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QQQ Short-Term Analysis
Yesterday, QQQ closed higher with a lower high and a higher low. I'm nervously long here for three important reasons.
First, QQQ has struggled to a small gain over the past week as oil plummeted from the 50 level. QQQ might react downward to an upside reversal in the price of oil, which is now oversold but starting to lose downside momentum. QQQ's muted response to good news relative to the oil's decline could be signaling a market ready for drop.
Second, QQQ is overbought. Short-term breath (e.g., Chaikin Money Flow and NAMO) show a negative divergence with price. Price oscillators (e.g., Slow Stochastics) are in a presignal area for a sell.
Third, despite QQQ's average price move this past week, total trading volume has been extremely low, indicating a lack of buying interest. Quite possible short sellers are covering positions causing a rally and smart money is leaving the marketplace.
Summing the weight of the evidence suggests resistance between 34.68-34.96 on 30 Sep 04. Therefore, if QQQ will close less than 34.19, the lower Raff Regression Channel line, I'm closing my long and going short.
http://img8.imgspot.com/u/04/240/16/QQQdailyCMF08270444436.jpg
http://img8.imgspot.com/u/04/240/16/NAMO27Aug04.png
http://img8.imgspot.com/u/04/240/16/QQQdailySTO082704.jpg
http://img8.imgspot.com/u/04/240/17/QQQdaily082704.jpg
QQQ Short-Term Analysis
Yesterday, QQQ closed higher with a lower high and a higher low. I'm nervously long here for three important reasons.
First, QQQ has struggled to a small gain over the past week as oil plummeted from the 50 level. QQQ might react downward to an upside reversal in the price of oil, which is now oversold but starting to lose downside momentum. QQQ's muted response to good news relative to the oil's decline could be signaling a market ready for drop.
Second, QQQ is overbought. Short-term breath (e.g., Chaikin Money Flow and NAMO) show a negative divergence with price. Price oscillators (e.g., Slow Stochastics) are in a presignal area for a sell.
Third, despite QQQ's average price move this past week, total trading volume has been extremely low, indicating a lack of buying interest. Quite possible short sellers are covering positions causing a rally and smart money is leaving the marketplace.
Summing the weight of the evidence suggests resistance between 34.68-34.96 on 30 Sep 04. Therefore, if QQQ will close less than 34.19, the lower Raff Regression Channel line, I'm closing my long and going short.
http://img8.imgspot.com/u/04/240/16/QQQdailyCMF08270444436.jpg
http://img8.imgspot.com/u/04/240/16/NAMO27Aug04.png
http://img8.imgspot.com/u/04/240/16/QQQdailySTO082704.jpg
http://img8.imgspot.com/u/04/240/17/QQQdaily082704.jpg
qqq bee, thanks. Appreciate seeing them when you have time to post intraday.
qqq bee
Where do you get intraday updates on NAMO?
BULLarkey
13 month time periods
2 standard deviations
typical price
Below is a chart of QQQ using monthly candlesticks. Five items of interest are:
1) Parabolic SAR is in short mode now.
2) We are operating in the lower half of the Bollinger Bands suggesting the long-term trend is down.
3) A close on 31 Aug less than 33.99 puts my trading model in full-short mode.
4) Bollinger Bands forecasting a significant breakout since they are narrowing now.
5) 38.2 thru 50 percent retracement appears to be in the works.
My conclusion is the short-term trend will not have legs...
http://img6.imgspot.com/u/04/233/19/QQQmonthly082004.jpg
Below is a chart of QQQ using monthly candlesticks. Five items of interest are:
1) Parabolic SAR is in short mode now.
2) We are operating in the lower half of the Bollinger Bands suggesting the long-term trend is down.
3) A close on 31 Aug less than 33.99 puts my trading model in full-short mode.
4) Bollinger Bands forecasting a significant breakout since they are narrowing now.
5) 38.2 thru 50 percent retracement appears to be in the works.
My conclusion is the short-term trend will not have legs...
http://img6.imgspot.com/u/04/233/19/QQQmonthly082004.jpg
Below is a chart of QQQ using monthly candlesticks. Five items of interest are:
1) Parabolic SAR is in short mode now.
2) We are operating in the lower half of the Bollinger Bands suggesting the long-term trend is down.
3) A close on 31 Aug less than 33.99 puts my trading model in full-short mode.
4) Bollinger Bands forecasting a significant breakout since they are narrowing now.
5) 38.2 thru 50 percent retracement appears to be in the works.
