For the third straight session we saw stocks gap-open out of the gate. Monday they made the big gap-down & recovery bounce from support. Tuesday gapped up and closed even higher, right near highs of the day for major indexes. And Wednesday saw the gap-open trifecta as price action shot higher, reached session highs early on and bounced gradually lower from there. Maybe markets are just consolidating for the next blast higher from here.
Markets look tired as a whole, although each day a new index leader arises to take price action up from every dip. The media is now in full-bull mode and why shouldn't they be? The Afghan operation is way ahead of schedule, the Fed has done all it can to lever money into equities or spending and companies are now coming out with less than dismal news. Maybe the worst is over.
By rights we should see markets go higher on pure emotion, which is what we've had lately. Investors have not learned their lessons about excessive prices and valuation from the first pop of this bubble, and focus solely on getting in front of the next massive wave of stock price appreciation. Maybe that will happen.
Maybe we should look at some charts and try to find unbiased price action clues or evidence instead of trying to out-guess the future:
(Daily Charts: Dow & NDX)
First we see that price action met rejection at 75% retracement of late August highs to late September lows. We can see each of the respective overhead points that lie in wait above, but might be more likely to catch new calls on a bounce from lower levels first.
In either case, a close above these 75% retrace levels on the daily charts would be a call-play signal while price action moving down might signal long puts instead. Simple as that!
(Daily Charts: SPX & OEX)
Same for the S&Ps, with similar anchor points but slightly off on the OEX... my mistake. I myself would be looking for put plays below the 75% lines and new calls on a daily close above and the next candle that begins to rise up from there.
(Daily Charts: OEX & Dow)
A big view of expanding patterns depict how the recent rally really chopped its way higher in volatile fashion. These patterns actually denote that most of the rally was short covering that saw price action fade when the furious buy-cover action subsided.
Failure to break and close above those lines of resistance would suggest a trip back to lower lines of support before long.
(60/30 Minute Charts: SPX)
Here's where it gets interesting. We still have overall chart patterns of bearish widening wedges even as price action rises steadily higher in staccato fashion. These expanding consolidations warn of price action instability for the underlying move.
Oscillators remain mixed to somewhat bullish right now, but not reaching oversold extreme shows they are drifting sideways as price action coils once more as depicted further below.
(60/30 Minute Charts: OEX)
And for a different twist on price action consolidation, we've redrawn the patterns to show how the overall expansions noted above have actually pinched together. An upside break in favor of current oscillator direction could be expected to reach the upper trendline shown in the expanding wedge on SPX charts. A downside break should fill the gaps created on that opening pop from Tuesday as well.
Better still if price action coiled tighter until stochastic values reached overbought extreme and turned bearish again from there. That would align D/60/30 signals with price action below key Fib retracements and broken wedge patterns to confirm. Right now it seems like the downside has more room to run that further up, which is to be expected but not ascertained.
Did you know that one of the most accurate contrarian sentiment indicators is percentage of newsletter editors who are bullish or bearish at any time? Supposedly we are the worst barometers to follow of all, or perhaps too many people do exactly that. Whatever the case may be, I see the majority of newsletter writers across the web turning euphoric with bullish glee, pounding the table that now's the time to buy. Hmmm...
Maybe if I sell out and join the herd it will finally capitulate markets from there. Nope; won't do it... I remain cautious to the upside, willing to play when the entry is right but just not trusting what I see.
Part of what I see are big-cap leadership stocks rising in price on falling volume. Here's your homework for tonight: dial up daily charts of the Dow and NDX leaders up the most these past two weeks only and see which way volume is headed. You be the judge if a majority of "leaders" are pumping on swelled volume by eager investors or lower volume by reluctant shorts instead.
The other thing that bothers me about this being the birth of a new bull is valuation levels. All of the other big bottoms came when the S&P values were near historical lows, and right now they are at all-time highs. Deluded analysts who think valuations will shrink as earnings rise faster than stock prices obviously do not watch the ramp job companies get right now just for not blowing up. Can you imagine what will happen when actual earnings truly return! Whooosh... stock prices will outstrip earnings by light year's distance. New bubble, anyone?
I'll test both directions as conditions see fit and look for the next substantial move that could go either way a great distance before long.
Best Trading Wishes,