Hello Slopers,
Being that we’ve now passed through the “hold onto your hats” summer sell-off, the “try not to throw up” range, and the “I can’t believe we haven’t #$A@! pulled back yet” October rally, it appears we are once again smack in the middle of decision time to determine where exactly it looks like we’re going next. While I admittedly can’t guarantee what will happen next, I’ll try and get as close as I can.
The current Sloper sentiment appears to be very mixed between those who figure we’re heading higher into year end and those who are setting their sites on SPX 1000-1100 or so. At this particular time, I see potential for both, but am slightly leaning towards revisiting our recent highs at least in the short-term. As you may recall, when I first posted here in early October, I discussed the potential October 4th had of being an intermediate bottom and speculated that SPX 1220 could even be broken to the upside. Fortunately, I was correct (this time). If you want to read it, the URL is here:
http://slopeofhope.com/2011/10/short-term-bounce-or-bear-market-rally.html
Now to be honest, unfortunately, I didn’t hold on nearly long enough. I was out of my calls around the last hour of Friday, Oct 7th with a tidy 43% gain (which could have been 150% easily) and began the next week (once I had my weakness/sell signal) looking for a pullback which never came. Somehow, In Aug/Sept, I managed to pull profits nearly every week out of the range-trade, but as soon as we broke out of it, I lost all of that and then some which was mostly due to me rationalizing my way out of following my rules and letting my emotions make my trading decisions. BAD BAD BAD.
Which reminds me, a personal thank you to Market Sniper for his excellent post on keeping a trading journal which I spent a healthy morning designing. I just closed my first trade using it which thankfully warranted a “B” grade (I followed my trading plan and I made some money). After going through the October pain, I had to do some review and research and recommit myself to certain rules that I trade by. Hopefully, lesson learned.
Now it’s time for some charts. I’ve put together some comparative charts for the last six years to hopefully give us some perspective on what kind of market we’re dealing with here. These charts include in order:
-the McClellan Oscillator
-% of stocks above their 10wk MA’s
-% of stocks above their 30wk MA’s
-S&P 500 price
-VIX chart
I have two large charts for you today, one from 2006 through 2008 and the second from 2009 to the present day. I’m going to go through the indicators and lay out what I see in them.
To begin, from 2006 through 2008, the McClellan Oscillator had 17 instances where it dropped below -70 and reversed. Each and every one of them marked a bottom or near bottom (except in June/July ’08). One close near exception is mid-September which did mark a short-term bottom that didn’t break for seven days. So, only about 3 out of 17 turned out to be wrong about a near bottom. The McOsc is very good that way. Next, take a look at the %MA indicators.
I use the %30wk (150day) for the main momentum of the market and that filters the signals I get from the %10wk and pretty much any other indicator that I use. For instance, in May ’08, the %10wk was around the 80% mark which was a strong reading. However, the %30wk was around 60%, so only a little better than half of the market was above its 30wk MA.
Once the 10wk started to reverse, it was a strong indication that the bear market was continuing. Also, notice the strong negative divergence at the ’07 top with the %30wk. Generally, as long as %30wk holds under 50, the market movement will favor downside and when it’s above, it favors upside. One other thing I’ve noticed is that a lot of the time when %30wk remains between 40 and 60, the market has a tendency to become range-bound which makes sense because there are a lot of conflicting charts with a reading like that.
Additionally, there are a few things I’d like to draw your attention to in this chart. Notice in 2006, the McClellan did not often get down to the -70 mark. I would bet money this was due in large part to the low volatility. The VIX spent most of its time under 15 so a more appropriate McClellan oversold level was more like -30 to -50 or so. Also, just by looking at SPX you can see the tight little ranges throughout 2006 and early 2007 before becoming noticeably larger as the VIX increased (naturally). Now for an analysis of the last three years.
For the 2009 to present time frame. There were 18 McOsc lows below -70. Every single one except the Feb ’09 signal was an accurate indication of a bottom or near bottom which is an accuracy of 94%. The %30wk once again put in a huge negative divergence at the summer 2011 top which should have been a great warning that the market was falling apart. Add to that the fact that the VIX was making strong gains throughout July and you had a market condition that only the Hun and Lester could get bullish about. 😛
So what do current readings tell us? The %10wk has dropped fairly hard over the last week and that with the %30wk reading at only 22.40%. Even at the top of the 20% rally on the S&P500, only about 40% were above their 30wk MA’s which is not an encouraging long-term picture. The VIX also remains stubbornly above 30 except for a brief foray into the 25 area and the MA’s are obviously favoring further highs. Overall, the picture looks bearish.
I drew a few channels and possible trend lines on SPX and it appears that SPX tested the upper channel line of its Aug/Sept downward-sloping range and held for two days so far. I’m sure you notice the disgusting giant upward channel starting at the ’09 bottom which I just noticed as I was messing around with the chart.
I would fall off my chair if we broke the summer 2011 highs and given the VIX and other conditions, I believe this channel is in the process of breaking down, but there it is, nonetheless. That said, the McOsc put in a low today of -77.27 so the argument for at least a short-term low is there (probably into next week at which time I will have to reevaluate conditions). It is certainly possible that we get yet one more push into the new year and I am currently on watch for a buy signal or at least relieved oversold conditions before going short again.
Well people, stay limber, try to trade what HAS happened in the world and not what you think will happen.
In closing, I’d just like to throw out an idea for an actual (perhaps weekly) Sloper Sentiment survey. I’ve seen blogs where you can just click and enter your vote and it might provide us with some interesting results over time. In the meantime, make your plans, trade your plans, and maybe even make some money!
