Wednesday, September 8, 2010
Patience is the Companion of Wisdom (St. Augustine)
Not much occurred today to get excited about either for the bulls or the bears in my view. The market is not declining impulsively so far, but can easily develop into an impulsive decline as time goes on. But until then, higher levels are quite possible in the very short term. We have a nice bearish outlook setup here and the key now is "patience". I can't emphasize that enough. That means both pscyhological patience, and risk management patience - in other words, make sure you don't overleverage into a position that you can't withstand some minor upside potential in the coming days to where you get knocked out of the market before it tops.
The internals today again show a lack of interest in the market overall with only 879 million shares traded on the NYSE today. Today's push higher was weaker than the push lower as today only had 2082 advancers while yesterday had 2203 decliners on the NYSE, and on the S&P today had 362 advancers while yesterday it had 413 decliners. So as a very minor piece of evidence for perhaps a bit of a change in short term attitude, you can see that with volume practically the same in back to back days, the bears were a bit more aggressive than the bulls. This is the type of stuff I'm watching for signs of a top. I don't see anything compelling yet, but history tells us that we can easily see a sideways or upward choppy grind in the coming days before a top is registered. A day or two more like this will suggest that the market is consolidating, perhaps in a triangle, which would mean one more upward push before a top. But we'll see what Thursday and Friday have in store for us.
VIX CHART OF THIS YEAR'S STOCK MARKET SELL SIGNALS
Above is the daily VIX chart which shows the 3 times we've had a stock market sell signal execute this year. I circled them in red. Just to recap, the signal executes when the VIX's daily bar closes below the lower bollinger band and then does another daily close back above it.
VIX SELL SIGNAL JANUARY 12, 2010
Above you can see the daily S&P chart showing the market action leading up to, and after, the VIX stock market sell signal execution. In this case, the stock market was in an uptrend when the signal executed, then continued the choppy grind higher for 4 more days where it made a major top and led to a 105 point S&P decline
VIX SELL SIGNAL APRIL 13, 2010
Then above you see the daily S&P chart showing the market action surrounding the April 13, 2010 VIX stock market sell signal. In this case, the market again was in an uptrend when the signal executed, only the market held up for 9 trading days this time before topping out and leading to a 192 point decline in the S&P.
So these signals in the VIX are rare as you can see this is only the 3rd time all year we're getting one. But the signal doesn't mean the market falls immediately, in fact both of the last two times the market made new highs before topping. But so far these past two indicators were very accurate in predicting major market tops occurring within a short period of time.
So the key here is patience. It's all about trying to block out the short term noise that will occur in the coming days and the mental sword fight that occurs in all our heads when the market does do what we want it to do. Let the market have some time to work through its topping process. I will be adding to my short positions as new highs are made in the coming days. I'm using put options in the SPY and QQQQ for this move since this is the rare occasion when I don't want to worry about price stopping me out since I strongly feel a major top will occur in the next few days.
After letting the euro structure unfold to the downside we see a nice 5 wave impulsive decline from 1.2918 with a small 3 wave correction so far. With that structure in front of us, I have no problem adding to my short position now with a stop just above the start of the 5 wave decline at 1.2918. Otherwise, the other shorting opportunity I see is on a break below 1.2625 because it would be a good sign that the longer term trend has returned to the downside
Side note: EWI is offering a free technical analysis handbook until September 22nd. I looked through some of it today and found some of it pretty useful. It's worth checking out since it's free and I'm sure many of you could find uses in at least portions of the booklet like I did:
Learn more about this free eBook, and download your copy here. Hurry, this valuable eBook is offered free until September 22, 2010
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.