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.

XME Head-and-Shoulders Top

I started mentioning the XME a couple of weeks ago because it had launched up to the top of the sector list, and had briefly surpassed the XLF as the top sector since the March low.

And now, it is a wreck, sporting the worst kind of head-and-shoulder topping pattern: one that slopes downward (click chart to enlarge):

xme-hns

This pattern projects down to the XME’s breakout level of 31.25, and very possibly a bit more.

Sorry bulls; it ain’t over.

SMN is the inverse ETF to go along with the XME, and as I mentioned in the comments over the weekend, it has a bull-flag pattern on its chart:

smn-bull-flag

A 100% extension of the bull flag would target the SMN’s May 14th peak (red circle). However, given the sorry state of the XME, the SMN may be intending to extend farther up and fill its April 30th gap (blue box).

If the XME wants to bounce up and back-test its neckline tomorrow, I will load up with some more SMN. (Note: UYM is the ultra ETF to go with the XME.)

SPY Bear Flag – 6/20/09

On this daily chart of SPY, you can see that it formed a bear-flag pattern last week (click chart to enlarge):

spy-bear-flag-1-6-20-09

The flag is bounded by the red lines. The blue arrow points to Thursday’s volume, which was the lowest of the week on the one day that SPY closed up. So, both the price and volume patterns match that of a bear flag.

The purple arrow points to the top of the flag channel on Friday to highlight the fact that SPY failed to reach the top channel line. It is possible that SPY has already topped out and the ideal short entry point was at Thursday’s high. However, SPY can move higher and still remain within the flag. Retracements of 50% and 61.8% are perfectly normal, and as we see on the next chart, SPY has not quite made it to the second, 38.2% retracement level:

spy-bear-flag-2-6-20-09

If SPY is done retracing, then a 100% extension of the bear flag would take SPY down to the 88 area to test the support at its May 4th gap:

spy-bear-flag-3-6-20-09

SPY has dipped into that gap, the red box on the chart, but has never filled it on a closing basis. So, I would say that it is a support level, though weakened, and a good candidate to be filled by this bear flag. If SPY can retrace upward some more, then the downside target would have to be raised accordingly.

At some point next week, I will likely buy some SPY July $88 put options (SZCSJ). At the moment, this option’s stochastics are oversold on its 60-minute chart, and its 15-minute chart is turning up with SlowK crossing above SlowD, and MACD crossing above zero. So, it already has two amigos, and is only a penny away from crossing above the 9ma for the third amigo. A 9/36/15 cross-up isn’t too far away either:

spy-bear-flag-4-6-20-09

The 9ma is the black line and the 36ma is blue. The MACD only made a shallow dip below zero, and is now slightly back above zero.

So, the setup looks promising now, but whenever I look at flags like this, I always say to myself: “there will probably be more of a retracement.” On the other hand, if SPY can only muster a 38.2% retracement, then that is a sign of weakness, and may indicate that SPY will exceed a 100% extension on the downside. Maybe it will hit the 127% extension down at 86.

As always with bear flags, you want to see volume decline when prices move up. So, if SPY can rally with better volume next week, then it can invalidate the pattern. But any light-volume rallying will only improve the shorting opportunities.

Friday’s Trading – 6/19/09

Looking over my charts, one thing that struck me was how the SPX has barely corrected at all compared to how badly breadth has deteriorated. The McClellan Oscillator is at levels last seen in early March, and the SPX isn’t even 30 points off of its high close of 946.

I suppose that this means one of two things. The bullish perspective is that many, many stocks have dropped, but by only very modest amounts, which indicates mild profit-taking.

The bearish perspective is that the market is a lot uglier on the inside than it is on the surface, and the worst is yet to come.

Tomorrow we will get a clue as to which perspective is right. SPY’s 60-minute slow-stochastic is overbought. The last two times it got overbought, on June 9th and June 11th, it rolled over pretty quickly. So, if SPY can push higher on Friday without first unwinding it’s overbought condition, then that will be a feather in the bulls’ cap.

Thursday’s Trading – 6/18/09

The sell-off was a low-volume affair until Wednesday when the XLF got slammed for a 2.8% loss on the heaviest volume in four weeks. However, both the Q’s and IWM surged on improved volume, so Wednesday was a sector-rotation day. But, the market can’t get far without the XLF, and the XLF obviously is not enamored of Obama’s new financial regulation plan. What will the market look like with a neutered financial sector? I don’t know, but I’m guessing this dims the long-term outlook.

