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Wednesday, June 09, 2004 5:34:29 AM
from Morning Briefing
WEDNESDAY a.m. June 9, 2004
By David Nichols
Yesterday did indeed turn out to be a narrow range day, with the markets down a little bit, and then up a bit, and ultimately closing with a bit of strength. Such muted trading after a big candle is entirely normal. If the top of the big candle holds up on a closing basis -- as it did on Tuesday -- it usually means the market is going to continue in the same direction as the candle. In this case, that means more upside.
However, there's a problem right now, and it's leading me to recommend taking profits on ETF positions on Wednesday morning. That problem is a VXO reading now under 14.
You don't see that everyday, that's for sure. You can also see when the SPX is overlayed (blue line), that all these touches of VXO 14 have led to pretty significant declines.
Although many have abandoned ship on implied volatility, I'm not willing to bail on it as a market timing tool. Even in the lower ranges where implied volatility now lives, a reading under 14 is a loud warning sign that something could go wrong for the bulls any second. Since the recommendation to go long was back on the open on May 26, over 30 points ago on the SPX, then that's a trading profit that should be booked.
Now, it's certainly true that the put/call ratios have been running high lately, but this free-fall in implied volatility is making the sentiment picture confusing. With the VXO dropping from 17.45 to 13.75 over just the last 4 trading days -- a drop of 21% -- then the time to make "easy money" from long positions has already passed.
Although there is still some room on the 150 minute SPX chart.
Yet the daily chart is down at 37 on the fractal dimension, and the weekly is still in the congestion zone at 59. It's likely that the weekly will stay congested, and now the daily will go to work consolidating this latest uptrend. That could be a multi-week process.
I recommend taking those profits!
Important note: Tom McClellan's timing models -- featured in his twice monthly newsletter, available to our subscribers on the web site -- have been doing a great job calling the turns. Tom is expecting a top soon -- as early as this week -- followed by a brief pullback that sets up a buying opportunity for a higher high in early August. So we'll keep that road map in mind.
—————————————————————————————————————————
Momentum of Sentiment
By Adam Oliensis
On Tuesday we got confirmation of our short-term buy signal and our VIXMO oscillator moved up sharp and fast to get close to overbought territory. The SPX hung around very near to its upper Bollinger Band and the VIX dropped down to the key 14-15 band, closing at 15.01, just 0.75 above its cycle closing low.
With the VIX digging into support, with the SPX within 8 points of the key 1150-63 resistance band, and with the volume persistently low (9 straight days below its 3-month daily average on the NYSE) we'll continue to expect this short-term rally leg to fail at resistance unless/until we see strong evidence to the contrary.
That's SHORT-TERM failure we're expecting. After that short-term failure we'd be looking for mid-term success...a break above the SPX winter highs. And here's why.
It's hard to see on this zoomed out chart but the P/C 20-dma (red line) has "button-hooked" after hitting an all-time high.
A subscriber wrote to me yesterday asking why I didn't view this all-time high on the red line in a non-contrarian manner. I wrote back telling him (and the chart above shows you) that DATA tells us to view the high level on the red line as BULLISH.
To be mid-term bearish when the red line is above its +2SD line (green highlighted areas) is to bet on the long-shot. It would have worked in the summer of '02 in the terminal phase of the cyclical bear market, but at that point virtually ALL contrarian indicators failed simultaneously. In the other 4 instances in which we got the red line above its +2SD line the market formed very satisfying mid-term lows.
COULD this indicator fail THIS TIME? ANY indicator CAN fail at ANY time. But absent a bout of complete hysteria like the one the market saw in the summer of '02, history and reality suggest that the smart money should be betting against the crowd along about now. That red line WILL unwind in the mid-term. And that will almost certainly drive prices higher (most probably after a short-term failure at resistance).
WEDNESDAY a.m. June 9, 2004
By David Nichols
Yesterday did indeed turn out to be a narrow range day, with the markets down a little bit, and then up a bit, and ultimately closing with a bit of strength. Such muted trading after a big candle is entirely normal. If the top of the big candle holds up on a closing basis -- as it did on Tuesday -- it usually means the market is going to continue in the same direction as the candle. In this case, that means more upside.
However, there's a problem right now, and it's leading me to recommend taking profits on ETF positions on Wednesday morning. That problem is a VXO reading now under 14.
You don't see that everyday, that's for sure. You can also see when the SPX is overlayed (blue line), that all these touches of VXO 14 have led to pretty significant declines.
Although many have abandoned ship on implied volatility, I'm not willing to bail on it as a market timing tool. Even in the lower ranges where implied volatility now lives, a reading under 14 is a loud warning sign that something could go wrong for the bulls any second. Since the recommendation to go long was back on the open on May 26, over 30 points ago on the SPX, then that's a trading profit that should be booked.
Now, it's certainly true that the put/call ratios have been running high lately, but this free-fall in implied volatility is making the sentiment picture confusing. With the VXO dropping from 17.45 to 13.75 over just the last 4 trading days -- a drop of 21% -- then the time to make "easy money" from long positions has already passed.
Although there is still some room on the 150 minute SPX chart.
Yet the daily chart is down at 37 on the fractal dimension, and the weekly is still in the congestion zone at 59. It's likely that the weekly will stay congested, and now the daily will go to work consolidating this latest uptrend. That could be a multi-week process.
I recommend taking those profits!
Important note: Tom McClellan's timing models -- featured in his twice monthly newsletter, available to our subscribers on the web site -- have been doing a great job calling the turns. Tom is expecting a top soon -- as early as this week -- followed by a brief pullback that sets up a buying opportunity for a higher high in early August. So we'll keep that road map in mind.
—————————————————————————————————————————
Momentum of Sentiment
By Adam Oliensis
On Tuesday we got confirmation of our short-term buy signal and our VIXMO oscillator moved up sharp and fast to get close to overbought territory. The SPX hung around very near to its upper Bollinger Band and the VIX dropped down to the key 14-15 band, closing at 15.01, just 0.75 above its cycle closing low.
With the VIX digging into support, with the SPX within 8 points of the key 1150-63 resistance band, and with the volume persistently low (9 straight days below its 3-month daily average on the NYSE) we'll continue to expect this short-term rally leg to fail at resistance unless/until we see strong evidence to the contrary.
That's SHORT-TERM failure we're expecting. After that short-term failure we'd be looking for mid-term success...a break above the SPX winter highs. And here's why.
It's hard to see on this zoomed out chart but the P/C 20-dma (red line) has "button-hooked" after hitting an all-time high.
A subscriber wrote to me yesterday asking why I didn't view this all-time high on the red line in a non-contrarian manner. I wrote back telling him (and the chart above shows you) that DATA tells us to view the high level on the red line as BULLISH.
To be mid-term bearish when the red line is above its +2SD line (green highlighted areas) is to bet on the long-shot. It would have worked in the summer of '02 in the terminal phase of the cyclical bear market, but at that point virtually ALL contrarian indicators failed simultaneously. In the other 4 instances in which we got the red line above its +2SD line the market formed very satisfying mid-term lows.
COULD this indicator fail THIS TIME? ANY indicator CAN fail at ANY time. But absent a bout of complete hysteria like the one the market saw in the summer of '02, history and reality suggest that the smart money should be betting against the crowd along about now. That red line WILL unwind in the mid-term. And that will almost certainly drive prices higher (most probably after a short-term failure at resistance).
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