My conclusion is the short-term trend will not have legs...
http://img6.imgspot.com/u/04/233/19/QQQmonthly082004.jpg
BCA thinks oil is topping out... See http://www.bcaresearch.com/public/story.asp?pre=PRE-20040820.GIF
frankp3
I don't think oil will go parabolic. See http://www.bcaresearch.com/public/story.asp?pre=PRE-20040820.GIF
Technical Analysis: The Weekly View.
Associate the comments below with http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]wiclyiay[de][pb20!d20,2!i!a33.68!a31.92!a31.6...
The Weekly Slow Stochastic Oscillator. Salient points: 1) Deeply oversold; 2) Downward momentum starting to abate as the oscillator and its signal line (dash line) are converging. This configuration implies we are in a presignal area for a buy. A buy signal for this oscillator will occur when it turns up. Don't have to wait for the oscillator and the signal lines to cross because of the deeply oversold reading outside the lower Bollinger Band. Compare buy signals of this indicator with price action--it has been reliable and profitable.
The Chaikin Money Flow Indicator. The main attribute here is the loss of money flow is decelerating as a trend the last four weeks. This fact hints that distribution is slowing down.
QQQ Price Chart. This chart shows a weekly open and close outside the lower Bollinger Band. With the Chaikin Money Flow not confirming price action this week, we have a Bollinger Band buy signal. If the Chaikin Money Flow indicator had a new low with the new price low this last week, it would suggest a continuation of the down trend. That's not the case now. As a result, the upside target relative to the regression to the mean is the middle Bollinger Band or the 15 week simple moving average of price now around 35.
Raff Regression Line resistance is at 33.68 and support is at 31.92 for next week.
Price the last four weeks are down while volume is declining. This suggests long positions being forced to liquidate; downtrend will end as all sellers sell their positions.
The next significant Fibonacci support level is at the 38.2% retracement level or 31.60
Putting all this together points out the intermediate-term trend is still down. QQQ's downward momentum seems to be lessening, however, as signs are pointing toward a retracement of the intermediate-term trend. Key support should be between 31.60 and 31.92.
Technical Analysis: The Weekly View.
Associate the comments below with http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]wiclyiay[de][pb20!d20,2!i!a33.68!a31.92!a31.6...
The Weekly Slow Stochastic Oscillator. Salient points: 1) Deeply oversold; 2) Downward momentum starting to abate as the oscillator and its signal line (dash line) are converging. This configuration implies we are in a presignal area for a buy. A buy signal for this oscillator will occur when it turns up. Don't have to wait for the oscillator and the signal lines to cross because of the deeply oversold reading outside the lower Bollinger Band. Compare buy signals of this indicator with price action--it has been reliable and profitable.
The Chaikin Money Flow Indicator. The main attribute here is the loss of money flow is decelerating as a trend the last four weeks. This fact hints that distribution is slowing down.
QQQ Price Chart. This chart shows a weekly open and close outside the lower Bollinger Band. With the Chaikin Money Flow not confirming price action this week, we have a Bollinger Band buy signal. If the Chaikin Money Flow indicator had a new low with the new price low this last week, it would suggest a continuation of the down trend. That's not the case now. As a result, the upside target relative to the regression to the mean is the middle Bollinger Band or the 15 week simple moving average of price now around 35.
Raff Regression Line resistance is at 33.68 and support is at 31.92 for next week.
Price the last four weeks are down while volume is declining. This suggests long positions being forced to liquidate; downtrend will end as all sellers sell their positions.
The next significant Fibonacci support level is at the 38.2% retracement level or 31.60
Putting all this together points out the intermediate-term trend is still down. QQQ's downward momentum seems to be lessening, however, as signs are pointing toward a retracement of the intermediate-term trend. Key support should be between 31.60 and 31.92.
Steve
My forecast is we will get to 34.50-34.96 on the QQQ before the down trend resumes. 34.96 is a 50% retracement of the recent down leg and 34.50 has a lot of volume around this price level. I'm accumulating QQQ so long as its greater than 32.32.
michael03332002
Agree with your scalp buy here's why.
Regression to the mean is a statistically concept which says that all things will eventually come home; for statisticians home is the mean or average. Thus as price depart from the average, we should expect price to move back toward the average. This is the statistical concept being the technical terms overbought and oversold. Regression to the mean implies that prices at the edges of the distribution--at the upper or lower Bollinger Bands--will revert to the mean--the average, or middle, Bollinger Band.
While there is evidence of regression to the mean demonstrated by stocks, it's not a strong as it should be, so tags of the band aren't automatic buys or sells with the average as a target. This is precisely why I use indicators to confirm tags of the bands. With indicators I can make rational judgments about whether to expect regression to the mean or a continuation of the trend. When the chosen indicators confirms a tag of the bands, you don't have a buy or sell signal; you have a continuation signal. When a tag is unconfirmed, expect regression to the mean. In this manner I combine information from stats with information from technical analysis, relying on the strengths of each to improve my decision making. With this background set, let's look at today's action...
