Caution tonight 10/25/10

Stock Market Technical Analysis

Click on above images to enlarge

Today the market did one of its trademark Monday ramp ups but then gave most of it back.  This is fairly bearish  considering where we are at.

Looking at the upper chart cluster, row 1, we see the the S&P keeps slipping out of its 8 week ascension channel and then clawing back up into it and then slipping again. The three inverse indicators, the VIX/fear index in row 2 and the 20 year bond and the US Dollar in row 3, are all trending upwards as can be seen in each one's small red channel.  The S&P should be doing just the opposite right now and trending downward, but the Fed just can't bear to let that happen right before elections.  Nonetheless it is easy to see that it is getting harder and harder to keep putting the S&P back up into its brown line ascension channel.  In row 2, now the Vix cannot be allowed to rise into its blue channel without crossing the heavy red breakout line which is where a market selloff could trigger if we cross above this red line.  With all three inverse indicators pointing to a down leg starting soon in the market, The FED had better act swiftly and forcefully with a major intervention or the market will start doing what comes naturally when it is at where it is right now.

In the lower chart cluster, row 1, chart 2,  we see the volume dropping off the past couple of days when it should be rising nicely considering how what a nice red/green line 5/10 line retest they are crafting just above it.  This is an indication that few are buying into it.  In row 1,chart 3, we printed a bearish candle today.  In row 2, chart 1, in the upper small card we see the VIX is trying to start another red/green line 5/10 retest upward indicating we are really close to a sell off.  In row2, chart 3 we see that the S&P keeps trying to get back up into summer's red line bull channel but keeps falling back out with every attempt. 

Considering how many bearish conditions we have showing tonight, those who are long stocks should be cautious here, this market could roll over fast if too many of the flash trading supercomputers get triggered into sell mode.

But ironically, anyone who is short the market should be very cautious here also.  For the past two months, every time the market starts to show it's at the brink of rolling over, the FED has intervened in a big way, causing huge short squeeze rallies.  

This is why so many people are so disgusted with this market lately, there is no longer any natural trading, just supercomputers humming away in locked rooms accounting for 70 % of the daily volume.  The market just drifts sideways with no direction bias until each time they come in and juice the pre-market futures, gapping the market way up with the first trading tick and then the talking heads on CNBC break out the pom poms and say the the market is "trading" higher nicely.

Alan

Daily chart 5/10 test tomorrow 10/16/10

Stock Market Technical Analysis

click on above images to enlarge

Today's market bounce back from tuesday's drop was designed to draw attention to the day chart 5/10  (red-green line) test that is coming tomorrow as shown in the lower cluster, row 1 chart 1.   The real story though is in the three rows of the upper cluster.  TheVIX/fear indicator, and the 20 year treasury and the dollar index have all three have been quietly uptrending for a week now as can be seen in the small red channels at the end of each chart (row2 and row 3 -chart1 and chart 2).

The S&P has been inversely trending down for a week now shown by its small red channel. This is an indication that the investing and trading community isn't completely sure the FED will intervene with another day 5/10 pump.  Everyone knows that many traders don't want to ride the momentum right up to the last election, knowing that the exits get crowded real fast if everyone wants out at the same time.

Granted everyone really expects the pump to happen, but if you study the violatility chart closely (upper cluster,row 2) you can see that when the vix moves back up into its 4 month blue channel it will be forced to also break above the thick red line, which could change things real fast. Safety has been found underneath the red downtrend line for 4 months. Now though, the VIX can no longer trade in the comfort of its blue channel without crossing the big red line also (the red line is normally considered the rally ender breakout),  Now the FED will have to jam the market higher big time to keep the VIX below the blue channel and below the big red breakout line. In naturally trading markets this is where everyone reverses their positions to profit during the down leg.

This market though is being fiercely driven higher, mostly through cheesy premarket gap ups on no news.  There is an old trader saying "Don't fight the FED"   If they want this market still higher you had better not be standing in their way.

