Options Wonderland

[dalcindo]

No Soup for $SPX - Opinion On $VIX, Market:
- And Why I believe $SPX will not reach the 1000-level


Alright, so looking back at our TA, charts below (especially relative strength indices in the Direxions, SML/MID/SPX, and taking the pulse on the market sentiment with VIX (or its reciprocal), I cannot help but notice that bears have remained strong despite all the recent good news of real-estate recovery, banks ability to raise capitals (e.g.: BoA), and what other Kool Aid flavor came out of the media factory.

Here is why I believe that the recent rally was a BEAR rally. First, all directional position among bears and bulls will cause markets to sway one way, then recover another. However, the overall VOLUME LOSS and unfavorable proportion of the move is what bulls should be concerned.

Volume - Taking a look at the monthly $COMPQ, $INDU, $NYA chart (listed here: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2140281 ), you will notice that every one of these markets have printed decreased volume since MAR 09. So, what is a predominantly decreasing market with decreasing volume is telling us? I will chance it that the masses participation has retreated with pain and fear of recent events, that most current participants are institutional, and that too little "cash" is now available for new investors to pour into the "bottom" that the media claims has been reached. In fact, I believe that a growing number of unemployment, market apprehension and recent doubt about financial banks sustainability (e.g.: Fed downgrade, more cash needed for GMAC, rising oil prices) are hardly the ingredient needed to push that $SPX to the 1000-level. So, no volume, no soup.

From a technical viewpoint, notice how the recent rally failed to reach the 50% level. Here again, volume times lack of masses participation spells further decline ahead.

I will let the charts below provide a better impression of how bearish the outlook remains. Please, not that I am extremely biased and that my market positions are shorting the market, especially the financial sector.

ECM Model: $SML, $MID, $SPX Relative Strength - 18 Month, Daily Chart:
(All indicators relate to $SPX)
1 - Notice RSI striving to remain above its 45-MA;
2 - $SPX retreats from its recent attempts to "touch" the 950 line; still respects its 20-EMA;
3 - ECM Analysis: a MAX Expansion signal occurs recently, usually associated with market decline as ECM tends towards MAX contraction, its next "natural" cyclical move:


$SPX vs. $VIX Reciprocals (1/vix)
Here, this chart shows a relative comparison between the $SPX against $VIX reciprocals, and Direxion's bulls ETFs (large caps, small caps, energy and financial sectors).
While 1/vix reached a new height (indicative of increasing confidence among "savvy" market participants), one should also notice that this occurred with an ominous negative divergence that formed not just market wide ($SPX), but also with a same consensus within large caps, small caps, energy and finance sectors:



ECM: $SPX, Direxion's Bulls - 8-Mo., Daily Chart:
Also, notice in this next chart how the Expansion/Contraction Model ("ECM") provides a MAX Expansion signal, just to belabor the bearish outlook. There, you will also notice that the Direxion Bulls - expressed againt $SPX - have moved relatively bearishly as well:


$VIX (1/$vix) - 36-Month, Daily Chart:
Notice how 1/vix peaked yesterday at the corresponding LOW reached in mid-July 2008. Consider that level to be a technically significant are for VIX as we move forward.


$SPX - 36-month, Daily Chart:
Here is a chart that highlights the speculative channels I like to work with. Is this not yet another validation of the down-trend channel's upper border ... Yes, it is. Although I have "shrunk" the upper border to leave out the outlying price segment that occurred in April to June, then Jul to Oct 2009, respectively, an imaginary parallel line that would include these to segments would still cause an upper border short of allowing $SPX to reach the 1000-level.


Finally, I am adding a collection of charts that should point to technically significat areas of resistance/support, which may or may not add any substance to the opinion expressed above.

Again, all this is my eyeballing, with a fair amount of bias and interest as I hold short positions in the broad market. All this comment is purely for entertainment, not advisory in one or other directional position. Due your own diligence.


$SML - 10-Year, Monthly Chart:



$MID - 10-Year, Monthly Chart:



$MID - 36-Month, Weekly Chart:



$SPX - 10-Year, Monthly Chart:



SPY - 36-Month, Weekly Chart:



$COMPQ - 10-Year, Monthly Chart:



$COMPQ - 29-Year, Monthly Chart:



QQQQ - 36-Month, Weekly Chart:



$DJA - 10-Year, Monthly Chart:



$DJA - 36-Month, Weekly Chart:



$INDU - 10Year, Monthly Chart:



$INDU - 29_Year, Monthly Chart:



$NYA - 10-Year, Monthly Chart:



QID - 12-Month, Daily Chart:



DIA - 36-Month, Weekly Chart


D.