BigTrends

Well here we are again ... the CBOE Volatility Index (VIX) has dropped down to the key 17.5 level, meanwhile the S&P 500 Index (SPX) has rallied again towards the 1,150 area.

Where have we seen this scenario before?  Well, it wasn't very long ago -- in January 2010, we tested these areas (see the following chart).  Last time around, we spent several days waffling around before a fairly big market reversal occurred.  This pushed the VIX from 17.5 all the way to the upper 20s, and the SPX dropped from 1,150 to around 1,050.

So, will history repeat itself this time with a market correction ... or are we going to breakthrough with continued upside in the SPX and decline in the VIX?  I would lean to the latter choice - why do I say this?  Well, first off the second test of key levels is often the point of breakthrough ... the market has shown resilience to push back up to here.  Secondly, we've again cleared a key Fibonacci level that I've discussed before around 1,121.  Additionally, the Daily Percent R on the SPX was over 99 on Friday, which is an extremely strong reading.  Also, there certainly is skepticism in the air ... yet we had one of the better economic reports in some time last week.

While I rely on various systemized signals for our Index Options Timer trades on (SPY) (QQQQ) and (IWM), which can go in either direction at any time, I would anticipate at this point that we will test 15 on the VIX before we again approach 30.

The CBOE Volatility Index (VIX) has long been utilized in a variety of manners for judging both investor sentiment, as well as market timing.  It can clearly shows times of both "panic" and "complacency" by the crowd, which is often late to the party and/or marks a turning point.

Take a look at this longer-term VIX Daily Chart below:




First thing that jumps out to me on this chart is the basic range on the VIX has been 20 to 30 over this time frame, with "outlier" range of 17.5 and 22.5.  Previously I have forecast that the VIX could reach as low as 15 in 2010, with 17.5 being a key level, but wasn't going to penetrate below 15 as an outlier, and I stick to that analysis.

There are several things one could see on this chart, such as short-term spikes in the VIX were often good entry points during market runup in 2009.  But there also is something interesting with the outlier range.  When the VIX consolidated in the 30/32.5 range in May/June 2009 (unable to breach above this area), it preceded a major upward leg in the S&P 500.  The VIX made lower lows through July as well, indicating the bear trend (rise in VIX) was drying up.

Recently we established a new bottom outlier range on the VIX, as we tested the 17.5/20 range repeatedly in December 2009/January 2010.  This was in effect a contrarian sell signal for the markets, and we have subsequently sold off.  Additionally, you can see that the VIX is making higher highs recently, indicating its strength (and actual volatility) has not abated.

Does this chart give me every answer as to where the market is headed?  Of course not, it is a snapshot and component of putting together a big-picture view.  But keep an eye peeled if we head back down into the 20/17.5 range (and even break down to 15), because that may well presage another sharp market correction.

One of the clues to finding turns in the market is to identify the subtle clues of the market.  Price action is always king and volume is the queen.  So, we have a chart below with notes that tell you how this got started.  Institutional distribution is slow and methodical but very evident if you take a step back and look.  The blue arrow was the day after Thanksgiving..big sell day.  Oh sure, the mkt rallied from there, but the big players were taking $$$ off the table.  You didn't know it, but it happened.

Ok...now, next levels if the spx closes UNDER 1072?  We're looking at minor support at 1055, then stronger levels at 1030.  Note, this market is now correcting in time AND price, which means swift moves down to counter the long grind higher.

The S&P 500 Index tracking ETF (SPY) closed today right around the 115.00 level.  This is a strike price where there is fairly heavy open interest, especially in the Jan 115 Calls.  There is a possibility that we may get "pinned" right around this strike price on Expiration Friday.

However, the good news for the bullish case is that last Expiration, the SPYders got stuck at 110 on Expiration Friday.  The following week they were "freed" of that expiring open interest, and subsequently rallied for the next several trading days.  As you can see on the following chart, the December 18th Friday low was 109.28, by the next Thursday (Christmas Eve) they reached a high of 112.61.

For those interested in index option trading, we have the BigTrends Index Options Timer program, which gives specific real-time, short-term trades on the SPYders and other indices.

We're approaching a critical time for both sides.  Yes, the market has been locked into a very narrow range for weeks now.  It seems we've been endlessly drifting around.  However, some clues are now there that may support higher prices.  We recently saw the Fed statement, sanguine about inflation and supportive of growing the economy.  They will leave 'well enough alone' for some time to come....any hint of rate hikes will be far off (late 2010) and gradual.  To be sure, the Fed will not want to ruffle any feathers.

As for the SPX, the 1100 number continues to be the magnet.  In fact, the 10 MA has been within 3 points of that number since Thanksgiving.  Now, that's what I call a tight range!  Reaching as high as 1119 and as low as 1085, the SPX has been bouncing along, taking trend traders down.  A rangebound market is good for premium sellers and stockpickers.  For the bulls to keep the momentum there has to be a move up soon.  This sticky 1100 level can be traced back to Oct 2008, where a major breakdown occurred.  So from a technical perspective...there is tugging on both sides of support and resistance.  Only time will resolve this, and it's just about time!