Alan

Where we are at...10/19/10

Stock Market Technical Analysis

Click on image to enlarge

The past week we have seen a somewhat successful squeeze of the shorts to take the market higher.  The problem is that at the levels we are at, we are very vulnerable to any negative news such as China's interest rate hike today.  The chart I posted above shows the percent of S&P 500 stocks above their 50 day moving average.  This year's huge spring rally peaked at the end of March at 93% as is shown in the top center of the chart.  September's rally peaked at 93%.  Examining this chart closely helps to understand how far we have come so fast and exactly where we are at now.  Anytime this percent passes 90, typically major legs down in the market follow. 

That is the voice of reason.  Realize that the pressure on the fed to keep the market going higher right up to election day is tremendous.  Once this election passes and the pre election market pump is over, everyone will be looking at this chart to see just how high we are.  Just a little food for thought...

Alan

The big picture & short interest 10/10/10

Stock Market Technical Analysis

                                       click on the above images to enlarge

The two charts above are of the S&P 500 index. The lower is a 35 year chart and the upper is a 8 year chart.  We are now at a major long term pivot point.  The four year down trend line is shown in red.  The 20 year uphill channel in brown lines. With fridays close we are right at the juncture of both.  If we move higher from here we will have a double line breakout and a monster short squeeze potential.  If we move lower from here we will have a failure at double line resistance and it might not be pretty.

To make things even more pivotal there is the short interest on the Nasdaq 100.  The so-called smart money,  is now massively short.  According to the latest CFTC report, "smart money" commercial hedgers are now net short $7.9 billion worth of Nasdaq 100 large & E-Mini Futures.  That is an increase of 5.2 billion from the previous week. The previous record short interests were $4.3 billion in mid Oct 2007 which was followed by a 4 month, 20% loss in the market and $4.2 billion in mid Dec 2004 which was followed by a 4 month 15% market loss.

This is a very powerful double edged sword.  If the Fed starts to lose their ability to keep propping the market up, there could be a very strong downdraft.  If they are successful and continue to prop it and move the market higher, this massive short interest could turn into rocket fuel  for a monster short squeeze higher.

When you consider it all,  the fact that we are at a big double line pivot point, and opposite of all the massive shorting  is a very determined election ramp up in progress,  it is easy to assume that we might just see a little bit of violatility in the next couple of weeks.

Alan

High Frequency Trading on 60 minutes Sunday night...10/8/10

High Frequency Trading on 60 minutes Sunday night...

There has been a lot written this summer about the studies showing that at least 60% of all volume on the  stock exchanges is now nothing but super computers making thousands of trades per second, known as High Frequency Trading (HFT).  This Sunday evening, 60 Minutes will run a segment on one of these firms that is heavily involved in HFT.  It should be an interesting clip to catch...

Alan

US Dollar Index 10/7/10

Stock Market Technical Analysis

Click on above images to enlarge

Today's market was basically another sideways day on low volume.  There was one event in the currency markets that everyone needs to be aware of.  In the upper cluster, row 3, I reduced the 20 yr bond chart and added a chart of the US dollar index as chart 2.  There are 2 reasons why I am doing this, the first is that it has become widely known that the govt. is going to be stepping into the bond market again and buying bonds in a big way soon, this causes distortion in the bonds inverse relationship to the S&P 500 index.  There will be a lot of speculation going on, manipulation to get better pricing, etc. for a while so the 20 yr bond needs to become the #3 leading indicator of big moves in the S&P 500 and the US dollar index will be the new #2 leading indicator, it also normally works inversely to the S&P 500 index.    The bailout team's continuing pumping of the stock market for the past 4 weeks has actually received considerable backup from foreign investors who rotate back and forth between our dollar & our index ETFs.  Looking at the new US dollar index chart you see that the dollar had a critical breakdown on 9/1 and then again on 9/13 which lead to a steep dollar sell down over the past 3 weeks which caused huge amounts of global investment money to hop over to the US index ETFs to ride their momentum until the dollar index gets down to its lower line of its horizontal mother channel shown with the red line on the chart.  I put a yellow #3 line on the chart on today's trading to emphasize the caution that should be taken since the dollar historically turns back up here.  It is widely anticipated that the US will support the dollar and cause it to start rallying at this level as it normally does.  This will cause global investors to rotate money quickly back out of US stocks and into the US dollar for its ride up.  Granted we all know the US government's official policy is to support a strong dollar while they actually let it fall when it is politically beneficial to do so because in the world market this makes our products cheaper and gives the US an economic boost.  Considering how tenacious the bailout team has been on getting this market higher as we approach midterm elections, we can't rule out the chance of an unprecedented maneuver where they let the dollar fall out of this horizontal trading channel for a little while to juice the short term economic numbers even though it would be very risky for our position in the world currency markets. It seems though that the overwhelming sentiment is that we will have a normal reversal turn up in the dollar which on its own should cause large scale selling in stocks in which the bailout team will have to try to compensate for or we will fall out of the 4 week up channel that is drawn with the thin brown line in the upper cluster, row 1. 

