Put/Call Ratio Extreme Suggests That Rebound Attempt Is Imminent - 3-28-18

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The above snip is the result of a scan looking at extreme put/call ratios by a few different measures while occurring in the context of a bull market moving average configuration.  Other conditions were that daily and weekly MACD were pointing down and SPY closed down 1% or more on the day.

That paired the list down to a very bullish subset.

SPY only declined about 1% or a little less this morning, but from short term timing cycles and non-confirmation with the QQQ fund, as well as the above noted study, it seems that the downside could be muted for the coming days. 

I exited the rest of QQQ puts I held.

I entered an April 4th SPY 258 strike call with a limit order of 13.50 to exit before expiration if it occurs, but otherwise exit at expiration next week.


Pete

QQQ Low Volume Warns of A Coming Correction in Stocks

QQQ Volume is Relatively Low Indicating Probability of  Correction Soon

The chart above is a daily QQQ volume chart with a moving average and standard deviation band.  In this case we see the moving average is about as low as it has been in the last 2 years.  The previous times it hit this low level were right near intermediate term peaks in stocks.  Also note that the moving average is low relative to the standard deviation bands.

This would imply that the power of this rally is fading.  I believe that CoT data suggests a non sustainable rally here as well.  I am not saying that stocks could not move to new highs, but given some of the factors I have noted recently, it appears that at least a sizable short term move to the downside will occur before prices could reach to new highs.


Pete

Short Term, Hourly Chart Sell Signal QQQ and SPY

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Today QQQ and SPY both gave hourly chart sell signals below the recent highs as suggested in the bearish trade set up post from a couple days ago.

So if you look at QQQ and were to short it at the current price with a stop a penny above Monday's high, there would be about 2.3:1 reward to risk if using the 3/26/15 low as a profit target to exit the short after entry.

For further confirmation a break of today/Tuesday's low would be further indication that a multi day sell off is in force.  Using the same stop but entering at Tuesday's low, would decrease the reward to risk to closer to 1.25:1.  Either way, I would estimate a short here to be a reasonable trade given the overall set-up and market context.  But understand that the profit target is not necessarily huge.  I do think there is reasonable chance of a sell off to near the February lows, but we will need to fine tune the exit as we see any decline unfold.  Stop movement and watching for the development of bullish divergence on a further decline would be the strategy to employ to lock in potential profits on a short and wait for the appropriate market feedback for exiting.

Pete

QQQ Short Trade Set Up - Price Logic and Bearish Divergence

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The chart shown here is an hourly of QQQ which is the Nasdaq 100 ETF.  For those who have followed this blog for a while and understand some concepts related to price logic and divergences, this should be an interesting pattern to watch unfold.  There is an obvious bearish set up here to short or inverse the Nasdaq if an appropriate signal occurs beneath point 0.

So notice the the move from -1 to 0 was retraced in less time than it took to form.  That indicates a probable short term (at least) pattern completion and the beginning of a new downward pattern in the market of some degree.  Now it is clear that the price action upwards from point X has occurred more slowly and with clear corrective/overlapping swings, suggesting that the move up from point X is probably a correction against a still developing larger downward price trend.

Since the smallest "pattern" that can develop is a 3 wave move, and point X has not been breached, it would seem likely that the next move down is likely to move below point X.  The other possibility from a pattern perspective is that a sideways/triangular pattern is forming within the bounds of points 0 and X.  In that case price would not be expected to break point X.

Now the study below the chart is a money flow index which is basically an RSI of both price and volume combined.  So it tends to be a leading indicator more so that price only based studies like MACD or RSI, etc.  Currently the MFI is displaying a bearish divergence at today's new high for the recent rally from point X.  Now the MFI is not at an extreme level, so it is arguably to significant.  But the other reasonable interpretation is that the current up move is very weak and this is an imminent sign of topping and another directional downward thrust in price.

Analysis is easy.

Consistently making objective buys, stop adjustments, and sells is much more challenging.

So for the trader here this pattern creates a nice set up to short the market or make a stop adjustment on an open short position to above point C if a sell signal is generated below point 0.  Another speculative play here would be to buy put options on the indexes here.  An ATM put option with April 24 expiration would have a very reasonable 100%+ profit potential if prices decline to point X before expiration.

If you have questions or ideas on managing open trades here or entering new positions, comment and we can proceed with further analysis and planning.

