Today the CBOE total put/call ratio spiked to 1.53 which is the highest it has been in over 3 years. Also the VIX is nearing levels last seen in the very large correction in 2011 where SPY declined 21% in 5 months from top to bottom.
So what is the significance of this reading? Well for those who follow this blog closely, you know that I always point out the importance of divergences occurring at market turns. And when we see a new extreme like we are in the put/call ratio, that is telling us that "fear" is high, but the fact that there is no divergence present, it indicates that the correction has NOT made a low.
So from this point, we may be close to a rally attempt after a big downer like this, but in my opinion, the rally will be a shorting opportunity on at least an hourly time frame basis.
Given the larger pattern at play here (possibly an ending diagonal in the Dow 30), prices may decline relatively sharply all the way back to the Oct 2013 low. That would be another 10% lower in the Dow 30. So just be aware here that if a bull market top is in place, the whole character of "oversold" will take on a new meaning over the coming weeks.
I will continue to update here at potentially important market turns and try to offer contingency plans at each event.
Pete
Monday, October 13, 2014
Expanding Bias Confirmed in This Decline - Look Out Below?
As of this mornings trade in SPY, it appears that the correction is developing with an expanding bias as suggested in the last post. The ends of expanding downside patterns can really end with sharp downdrafts. At this stage I am more or less expecting that.
The break of the August low today is a notable chart occurrence and may lead to some buying and an attempted reversal. I will post if there are legitimate reversal attempts according to my methods. At this point hourly time frame momentum and MACD, etc are very oversold, but they are not showing any divergence. So I would advise against believing that today is a bottom day even if a reversal attempt occurs. The odds just consistently favor divergence to appear at the significant market turns.
For now if you look at the weekly MACD and stochastics of the SPY and other indexes you can see that the indicator is opened up with a downside configuration. So this means that the odds are for the larger trend to be down. From a purely technical standpoint, I would not personally even consider a long trade until there is hourly time frame bullish divergence on the technicals while the weekly is down. Even better would be for the daily MACD to end up oversold with divergence.
From a multiple time frame stochastics analysis on the weekly chart of SPY, the fast line is just getting to the oversold area. So we could be alert for this week or next for a daily time frame stochastics divergence to develop while the weekly is near oversold. We are not there yet since the daily is at a new low in the stochastics for this correction. So again, waiting for bullish divergence to develop would be advisable here before considering long.
As another guide for the trader here, read this link showing what the last 2 bear markets were like in terms of price and time duration of legs down in a bear market. The typical bull market correction is about 1-3 months and averages about 10-11% decline. A bear market leg down is on average larger and longer than that. So what you want to do is to track the developing price action (and sentiment of course) and constantly compare......"does this look more like a bull market correction, or a bear market decline?"
In my opinion the SET-UP looks complete for a bull market top to be in place, with broad spread weekly time frame divergences, etc. However, it is early to make comparisons beyond that.
The break of the August low today is a notable chart occurrence and may lead to some buying and an attempted reversal. I will post if there are legitimate reversal attempts according to my methods. At this point hourly time frame momentum and MACD, etc are very oversold, but they are not showing any divergence. So I would advise against believing that today is a bottom day even if a reversal attempt occurs. The odds just consistently favor divergence to appear at the significant market turns.
For now if you look at the weekly MACD and stochastics of the SPY and other indexes you can see that the indicator is opened up with a downside configuration. So this means that the odds are for the larger trend to be down. From a purely technical standpoint, I would not personally even consider a long trade until there is hourly time frame bullish divergence on the technicals while the weekly is down. Even better would be for the daily MACD to end up oversold with divergence.
From a multiple time frame stochastics analysis on the weekly chart of SPY, the fast line is just getting to the oversold area. So we could be alert for this week or next for a daily time frame stochastics divergence to develop while the weekly is near oversold. We are not there yet since the daily is at a new low in the stochastics for this correction. So again, waiting for bullish divergence to develop would be advisable here before considering long.