All of last Friday's price range was outside the lower Bollinger Band. This condition is very rare and indicates an extreme oversold position. In fact, since the market topped out in March 2000, there have been only seven other trading days where the open and close were outside the lower Bollinger Band. In 6 of the 7 cases, the minimum move was a regression back to the mean and in most cases a tag of the upper Bollinger Band resulting in significant profit. Therefore, the estimated probability is 86% we will have a regression to the mean off of today's close. If that happens, that a minimum 6%.
Now let's look at volume-based indicator I choose to employ--the Chaikin Money Flow indicator. The Chaikin Money Flow indicator is based on the Accumulation/Distribution line. It is created by summing the values of the Accumulation/Distribution Line for 21 periods and then dividing by a 21 period sum of the volume. A divergence between the Chaikin Money Flow indicator and prices is significant. When the most recent low point of the indicator is higher than it's prior low point, yet prices are continuing downward, this suggests a trend reversal is at hand. This is the current situation with QQQ.
http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]diclyiay[db][pc20!h.02,.20!d20,2!i!c50!c200!f...
Moreover, NAMO and NAA50 are also in presignal areas for a short-term buy. Check out the charts:
NAMO http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[db][pd20,2!a-55!a30!f][iut]&pr...
NAA50 http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[db][pd20,2!a-55!a30!f][iut]&pr...
As a result, recommend you buy QQQ in the a.m. premarket Monday and set a stop loss order 8% lower than your entry price. I'm playing the odds and going against the crowd for a short-term speculation.
Regression to the mean--what does it really mean?
I've mention this phrase several times and I wanted to explain it and its significance to the current state of QQQ.
Regression to the mean is a statistically concept which says that all things will eventually come home; for statisticians home is the mean or average. Thus as price depart from the average, we should expect price to move back toward the average. This is the statistical concept being the technical terms overbought and oversold. Regression to the mean implies that prices at the edges of the distribution--at the upper or lower Bollinger Bands--will revert to the mean--the average, or middle, Bollinger Band.
While there is evidence of regression to the mean demonstrated by stocks, it's not a strong as it should be, so tags of the band aren't automatic buys or sells with the average as a target. This is precisely why I use indicators to confirm tags of the bands. With indicators I can make rational judgments about whether to expect regression to the mean or a continuation of the trend. When the chosen indicators confirms a tag of the bands, you don't have a buy or sell signal; you have a continuation signal. When a tag is unconfirmed, expect regression to the mean. In this manner I combine information from stats with information from technical analysis, relying on the strengths of each to improve my decision making. With this background set, let's look at today's action...
All of today's price range was outside the lower Bollinger Band. This condition is very rare and indicates an extreme oversold position. In fact, since the market topped out in March 2000, there have been only seven other trading days where the open and close were outside the lower Bollinger Band. In 6 of the 7 cases, the minimum move was a regression back to the mean and in most cases a tag of the upper Bollinger Band resulting in significant profit. Therefore, the estimated probability is 86% we will have a regression to the mean off of today's close. If that happens, that a minimum 6%.
Now let's look at volume-based indicator I choose to employ--the Chaikin Money Flow indicator. The Chaikin Money Flow indicator is based on the Accumulation/Distribution line. It is created by summing the values of the Accumulation/Distribution Line for 21 periods and then dividing by a 21 period sum of the volume. A divergence between the Chaikin Money Flow indicator and prices is significant. When the most recent low point of the indicator is higher than it's prior low point, yet prices are continuing downward, this suggests a trend reversal is at hand. This is the current situation with QQQ.
http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]diclyiay[db][pc20!h.02,.20!d20,2!i!c50!c200!f...
Moreover, NAMO and NAA50 are also in presignal areas for a short-term buy. Check out the charts:
NAMO http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[db][pd20,2!a-55!a30!f][iut]&pr...
NAA50 http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[db][pd20,2!a-55!a30!f][iut]&pr...
As a result, recommend you buy QQQ in the a.m. premarket Monday and set a stop loss order 8% lower than your entry price. I'm playing the odds and going against the crowd for a short-term speculation.
QQQ Long-Term Analysis
The long-term trend appears to be at a crossroads since QQQ has consolidated the last six months. Using a monthly compression for the charts, a close on 31 Aug less than 34.50 suggests the long-term trend has changed to down as the 23.6% Fib retracement level will have been violated. This would imply a move to the 38.2% thru 50% retracement areas. The 50% retracement area lines up with the Sep 2001 lows too. Also note we are up against the 61.8% Fib Fan trend line which usually functions as resistance. Lastly, note the compression of the Bollinger Bands. This compression is forecasting a significant breakout. August should be an exciting month for trading!
