Price: 142.15 doji
+2 std dev: 144.75
+1 std dev: 142.62
20 EMA: 140.48
-1 std dev: 138.34
-2 std dev: 136.21
Notable Fib Lines:
135.70 (.382) Spot of Reversal
Technical Analysis: Price firmly bounced off 50 week EMA, which was also the .382 Fib Line. Price jumped through the 20 day EMA and then came back and touched it, firmly rejecting wanting to go under that point. Price has shown extreme resilience against bad news. Price has not been able to pierce the upper channel trend line, but has attempted to consolidate underneath it.
Expectations: Price will likely take 2 days to get to 143.87 (the market does not have enough juice to go past that point). Price will likely then fall 3-4 days to slightly below the 20 EMA. After that, I am not sure at the moment. The Fiscal Cliff will look very real in the next couple weeks. If $VIX spikes to 18 or 19 again, I firmly expect a crash. VIX:VXV is .915, and we are nearing a local top on SPY. With 3-4 hard days down, I could easily see that number jump to 1.00. $NYMO hit the top BB recently, and that usually suggests a top, but yet it wasn't. It is again hanging very near the top BB, and a couple up days could easily spark another top BB touch. $CPCE is suggesting complacency/greed overall.
Bottom Line: Short at 143.87, then you can ride it to the 20 EMA or choose to hold if you think there is more behind this.
9:15 AM - Well, you have to hand it to the bulls, they refuse to give up, but I never doubted they would. They are becoming feral, rabid, and greedy. Also, please note that while I am bearish now, I prefer being a bull, it's a whole lot easier, but I see legitimate problems developing there, hence my unwavering stance lately. Also, I am not insulting them either. It's their collective approach not individually that is causing this.
Today will likely be the last day in a run. I expect a gap past the long term channel to avoid the issue of breaking it during session, which did not work for the bulls all yesterday. I do expect gap-fill, so we should retrace some early on, and then I expect the bulls to give it a nice run into the finish. Block out the news for right now. The only news that matters right now is "IF" they should find and announce an answer to the cliff. A firm answer with signatures. Until then, the news is a rollercoaster, so lets go back to charts.
Today is not a day to jump on the band wagon for bulls. It is only a set-up for shorts. I have a target of 138.8 as you can see in the chart below. One thing that must be noted, is that the 2 head fakes were in a bear market under a 10% correction, and we have reversed, so history may vary a little here as the situation has changed. It still is an excellent entry point. Today is Friday, and Monday is a new week, with a different momentum, and lots of time in between for traders to rethink positions.
If I am right, and if this is the last in a run, then we should have 3-4 bear days starting next week in a row as noted earlier this week. So far, everything has worked according to previous predictions, and I don't say that to pat myself on the back, but perhaps to note that our game plan / road map seems pretty accurate, and I think we can and should stay on course. If we are to have 3-4 day bear run watch out for VIX:VXV ratio. We are at .895 at the top of a bull run. What do you think will happen with 3 or 4 scary days. I could easily see a spike to or over 1.00. The 1.00 marker means, do not enter bull for ANY reason, and anything over .90 is "swim at your own risk". At any rate, the end of next week is my "official" week for capitulation prediction, but unlike the Mayan calendar, I do not want to confine it a day, as it was done using weekly charts and all chart predictions have some variability as well. I do still see it looming though.
9:03 AM - I know on the surface, this may not seem like what I was expecting, but really it is. We got our touchback to the 20 day EMA, and I think the market should rally today and maybe tomorrow too. Why did I not sell my bear position? I think I will be okay, and I am interested in capitalizing on capitulation so I would prefer to keep my exposure as long as I won't get killed. Again, I cannot day trade, because I trade through a roth IRA, and have no margin, so my options are somewhat limited. I should be okay for now. I am down about 1.2% overall from my purchase point. I expect to lose more today. Despite the market rallying hard and for now appearing to gap up hard, I suspect we will see further up. I plan to place another short around 143.88, which I believe will be our new short term top (at least for a handful of days). Then I would see us retrace to around 139.5-ish again, at which point I will likely dump my first short and hold my second. But, we will need to see the market conditions at that time as well.
The more it rallies the more bearish I am. Things are not what they appear right now. This is common behavior before a collapse. The market has way too many bulls, but still not enough to crash quite yet.
Let's take a quick look at the disturbing stats:
$VIX - 15.51 bounced off mid BB, heading down, but already 1 std dev below 20 day
$VIX:$VXV - .902
$NYMO - $41.07 in top second std dev, already pierced top BB a couple days ago
$CPCE - .600 in lowest second std dev. pierced bottom BB 19th.
