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    Wednesday, April 02, 2008

    Market Breakout

    Kevin over at Kevin's Market Blog said it best on his Dow Theory watch; Dow followed Transports higher.




    While the Semiconductors did their bit to support the Nasdaq 100 with a breakout of their own:


    But there is the question as to what volatility (and fear) will do now there is a test of the 200-day MA? Will profit takers emerge? Or will the 200-day MA turn from support into resistance, thus supporting a more substantial rally than previous corrections in this indicator have given?


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    Tuesday, March 18, 2008

    Volatility and the 2000 top

    I took a look at the 2000 top for the S&P and compared how volatility from then compared to now. During the 2000 peak there were four small sub-30 micropeaks, a sharp drop, then a rally to 35 which was associated with the cliff fall for the early part of the 2001 decline in the S&P. Monday's peak above the recent triple top may precede such a decline, although breadth indicators do suggest otherwise (i.e. this will shape into a double bottom).

    However, it has been a while since the VIX has seen a spike to 45. It would be hard to argue against another one happening soon, which would mean more pain for the markets.



    The Fed may bring some short term welcome relief, but when the guts of next rally are done we could have the kind of setup where a VIX spike to 45 would be favored. Perhaps September/October of this year??? Who knows, but the beast is out there - lurking, waiting to strike.

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    Tuesday, February 26, 2008

    Volatility and Zig Zag

    There was an interesting relationship between profitable long trades in the S&P and the Zig-Zag indicator applied to the VIX. Over the past 10 years there have been 4 periods when a trade initiated at turns in the Zig-Zag indicator have turned profitable long trades - with no failures. The 'buy' side Zig-Zag signal has matched reaction lows in the S&P very nicely. The 'sell' side Zig-Zag signal has been a little early, although during the 2000-2003 Bear market it gave a perfect signal.

    However, one thing which has been consistent across 'sell' signals has been a lower 50-day MA compared to the 200-day MA. In the current market, this would approximate to another 6-months of VIX weakness/sideways action (and higher market prices). In terms of S&P returns it could be anything from 15-50% depending on market conditions (likely the lower end of this range for a bear market). Does this rank as another tick in the bull column?




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    Bullish Percents mixed once more

    The Nasdaq Bullish Percent turned bearish with a drop below its 5-day EMA. If this weakness was to represent itself in the index I would look for a new closing low for February (but not necessarily a break of the month's intraday lows). However, the index does sit close to a break of declining resistance connecting January, and both February reaction highs - a big day this week would break through this resistance and likely negate the 'sell' trigger in the Nasdaq Bullish Percent:



    Better was the leading action in the Dow Bullish Percent. It finished Monday at 33% having managed a new reaction high for the month. This strength filtered through to the index Monday when it made its first break of the two reaction highs for February. Look for this strength to continue with a further push above 12,750 (but 12,200 can't be violated on a closing basis):



    The S&P Bullish Percents has yet to push above its February reaction high. The action in the index is a little better in that it has surpassed its first reaction high for February, in addition to a resistance line connecting December and the two February reaction highs (based on closing price - but resistance connecting January and the two February reaction highs holds).



    On a final note, the VIX looks ready to test its 200-day MA as I had suggested here. Bears would then be in a better position to scare bulls out of their positions.



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    Friday, February 08, 2008

    Bulls step in....

    The McClellan Oscillators held their bullish form as bulls stepped in, with volume, to stall 3-days of declines. At least on a closing basis (ignoring the intraday range) both the Nasdaq and NYSE are on course for a double bottom; confirmation will come on a closing break of 2,400 for the Nasdaq and 9,250 for the NYSE.





    Dow Theorists will take comfort in the strength of the Dow Transports. Note how bulls maintained control as other markets reversed from their late January bounce [+DI > -DI; ADX > 20]. Stochastics are overbought which suggests a pullback to test the 50-day MA is needed to shake out the last of the weak hands. Volume in this index has certainly sided with the bulls.



    Volatility watchers are unlikely to see another spike into the high 30's on this decline, and those waiting for a second spike before buying are likely to be disappointed. A push back to the 200-day MA would look to be the most likely scenario.



    Nasdaq theorists will look for the semiconductors to build on Thursday's doji. There is a need to show bears last Friday's big gains were something more than just short covering. Up to that point the index was well on course to building a meaningful rally (having weathered January declines relatively well), but this week has knocked that idea back a bit. The difference between the 50-day and 200-day MAs has stretched out to 16%. Not since 2004 have we seen this much differential between the two averages.



    But even back in 2004, semiconductor prices moved much closer to the averages than they do now. The difference between the 50-day and 200-day MAs is likely to widen before improving as prices work back towards the averages. Bearish trend strength is considerably stronger in 2008 with ADX peaking in the mid-50s compared to low-40s in 2004. This suggests an oversell in the semiconductors. But I won't deny rose-tinted glasses are on because of my SMH position. Buyer beware



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    Tuesday, January 22, 2008

    Brace for Impact!

    The stage is set for the capitulation:

    [1] Futures are horrendous


    [2] The VIX is ready to spike from its consolidation


    [3] Volume will no doubt be huge

    Grimace


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    Thursday, December 06, 2007

    Volatility and the S&P

    Volatility and the S&P sit at two important tests; the S&P is nestled against 200-day MA resistance, while volatility holds at 50-day MA support. The relatively high volatility suggests a good deal of fear in the market which should be (contrarian) bullish for the S&P. However, the S&P sits at a (potential) major resistance level and with oversold stochastics for volatility combined with what looks to be a positive test of support at the VIX 50-day MA. It could be a rocky road down to August lows in a "Bah Humbug" kind of way for the Blue Chip average.

    If this turn of events was to occur it should reveal itself over the next couple of days. I suspect the next major downward turn for the market won't occur until Volatility makes its way back to the 200-day MA.





    So patient buyers might find some joy taking advantage of what could be a short, sharp, retreat for the S&P before rallying back to its 200-day MA (and possibly higher).


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