With the volatility indices hitting extreme lows this week (VXO sub-18), an oblivious, complacent market was miraculously saved in the closing minutes of Friday's session by a vertical spurt of bids. Volume was strong, with 1.4B NYSE shares and 1.98B Nasdaq shares changing hands, with numerous surprises to the upside and downside to tempt every trader. Despite the apparent chaos, however, the markets behaved in an orderly fashion.
In an effort to simplify and clarify, I've begun with the weekly views of the Nasdaq and the Dow. I then review the shorter timeframes pertinent to our primary trading vehicles, the QQQ and OEX, focusing in on the daily and 30 minute candle charts.
As noted, complacency remains high. This bear market in volatility/fear has dominated for the past several weeks, and Friday's negative closing prints on the VXN, VXO, QQV and almost VIX (+.03 at 17.71) is as close to a technical indictment of the current equities prices as one is likely to find anywhere. With the market's bellwethers, GE and MSFT being sold precipitously, option premium remains ready collapse on the slightest hint of short covering. This virtually guarantees that the markets will be slow to react to further downside, which in turn should exacerbate that downside when it does come.
A different facet of this low volatility/low premium environment is that most participants have developed strong faith in the cycle upphases when they are due. This is a Pavlovian response to this long year of surprise flagpole rallies and robot jams off the flimsiest of buy signals. All participants, this author included, expected a bounce all afternoon and were reluctant to short/ eager to get long or hedge open shorts in anticipation of a nice upside run. Fortunately for the market it came, if somewhat later than expected. I expect this to prove disastrous in the long run, because when a big drop does come, there will be fewer shorts to provide buying (covering) on the way down.
I had prefaced this with the statement that the markets behaved themselves this week and on Friday. Let's take a look:
Weekly COMPX candles
The Nasdaq moved lower this week, dropping 2.4% this week and 1.1% or 19.92 points on Friday. The Naz is down 1.9% for the month. This weakness reflects itself with lower low for the weekly candle print above, and the general weakening of upward momentum shows up as a bearish stochastic divergence since the end of June. Despite the higher price highs, the stochastic oscillator has been weakening, and continues to await the beginning of its downphase. A break below 1800 could kick off the move from what have become very overbought levels on the weekly oscillators.
Weekly INDU candles
We see a similar picture on the Dow weekly candles, with a clearer bear wedge pattern off the March low. 9500 looks like the key support at current levels, tested but not broken on Friday. For the week, the Dow lost 1.4% and is up .1% for the month. The same bearish stochastic divergence as we see on the Nasdaq is evident here.
Daily QQQ candles
The weakness in the Qubes this week lined up perfectly with the oscillator downphase on the daily chart oscillators. This downphase confirmed the rally high as an actual high for the time being, and a lower price high for the next oscillator upphase will seal it. Trendline support at 32.90 was not tested, and the trend on this six month chart is clearly still up despite this week's bearishness. However, the increasingly underdone sentiment readings combined with the toppy, divergent weekly oscillators are keeping score, and the markets shouldn't rise forever. We await the test of 32.90 to give us a clearer view of what to expect, but for the time being, the stronger-than-recent price declines derived from the coincident downside cyclicality of the weekly and daily oscillators.
20 day 30 minute chart of the QQQ
The weakness mentioned above is most evident on the 30 minute charts, with a trend of lower oscillator highs under the influence of the dailies. Price fell far more easily than it rose this week, Friday's end of session ramp job notwithstanding. If my interpretation is correct, the bull wedge on this chart should not play out to its full 35.40 target, and I expect a battle at 34.50. The Friday bounce was anticipated by the oversold 300 minute stochastic on this chart, which continues to track the price very efficiently.
Daily OEX candles
We see the same setup on the OEX, with this week's weakness following the daily oscillator path perfectly. Meaningful support is at 505, below which 497 should provide some bids. The trend remains up until those break, but note that the last upphase in October was much shorter than the previous one from August to September.
20 day 30 minute chart of the OEX
Same story on the 30 minute chart. 515 looks like the next problem area for bulls, and as the 30 minute chart oscillators are fighting the downphase on the daily, I expect a lower high from the current upphase. Above 517, my picture will become more complicated than this, and we'll have to reassess.
For next week, the bias is short term strength as the 30 minute upphases play out, but within the context of overriding weakness under the influence of the downphasing daily and weekly chart oscillators.