BigTrends

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.

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.

We've noted throughout 2010 that the small cap Russell 2000 index (RUT) (IWM) has been a relative outperformer versus the other major indices (QQQQ (DIA) (SPY).  Especially when the market rallies recently, the IWM gains ground quicker.  Take a look at the following 2010 performance chart -- IWM is blue, QQQQ is yellow, DIA is red, SPY is green.

2010 Performance Chart


You can see the IWM has steadily been above the other indices -- it also "spikes" higher in general when the market rallies.  On the flip side, it also looks to come down quicker when we sell off, but still maintains a net edge in yearly gain/loss.

This increased leverage/movement/volatility is priced into the IWM options, so you do pay for the potential gains.  For example, my data currently shows the IWM at-the-money August options are priced around a 27% implied volatility.  By comparison, QQQQ is around 22%, DIA 19%, and SPY 20%.  Some of this increased option premium pricing can be alleviated by buying deeper in-the-money options -- but also of course premium will dissipate as we get closer to expiration.

Hi, just wanted to pass along a couple of new developments that I'm excited about.  These are available on our free TrendWatch newsletter, which arrives daily in your in-box.  If you aren't yet receiving the TrendWatch, please register for it here.

In our new re-design of the daily TrendWatch, we've added some new features.  One of these is the BigTrends TrendScore.  TrendScore is a numerical formula we've designed, based on our different Percent R readings, that gives a snapshot of the current strength of the market trend in Stocks (SPY), Gold (GLD), Oil (USO), and Bonds (TLT).

Also new on the TrendWatch in addition to the Featured Article of the Day is:

Options Educator, a brief explanation of various option and technical trading terms and concepts.

Editor's Picks, links to our best recent articles.

Popular Articles, links to some of the all-time reader favorites from the BigTrends site.

We're sure you will find the added information on the free daily TrendWatch to be educational and informative to you in your trading.  Please feel free to leave me suggestions and feedback in the comment box.

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.

Despite the market selloff, the latest leg of which began last Friday, we haven't seen an appreciable rise in the CBOE and ISE Equity Put/Call Ratios.  We track these nightly along with other important indicators in BigTrends Trader's Edge (call 1-800-244-8736 for information on Trader's Edge).

The chart below has an overlay of the S&P 500 Index ETF (SPY) on the top, followed by the CBOE Equity Put/Call Ratio and the ISE Equity Put/Call Ratio with Bollinger Bands.  Normally, we would expect to see Put/Call readings over 1.00 during times of a clear market panic -- these often precede significant market bounces, as they mark periods of panicked Put buying by the public.  However, both of these readings are around midlevels, which indicates a fairly even amount of Call & Put buying.  This is a relative sign of complacency among traders, given the negative market price action and poor economic news coming from around the world on an almost daily basis recently.

Short-term bottom line is continue to be cautious of this market and look to profit on the down side from market bounces.

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

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.

When the market had its giant gap up on Monday morning, which was not filled in during the rest of the trading day, our analysis indicated that it was likely to be filled in quickly.  This occurred today, the last day of trading week.  You can see on the following S&P 500 Index (SPX) (SPY) Daily Chart that we traded below the highs from the previous Friday (and also above the lows from Monday), thus "filling in" this gap.  From a technical basis, the current situation looks like there should be more market downside ahead over the near-term.

SPY Daily Chart

The stock market correction began in earnest on Tuesday and has continued through the end of the week.  The sovereign debt crisis appears to be spreading to different countries around the world -- or at least there is a fear/perception that it will.  Often, the perception/market reaction to events is more important than the event itself, at least for the short-term.

We've seen a classic "flight to quality" during this pullback.  Gold and the U.S. Dollar have seen a strong rally, as have U.S. Treasuries.  Stocks have born the brunt of the move to safe products, as has Oil.  Take a look at the following performance chart for 2010 for the SPY, GLD, UUP, and USO.



You can see that as of the current prices on Friday, the S&P 500 has now wiped out all the gains of 2010 and is flat for the year.  The fact that the yearly gains were basically erased in 4 trading days is sure to frighten some individual investors.  Many retail investors were already wary of the market from the 2008/2009 crash and yesterday's false-looking huge downprint isn't likely to pacify them.

I would note that the de-coupling of Gold from Stocks, and the flight into Gold and the Dollar is a classic correction safety move.  We've seen this occur time-and-again in the past, although the last couple years were a bit of a different aberration -- and it actually is somewhat of a healthy sign for the world financial state that "normal" kinds of market rotations are back.