The Q’s and IWM are still holding above their June 1st gaps. Those gaps are critical now that Obama has killed off the XLF.

Dixy Doubleplusungood

If this bullish ascending triangle on the chart of the dollar index (DXY, or “Dixie”), is the real deal, then life will get doubleplusungood for the bulls (click chart to enlarge):

dixy-doubleplusgood

The triangle is outlined in red. A breakout should see the Dixy travel the height of the triangle, up the green line, to the blue line at $84.50. And perhaps it is feasible now that the FOMC is contemplating letting the printing presses cool down for awhile.

Maybe this signals the end of the great stock-and-commodities inflation of 2009.

Note: I don’t trade currencies, so if you do, I’m interested in hearing your take on this chart.

Wednesday’s Trading – 6/17/09

The Q’s are holding at their June 1st gap. That is a critical level because that gap was when the Q’s broke above their May 6th peak. So, 35.34 is a do-or-die level for the Q’s, and the market looks like it intends to test that level. Bulls should be praying that the Q’s can bounce and rally on strong volume before getting there.

The IWM dropped below it’s June 1st gap, but then closed above, so that gap is still a support level, though a weakened one. SPY and DIA have completely filled their gaps. So, it is up to the Q’s to hold the market up here.

If you look at the 15-minute chart for SPY over the past two days, you see SPY trying to form a falling-wedge reversal pattern. However, volume increased on Tuesday, so it is possible that the wedge will degenerate into a downtrend channel. IWM, and I’m sure plenty of other things, has the same pattern: the shape of a falling-wedge, but increasing volume. In both rising- and falling-wedges, you want to see volume decline as prices head toward the apex. SPY got hit with a large jolt of selling before the close Tuesday, so its wedge is a bit iffy.

False Flag

Over the past couple of weeks, you have probably seen charts like the one below around the blog-o-sphere showing the market to be in a bull-flag pattern (click chart to enlarge):

false-flag

On this daily SPY chart, the purple vertical line is the flag pole, and the flag-part waves inside of the blue lines. The first four days of the flag were ideal: a high-volume flag pole, followed by a low-volume flag.

But then the volume came up and prices failed to break out. (See the blue arrow in the volume panel of the chart.)

That is not supposed to happen. The flag-part of a bull flag is supposed to be a time of quiet consolidation where a few bulls take profits. There are not supposed to be any high-volume wars raging in there. The same is true, in reverse, for bear flags.

Flags are very reliable patterns, but you can’t just look at the shape. If the volume doesn’t conform, then it is no longer a pure flag.

Tuesday’s Trading – 6/16/09

Here’s me discussing the Q’s on Friday afternoon and how they could not fill their gap.

Here’s me discussing the “photo finish” at 923.85 on Monday.

I look for these dramas because they often give good hints about market psychology. For example, on Friday afternoon, the Q’s pushed hard into the close, attempting to fill that gap. But they were defeated. That sort of event makes the bears more aggressive, and dispirits the bulls. And the psychology often carries over to the next day.

While we often get a reversal of Monday’s direction on Turn-Around Tuesday, the futures are sagging as I write this. The bulls are probably depressed again over the defeat at 923.85 in the final seconds of trading. And that my put the kibosh on a turn-around tomorrow. Of course, big news events can always reverse psychology.

I look for these dramas around important levels and gaps, though I am sure other important dramas exist. But if you pay attention to these events, you can literally feel the psychology shifting in real time. And that’s way better than waiting for a sentiment survey. You ladies should be able to do this with your powers of intuition that seem like space-alien magic to us men.

The market is always trying to accomplish something: punch through an important level, test a trend line, break out of a pattern, shrug off bad news, etc. So, ask yourself: “What is the market trying to accomplish today?” And then see which side, bulls or bears, carries the day. Then look for the psychology to carry over to the next day.

Monday’s Trading – 6/15/09

Bloomberg’s story is written with a chirpy tone, but what’s so chirpy about the economy still being “months” away from hitting bottom?:

“…the recession-stricken U.S. economy is within months of hitting bottom…”

“Months” seems like a long time to me, especially when you consider that the economy will probably bounce along the bottom for more “months” once it gets there. And having capacity utilization take out the all-time low doesn’t exactly strike me as a rally catalyst:

“…the proportion of plant capacity in use probably dropped to 68.4 percent, the lowest since records began in 1967.”