Pete

Price Logic Confirms Probable New Downward Pattern Off The Recent Highs In Stocks

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The hourly chart of QQQ above shows that the current decline off of the 3/20/15 high is occurring rapidly and has retraced the recent rally up from 3/13 in less time than the rally took to form.  That is reasonable price logic confirmation that a larger phase of market action is ending and a new (at least short term) downward pattern has begun.  If a major top is not in place, then the pattern may not result in much further downside.  But given some of the things I've shown here over the last several weeks, the overall context seems ripe for a market high.

I would not advise an exit of short positions here until some bullish divergence develops.  And even then, a partial exit may be wise with prospects of greater gains.

Given the price is now at a 1 month low, my bottom spotting algorithm with begin to flag certain 1 day reversal patterns as potential bottoms.  Those would be my preferred exit signals here - waiting for at least the shortest term signal, a "1 month low" to get picked up by my system.

Also given the data point registered on Monday, please review the stats in my December post highlighting the put/call ratio sell warning.  

Pete

QQQ Hourly MACD Bullish Divergence - Early Week Rally Probable Next Week

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This is an hourly chart of QQQ.  Evident on the MACD below the chart is a pronounced bullish divergence between the MACD and price.  Price made a lower low, and the MACD made a higher low and reversed modestly higher today.  This is not enough to trigger a buy signal in my trading algorithm.  But it won't necessarily catch every turn, especially on a short term time frame.

Its seem likely that price could form a short term rebound of at least part of a day, and maybe about 2 days.  Now there is certainly potential even for new highs, but the weekly chart appears solidly bearish at this point, so I don't necessarily count on new high to create the classic multiple time frame bearish divergence which I mentioned in my stock market top video last week.

At this point, my expectation is for a brief rebound from these levels, followed by a move to yet lower lows for this decline.  I won't offer any more expectation than that currently for the short term trading time frame.

On an investment point for stocks, it seems like the only reason stocks have held up is "free money" that has continually been shunted into stocks and stock futures in the last couple years of quantitative easing.  So if long stocks, the February low would be my suggested stop loss point to exit investments.  On could certainly rationalize just remaining long stocks with a stop at that support level or with some % based trailing stop.  That would allow continued appreciation.

Pete

Low Volume in QQQ Suggests Rally Will Falter

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The chart above is the volume of QQQ with some moving averages and standard deviation bands.  The 8 day average of the volume is the lowest since August 2013, at which point it went very slightly lower.  The next lowest reading in between came at the beginning of Sept 2014 as stocks pushed towards the highs and then corrected sharply into October 2014.

In general waning volume on a rally is a bearish leading indicator meaning that it will occur in advance of a top in price.  So my interpretation here is that near multi year lows in volume as the other indexes are trying to make breakouts of the December highs (and in the NYSE highs back in July 2014), is probably not a good sign for bulls.

I have analyzed current Commitment of Traders data for the major stock indexes, and a major selling surge came in in mid December.  There is not the same level of extreme in selling currently.  That could be interpreted as a bearish divergence, but it also could be interpreted as the smart money just not being extreme, and so there may be room to move higher before they create another extreme selling effort.

Shorter term measures of the total put/call volume ratio and equity put/call volume ratio came towards the lower end of their recent range this past week.  And so in conjunction with market volume waning, it appears that some complacency is setting in for this rally.

Given stocks are at new all time highs, a trailing stop behind the market may be the way to proceed from here, but another possibility is to exit part of long positions at these levels, with the idea to consider rebuying on the next correction.

Pete

Stock Market Update

Based on my most recent post mentioning US stocks and the elevated VIX/VXV ratio, the 1-16-15 reversal was a potentially significant bottom reversal.  Given the overall bullish trend, it would make sense to be long with a stop below the Jan 16th low.  However, given the position of elevated volatility and a multiday attempted rally so far, a break below the Jan 16th low may lead to significant continuation to the downside.

Click on Chart to Enlarge

This chart of QQQ has the general appearance of a descending triangle, which most often is a bearish chart pattern, but not confirmed until a close below the lower boundary line.

There is a downward tilt to the pattern that makes it possibly a falling wedge, which is typically a bullish pattern in an uptrend.  So the key here from a charting perspective is whether the top boundary or bottom boundary trendline is broken on a closing basis.  The assumption at that point will be that the trend will continue towards the next support or resistance area.  In this case that would be the all time highs as resistance, and the October lows as support.

