Market Update

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The daily MACD has turned down on the indexes now as shown in the chart above.  However, so far this move down is much slower than the move up off the late Nov low.  So I think the odds favor the market turning up here, similar to mid April.  The seasonality is positive and there is no confirmation of a new downward pattern yet, so the odds are that the market drifts up over the near term.

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The 10 day advance-decline average did not hit quite the extreme level on this last little rally, for a top of a leg up.  The average crossed back below zero which is usually a decent continuation sign for a downward move after an extreme reading, but it may be a whipsaw here.

The equity put/call ratio was above 0.90 the last 2 days, which is a little odd given the mainly positive bias Friday.  From a contrarian standpoint, it would favor at least a day or 2 bounce from these levels.  Longer term I don't think it is very significant.

Again the 1226 SPX level is a significant harmonic level.  If the market stays under that level (which it did close back under after moving above it Friday) it would favor continued weakness on that front.

Probably the most reasonable expectation is for a somewhat lackluster and slightly positive market into the New Year time frame.  Then likely some selling afterwards would be my guess.

[As a side note, I will be making some significant changes to the blog for 2012.  I will make a more detailed post going over those as I make them.]

Equity Put/Call Averages and US Dollar Index

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The chart above I have shown several times in the past. It is simply a 21 and 34 day moving average of the daily equity only put/call ratio which is a good contrary indicator to follow. The way I use the chart above is pretty simple. When the shorter-term average crosses above the longer average and they point upward, that could be thought of as a "sell signal" for the market. Almost always I have found that this particular set-up occurs after a intermediate term high has been made. That is it tends to lag price a bit. That makes sense because the equity only options have a solid history of being reactionary rather than precautionary.

As of Thursday's data, the averages had crossed and both pointed up. They have flattened back out a bit the last 2 sessions. Based on some other data it seems that a reasonable expectation would be for at least another marginal push to new highs before an intermediate term top. Personally I have a rule of thumb that I don't try to catch "the last wave" so to speak when the table is set in the opposite direction. However, I do tend to take every opportunity at catching the first move in a new trend because they tend to be explosive with very high reward/risk ratios.

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This chart is a weekly chart of the US Dollar index as of last week's close. I have circled a few similar candlesticks in past data. It is a type of hammer candlestick with a long tail and a small real body that closes in the upper quarter of the range. It is not the textbook hammer candle because of the little upper shadow, but with a close above the open in the upper part of the range, it probably makes little difference. I like these candles on weekly charts for attempting trend reversal trades (particularly bottoming trades).

The MACD above is about as oversold as it has ever gotten, and is starting to flatten out indicating waning momentum. The EUO trade from Friday is a bullish dollar fund and has a similar nice hammer candle. While I realize most people following the blog may not be too into currencies, the valuation of the dollar means everything in terms of the mending of our economy and reduction of debt.

Maintain the current stop on EUO until there is some sense of direction this week. Despite the solid gains in stocks today, the dollar gained. This may be a hint at underlying buying interest in the dollar, so it would not be surprising to see further gains this week without a substantial retracement of the move off last week's low.

More Objective Signs That Price is Stretched to the Upside

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I am posting several charts tonight, and they have notes on them, so I won't repeat those notes in the text here. In recent weeks I have been expecting the market to form a top soon. As the S&P 500 pushes toward the 880 level, the scenario I proposed from a pattern standpoint looks less likely. However, I feel it is important to remain objective and stick to quantifiable facts for determining likely market direction. From the broad spectrum of indicators out there that I follow, the indicators at optimistic extremes are growing, with a notable jump today despite muted market movement.

The chart above is the equity put/call ratio with 21 and 34 day moving averages in blue and red. Again, read the notes on the chart for detail. I would like to see the averages turn up in the next couple weeks to confirm a bearish outlook.

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The chart above is the sum of the volume of SDS, QID, and DXD which are the 2x inverse ETF's for the S&P, Nasdaq, and Dow. I have discussed this indicator before and it is used in the same way as put/call ratios. You can see from the chart that trading volume in these funds has dropped considerably the last few weeks and the recent levels are below the 2 standard deviation band. This is interpretted as complacency and lack of leveraged hedging which is typically bearish in the intermediate term.

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This chart is the VIX/VXV ratio with bollinger bands overlaid. Read the notes on the chart for detail. This indicator has been perfect so far this bear market in that it has given a signal at every important top, and every signal has worked like a charm. I am not implying that any indicator will work all the time, but as I always say, if it doesn't end up working this time, then maybe the market is changing character (aka a bull market).

I didn't post the chart of the VIX itself, but the VIX closed below its lower bollinger band Thursday. This does not happen very often. It has been an outstanding contrary signal during this bear market, but it has only happened 3 times before this time. The dates were 12/21/07, 2/26/08, and 5/15/08. All were basically 1 day from a significant high and great selling opportunity. Again, if the VIX falls below Thursday's low or closes below the bollinger band again, then that would be a warning that maybe things are changing.

The contrarian set-up here seems to be on par with past intermediate highs in this bear market, so the next couple weeks (even few days) should be important to watch for price confirmation. If the markets don't drop a good bit by next week I will be backing off on trying to pick this top for blog trades and will focus mainly on bullish trades if the market remains above the 20 day moving average.

Pete