The “FROTH” Awaits…

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Since my last post of March 1st, the ES has made a new high, after experiencing a tremendous amount of volatility, as shown on the following Daily chart.

You can see that price nearly reached a 100% Fibonacci Extension level on Thursday, before declining on Friday. This extension was measured from the 2012 lows. For the most part, price has remained within the lower half of its channel from those lows.

Any further price movement above the 100% extension level would bring it into, what I’ve dubbed, the “FROTH” area, and would, potentially, be subject to even greater volatile price moves than we’ve seen since the lows of 2012. I’ve projected (on the ES) what, theoretically, could take place by September (albeit that would happen within the typical “Sell-in-May” Spring/Summer trading period), if we see large-volume buying occur in its corresponding SPX large-cap index.

We may track the relative movement and rotation of stocks from one index into another by watching the percentage movements of the 5 Major Indices, namely, the Dow 30, S&P 500, Nasdaq 100, Russell 2000, and the S&P 100 on one Comparison chart, as shown on the following Daily chart.

You can see that, from the 2011 lows, the Russell 2000 index has made the most gains on a percentage basis, followed by the Nasdaq 100, S&P 500, S&P 100, and the Dow 30.

Should we see the spread begin to narrow, with more money funneled out of the small-cap stocks (and/or possibly Tech stocks) and into the larger-cap stocks, I will assume that there is still a general buying bias in the markets. However, if we see all 5 indices begin to decline on accelerating downward momentum, then the markets could be in for a major correction.

You can see from the following Daily charts of these 5 Major Indices, just how much they’ve gained from their 2011 lows. All of them are well above a 100% External Fibonacci level since then. However, the buying momentum has begun to wane, perhaps signalling a reluctance or insincerity on the part of traders/investors. In fact, the Momentum indicator has fallen below the zero level on the Nasdaq 100 and Russell 2000 and is close to zero on the S&P 500 and S&P 100.

By the way, the S&P 100 has recently made an all-time closing high, but not yet an intraday high. We may see evidence of money flowing into that index sooner rather than later, if market participants begin a rotation into large-cap stocks.

The last chart I’ll show is a Daily ratio chart of the SPX:VIX. There is still room within its channel from the 2011 lows for further gains to be made in the SPX. I’d watch to see if the Momentum indicator falls and remains below the zero level as one gauge of possible further weakness to come.


So, we may either see all major markets continue their volatile intraday swings until they break and hold above their recent highs, we may see one or more index become weaker than the others due to a rotation of buying, or we may see a general market correction. The above charts will tell the tale in due course. We may not have seen a general market top yet, as conditions don’t appear to be particularly “frothy” or parabolic yet, but, who knows?

In any event, I believe that more volatility is sure to be the name of the game in the coming weeks/months.

Best of luck in the markets for the coming week!