One other notable item is in the lower cluster, row 1 chart 1, you will notice the divergence between the On Balance Volume trend and the S&P index trend (a reminder that the on balance nets out total buying and total selling on a daily basis to give either a positive or negative reading for the day and then plots it ongoing with the blue line as shown).  You can see that from 9/1 thru 9/13 the blue OBV line went up proportionately to the rise in the S&P index.  Since 9/13 though, the blue OBV line has been steadily trending down while the market has continued trending up.  This means that since 9/13 there has been massive unloading of stocks into each and every up move in the index.  This is an extremely bearish divergence that lets us see visually how the masses of investors and institutions are getting out of this market while there are still liquid up moves to do so in belief that the fed will not be able to continue to prop the market. 

The bailout team is really in a conundrum here in that if they step in and support the dollar at this level as the world expects them too,  it could jeopardize their ability to continue to prop the stock market into elections.  This developing scenario will be very closely watched here in the US and globally.

Alan

Market Breadth

Stock Market Technical Analysis

Click on above images to enlarge

Very little changed in the charts today, basically a sideways day overall.  I am going to take this opportunity to discuss market breadth for a moment.  Market breadth is commonly measured by the % of stocks above their 50 day moving average.   Major legs up in the S&P 500 index often take it to the point that 90% of its stocks are above their 50 day moving averages.  This 90% level is where most major rallys end and major down legs begin in the market. When we get above 90% we are considered to be entering bubble territory.

Yesterday's big short squeeze in the market took the S&P to the 91% level.  If they take us higher, even the bulls may begin to voice concerns.  This might be a good place to tighten your stop loss settings on open trades.

Alan

Stock Market Technical Analysis Blog

Click on above images to enlarge

LOL, You just have to love it...

After spending a week trying repeatedly to break out of its sideways channel using every trick in the book, today the bail out team decided to heck with legitimately trading the market higher method and decided to  pull out plan B - the old "Gap and Squeeze" and it worked quite well causing the shorts to spend the day trying to get their short positions covered.

In the upper chart cluster, row 2, the VIX / fear index, I drew in a red break out line to show why it was critical that they get the market higher regardless of how.

In the lower chart cluster, row 1 chart 1, we see how today's move twisted the red/green 5/10 downward pierce into a doglegged 5/10 bounce. 

In row 2 chart 2 we see that the bears kept the 30 min S&P from crossing above the lower line of the early summer red line bull channel, once again. 

In row 3,chart 3 we see that the advdec chart is up in the overbought area, so we will have at least an intraday pullback in the morning.

Where do we stand now?  We avoided a bullet when the VIX chart (upper cluster, row 2) came back down below the red breakout line. Yet it is equally as bearish that the 30 min S&P chart couldnt get back up into the red bull channel (lower cluster,row 2 chart 3).

Hopefully we don't start another week of drifting sideways that leaves few trading opportunities.

Alan