filled. I would be surprised at this juncture if buying interest does not come in when that gap is filled.

I may suggest re-entry to the recently stopped out BGU trade if things shape up well today.

Pete