$CPC - currently .83, pierced lower BB at .64 on the 26th, a 6 month low.
If you are not familiar with all these, the combined effect is that investors are very complacent, and the few that are protecting themselves see a need to pay premiums for short term protection. If we combine this with our VIX expectations, and so far I do not see a need to deviate from my current plan.
IWM, QQQ and XIV are all bullish, and that bodes well for a rise today. Without getting too in depth, there were a number of bullish crossovers yesterday as well on many ETFs and indices, but we are getting into overbought. I would be inclined to expect a gap + rally for today. I am sort of thinking about setting up a strangle / straddle, but we will see on the next good entry point.
Lastly, if you are following me or my advise, be aware that I am okay with draw down. I will get a better point to sell, but again I am looking for exposure when possible for the next couple weeks.
9:00 AM - Harry Reid came out yesterday and rattled what appeared to be a slightly bullish market (from 10:30 until the comments made around 2:30, the market was either rising to or staying above the 20 EMA) with a few short words summed up as political frustration and no new progress. Long term algorithms displayed an immediate negative response. The Volume was larger than initial volume and more than 3 times avg volume with pricing dropping more than 1.5 std deviations in 10 minutes piercing the lower BB. The subsequent volume was also elevated and price could not maintain any upside gained.
What needs to be observed here, is despite the Bullish appearance, there is pent up fear lurking. If this is what happens when Harry Reid Speaks, wait for Obama. He is consistent if nothing else in injuring the market everytime he speaks on anything contentious.
There is support for swing traders at 140.33, 140, 139.11 and 138.78. Anything under that, coupled with a correlating rise in VIX and VIX:VXV ratio, which currently stands at .90 (warning level 1), suggests heavy downside to the market.
I am expecting to be holding my bearish position today. Any spike over 19 in VIX (not likely today as it is at 15.5 now), I intend to buy a VIX call option at the money.
Again, if the market rallies, and it sure can, it should at bare minimum hit 140 before rising. The market still has lots of believers in it. Upside resistance is 142.10, 142.43, 143.90 and 144.22. If the market finds a way to rally, 144 would be an expectable target.
9:28 AM - Never think you can outsmart the devil, but you do know his tricks. Here is the deal. I am bear until the end of year. And sadly I somewhat expect it to be painful at times. I will have to do a damn good job at timing, because the market wants to rally. Let's look at what we know:
1. Classic TA pretty much unanimously declared a bottom. Strong Volume shaping a hammer reversal on an important trendline. At the time of the reversal the hourly and daily Oscillators were all coiled for an up move, and the weekly was bottoming out. Everything lined up nicely.
2. Right now, the news is mostly positive, with a lot of unknowns: Fiscal Cliff talks look promising. Big wigs such as Buffet and Greenspan are confident. Greece got it's bailout money, Israel and Hamas are singing Kumbaya together in the streets, Black Friday went well (above 12% over last year, I believe).
And that is what will do this market in. Everyone is already on one side of the boat. Options are too heavy on calls, sentiment is way too bullish, VIX is way too low, VIX:VXV is way too high. You see this behavior at the end of a run, not the beginning of one. We never hit 20 or 25 on VIX in this last 10% price correction. Fear was prevalent, but panic never set in, and that means greed is festering. Panic offsets greed. To define greed for the sake of what we use it for, it is disorderly optimism, in a similar format that panic is disorderly fear.
So, here is the dilemma. We want to capitalize on a downward movement. The market wants a bull movement. We are contrarian to the market, so we have to be really careful. First, we need to predict a time for the market to capitulate. I have this at 12/7. This means we may bull rage until then. It also will not likely go on the exact day that I have it at. That's life and that's the market, so that means we have to be prepared both a little before and a little afterwards. If the market does not capitulate, we will miss the big run-up, and we have to be okay with that. People will call us foolish, and if capitulation does not come, we will look foolish. I am okay with that too. Trading is not about ego, it is about making money and preserving money when you cannot make money.
Take a look at the chart below. We are not giving up reading charts at all, but we may have to extract every reliable bearish move possible if we want to stay in the market. There is a lot of congestion between 141 and 142. I would expect us to range between 140-142 for the bulk of this week. Daily volume was tapering on up days and spiked slightly on yesterday's down day. Now, SPY is an ETF, not a traditional stock, so volume does not directly influence price in the same way, but it does signify demand and investor's sentiment guidance.