As another guide for the trader here, read this link showing what the last 2 bear markets were like in terms of price and time duration of legs down in a bear market. The typical bull market correction is about 1-3 months and averages about 10-11% decline. A bear market leg down is on average larger and longer than that. So what you want to do is to track the developing price action (and sentiment of course) and constantly compare......"does this look more like a bull market correction, or a bear market decline?"
In my opinion the SET-UP looks complete for a bull market top to be in place, with broad spread weekly time frame divergences, etc. However, it is early to make comparisons beyond that.
Friday, October 10, 2014
Expanding Pattern Off the Highs Suggests a Further Sharp Stock Decline Coming The Next 1-2 Weeks
Click Chart to Enlarge
This chart is a daily chart of SPY, the S&P 500 tracking ETF. What I am showing here is that the decline thus far off the high appears to be occurring with an expanding bias and we have seen increasing volatility. Based upon this, if the next move down continues in expanding fashion, and is 1.272-1.618 times the size of what I have labeled as the "c?" move, then that would project down to the little rectangle box around 185-187 on SPY. Based upon the time of the recent smaller movements in the pattern, I think it would take in the 4-10 day range for that to occur.
This would fit with the idea of the Russell 2000 completing a double top formation and breaking support and dropping sharply as I discussed a couple times over the last week or so.
Now at this point we are obviously seeing some extreme selling and should be alert for a bottom reversal process. Yesterday the VIX/VXV ratio closed above 1.0 for the first time during this decline. This occurrence has preceded the significant market lows over the past few years, often preceding the low by a day or 2. So while I believe both the SPY and the IWM chart patterns have significant bearish implication and could break the character of the recent corrections, I am alert here for more bottom attempts and will do my best to post here in timely fashion when prices do show high quality bottom reversal attempts.
As a side note, if SPY moves below 190.55 by Oct 31st, then it would retrace the last leg up from Aug-Sept, in less time than it took to form, and this would indicate a likely larger shift in market psychology to the downside.
So as the market develops here, especially if volatility continues to expand, if you have any questions on analysis or trade planning, feel free to start a comment dialogue below and I will try to assist you. I feel that in high volatility times where rebounds can be very sharp, it is wise to exit short positions on breaks of prior key chart support that may lead to rebounds. Also, as corrections hit new lows with underlying bullish divergence, my trading experience is that exiting portions of the trade into that type of price weakness will often produce the most favorable exit price.
The specifics obviously need to be planned well, but in terms of the general approach, that is what I would suggest in theory here.
Thursday, October 9, 2014
Beware of Another New Low For This Correction
Interestingly as my last post had mentioned, if we saw a new low for the correction and another buy signal, followed by yet another new low and high VIX spike, I think it would bode poorly for stock prices moving forward.
At this point we did see an initial new low followed by a major reversal higher and a follow through type day yesterday. Now here we are with immediate reversal in prices back towards the lows of the recent correction. So, again I suggest here that continued "nudges" lower will likely be indications that force is gathering behind a crack in the dam. And it could break and lead to flood of selling. Specifically refer back to my last post on the Russell 2000 support level and double top projection.
I again suggest that a short on a break of yesterday's low with a stop above the intervening high could be a profitable play with significant downside expectation.
Pete
At this point we did see an initial new low followed by a major reversal higher and a follow through type day yesterday. Now here we are with immediate reversal in prices back towards the lows of the recent correction. So, again I suggest here that continued "nudges" lower will likely be indications that force is gathering behind a crack in the dam. And it could break and lead to flood of selling. Specifically refer back to my last post on the Russell 2000 support level and double top projection.
I again suggest that a short on a break of yesterday's low with a stop above the intervening high could be a profitable play with significant downside expectation.
Pete
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.
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).
Pete
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.
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).
Pete
Thursday, October 2, 2014
Today's Bottom Reversal Attempt
Today stocks put in a bottom reversal attempt. All the key factors are in place based upon my algorithm, so this could be a legitimate time to make a trend continuation buy. However, the position would need protected with a sell stop below today's low.
This is a shorter term signal in that price is only at a 1 month low. And these have higher failure rates than similar longer term signals.