P. S. Note the many negative divergences among indicators and price http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]miclyiay[d19990330,20040730][pc20!h.02,.20!d2...
Frank
Here's my QQQ observations for 27 Jul and trading plan for 28 Jul.
NAMO went on a buy signal today at Nasdaq breath improved significantly as shown by the upward cross from under -50.
(http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhllynay[db][pd20,2!a-55!a30!f][iut]&pr... area of concern, however, is volume was relatively weak. This is the key factor which is keeping me from closing the short and moving to a long position. Therefore, if QQQ will close greater than 34.61 and less than 34.96 on 28 July, I'm closing the short and moving to cash. If QQQ will close greater than 34.96, moving to 200% long position. (http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]diclyiay[dc][pc20!h.02,.20!d20,2!i!c50!c200!a...
Observations and QQQ trading plan for 26 July.
NAMO is now under -50 which signals a buy signal is close. A move upward signals a buy from the current presignal area. http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhllynay[db][pd20,2!a-50!a25!f]&pref...
NDX futures hedgers are positive. These guys are usually the smart money in the futures market.
Positive divergence between price and RSI (5) in that price set a new low and the RSI didn't. This suggests downside momentum is lessening.
The Chaikin Oscillator has a positive divergence with price. The most important signal generated by the Chaikin Oscillator occurs when prices reaches a new low for a swing, particularly at oversold level, and the oscillator fails to exceed its previous extreme reading and then reverses direction. That's what's happening now.
Lot's of support between 33.50 and 34.10. Moreover, there's a potential triple bottom showing indicating support on the daily charts. Because of all the above, if QQQ will close greater than 35.11 on 26 July, I'm closing my short and going long.
Observations and QQQ trading plan for 26 July.
NAMO is now under -50 which signals a buy signal is close. A move upward signals a buy from the current presignal area. http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhllynay[db][pd20,2!a-50!a25!f]&pref...
NDX futures hedgers are positive. These guys are usually the smart money in the futures market.
Positive divergence between price and RSI (5) in that price set a new low and the RSI didn't. This suggests downside momentum is lessening.
The Chaikin Oscillator has a positive divergence with price. The most important signal generated by the Chaikin Oscillator occurs when prices reaches a new low for a swing, particularly at oversold level, and the oscillator fails to exceed its previous extreme reading and then reverses direction. That's what's happening now.
Lot's of support between 33.50 and 34.10. Moreover, there's a potential triple bottom showing indicating support on the daily charts. Because of all the above, if QQQ will close greater than 35.11 on 26 July, I'm closing my short and going long.
Nas 100 ETF Short Term
Here's how I see QQQ short term. NAMO (http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhllynay[db][pd20,2!a-50!a25!f]&pref... still not under -50 which suggests more downside to 34.11--the low on 17 May. Also, the probability of QQQ's daily chart pattern being a head-and-shoulder top is increasing. If we happen to close less than 34.11 on heavy volume, the pattern will be confirmed IMHO. The minimum target then becomes 28.79. Stay tuned...
What do your tea leaves tell you fellow techs?
QQQ--Short Term
Here's how I see QQQ short term. NAMO (http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhllynay[db][pd20,2!a-50!a25!f]&pref... still not under -50 which suggests more downside to 34.11--the low on 17 May. Also, the probability of QQQ's daily chart pattern being a head-and-shoulder top is increasing. If we happen to close less than 34.11 on heavy volume, the pattern will be confirmed IMHO. The minimum target then becomes 28.79. Stay tuned...
What do your tea leaves tell you fellow techs?
Bliss
QQQ's volume was slightly above its 50-day moving average. With such a large price move today, I'd expect more volume to show new buyers were coming in vs. just short covering. Let's test the legs on Wednesday... If QQQ will close > 35.65 on 21 Jul, I'm closing my short and moving to long position with you.
Nas 100: At the Crossroads Again
What a couple of weeks to be short! Nevertheless, the rubber band is at an extreme point now and it's probable to snap back or break. Let's examine the daily price and volume-based indicators of QQQ which led me to this conclusion.
The selling pressure as measured by Larry Williams Ultimate Oscillator is at the most extreme point since mid March. Also of note is the extreme amount the oscillator is outside the lower Bollinger Band.
The 5-day RSI hasn't been this oversold since May of 2002 and is outside the lower Bollinger Band. The classical definition of oversold on the RSI is less than 30. We are at 10 now!