I suspect if we touch 142 without touching 139.67 first, we will pull back to that number then before any move higher. If the market is really as feral and as ravenous as I think they are becoming, we will shoot to 144 within a few short days after that. I am not ruling out short bull plays, but they would just be for reversals with quick entries and exits. It would be far worse, to accurately predict a capitulation, but have it start a week early and get caught in it, just to make a few extra pennies. So, we will see at the time, and what the market is behaving like. We will also consult VIX:VXV, CPCE and VIX at those points.
So I took a bear position around the 140.90 marker and I am quite happy holding it for now.
Lastly, something to think about for today: just because the market behaves poorly, does not mean you should.
The market will experience a 38.2% retracement of 2009 lows around 12/07/12 as the 20 week EMA passes through the descending wedge trend line on the chart. This will take SPY to roughly 115 to 120 level. The market should make a short lived temporary bounce at 23.6% (128.7) retracement during the correction, but will quickly continue on to it's final destination around 117. VIX will spike to 45-50. People will talk about similarities to 2008, but this should have more similarity in structure to August 2011.Background information:
My suspicion of a VIX spike / disorderly correction, came about 3 months ago when I noticed that from each major VIX spike since the collapse in 2008 a pattern developed that a subspike (over 25 spike, but short-lived with relatively low damage to SPY) would occur a certain point. If you were to take the time from the first spike to the subspike and cut it in half and tack it on to the subspike, then a new VIX spike would occur that week in the future. It's strange to think that fear spikes can be timed, but I do believe they can be to a large degree.
Most of trader's minds are still fresh with pain from the 2008 disaster and even from 2000 dot-com / tech burst. As we approach the 150 level in the SPY market, you cannot help but notice that so far nothing good came from that level thus far, and that general territory warrants further analysis. SET-UP:
The set-up so far is very much that of the May 2010 Flash Crash and the August 2011 Crash as far as VIX is concerned. As you can see from the second chart, we are in the third wave of a bull cycle since 2009. The 90's Bull and 00's Bull Cycles had three stages, which Charles Dow defined as oversold, fair market, and overbought cycles. He puts it a little more elegantly than that, but it is easy to see the market psychology in each of those cycles play out since the bottom in '09. We are in the third cycle now, which should make sense. The whole cycle has done nothing but climbed a wall of worry. It goes up simply because momentum has not exhausted. There is no really good news out there, there is just less bad. We are overpriced, everyone knows it, but since the market just goes up, who are we to stop it, so we rationalize it. If you don't believe this is the sentiment, why is VIX at 15 with all the world's problems including the US's knocking on the door. People are just tired of losing money in puts and shorts, because the market seems like a juggernaut. But, this market is no different than any other, and that momentum is showing signs of weakening.Why this is not 2008 despite the SPY level:
The entire year leading up to 2008 was turbulent and VIX lived for quite a while above 20 and 25 leading up to the crash. Both SPY and VIX leading up the crashes in 2000 and 2008 had wild swings up and some down too, which have not been observed here. The pattern simply best matches the other more recent 38.2% corrections much better. Additionally it has only been four and a half years since the last major crash, and usually they come once a decade roughly.
If I am wrong though, and this were to explode into a 2008 style disaster, it would be truly be worse than 2008 as we would have the classic head and shoulders completed, and we could expect to descend in a similar fashion as we ascended through the whole 1990's. It would likely mean the end of the equities system as we have known it in our lifetimes. So for the record, I do not expect that.
Implications: Obviously, first and foremost, protect yourself short term. I can't tell you if we will have a classic T.A. top-off or if it will just go one day on a news related item that is hard to time.
Second: This means the market has a real shot at breaking this 150 level curse on potentially the next pass up. SPY may not make it too much further than that though, since SPY tops do appear to be tapering off logarithmically and this will not be the start of a new bull cycle, but a rare fourth wave on an old bull. This is actually good news for the country outlook though. Higher highs each time.
As we have made mention and you can see in the SPY and VIX charts, near the top, things usually get a little hectic and momentum carries price a little further than it should. T.A. can sometimes get stretched a little, as overbought becomes more overbought. This is why so many people get suckered in to bull. It's hard to time bear moves before the cliff as the Bull is exhausting itself.
Accuracy: I believe this scenario is more than 50% likely. We are too high on relative pricing with too low a VIX with economic/political/earnings situations to be what they are. I believe my confidence level is somewhere around 66% to 75% likely. At any rate, we will find out soon. Good luck and good trading. I went into Bear on Friday for SPXU.