Now a subtle factor here is that the Russell 2000, IWM, did break below recent support as suggested. However, price reversed back to the upside, and it closed substantially higher, where the other indexes were flat. To me this illustrates the flush out of stops and then trade algorithms kicking into buy mode just below support, which occurred on the Russell but not on the other indexes. This being the case, it seems to be a hint that the buying is not broad spread legit market interest, rather it may be simply a reflection of the price/chart structure of the Russell 2000 index. So for now it looks good. However, I have seen this type of trade action before at key chart points. And what I would warn of is that a break of today's low would indicate that all the short term program buying was exhausted and that prices may then fall sharply. A notable comparison may be the August 2011 break of the June 2011 low.
So at this point it may make sense to be flat rather than short. Also, a move above today's high could be a typical buy signal. But a move below today's low could be reversed into a short or used to establish a new short if out of the market.
As a side note, the significant lows over the last year or so have occurred at the 126 day simple moving average. And today's reversal on SPY occurred there as well. So again, based upon that measure of trend, this would be a logical stopping point for this decline. And again at significant market turns, there will be a change of character. So, if prices decline below today's low with several percent follow through, that may reflect a larger scale market turn.
This is my take on things, anyway, and I will track the market more closely here for the blog as volatility is picking up.
Pete
This is a shorter term signal in that price is only at a 1 month low. And these have higher failure rates than similar longer term signals.
Now a subtle factor here is that the Russell 2000, IWM, did break below recent support as suggested. However, price reversed back to the upside, and it closed substantially higher, where the other indexes were flat. To me this illustrates the flush out of stops and then trade algorithms kicking into buy mode just below support, which occurred on the Russell but not on the other indexes. This being the case, it seems to be a hint that the buying is not broad spread legit market interest, rather it may be simply a reflection of the price/chart structure of the Russell 2000 index. So for now it looks good. However, I have seen this type of trade action before at key chart points. And what I would warn of is that a break of today's low would indicate that all the short term program buying was exhausted and that prices may then fall sharply. A notable comparison may be the August 2011 break of the June 2011 low.
So at this point it may make sense to be flat rather than short. Also, a move above today's high could be a typical buy signal. But a move below today's low could be reversed into a short or used to establish a new short if out of the market.
As a side note, the significant lows over the last year or so have occurred at the 126 day simple moving average. And today's reversal on SPY occurred there as well. So again, based upon that measure of trend, this would be a logical stopping point for this decline. And again at significant market turns, there will be a change of character. So, if prices decline below today's low with several percent follow through, that may reflect a larger scale market turn.
This is my take on things, anyway, and I will track the market more closely here for the blog as volatility is picking up.
Pete
Downside Projection Based on IWM (Russell 2000) Chart Pattern
Click on Image to Enlarge
This chart is a daily chart of the IWM etf which tracks the Russell 2000 small cap index. Of note here is a picture perfect double top so far where there was a false breakout and immediate selling. Now prices are at support where I have highlighted with green arrow a price level that has formed a very tight support level at about 108.00 on IWM. These are logical stop points based on price history on the chart. That being the case, there are two things that we can be quite sure of in my opinion.
- Prices will break below those levels in order to run the stops
- Given the magnitude of the pattern, there are likely enough stops and new short orders to create a follow through in price below the support level
How far will it follow through? Obviously only time will tell. But based on a typical double top chart projection, I have placed a projection line down from the support level showing a price projection to 95.50 if the double top completes and meets the equal projection from top to neck line, down from the neck line.
My personal bottom reversal algorithm registered a new extreme in downside panic yesterday. So at this point, we need to see a divergence in real money sentiment to develop concurrent with a price reversal bar in order to consider any long side trade from this point.
So to be clear here, there is currently a long side set-up on par with other high quality set-ups that have occurred in this bull market. So on that basis keep alert for long opportunities. However, given the multiple time frame large scale bearish divergences just completed, the double top in the Russell 2000, and other large scale optimistic extremes registered recently in the bull market, I expect that this correction could unfold differently and more ferociously to the downside. And bottom reversal signal that does occur certainly needs to be protected with a stop. I will update when those signals occur.
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