It's that time of year again when investors start adjusting the rear-view [investment] mirror as they look forward to a new year of money making trends. It's a good time to peruse the free analysis available, all-the-way from the top investment banks down to your local advisor, but be selective and filter out the noise because a lot can be misleading or incorrect.

That said, I found this handy little document called, Goldman Sachs Global Viewpoint - Top Trade Ideas for 2010, which covers Goldman's (GS) top 8 trade ideas for 2010. In my view, it's well worth the time to scroll through the short 7 page analysis, there are some ideas that I agree with - for example, Trade #2 is LONG RUSSIA Equities (RSX), this points towards the strength in BRIC countries (BTW, Goldman coined that acronym back in 2001), however, I would expect Brazil (EWZ) to be a larger beneficiary of BRIC investments next year. I'll be covering the details of Brazil in BigTrends 2010 Outlook due out next week (sign up for a free BigTrends Insider account to receive)

Tell us what you think about these trade ideas below, I'm especially interested in the 12 month volatility play...

Trading volume and activity is relatively light today, as was the case yesterday.  Many bulls are concerned that the S&P 500 is not making new closing highs now that we are in December.  Adding to those concerns is the relative weakness of financials compared to the broader market.  Financials typically out-perform in bull markets, but they are only up 3.35% since September 4th compared to 10.6% for the S&P 500.

Although there is some truth to this argument, the focus right now should not be on relative strength of financials, tech stocks, or anything else for that matter.  The jobs number and volatility is where you should focus your watchful eyes over the next 24 hours.

Since the last Non-Farm Payrolls and Unemployment numbers were released on November 6th, all three major indices are up over 4% (Dow 4.41%, S&P 4.04% & Nasdaq 4.15%).  That doesn't seem to make too much sense considering the unemployment rate on November 6th hit 10.2%, the highest level in over 26 years!

So even if the unemployment rate rises tomorrow, I think that the market is set for another rally from a technical perspective.  The chart below shows the S&P 500 Index at the top, with the CBOE Volatility Index (VIX) at the bottom with 20-Bar Bollinger Bands.  As you can see, the outer bands on the VIX currently sit at 25 and 20.  This is no coincidence, because those are two clearly defined support and resistance levels for the VIX on a daily chart.



Secondly, look how tight the bands have become around the VIX in the last week.  Even in the face of last Friday's panic about credit problems in Dubai, we still have seen the bands continue to tighten.  Even if we get a terrible jobs number and the market sells off hard tomorrow, the upper band is so close to where the VIX is now, we are likely to see a break of the upper band.  And the last four times we have seen a close outside the upper Bollinger Band, the market has put in a short term bottom.

At the end of the day, tomorrow's jobs number is the catalyst to get this market into a trending phase once again, and I believe that the trend will be bullish.  Buy any dips in the next few days, because that will be your best opportunity for profit.

Thus far in the 4th quarter of 2009, there has been a distinct performance differential between larger and smaller cap stocks.  Take a look at the chart below:  Yellow is the Dow Industrials ETF (DIA), Green is the S&P 500 ETF (SPY), Grey is the Nasdaq 100 ETF (QQQQ), and Blue is the Russell 2000 ETF (IWM).

You can see that since the beginning of October, 3 of the indexes are up on for the quarter, while the IWM is down around 3% currently.  The fact that the DJIA is the top performer and the IWM is the bottom performer indicates that large-capitalization stocks are more in favor currently.

Since smaller-cap stocks tend to do well in an economic growth environment (historically), this may indicate a preference for "safer" big name global companies currently among traders.

SPY, QQQQ, DIA, IWM Performance Chart

I've been keeping an eye on this pattern for some time, and have written on it before.  But now we are imminently approaching a major 50% retracement test on the S&P 500 Index (SPX) (SPY).  Take a look at the following Weekly Chart, which tracks the 2007 high to the 2009 low and places Fibonacci retracement levels on it:



So 1,121.44 is the exact 50% SPX retracement level (we closed at 1109.30 on Monday night).  Besides being an important Fibonacci sequence number, this is also a generally known area of potential trend reversals.  Keep a close eye as we move in on this area ... we certainly could overshoot to the upside due to the market strength, but it definitely is a likely area of a market reversal lower (at least back down to the 1,000 area).

Bearish sentiment was steep last week, the AAII said that bears outnumbered bulls by more than 2-1.  In fact, it was the biggest spread of this kind since the March lows!  The chart of the SPX was even portraying a potential head/shoulders pattern, a bearish development that measured all the way down to 980 or so.  We've seen this movie before...in fact, this same thing nearly occurred in July, and the bears were lining up for a bull funeral...intent on taking the markets down.  A funny thing happens during bull rallies...the bears tend to get too giddy in anticipation and get blasted...much like Monday.  Lower volume is a concern but dollar volume was higher, something to consider.  This recent pattern was violated at 1080 Monday.  New highs are just a whisker away, and the market is not yet overbought.