VIX weekly - expected spike to 45-50 due soon
SPY monthly showing 3 waves up cycle
Action: Price slid down lower BB, reversed to mid, slowed down and pierced mid.
MACD: negative, but bullish cross. Note: June 2012 bottom saw MACD of -2, same as now.
histogram: positive, increasing
RSI: 54.22 Action, last touched under 30 and rising.
200 SMA: 137.57
VIX:VXV = .861, comfortable
CPCE = .590, too low, bearish (coming off lower BB touch Nov 19th, very S.T. bearish usually)
VIX = 15.14, Too low as well, can go lower, but suggesting market complacency under 15. For as many problems as the economy has, the fiscal cliff and the negativity of earnings and unacceptable unemployment levels, this is problematically low.
Technical Analysis: 5 consecutive white candlesticks with consistently waning volume and nearly 1.5 std dev movements since last down day, suggest that we are short term extended, but heading upwards overall. We experienced a rapid rise in RSI similar to June 2012. MACD is bullish although negative, suggestive of June 2012 as well.
Suggestions: Tread carefully because of VIX. I would expect a downward movement to at least the 20 EMA and probably a little further first. Then, we will need to see if this can rebound. Based solely on this chart, it would seem likely to rebound to around 144 or so. If there is no VIX spike, price will likely ping pong between the 20 EMA and the top BB.
Again, for people not familiar with my advice, we are looking for a potential VIX spike on a break through a descending wedge in the VIX pattern. This VIX spike is not guaranteed, but I do feel it a serious concern, and will be playing extremely conservatively until the VIX 20 week EMA pierces the trend line with or without any consequential effect. My chart predicts it at the week of 12/7, which ironically is around the time period that fiscal cliff discussions come to a head. The cross-over is not confined to that week, but it will not be too far from it.
Play the market as you see fit, but please do keep it in mind at least.
*** Before I start here, you may want to review my last couple weeks of blogs if you are not familiar with them. We have two different plausible scenarios playing out. I suggest protecting your investments carefully when there is a possibility of capitulation around the corner, you can draw your own judgement.
SPY weekly charts
Risk to Reward considerations: price about 6% under the 52 week high, about 8% under the 2000 high and about 10% under the 2008 high. The 2009 low was about 55% under the current value, and the 2003 low was about 44% under the current value.
Action: Last touched top BB, came close to bottom and seemingly bouncing upwards, but did not quite touch. We are slightly above the mid BB within a week of the low.
histogram: negative, but ascending
Notes: Descending MACD peaks. Prices increased during this period creating a divergence. Histogram wave decaying since Aug of last year.
RSI: 54.05, coming up from under 50. The low value a week ago was nearly identical to May 2012's low, which was a true low. It is also about the same value as May 2011, which 3 months later developed into a 38.2% retracement. While I do not trust the market, the RSI compares more closely to May 2012 of the two historical checkpoints.
50 EMA: 135.92 Notes: Price deflected very convincingly off the 50 as in May, with only the wick piercing it and a solid movement up the following week.
Technical Analysis: Between the hammer reversal off the 50 week EMA, with comparative RSI to May '12, to reversal in MACD histogram and low STO value (24) to the price action seen in last week's movement, this is a confirmed reversal.
Suggestions: Based solely on this, bull swings are most likely to succeed and that very well may the case in the very short term. The weekly VIX descending wedge remains a concern for me especially for the month of December, so I cannot jump fullheartedly into bull. Despite my bearish stance, I do semi-expect prices to jump quickly back to the 150 range within a few weeks. It is at this point the market may more likely lead to a very large capitulation as in 2000 and 2008. However, there is no golden rule that price must go back to that level, and thus the market remains in a worrisome state. Additionally, the quicker and more rapid the rise in price back to old highs, the more likely the market is to enter a disorderly sharp correction.
Lastly, with respect to risk/reward, we are 10% under the high, and nearly 55% over the low. But... that 10% leveraged is nearly 30% to 40% gains in a 3x leveraged etf or through inverse volatility. It comes down to greed versus risk protection. Two things to remember at this point:
1. Money is precious, opportunities are limitless. Conserve Money. If you play bull or bear right now, do it limitedly.
2. Hogs get slaughtered. Do not be a hog, the seemingly easiest dollars can be the most dangerous. Mr. Market does not have good intentions with you.
Anything over 139.66 is fair game to short, going into next week. A top off will likely have pricing get lazy at minor resistance lines, just hanging out. Should the market rage rally today, then I will short at end of day. If I am wrong and it does not pierce the 20 day and just gives up the ghost this morning, let it go, we will await a better set-up.