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Index Wrap

Volatility Drops

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The Dow and SPX made it above Friday's on an intraday basis while the Nasdaq tried but failed. The strength in the Dow and S&P generated some extreme volatility readings, with the VXO plunging to 13.65 in the early afternoon before a weak bounce that saw the VXO close near its lows of 13.58. Bonds rallied throughout their session, while equities fell from their highs from 1:30PM and struggled to hold their opening gains.

Volume was slightly stronger than on Friday for the NDX, while it declined for the Dow and SPX. The bifurcation noted in the weekend Futures Wrap and by both Keene Little and myself in the Market Monitor continued, with the Dow and SPX behaving less bearishly than the NDX.

Daily Pivots (generated with a pivot algorithm and unverified):

Daily NDX candles

The NDX respected the lower rising trendline connecting the lows from the August bottom, plunging sharply intraday on the break below 1380, only to bounce sharply to close higher by .73% for the day. The end of session bounce left us with the candlestick version of perfect indecision, being a doji star. While the sharp bounce from the lower rising trendline is bullish, the NDX nevertheless respected a pattern of lower highs, failing to break Friday's high even on an intraday basis. That action confirms what has so far been a slow daily cycle rollover over the past week, and the daily chart suggests a complex top being formed. This assessment also coincides with what the SPX-VXO chart below appears to suggest, but we won't know until the 1360 level is broken on a closing basis. So far, the daily cycle downphase for the NDX has been weak/sideways, which on its own could prove to be bullish, but only if we see the cycle reverse to the upside with a higher closing high above 1400. That has yet to occur.

20 day 30 minute chart of the QQQ

The primary NDX trading vehicle, the QQQ, shows the lower high below Friday's peak, both price- and oscillator-wise. Once again, this action coincides with the daily cycle downphase within which the 30 minute candles are trading. The way to understand this cycle picture is using an image of larger and smaller pipes: the daily cycle is a wide pipe within which a narrower pipe (the 30 minute cycle) flows. The 30 minute cycle can oscillate whichever way it wants, but with only rare exception, it should not exceed the limits of the daily cycle. With the daily cycle rolling over, we should continue to see the 30 minute cycle making lower highs and, below 34.10, a pattern of lower lows until the daily cycle bottoms. That should approximately 2 weeks from now, based on the action of the daily cycle oscillators over the past few months. A sustained break above 34.80 would likely stop the daily cycle downphase, and shortly thereafter, replace it with an upphase, but as we saw today, that level feels like it's a long way away.

2-day 100-tick chart of the QQQ

The short cycle is represented by the narrow 10 period Keltner channel (in red), which oscillates within the 30 minute channel (35 period orange Keltner channel). It was in a sharp upswing as of the close, but with 30 minute cycle resistance at 34.45, it will take a strong open to turn the 30 minute channel back up. A break above today's high of 34.58 would do it, while a failure will find support at 34.30, followed by 34.20 and 34.05-.10 QQQ.

Daily SPX candles

The SPX continues to trade bullishly, with today's higher high and nominally higher low sufficient to pin the 10-day stochastic in overbought territory, in what is becoming a bullish trending move. There is no downphase on the SPX yet, with rising channel support up to 1114 currently. Today's range is within the interminable 1122-1136 range we remember from earlier this year, and unless bulls can rocket their way through this stiff overhead resistance, it very likely that there will be at least a consolidative pullback before making the attempt on descending resistance at 1134.

20 day 30 minute chart of the SPY

The only suggestion of trouble in paradise is the bearish oscillator divergence against today's higher high for the S&P 500 Depository Receipts (SPY). 112.30 held as intraday support, but the lower oscillator highs against the touch of 113.13 mandates caution. Generally, bearish divergences are followed by impulsive declines, and while a break of today's high would disarm that signal, bulls with open positions will want to be quick on their stops in the event that the 112.30-.40 level is broken at tomorrow's open. 112 should provide firmer support, but that bearish divergence is troublesome, and a 30 minute cycle downphase from here would provide it with a strong challenge.

Daily SPX-VXO comparison chart

I've correlated the VXO lows over the past 6 months with the SPX highs in this chart. In every case, these moves below 14 have proven to be excellent exit points from long positions. While I have been bullish on the daily cycle upphase still in progress, that cycle is now toppy, just as the VXO is printing extreme bottomy readings. While nothing guarantees that the SPX won't extend its upside trending move and possibly drag the NDX along with it, the current readings dictate caution for bulls and lower highs as possibly entry points for bears.

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