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Index Wrap

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Friday's numbers look stronger than the day actually felt, with the Dow dropping 69 to close at 9768, the Nasdaq 37 to close at 1930 and the SPX -8.06 to 1050.35. The bulls can take comfort in the fact that the Nasdaq did not go out with a 1929 print.

For the week, the Dow lost 0.4%, the Nasdaq -2.1% and the SPX -.3%, with the bulk of these declines accounted for by Friday's drop. Year to date, the Dow is up 17.1%, the SPX 19.4% and the Nasdaq 44.5%.

More ominous, however, are the following facts: the Commodities Index (CRB), the Amex Goldbugs Index, and the Phlx Gold and Silver Index (XAU) all made multiyear highs this week and on Friday, while the various volatility indices, notably the VXO, made multiyear lows. Moreover, equity weakness on Friday lined up with strength in bonds, commodities and the other classic "refuge", treasury bonds.

The VXO printed a low of 16.62 on Thursday and rose 4.69% Friday to close at 17.63. Without wishing to beat a dead horse on this issue, volatility hasn't tended to stay low for extended stretches, and this week saw sustained readings below 17 at what are 5 year lows. Unless an equity bull believes that this is a new bull market, the VXO is telling us that current price levels are simply untenable, and Friday's reversal from its highs was the first whiff of confirmation.

The Nasdaq significantly underperformed the SPX and Dow, and the QQQ underperformed the Nasdaq. QQQ tends to be a market leader, and its leading weakness is yet another portent of trouble ahead. With that said, let's look at the chart and review this week's action on the cycles we follow:

Weekly COMPX candles

This week's bearish doji confirmed last week's shooting star doji as a top. Whether this proves to merely temporary or more significant cannot be known for the moment, but if this week's weakness continues below 1890-1900 support, bears may well have something about which to cheer. The pullback so far is routine, and does nothing to alter what remains an impressive uptrend off the March lows. But that rise is occurring within a now-extremely low volatility environment, within a large bearish ascending wedge. More worrisome is the bearish divergence on the 10 week stochastic, drifting lower against higher price highs. The Nasdaq appears very toppy on this timeframe, and while a bounce off the 1890-1900 support line is possible, the bear wedge is edging ever-closer to an apex, and a decisive break is due. The oscillators tell us that a downside break is the more likely outcome.

Weekly INDU candles

The picture is identical on the Dow, with 9650 the support level to watch. The Dow became less oversold than the Nasdaq last year, and it is for this reason that the bear wedge has a less positive slope than that of the Nasdaq. The Dow is even closer to its apex, and I expect a breakout anytime, with 3 weeks as my outside guestimate. The bearish oscillator divergence is also apparent here, and it portends a breakdown.

Daily OEX candles

Zooming in to our primary trading vehicles on the daily candles, we see more bearish divergences, both on the Macd and the stochastic, with Friday's decline confirming the sell signals on the 10 day stochastic. The weekly and daily cycle oscillators are now in gear to the downside, which puts the wind at bears' backs. The decline on Friday stopped right on the lower support trendline of a bear wedge projecting to a potential downside target of 497. If support holds, we can expect another bounce, but the synchronous downphasing weekly and daily oscillators make anything more than a deadcat bounce unlikely.

20 day 30 minute chart of the OEX

The 30 minute candles show the precipitous drop from Friday's 10AM spike high. The end of day short-covering bounce caused a slight uptick in the otherwise downphasing 30 minute cycle oscillators, and this hints at a possible bounce on Monday. But, I believe that the sharp selloff from 10AM makes the outlook clear, and I don't expect that high to be exceeded on the next bounce. The shorter the timeframe, the less power its cycles exert. With the daily and weekly cycles pointed south, the 30 minute oscillators should hit the ceiling without generating higher price highs.

Daily QQQ candles

The daily candle chart of the Qubes is also rich with oscillator divergences, and 35 is looking like a critical level for bulls to defend on Monday. With Friday's key outside reversal stopping just above the rising bear wedge trendline, there will either be a violent selloff on Monday, or some kind of recovery at or above the rising trendline. I'd be inclined to wait for confirmation at a conservative 35.75 to put on new shorts so as to avoid getting whipsawed. With volatility this low and prices this high, there should be plenty of downside to catch from there. I am not interested in long positions for the same reason, although more nimble or daring trades can try the bounce off the trendline in the knowledge that they're fighting a synchronous downphase on the daily and weekly oscillators.

20 day 30 minute chart of the QQQ

More divergences on the 30 minute QQQ. Again, we see the 300 minute stochastic in bottoming territory, and a bounce is to be expected. If it is anything more than weak, I'll be surprised, but it wouldn't be the first time. Unless the upphase gets excellent price traction, I expect it's top to be confirmation of a new downleg in the market, possible The end to this year's rally, and, obviously, an excellent shorting opportunity. If 36 gets exceeded, we'll have to reconsider.

Whichever direction you choose, we have daily and weekly wedges building to an apex, and volatility very low. That means that big, sudden moves are increasingly likely, which means more caution than usual for wise traders. Use stops, be alert, and don't get married to a direction that isn't working out. Cash is an excellent position when you're uncertain. See you at the bell!

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