The Chaikin Oscillator is outside the lower Bollinger Band indicating oversold from a volume-based perspective.
The missing ingredient relative to saying a swing low is in is heavy down-side volume. Nevertheless, if QQQ will close greater than 35.46 on 19 July, then I'm closing my short and moving to cash. Moreover, if the upside move is on decisive volume, I'm moving to 200% long since the odds for a snapback rally to the mean inside the Bollinger Bands is huge with the current setup. Alternatively, we could also get a dose of heavy selling as volume accelerates to the downside providing the missing ingredient for a swing low. If that's the case, the current short position will serve me well...
Comments?
QQQ: At the Crossroads Again
What a couple of weeks to be short! Nevertheless, the rubber band is at an extreme point now and it's probable to snap back or break. Let's examine the price and volume-based indicators which led me to this conclusion.
The selling pressure as measured by Larry Williams Ultimate Oscillator is at the most extreme point since mid March. Also of note is the extreme amount the oscillator is outside the lower Bollinger Band.
The 5-day RSI hasn't been this oversold since May of 2002 and is outside the lower Bollinger Band. The classical definition of oversold on the RSI is less than 30. We are at 10 now!
The Chaikin Oscillator is outside the lower Bollinger Band indicating oversold from a volume-based perspective.
The missing ingredient relative to saying a swing low is in is heavy down-side volume. Nevertheless, if QQQ will close greater than 35.46 on 19 July, then I'm closing my short and moving to cash. Moreover, if the upside move is on decisive volume, I'm moving to 200% long since the odds for a snapback rally to the mean inside the Bollinger Bands is huge with the current setup. Alternatively, we could also get a dose of heavy selling as volume accelerates to the downside providing the missing ingredient for a swing low. If that's the case, the current short position will serve me well...
The Weight of the Evidence for QQQ
QQQ is at the 2/3 Speed Line (potential support), it opened and closed outside the lower Bollinger Band (95% of the time price closes within the bands), and the key 61.8% Fib retracement level held as support today. RSI and Slow Stochastics are oversold but haven't produced buy signals yet. In other words, momentum indicators are in a pre-signal configuration for a buy. A bullish divergence occurred when QQQ's price make a lower low that was not confirmed by a lower low in the Ultimate Oscillator. Because of this, a regression to the mean is nearly at hand--the rubber band is getting tight. (Hope it doesn't snap and we get capitulation.) Next potential support levels are 35.55, 35.20, and 34.10. As a result, if QQQ will close greater than 36.17 on 9 July, I'm moving to 100% cash from my 200% short position and take some of the house's money!
God Bless you and your family!
xe2dy--thanks for the URL.
Adam Hamilton has it nailed in the following article...
SPX Volatility Extinctions 2
Adam Hamilton
June 25, 2004
2961
We examine the unnaturally low volatility and high complacency that has plagued the stock markets in 2004 along with its implications going forward.
From a speculator’s perspective, 2004 has been one heck of a dull year so far in the US stock markets. The very volatility that usually creates the great opportunities to trade has been glaringly conspicuous in its absence.
Using the flagship American S&P 500 stock index as a proxy for the markets as a whole, the raw numbers tell this whole flatlined story. As 2004 dawned, the SPX closed at 1108. By early February it rallied to reach its latest interim high approaching 1158. Then it decayed and faded into mid-May when its lowest year-to-date close of 1084 was witnessed. This tight range of 74 points yields a minuscule trading range under 7% so far this year, amazingly low!
Just how amazingly low is this? Well, in closing terms the SPX swung 34% in 2003 and 34% as well in 2002. Thus, at this point in 2004 the S&P 500 has only run through 1/5th of the range witnessed in recent years! With the stock markets languishing in these surreal doldrums sans volatility, both the interest in trading and volume are vaporizing as speculators seek tradable markets elsewhere.
The art of speculation demands buying low and selling high, and when the markets stagnate they fail to provide the crucial low points at which to buy and high points at which to sell. The longer an episode of waning volatility persists, the more the general trading interest in a particular market fades. If you are not granted interim opportunities to either buy low or sell high at least a couple times a year or so, there is little point in spending time and effort to follow a dull market.
I have been marveling at this abnormally low volatility in the US equity markets all year. This week I would like to analyze and quantify this strange phenomenon. Is our perception of unnaturally placid markets backed up by the actual raw volatility data?
In order to execute this research, we decided to look at interday volatility, the actual day-to-day change in the closing price of the S&P 500. Unlike the mathematically complex implied volatility indices like the VIX, simple interday volatility is a much cleaner number since it does not rely on continually shifting options expectations running one month into the future. True volatility and implied volatility are both very useful and have their places, but this week we are using the true absolute interday numbers.
