Stock Market Technical Analysis
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In the market today we went back up early to do a back test of the S&P 1928 line, held a little, then dropped back down into the bell. Before we look at the damage done today I'd like to focus on the big picture of the VIX.
In the VIX chart, the lower chart above, it can be seen that the playing field from the red sell area up to the green buy area has had the goal posts set at 13 and 21 through the latter part of 2012 and into 2013. In March of this year they moved the buy area down to 17 which has been the buy area until recently. Now that the S&P has lost its 2 year up channel they're obviously going to be forced to move the VIX buy area back up to 21. The VIX surge today was definitely overdone numerically and it took us all the way up to the 21 line. It's reasonable to expect that they must make that the new buy area, the same area we have used the previous two years. They have to make sure the 21 line holds and becomes the new buy area because the next level up is the 38 to 40 range, the 2010 post bank crisis area. If the VIX climbed up to that level, the damage to the stock market would be catastrophic because of the height at which we are perched.
In the process of considering if we are near a bounce area with today's 21 VIX, we can look at the S&P chart (above the VIX) chart and see that we closed at the early August lows and also right at the 200 day SMA line. It would be reasonable to expect that these two important support lines could be successfully defended at least for a couple of days if the selling worsens. The longer we stay in the VIX 21 range the better it becomes established as at least a stock market bottoming area since it was the buy area for 2012 & 2013. We will have to see but it is quite possible we are already in the bounce zone because of that VIX 21 line.
Now to take a look at the damage done today in the chart clusters below. The VIX climbed back up into its late September uphill red channel while the S&P continued to establish its secondary channel shown in red.
Looking at the S&P and VIX EMA pivot charts below that I have focused on the past few nights, the focused views on the right sides show we have clearly down crossed on the S&P and up crossed on the VXX. Or have we? Remember these are exponential moving averages and with exponentials a big enough move in one individual bar in the opposite direction of the trend moves the position of the actual EMA line substantially in the previous bar and some in the third bar back. With everyone expecting a black Monday, I'd like to look at the contrarian position. What if they decided to jam the S&P in premarket Monday to defend the 200 day EMA line and the early August low? A large enough up move Monday could still pull the tip of the red S&P EMA line back up to a merge instead of a down cross that is showing now. This has happened before, specifically, the first week of February this year where we clearly showed a down cross until they jammed the market for two days straight changing a visible down cross into a line bounce and then a multi-week rally. Just for the record, this is still very possible because the position of the tips of the lines in the current down cross is identical to the line positions in late January, early February where we sold off and then had a surprise reversal.
It may not happen, may not even have a chance of happening but the name of the game is to always consider the contrarian view because the stock market has a long history of doing the opposite of what the masses think it will do at critical junctures.
Trade well my friends