Wednesday’s Trading – 7/1/09

I haven’t been posting much because I’m working on an automated futures-trading program. It’s coming along nicely, and I will be spending a lot more time on it in July.

The bulls staged an impressive reversal Tuesday afternoon, and stole the month from the bears in the final seconds of play. In June, the bulls managed to rally the SPX by a whole 0.18 points.

The fact that the close for the month was a photo-finish may indicate that the forces of supply and demand are now in balance. It may also show that the bear army has become a credible threat to the Bovine Empire. The rally-leading XLF was down for the month, so the bulls already have a casualty.

H&S vs H&S

Everybody is talking about the head-and-shoulders pattern on the SPX. Danaric has a chart here, and The Fly has his opinion here. However, SPY has also formed a smaller, inverse head-and-shoulders recently (click chart to enlarge):

spy-06-30-09

Notice that SPY bounced exactly where it had to bounce: the 91.27 low from June 26th. And it rallied into the close on strong volume. That is bullish action, so it’s important not to discount it. Especially since this pattern projects up to the June 11th peak.

Which H&S wins? It’s impossible to know that, but crucial to be mentally prepared for either outcome. The topping pattern is much larger and should carry more weight. But it is possible that Wednesday will be a consolidation day while the market awaits Thursday morning’s jobs report to decide the matter. The consensus is for another 350,000 jobs lost, and a jump in the unemployment rate to 9.6%.

Tuesday’s Trading – 6/30/09

The SPX closed at 919.14 at the end of May. So, it is up a whole 8 points for the month of June. And that’s all it will take to put June in the red today. Will the rally make it four months in a row, or will the streak die at three? The Q’s closed Monday poised to make a 9/36/15 cross-under, so I’m betting that the streak dies.

A Volume Projector

Here is why you hear me talking about volume so much: Last week, we had three range days, and two trend days. Monday trended down, and Thursday trended up. You could have spotted the trend days by looking at nothing but volume, which surged on both days.

The chart below shows SPY (15-minute bars) with a “volume projector” indicator. The blue bars are the cumulative volume to that point in the day. So, the blue bars always march upward as volume for each new bar is added to the total of all the previous bars. The red line is the same thing from the previous day. So, if the blue bars are above the red line, then that means volume is outpacing the volume of the previous day (click chart to enlarge):

volume-projector

So, if you looked at nothing but the lower panel of the chart, you could easily spot the trend days. And on Wednesday, you had a hint that the morning’s surge would not last because volume was very light compared to Tuesday morning’s volume.

A surge in volume tells you that traders are excited; that the herd is stampeding, and that it is usually a good idea to stampede with them – at least until the end of the day.

Note: If you use TradeStation, you can download the code here. If not, the algorithm isn’t very complicated.

Vix up to Trix?

JungleGirl pointed out that the Vix closed below its lower Bollinger Band today. This is a pretty rare event and definitely has bearish implications. I wrote a few lines of code to make these charts. When the Vix closes below the lower Bollinger Band, the code paints the SPX’s candle for that day blue, so it is easy to spot these events. The first chart is the SPX since the March low (click to enlarge):

vix-extreme-1

Not counting today, there are four blue candles on this chart. After each one, the SPX was lower within a few days. And that’s during one of the greatest rallies in history, so this is a very robust shorting indicator.

Prior to March, we have to go way back to May of last year to find the next event. And here we have a blue candle almost marking the exact top of the March-to-May 2008 rally:

vix-extreme-2

Not bad, huh?

Here are three more blue candles preceding vicious downswings early on in the bear market:

vix-extreme-3

That’s it for the bear market. Here is a Vix barf that occurred on the mad rush up to the October 2007 top:

vix-extreme-4

Even here, shorting at the open of the next day, you would have had a nice profit with a little patience.

You could build your whole trading strategy around this one indicator, provided that you could wait patiently for months at a time for a signal, and then bet big.

Over the next few days, we should see some excellent shorting opportunities, if not an outright death-defying plunge.

Thanks for the heads-up, JG!

Note: if you are not familiar with the Vix or Bollinger Bands, here is a chart of the Vix with BBs where you can see the Vix closing below the green lower band today:

vix-bbs

You can read about the Vix here, but in general, a sharp drop in the Vix shows an extreme of bullish complacency: everybody’s all-in without a care in the world, and dreaming of all the free money that will soon be falling from the skies.

Bollinger Bands define an envelope of extreme prices. The recommended setting is two standard deviations. So, what the chart above is saying is that bullish complacency is two standard deviations beyond the recent norm.

Thursday’s Trading – 6/25/09

Yet Another Bear Flag
While SPY made a bullish, inverted head-and-shoulders reversal pattern on its intra-day chart after the FOMC announcement on Wednesday and may rally a bit on Thursday, its daily chart is starting to look like another bear flag. SPY had a high-volume drop on Monday, and a sharp, but low-volume retracement Tuesday and Wednesday. That’s a classic bear flag. If SPY is unable to surpass Wednesday’s high, the next leg of the bear flag projects down to the May 4th gap at 87.89.

QQQQ, IWM, XLF, and ES all have the same pattern, and DIA may already be leading the way down. The XME popped back above the neckline of its head-and-shoulders top, but did so on light volume.

The market needs to rally on strong volume immediately; otherwise the SPX has another 20 points of downside coming soon.

Losers
The top four weakest sectors since the June 11th peak are: XME, XLE, XLB, and XLI.

Ant Stampede
Wednesday morning, breadth on the NYSE hit a peak of +2100. That’s a lot of stocks being up. You don’t get breadth like that every day. In fact, the last time was June 1st – a day when the SPX was up 24 points. And the SPX was up only 6 points on Wednesday? That’s a major bearish divergence. The market may not be able to generate breadth like that again for another three weeks. When you get that many stocks rallying, you have to put some points on the board, and the market failed miserably. Lots of stocks were up, but not by very much; sort of like a raging stampede of ants. Yes, there are a lot of them, and they are coming at you hard, but they are easily squished nonetheless.

Wednesday’s Trading – 6/23/09

The bulls looked like they were about to turn the tide on Tuesday until they got slammed down in the last ten minutes of trading. I would expect the negativity of the close to carry over to the morning, just as it has to the futures so far tonight, but the market is tough to call here. Tuesday could have been the beginning of a reversal, or it could have been a consolidation of the downtrend. The XLF looked good, but there is nothing “reversal looking” about the IWM’s candlestick on the daily chart.

Of course, the fate of the market will be decided by the FOMC announcement at 2:15pm. Interpreting this event is very easy: the market wants the Fed to keep pouring freshly-printed dollars upon it. If the Fed pulls back on any of its crazy schemes, or hints that they might do so in the future, then the market will commit suicide. The market knows that it is being inflated; it knows that it is a stuffed shirt.

The Fed’s leak to the Wall Street Journal said that there would be no tightening of any kind. However, it is possible that Bernanke will hint at a tiny tightening in the future, and the market won’t like that. The market has probably plunged this week because the Fed said that it would discuss “exit strategies” at the meeting. So, you can imagine what would happen if an actual exit strategy reared its ugly head.