Provocatively though, the S&P 500 VIX and S&P 100 VXO implied volatility indices have just this week carved their lowest closing lows since the Great Bull of the 1990s. The NASDAQ 100 variant, the VXN, has plunged to all-time record lows. So while we are not specifically looking at the implied volatility indices this week, they also provide rock-solid evidence that 2004’s abnormally low volatility is very real and not just in our heads. Truly something strange is afoot.
I last discussed absolute volatility in October’s “SPX Volatility Extinctions” essay if you would like more foundational background information on these studies and their implications for speculators. Our graphs this week are modified updates of those earlier ones, focusing exclusively on interday volatility this time around.
Absolute interday volatility is calculated by subtracting yesterday’s SPX close from today’s and dividing the difference by yesterday’s close. An absolute value is applied to this quotient to ensure all the resulting volatility numbers are positive and comparable. The dark gray lines below graph these raw numbers, which can fluctuate quite violently day-to-day. A 10-day moving average, drawn in red, is also applied to smooth the raw absolute interday volatility calculations.
Our first chart takes the long strategic perspective, examining interday volatility in both Great Bull and Great Bear markets since the late 1990s. It is provocative to note that not even when the S&P 500 doubled from 1997 to 2000 did we witness a similar period of extraordinarily low volatility as we have seen thus far in 2004. The hard data backs up speculators’ perceptions of something weird transpiring today.
If you concentrate on the red absolute interday volatility 10dma line in 2004, it is apparent it has hovered around 0.5%. On average, so far this year the day-to-day changes in the US stock markets have averaged a trivial and not very exciting half percent or so! On a sidenote, when my partners and I talk about the markets each day as we work, we consider any daily move in any market of less than 1% or so to be “unchanged”, not even worthy of consideration in isolation. Most of 2004 has slumped under this key metric. Yawn.
In fact, if we average the interday volatility for the first half of this year, we arrive at an average daily move of only 0.58% for the S&P 500. This number, along with the annual average interday volatility numbers for all of the years shown in this graph, is noted above in yellow. We’ll delve further into these yearly averages below, but for now just realize that 2004’s unnatural serenity has been far more pronounced than even during the Great Bull years of the late 1990s.
Why is volatility so important to consider? As I outlined in my original essay, it is one of the best proxies for general greed and fear in the marketplace as a whole and hence tends to mark major interims tops and bottoms remarkably well. There is no more powerful force driving short-term market movements than this general greed and fear among speculators as a group.
If you carefully examine every major SPX interim low in this graph, during both bull and bear, you will note that they all corresponded with big spikes in interday volatility. Conversely, major interim tops coincided with periods of low volatility. If some visual guides would make this easier to see, the first graph in “SPX Volatility Extinctions” has vertical lines drawn in to connect these volatility episodes with the respective interim turning points which they flagged in the S&P 500.
Volatility quantifies general speculator emotions so well because it captures the behavior of traders at turning points, and this behavior is driven by emotions. The greed and fear that drive the short-term markets are asymmetrical, with fear being a much more powerful and urgent emotion than greed. While greed nurtures itself gradually, fear ramps up very fast once speculators feel they are in danger of getting really hurt and losing big.
To illustrate this market truism, imagine the behavior of a group of tourists visiting one of those enormous Las Vegas casinos on the Strip. As the tourists wander through the casino floor, they see other people winning money so they get interested. After observing a bit they are sucked into the glitz and glamour and are ready to gamble. They sit down, relax, play the games, and visions of wealth dance through their heads. Speculators in the financial markets act the same way, biding their time initially and only growing greedy once they see someone else winning so they want a piece of the action for themselves.
On the other hand, what if this same group of tourists was in the casino when a cell of terrorists armed with AK-47s and grenades burst through the doors and started randomly shooting people. God forbid, but the black fear would be overwhelming and everyone would instantly forget gambling and jump up and scramble for the opposite doors, creating a stampede. Once people fear for survival, their own or their capital’s, fear wells up instantly and the need to escape becomes blinding and all-consuming. In the financial markets this flaring fear coincides with the heavy selling at major interim lows.
In the stock markets volatility acts as a proxy that quantifies general greed and fear. When the markets are up and others are winning like at the casino, greed waxes extreme among speculators. Trading tends to be less aggressive as everyone relaxes and enjoys the ride. Without heavy trading, volatility gradually shrinks towards oblivion as greed rules. Naturally though, as all contrarians know once greed grows too great an interim top will be reached and a correction or downleg will be necessary to burn off the greedy speculative excesses.
