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Index Wrap

Distribution or Consolidation

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The markets traded for the most part within yesterday's ranges on higher volume today, with the S&P 500 and Dow printing lower highs and lower lows while the Nasdaq-100 and QQQ printed nominally higher highs and higher lows. Bonds rose strongly, recovering from earlier weakness as Chairman Greenspan testified before Congress.

The extreme lows in volatility noted yesterday produced the anticipated decline, with all major equity indices finishing the day in the red. However, those declines were generally slight, and the VXO added only .88% to close at 13.70 for the day, still below the benchmark 14 level and at what has in recent years constituted an extremely low level. With the NDX and QQQ staying above yesterday's lows and the Dow and SPX spiking only briefly below them, only to reverse quickly, the question remains whether the current range from last week is a distribution top, destined to collapse, or a consolidation near the highs, gathering shorts to squeeze and fresh buyers for the next leg up.

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

Daily NDX candles

The NDX was rejected at the high of 1393 and at the low of 1374, closing near the bottom of its range. This action left us with a daily doji star verging on a gravestone doji right on the rising support line connecting the lows for move from the August lows. The closing print looks more bearish than bullish to me because of its proximity to the low for the day. Once again, however, the overall decline was minor and the sideways range in place since the beginning of last week remains, despite the daily cycle sell signals. As I stressed in the intraday Market Monitor this morning, a weak daily cycle downphase should prove to be very bullish, as weak downphases (corrective) are generally followed by strong upphases (impulsive). It's for this reason that I can't decide whether this action is distributive or consolodative. While the daily cycle oscillators suggest shorting all bounces, those oscillators are no longer overbought, and the price isn't as toppy as it was just days ago. On a trading basis, my inclination is to follow a break of the range on a daily closing basis, either below 1375 or above 1400. As noted by many of us in the Market Monitor, the middle of this range has turned into a chop zone.

20 day 30 minute chart of the QQQ

The NDX tracking stock, the QQQ, displays the same dilemma on the 30 minute candles. The daily cycle downphase reflects itself in this intraday timeframe with a pattern of lower price and oscillator highs, but there has been no steep, sharp plunge of the type suggested by these lower highs. More particularly, the most recent 30 minute cycle downphase was only good for the minor 13 cent decline in QQQ today. That's generally corrective action, and it generally is followed by an impulsive upphase. On the other hand, the pattern of lower oscillator highs cannot be ignored, and the rising trendline that has supported QQQ since last Tuesday's low was tested twice today. Any weakness at the open should start the breakdown below the line.

The intraday range discussed in the Market Monitor today still looks good to me- while support is up to 34.25 on this chart and resistance 34.60, a break of those levels will be relevant only in terms of a test of range support and resistance, being 34.05- 34.10 and 34.80. Last ditch support for the bulls is at last week's low, just north of 33.60.

Daily SPX candles

The SPX had an inside day, breaking neither yesterday's high nor low. Rising support at 1113 was not tested, though the high of 1123 came within spitting distance. The inside day is another form of harami or pennant, and the coiled price action is usually followed by a strong breakout, building "cause" to borrow Tom O'Brien's expression. While a pennant is generally a continuation pattern, which in this case would break to the upside, the toppiness in the daily cycle oscillators as well as the slight bearish divergence in the Macd histogram should give us pause. It's difficult to bet in the direction of an overbought trending move, but for the past few sessions, that's exactly what this is. I expect heavy resistance until at least 1134, and recall this wide confluence zone hanging onto the price until 1144 at other points this year. If this is going to be a bullish breakout, those levels will need to get crossed, and an upside break will imply a weekly bull flag breakout targeting the year highs for starters. On the other hand, the daily timeframe is toppy, and a break below 1113 on a daily closing basis, confirmed with a move below 1106, will kick off a new daily cycle downphase.

20 day 30 minute chart of the SPY

It's easier to entertain bullish thoughts looking at the 30 minute SPY chart. While the action of the past week looks like a complex top or distribution zone, a casual glance at this chart shows an unchallenged price uptrend. The pattern of lower oscillator highs is a bearish divergence, but like yesterday's low VXO close, none of the downside fireworks that such would normally portend occurred today. If 111.6 doesn't get broken quickly, the next 30 minute cycle upphase should challenge or break the highs of the move printed on Friday. A break below that line will target 110.90 for starters, but given the weakness of the 30 minute cycle downphase today and the strength of 111.60, being fibonacci, trendline and confluence support, it looks likely that the line will hold, at least on the first try. A bounce from there to a lower high would look more promising from a bearish perspective.

Daily VXO chart

While the S&P-100 Volatility Index, the VXO, is derived from the implied volatility of OEX options, there's always been an impressive inverse relationship between it and the broader market, as demonstrated in yesterday's SPX-VXO comparison chart. Prints below 14 are extremely low given the action in recent years, and for that reason, it's reasonable to be looking for a rise in volatility/plunge in equity prices. While we got a drop today, there was little upside in volatility, and the decline in the SPX and broader market was minor.

Just like the daily cycle oscillators for the NDX and SPX, the markets appear poised for a strong downmove. However, there are chart patterns and price action to support a renewed move higher from here. Unless you have a strong opinion as to what the immediate future holds, my suggestion is to let the market tell us where it wants to go next, by means of a range break. The levels discussed above for SPY and QQQ appear as significant support and resistance levels to me, and if they're broken with a confirming surge in volume, we should have a good idea as to likely direction from there.

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