Been away for several days but the market is about 4% lower than when I left. That was the day of the Fed meeting of course, and while they went out of their way to state the obvious - poor economy, high unemployment and more accommodation on the way - the market did not take that message as a positive. I'm a bit surprised by the quick reaction but the market had been lingering for some time, waiting for some catalyst to help sellers get going.
While I was gone we saw the Hindenberg Omen flash a sign. I think that term set an internet record for searches on markets! Anyhow, I'm at odds with it. Oh sure the signal is negative, no question. The criteria all met, too. But the last time we saw this was during the market meltdown of 2008, in fact twice that year. Catalysts abound: Bear Stearns, Lehman, housing, AIG, the kitchen sink, you name it. And the Fed behind the curve. What do we have this time around? Potential economic slowdown? Another recession, which is rare indeed. The market is right smack in the middle of a wide range, but threatening to go LOWER before it goes HIGHER. Take a look at the chart below and see if you don't agree.
Is there every nothing to worry about? After all, if we had nothing to fret or fear then we would never be challenged, nor would we have anything to think about. Well, we know that markets tend to climb when it seems everyone is against it or worrying about something that effects market movements. Markets zig when they should zag, and vice versa...often times leaving most too late for the party. Let's face it, nobody throws up a flag to signal to come into the game.
So, what's to worry about? Just about anything imaginable. But we notice a change in character when the market takes news in stride, especially bad news. That's been the case of late. Yesterday's economic numbers were atrocious, and today was not much better. Yet, the markets showed resilience and did not take the news as a sell signal. Certainly something different than recent times and something to watch.
Looking back at the S&P500 and the flash crash the major market index has tested support and resistance three separate times. Typically, the more times a key level of support or resistance is tested the weaker it becomes. I've found that three times is a key number of tests to watch - if a key level is tested three times it is exponentially more likely to break that test. Of course, this has just been an observation of mine over the past several years in my trading so we'll continue to watch and see what happens.
A little recap and a some forecasting here to start the week. Markets ended stronger this week even with some poor retail sales data, but much stronger consumer sentiment numbers. I find the action Thurs/Fri rather constructive and similar to what we had seen in previous months, where the markets had a trend day (Thurs) and then rallied when it seemed there was nothing happening (Fri). That 'could' be a change in character, and thus a chance for us to resume with 'normal' market action. As usual, I want to wait n' see if that occurs...and no, I won't be late to the party.
This being expiration week, my favorite time of the month...we should see some good action back n' forth. See my notes below on the VIX chart. If the VIX gets an early week close under 27.5 then we may see the SPX finally break out of its topside range, circa 1105. I'll be looking this week at some of the usual suspects: metals, coal, oil/energy, fertilizer and tech...especially if the dollar makes its way lower (as that trend may be at hand).
I've been discussing the 105 to 110 SPY range for some time now, and we are again testing the bottom of this range today for the third time. A test of this area look almost inevitable given Friday's weak action and Monday's fakeout upmove on the open. We've been on the right side of this weak market, with repeated Sell signals coming from our multiple Index Option Timer trading systems in May and June. The next big obvious downside target is SPY 100, equivalent to SPX 1000 -- once we break down through 105, we may stop at 102.5 as well, but 100 is the likely spot for a market bounce. Could we see another run up to 107.5 and 110? Certainly, but I maintain that the market is inexorably drawn to test SPY 100 fairly soon.
I want to point out some notable VIX action on Thursday and how it may portray a lessening in volatility going forward. Now, I can't predict the next blowup by country or the next debt crisis, but I can look at clues here to see how people are 'feeling'. In fact, the market could be at a 'weigh station' before moving back down.
So, back to the VIX. What caught my eye? The VIX was down sharply on the session, but the range was narrow. The VIX traded within a two point range all day long, even though it was down more than 20% on the day. As a result, the index left a big gap on the daily chart around the 35 area, which will eventually be filled (gaps are always filled). The question is, sooner or later? A quick fill probably means more downside to come whereas a fill somewhere out into the future could see the market move higher before going lower. In fact, there was a gap left on the VIX chart in Nov 2009 that was not filled for another three months! So, we wait to see what it all means, certainly volatility in the 30% area shows some fear is still out there.
However, some good signs signal some positives are on the way, including a VIX trending lower (needed to see a lower high/lower low pattern on Wed which happened even with the poor close), put/call ratios off the chart on Wed, the return of key leadership groups and then of course there is volume. Thursday was not great volume but decent. We cannot score it an accumulation day like Tues and last Fri but hasn't that been the problem since last Spring, low volume on rallies? I cannot explain it other than momentum players, dip buyers jumping back in the fray. Psychology is fragile though, and it won't take much to turn around...but, it's a start.
Following the "fat finger" panic selloff in early-May, the S&P 500 Index (SPY) (SPX) has been in a relatively orderly "stair-step" pattern lower. The key round levels of 117.5, 115, 110,107.5, and 105 have marked clear support and resistance levels during the downtrend (see the following chart). As we often point out, round levels are important from a technical, psychological, and in terms of option open interest.
Even the recent wild intraday and day-to-day market swings in both directions have continued to maintain these key levels. Today's gap up in the markets put us right below the key 110 strike. Will we break through here, disrupting the recent market pattern and putting us into a new mode -- or is a failure at 110 and a pullback to 107.5 & 105 in the cards? At this point, I'm banking on the latter.
SPY Hourly Chart
HAMMERTIME! That's what the bulls have been looking for! What we witnessed on Tuesday dear friends was perhaps the sign of a nice reversal, something unseen since early February. Oh, it was only one day and we NEED to see some confirmation here, but this seems 'different' this time around, certainly better than the last few rally attempts. What gives? Well, we had our FIRST accumulation day since April 22. Again, a first step but it appears the downside is limited (save for anymore negative surprises). The VIX made a lower high in its most recent flight, and a lower close on Wednesday would confirm the trend of lower volatility.
I mentioned in my latest trendwatch about the expensive options, which makes sense because of a bloated VIX. This may not be the case if the fear indicator trends down. I'm not saying we are bullish, however a bit LESS fear would go a long way to see this market reverse after a very quick and sharp 14% correction.
With the VIX flashing in the high 30's and the smell of fear/panic everywhere, wouldn't you think we would see some big drop days? Oh sure, last week we had one; Thursday the SPX dropped 45 points, or nearly 4%. But that was eight days after a 49 point move up. Does the elevated VIX mean we go down big? Well, yes and no. Actually, the higher volatility only means we should expect wide moves, but generally these are associated with fear, protection and not outright buying. Historically, and recent history is a guide we have seen big blowouts of volatility but they don't last too long. Fear and panic are short-term in nature and will generally reverse when it hits a crescendo. So far though markets have been selling off rather orderly. For now, that is the case. I mention in this week's trendwatch about similarities in the VIX chart between Sept 2008 and now, eerily similar (see below). Do you see it?