Once these corrections or downlegs run their courses, general sentiment is overwhelmingly negative as a major interim bottom is approached. As fear soars, speculators grow frightened and run for their lives much like the tourists would during a terrorist attack at a casino. Heavy panic selling leads to a great increase in volume and an explosion in volatility. And just when things seem like they are never going to get any better again, the capitulation ends, volatility plunges, and the next rally or upleg can rise like a phoenix from a clean sentiment slate.
This pattern is fascinating as it holds up flawlessly in both bull and bear markets. Emotions are powerful forces, but they only react over the short term. Thus, an endless torrent of tactical emotional waves running from greed to fear and back again cascades through the markets constantly, regardless of whether the primary long-term trend is bullish or bearish. The chart above really drives home these crucial speculation concepts.
Therefore from a contrarian perspective the prudent course of action when popular greed swells and general volatility nears extinction is to sell and plan for an approaching correction or downleg. Bringing this analysis full circle, right now in 2004 we have seen the lowest volatility levels in about a decade or so. Low volatility always betrays extreme greed, an environment much like today’s when the vast majority of players expect the markets to catapult higher. Yet, these very greed/volatility extremes tend to mark major interim tops, the time to sell or go short.
While the nearly year-long unnaturally low volatility stretch through which we are sojourning today is certainly unequalled anywhere else on this chart, it is really provocative to note the only other place which came close. If you examine the 0.5% line relative to the red 10dma above, you will note that the only remotely comparable volatility period was the notorious summer of 1998.
The summer of 1998 was initially much like today, with very positive general sentiment and a complete lack of fear coupled with the usual vacation-months slowdown in trading. The past year had been very kind to stock-market investors and Wall Street predicted great gains ahead. All it took was an unforeseen exogenous event, however, to shatter this bubble of complacency and pummel the SPX 19% lower in a matter of weeks.
Devaluing currencies and a Russian default on its sovereign debt led to enormous problems for hyper-leveraged derivatives players like the elite hedge fund Long-Term Capital Management. LTCM’s spectacular implosion, of course, frightened Wall Street and the Fed so badly that they engineered a bailout lest the derivatives fireworks spread and endanger the entire US financial system. While the low volatility in stocks did not spark this crisis, it did provide the perfect backdrop of complacency and low volume to greatly magnify its impact on the markets.
The past year or so has been even worse in terms of greed and complacency than the summer of 1998! For a lot of reasons including the upcoming US elections, speculators just seem to generally believe that the stock markets can only move higher. However, as contrarian speculation theory states, the very times when consensus is vastly in favor of one particular direction is when a sharp move in the opposing direction becomes most probable.
A topping market on low volatility is very fragile and highly susceptible to a catalytic shock from some unforeseen exogenous event. We are certainly in this fragile zone now, and while no one can know what potential surprises are approaching over the horizon to spark the fear that will pop this sentiment bubble, we can know that the risks are extraordinarily high. In both bull and bear alike, very low volatility levels are harbingers of a coming major correction or downleg, not higher markets ahead.
If we zoom into this chart to just encompass the market action since the beginning of 2003, the amazing volatility lows and decaying topping pattern in the S&P 500 become even more apparent. The yellow numbers on the left show the average daily interday volatility of each of the past seven years in reference to 2004 year-to-date. It is certainly ominous to realize that 2004’s average volatility is running far below that of even the greatest bull years in memory, the late 1990s.
The Great Bear years of 2000, 2001, and 2002 witnessed average absolute interday volatility of 1.12% in the S&P 500. As expected since greed and fear are asymmetrical emotions, the Great Bull years of 1997, 1998, and 1999 had a lower average interday volatility of 0.89%. 2003, not a secular Great Bull but a definite cyclical bull, weighed in at a very similar 0.83% in volatility. All of these numbers make sense in light of the way volatility works, until 2004 enters the scene.
Year-to-date, we are only running 0.58% in average absolute interday volatility in the SPX. This number is stupendously low and arguably flags one of the most overly complacent markets in modern history. With 2004 volatility only running about 2/3rd of what we would expect during a typical bull market, the probabilities of this being a major interim top grow very high.
The technical picture certainly supports these topping arguments as well. In S&P 500 terms, the blue line shows the decaying downtrend channel in the SPX in 2004. The US stock markets are gradually making marginally lower highs and marginally lower lows. Meanwhile the 50dma and the 200dma of the SPX are converging. The next minor selloff in the S&P 500 could very well take it below its key 200dma bull-market support just under 1100 now.