Pete

Bearish Engulfing Pattern in QQQ Could Mark a Top

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Today both the QQQ and SPY formed bearish engulfing candlestick patterns.  These are top reversal patterns, and should be considered significant if there is a technical overbought condition, a failed breakout on a chart, or a bearish divergence.

Currently, there is a triple time frame (weekly, daily, hourly, and even 15 min) bearish divergence on the MACD of the QQQ chart with other massive divergences in breadth, volatility, and put/call ratios.

So my current suggestion here is that you completely exit all index long positions on the US stock indexes.  This has the technical and sentiment back drop for a potential major high, and we are entering the seasonally weak period of Sept/Oct, which should just be an additional factor for the trader to understand here in terms of market dynamics.

Short positions could be established on a break of today's low, with an initial profit target of 1:1 with a stop above today's high.  So since this has the possibility for a big move down, you only exit 1/3 or 1/2 the position at the initial profit target.  And another option is to just hold the whole position with a stop adjustment mechanism and allow the market to go however far it will until we get a legitimate bottom reversal signal.  The pros to the first strategy is a higher win or breakeven rate, but a probably lower expectation given the quality of the set-up.  The second scenario likely has a lower win rate but a higher overall profit expectation in my opinion.

Multiple Time Frame MACD Bearish Divergence on QQQ Suggesting a Possible Bull Market Top

Multiple Time Frame MACD Bearish Divergence on QQQ Suggesting a Possible Bull Market Top

I have published a new technical analysis video covering the Nasdaq, VXN, banking stocks, and housing stocks in depth.  The trend channel and MACD technical analysis as well as broad scale index and sector non-confirmations suggest to me that a major top is indeed in process here in stocks.  That is my opinion anyway from an analysis standpoint.  As always, translating analysis into objective trading is another level, so simply use this info within an objective trading context.

Futures this evening are up, and it will be interesting to see this week whether there is a weekly top reversal candlestick in QQQ.  A gap up tomorrow/Monday followed by a significantly lower close on the week, would fit with the typical topping price patterns seen in markets.  If prices on QQQ this week close below last week's open @ 95.27 after a gap up tomorrow, that would be a weekly bearish engulfing pattern, and that would be a significant price bar given the technical analysis in my opinion.

97.94-98.35 would be the typical topping price range for QQQ given the hourly chart technical analysis in my opinion.  I personally have an order to purchase deep OTM puts on the SPY etf to take advantage of a possible top and sharp decline into the seasonally weak period of Sept-Oct in stocks.

Dual Time Frame Volatility Analysis

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I have shown charts like this in pats videos to The Trader's Crystal Ball mailing list, but I thought I would share this one today with everybody.

This chart shows the VXN which is like the VIX but for the Nasdaq 100 stocks.  And the specific set-up here is that the dark blue standard bollinger bands have expanded so that the top band is above the 126 day 2.0 standard deviation bollinger band.

What does this mean??  It basically is just telling us that the short term volatility is far from the average longer term volatility.  And this is a condition that often precedes significant lows in stock prices.

We did not see this happen in the VIX on this pullback, but the chart above of VXN very clearly shows the spike in the VXN and now a reversal back inside the bands which has corresponded with a hammer type candlestick in QQQ prices on Tuesday.

So for now, it looks like a significant low may be in place in QQQ.  My suspiscion is that we will see a significant rally, but this one might fail to make a new high in QQQ, and then we see a larger scale correction.

For now I am bullish as long as prices are closing above Tuesday's low in QQQ.

QQQ Short Trade Set-Up

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QQQ (Nasdaq 100) is setting up for a nice short-selling opportunity.  The move down off the Sept high made a minor shift of the price logic to down.  Now the correction back toward the highs has been slow relative to the decline keeping the price logic down.

The chart above highlights a probable rally high area in which technical sell signals could be taken for entry with a minimum target below the recent Sept. lows.

The set-up is very similar to what occurred at the spring high this year which I highlighted in this post and  in this follow-up post as the entry was completed.

In the current set-up, wait for 30 min or 60 min bearish divergence to show up on the technicals.  Then wait for a sell signal for entry.  The stop must be above the rally high.  If the high is broken the pattern is invalid and the rally may be very likely to continue.  For exit, half could be sold if the recent Sept low is broken.  Then exit the other half on a technical buy signal (i.e. MACD bullish cross from below the zero line).