BigTrends

I noticed a fairly unusual pattern on the S&P 500 (SPY) hourly chart in terms of Percent R.  We had a real spell of whippiness through Wednesday.  Take a look at Percent R at the bottom of the first chart below, you can see we quickly cycled through extreme bearish, then bullish, and back into bearish readings.  It's not unusual for an hourly indicator to give strong bullish or bearish readings, but the quick 3 turn cycle is fairly unusual.

Current SPY Hourly Chart


We haven't really seen this type of pattern recently, so I looked back with an eyeball test at recent data.  A similar pattern caught my eye.  Then the dates of when it occurred really piqued my interest ... it was a couple days before the infamous Flash Crash.  This also was right at the beginning of the 2 month market downtrend we saw through June.

Recent Similar Percent R Pattern


Something to keep in mind for your trading, especially given that we've just had the VIX pop with increased volatility and the market sell off.  There may be more bad news or events coming ... either way a strong trend may be likely to emerge soon.

The Williams %R is a key momentum indicator that helps us determine trends. I use 30 bars when examining the daily and the hourly chart, also with RSI (14 bars) and MACD to help determine the quality of the trend. Price Headley uses the %R as his specialty tool and trades quite well using it.

Well, I looked at the daily on the SPX with the %R, and it looks quite similar to this past February. Notice the rise up to the 50 area in the indicator. Could we see a repeat from early spring, when markets ran up to new yearly highs? We'll have to see, but this one momentum indicator is certainly supporting the bullish case.

So, was that THE bottom?  Last week the SPX touched 1010 on July 1, flirted with going lower but the oversold condition was too much to bear, and now we're back to levels last seen in very late June.

But as you may know we don't pick tops/bottoms, rather we ride trends just before they begin to accelerate. The market is moving fast and is filled with fear, hence the elevated levels of volatility.  We have not seen a concentrated effort by the bulls to push this market higher, and while Wednesday was a bull win it was not a landslide, and last look the market was still UNDER the 200 MA and the 50 MA.  Volume has been rather modest, I don't think the bears were seeing a strong move Wed and the buying was likely short-covering (let's not forget, bull markets can start from short-covering).

All in all the market is stuck in a range, some decent short setups are there but it looks to be a bit early as this buying frenzy continues on a bit longer.  The VIX hovers near 25, a recent area of support.

In response to the "Flash Crash" / "Fat Finger" market plunge of May 6th, the SEC has enacted new trading rules and circuit breakers that are being phased in today.

Read the full press release at the SEC site here.

"Under the rules, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause, which would apply to stocks in the S&P 500® Index, would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through Dec. 10, 2010. "

So the new changes apply to individual stocks only, and only those in the S&P 500 Index (SPX) (SPY) ... yet another indication that the SPX truly is the most important market index in U.S. trading.

As far as circuit breakers for the market itself, the SEC says this:
"The SEC staff is working with the markets to consider recalibrating market-wide circuit breakers currently on the books - none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets."

What do you think?  Will these changes help alleviate the problems, or is it only a minor fix that won't stop the volatility?

The S&P 500 Index ETF (SPY) (SPX) is testing the 105 level for the 3rd time in about a month.  See the SPY Hourly Chart below.  The first was on the infamous "fat finger" rapid market crash.  Interesting how the level where the market reached that day in such a short time frame has been tested again twice (May 25th and today).

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.

My friend Fred Goodman writes a daily newsletter that I have read for years.  He is quite thoughtful in his analysis.  This morning I'm going to pass along his notes about the equity/gold ratio, very interesting.

I reread the section on gold in Currency Trading and Intermarket Analysis by Ashraf Laïdi, in which he shows that since the 1920s the equity/gold ratio has peaked approximately every 35 to 40 years -- in the late 1920s, the mid-1960s and again in the late 1990s. If we continue the sequence the next peak will be around 2030.

The other side of the equation is that there has been a low in the ratio between each of the peaks. The last one occurred in 1980 so the next one is due in five years, in 2015.

The current ratio between the S&P 500 and gold is 0.85. It fell to 0.125 in January 1980 when gold reached 850 for the first time. With gold currently at 1240, the S&P would have to fall to 155 to equal that equity to gold ratio.

Alternatively, with the S&P currently at 1050.47, gold would have to reach 8400 to equal the ratio, so you can why the gold bugs are excited. Even if the S&P were to fall to 700, gold would have to climb to 5600 for the ratio to reach 0.125.

Of course there is no guarantee that the ratio will even drop from current levels, but is has done so on several occasions in the last 100 years, and therein lies the hope of the gold buyers.

However, there are differences between 1980 and the present. Back then the interest rate was in double digits and now it is in no digits. Inflation was at a century high in 1980 and now it's near a bottom. I can certainly justify owning 5% in gold as an insurance policy, but I cannot justify a much larger position than that.

1066 on the SPX, 9900 on the Dow.  Seems vaguely familiar...hmm, oh yes, we traveled down there a month ago during the 'flash crash'.  Says A LOT about this market and how weak it really is.  Oh, we rallied some last month, up to 1170 or so on the SPX.

We're in the summer doldrums now, volatility is up only because there is so much uncertainty and instability.  So, we're basically at some level of support here, tenuous as it may be.  Volume was heavy on Friday, hence a distribution day.  Caution warranted next week, if we move out to 1000 then subsequently to 980 then we're in bear market territory.

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

As you know, I don't trade reversals, there is just too much uncertainty and risk.  I wait for confirmation of a trend and trade those, often looking for the low-risk entry point which defines risk.  However, I do LOOK for signs of a reversal in a trend which may help to identify new trading ideas.  That being said there are some very unique patterns that established on Tuesday that may auger well for such a circumstance.  Besides the very strong hammer on the SPX chart that is so noticeable we find some names with 'line in the sand' patterns.  Simply put a reversal area was established and quickly tested, sellers were not interested in dumping any longer and buyers stepped in.  We can see this pattern on the chart below.  Mind you, this is not a 'trading' pattern that I use, it's low probability and very much a 'guessing game', but I feel rather confident that the trend may well reverse.  What am I looking for on the horizon?  LOW volume on the selling days.

As mentioned many charts 'fit the bill', but we don't want to get hammered by this highly volatile market with surprises around every corner.  Better safe than sorry.

We've been watching the big picture market retracement rally for some time.  From the 2007 S&P 500 Index (SPX) (SPY) highs to the 2009 panic lows, we've now regained a significant amount of the losses.  The problem?  The 50%, 61.8% and 31.8% Fibonacci retracement levels now become potential resistance levels to further market upside.

Take a look at the SPX Weekly Chart below that we've discussed previously:

SPX Weekly Chart


You can see that the recent market correction began after we approached the 61.8% retracement level around 1,228.  We've now busted down through the 50% level of 1,133, and look like a test of 1,014 (roughly 1k) is approaching.  One potential positive to note is that we are right around a key level if you draw a trendline of the lows from late 2009 -- if this area holds as support, we could see a weekly bounce to 1,150 or 1,200.  Remember though, that these are longer-term weekly charts and the trends are fairly wide as are the weekly high/lows.  That's why we utilize Hourly, Daily and even shorter-term charts to trade our Index Options Timer real-time trade recommendations.