And while the S&P 500 appears to be topping, volatility is flatlined along that incredibly rare 0.5% interday 10dma line. While 0.5% has been touched about a dozen times in the last decade or so, it is extremely odd to see volatility remain near or under it for almost a year straight. The red technical lines framing the volatility 10dma trend really highlight this flatlined hyper-complacent development.
Another interesting observation involves the actual raw interday volatility data itself, drawn in gray above. In 2004, the highest absolute volatility days have only run around 1.5% or so. This compares to high days of 3% to 4%+ in normal bull and bear markets. Even on the most “extreme” days so far this year, the extinction of volatility becomes apparent and really sticks out like a sore thumb.
Why is volatility so low? I suspect it is probably at least partially because of the powerful election-year propaganda that Wall Street has been so zealously advancing this year. All day long we hear on CNBC and read in the financial newspapers how election years are generally positive for stocks. Never mind the last election year of 2000, which finished down by the way. After enough repetition of this election-year-bullish mantra, true or not, bulls get lulled into complacency so they don’t trade and bears just stand back so they don’t get hurt.
A lot of folks believe active manipulation is happening in the SPX futures to attempt to steer the US markets in a tight trading range at worst leading into this autumn’s elections. The usual suspects are believed to be responsible, the Fed and/or the Working Group on Financial Markets (aka Plunge Protection Team the Wall Street Journal talked about following the 1998 crises). Not being an SPX futures floor trader myself, unfortunately I can’t know for sure either way on this, but I do know without a doubt that for unknown reasons 2004 has been unnaturally calm.
Whether these surreal volatility doldrums are a consequence of herd psychology or active engineering, the longer they last the higher the probability of a serious correction or downleg becomes. Sentiment in the financial markets is like a great pendulum, the farther it swings towards greed the more momentum it gathers so the farther it will careen back into fear once it reverses. Like a rubber band can only be stretched so far before breaking, there are finite limits to popular greed and complacency.
Disregarding the disturbing volatility extinctions today, the headline markets appear to be relatively strong with little risk involved. I suspect this is what most American investors feel today, high complacency and little fear that prices are going to fall leading into an election. But when volatility and other sentiment indicators are considered, complacency and greed are far too high. These are the exact market weather conditions we would expect before a major fall.
In general, in bull and bear alike, low volatility is a telltale sign of major interim tops, not bottoms. Just when greed and complacency wax the most extreme, the markets tend to correct or fall to bleed off these unhealthy speculative excesses.
Just as many speculators have sensed, the raw numbers absolutely back the observation that volatility levels in 2004 have been off-the-map low. These strange developments are no doubt important and should not be taken lightly.
With today’s anomalously low volatility, it sure appears like probabilities massively favor the thesis that we are witnessing a major interim top in 2004. If low volatility marks major interim tops, then isn’t it logical to assume that unnaturally low volatility marks even bigger major interim tops as well?
I don’t know what the catalyst will be that pops this massive bubble of complacency boiling in the US stock markets today, but it is probably stealthily approaching over the horizon. Please be careful on the long side until we see how this peculiar anomaly manages to resolve itself.
Adam Hamilton, CPA
June 25, 2004
Will 2004 be an “Average” Election Year?
In spite of a couple of scary sell-offs, 2004 may still shape up as an “average” election year. Gains have not been spectacular this year, but there are profits to be found, as we carefully navigate the choppy waters between now and November’s election.
Election years are normally stable for the stock market. This table shows actual gains and losses in the S&P 500 between July 1 and Election Day for the Presidential Election years. There has not been a single election year since 1928 that experienced more than a 3.4% loss. There are never any guarantees in the stock market, but these are the kind of odds we like to see.
See http://www.investech.com/others/chart.cfm?id=495 for the chart and graph for the above.
BlissBull
You points are noted.
QQQ is at the crossroads once again. So far the 50% retracement level has held two consecutive days. With a close > 36.61 on 8 Jul, I'm going from a fully short position to 100% cash. Why not go long? NAMO isn't in a good reward/risk position for going long as the best buys are generated when NAMO <= -50. See http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhllynay[dc][pd20,2!a-50!a25!f]&pref...
GL!
Hi BlissBull,
I don't trust the five-period RSI for the QQQ now. With the 50 day EMA being takin out decisively today, I see a minor retracement back to 36.40 area and then a further decline to the 200 day EMA. Morevoer, Nas breath isn't that bad considering what the large caps have done the last three trading days. Lastly, slow stochastics aren't confirming the 5 period RSI signal. Therefore, my current target is 35.25 area. http://stockcharts.com/def/servlet/SC.web?c=QQQ,uu[w,a]declyiay[db][pc200!h.02,.20!d20,2!a35.25!c50!...
OT--Whatever happened to Sentiment Guru?