Friday’s price action has allowed DIA and SPY to breakout out of the overhead resistance it was facing the last two weeks. With this breakout, the two indicies have clear shots at their all-time highs. SPY is pretty much within this resistance area any further upside and those highs are tested. DIA has a little more room but there is little resistance till those highs. As long as SPY stays above 208.18 and DIA stays above 179.75, the bulls hold the edge.
Dow Theory is simple, it says the market should rally with Transport stocks. So lets break down the Transports. First the Transports was one of the few sectors that was green on Tuesday which is a bullish sign. Our indicator flashed this sector as oversold on Monday and has since moved away from oversold. The bounce on Tuesday supports further upside if it can get above todays high at 155.22. Looking at this chart, though the Transports are resting at some serious support and over the past two days has been able to stay above this cliff of death.
To play this sector with a normal ETF, is just as easy. IYT tracks this industry and has a similar chart. Any break below 153.50 is bearish and its bullish above 156.18. A move above 156.18 and 160 is very possible. The risk/reward here is not bad risking about 1.5% on the downside with a stop below 153.00 for a reward of 160+ on the upside.
Below is a chart that shows a nice correlation between the price action of VIX and SPY and their 20, 2 Bollinger Band. What the chart shows is that typically when the VIX hits the upper level of its Bollinger band along with SPY hitting the bottom of its BB, it marks a low in the market and a bouncing point. It is same on the opposite side of the Bollinger Band, so when VIX touches the bottom of its BB and SPY touches the top, this marks a top in the market.
VIX touched the touch of its BB yesterday but SPY did not. This pattern usually jump starts when both hit the BB and the VIX will typically hover around its BB for 2 – 4 candles. For SPY to hit its BB it would need to get to 203.38, which is right around the March lows. This correlation is pretty strong and it shows there is some potential for further downside but it is limited. Plus our signal is flashing oversold I know not music to Slopers ears so be careful!
The market has fallen a little over 3% since it hit its highs and in the new bull fed supported market this is considered a crash, there is an overall lack of fear this decline compared to the last declines. Looking at the chart below you can see that the VIX index rallied at least 40% before the market bottoms. The stepper the decline the larger the drop but on average the VIX climbed 86%. So where are we now. Well the market has declined around 3.9% and the VIX has climbed about 35%. So what does this all mean, well it means there is a strong possibility that the market has another 2-3% decline and the VIX has another 5%-10% rally before we can start thinking a bottom has been put in. Of course the markets can prove us wrong but history does repeat its self. Click the chart to zoom in. (more…)
Oil broke below support today but managed to close back above it. Key support for oil is at 48.46. What makes this level important is that it is the base of the descending triangle that has formed. It is make or break time for this pattern, as oil nears the sweet spot of this pattern. The key levels to watch now are the 50.15 level and the 48.46 level. A break above 50.15 voids this pattern. While a break below 48.46 and more importantly a close below it, confirms that pattern. The descending triangle provides a potential move of about -10% if it was to break. This would send oil down $44. Keep an eye out because if Oil sells off it just might be that catalyst that gets this market to sell off further. This pattern is also seen in USO. (Click on either chart for larger version): (more…)
Below are two charts showing centered around CPCE the Put/Call Ratio. On Thursday the CPCE hit .79 with the VIX below 20. The charts below indicate other times when this has happened. The .79 CPCE is not a high number at all but in looking at it with a low VIX it is. What the charts show is that the market has a tendency to rally when CPCE is at .79.
The chart also shows that the CPCE will climb higher before the market bottoms when VIX climbs higher. This means whats VIX and the market, if VIX rallys above 17.84 a resistance level, there could be additional downside, if not and we see VIX settling back down the market may be bottoming. Feel free to discuss.
Over the last 10 days the market and SPY in particular have rallied off the lows of 135.76. Since then SPY has moved upwards establishing two new trendlines. The first is the extension of the long-term trend from December the second is a short-term trendline from 4/10. SPY upwards movement has also been capped by a uptrending channel. All-in-all this has created a bear flag bearish pattern.
Bearish Flag: Is a bearish continuation pattern that is formed after a down movement. Its is characterized by a sweeping down movement followed by an upwards consolidation.
- Measured Move: The "Flag Pole" for SPY bear flag is about 6, from 141.82 to 135.76. This means the estimated downwards movement of SPY would be 6 points from its break.
- Price Target: Depending on where SPY breaks a price target of this move would be 132.66