Every evening I publish an outlook for the next day's trading in the SPY ETF … it looks at important levels and potential patterns. Then on the following morning, I update the outlook with a tighter focus on the pre-market action and the specific Control Bar Values and other support/resistance areas.
I suggest that this exercise makes me a more prepared trader and I would suggest ALL active traders perform a similar exercise. For illustration purposes I will combine last night's report with the pre-market update that I just published.
Cheers …
Pre-Market Update …
The markets are trying to rally here pre-market … here are some longer-term charts followed by the relevant 3-minute chart with the important levels to keep in front of you today.
SPY Daily Chart
The daily chart above shows something interesting … momentum made a new high, while price failed to make it back to the high of the current wave structure. This implies a retest of the high is yet to come, and that a new high is likely.
When looked at on a daily basis, price still looks fine as even with the current weakness, it is still above the Aug-Oct consolidation pattern (high of $123.51).
SPY 60-Minute Charts
Price could find support here at the first level of support if Europe cooperates … if traders are not sure of what is going on and some additional selling pressure surfaces first thing, then look for price to extend down to the next target area (2.618x) at $122.50 – $122.40ish.
Noitice that momentum has decidedly one-sided, but on the other hand, it has not pushed to a new low.
That expected area of support is actually equal to the top portion of the SLOT … that area looks like a nice target zone.
Note that the MFI indicator actually made a new high for the current structure Thursday morning on the failed break higher …. there are lots of signs that price should make another attempt at breaking higher back to at least the Oct 27th high.
SPY 3-Minute Chart
Except for the Control Bar Value drawn off of the last bar of the day from yesterday, I kept the CBV's over from yesterday. These levels were so important yesterday that they will have importance again today.
Apple Inc …
I thought I would include a couple of charts on AAPL this morning. The chart is at a very interesting point here.
AAPL 135-Minute Chart
AAPL is knocking on the important 50% retracement level drawn from its all-time high back on Oct 17th. That level was also a big level of prior failed support.
More importantly is that the wave structure has a nice neat/clean wave look to it. To me the recent action is the corrective 4th wave. That implies that a break of that 50% level would also mean that the 5th wave has kicked off.
My 5th wave target zone is $403.52 – $412.64. The $408ish level was the top area of the second wave consolidation from Oct-early Nov.
AAPL 10-Minute Chart
Here is a closer look at the possible start to Wave 5 … my target zone for smaller wave iii of Wave 5 is $397.79 – $400.75.
Sentiment Trader Notes …
Selling Pressure
We finally saw some selling pressure, which was more expected earlier in the week. It was enough to push measures like the Cumulative TICK into extreme territory.
2% Drop In December Isn't That Unusual
While December has a well-deserved reputation for being positive, today was the 53rd time since 1928 that the S&P 500 has dropped -2% or more in the month. It's not all that unusual – January, February and July all had fewer -2% drops than December had.
When the S&P lost -2% in December, performance in the day(s) ahead was mixed, about in line with random. Holding until year-end (no matter when in the month the drop occurred) resulted in 75% winning trades, averaging +1.9%.
If it was a -2% down day accompanied by at least 90% of NYSE flowing into declining issues, then holding 'til year-end resulted in 8 winning trades out of 10 since 1940, averaging +5.0%. The losers were -0.9% in 1941 and -2.1% in 2007.
Arms Index Shoots Higher As Sellers Pile In
More intriguing is the Arms Index, which closed above 4.0 today (this will vary among quote vendors). Very, very roughly, we could say this means that sellers were 4 times more eager to sell than buyers were to buy.
This is extraordinarily unusual for December. It has happened only 4 other times in 60 years (12/29/43, 12/17/45, 12/4/50 and 12/1/08). All four of them marked the exact December low for those years, with the S&P subsequently rebounding over the next week to the tune of +4.0%, +1.4%, +3.8% and +11.5%, respectively.
If we use an Arms Index above 3 in December, then it's the same story. There were 6 occurrences, each marking the low for the month (12/17/57 and 12/27/02 were the dates other than those mentioned above).
A Long-Term VIX Buy Signal
In doing some research for a client, something interesting came up.
Because volatility ratcheted higher in August and hasn't subsided all that much, the 3-month average of the VIX has reached a rare plateau.
I'm using a median instead of simple average in this case because very large one-day readings can skew a simple average. The median is a better tool in this case.
Since 1986, whenever the 3-month median reached the current level of 34%, stocks did quite well going forward.
Night Before Preview …
It almost doesn't make sense to do this before the European Ministers finish their big supper tonight, but I thought I should put some charts together before I go visit my mother-in-law in the hospital.
Well the Rectangle Pattern I included in this morning's update broke … but it broke to the downside, when everyone was expecting an upside move. That is why I was stating that a move higher smelled "fishy". That is also why it is good for traders to always look at the two sides to every possible set-up. Everybody and their dog were primed for a rally into Christmas … that told you there would be plenty of selling if certain levels were breached.
Here is that chart from this morning …
SPY 10-Minute Chart
The measured move for this Rectangle was $129.00 or $123.36. We hit $123.65 at the low into the close. God only knows what could happen overnight with Europe so no use in guessing if the selling is over.
In the Afternoon Trading Plan I used what I thought could have been the end to a wave lower to project out the possible end to today's move. As it turned out, that level was a minor wave low and the levels are not the best to draw off of. The zone they came up with was $123.94 – $123.03. That is why I was looking for a $123ish level target.
Let me show you what to do if the waves are minor and you don't know where to draw them from …
The projected target using this method gave us a zone that was hit with the last push lower for the day.
I mentioned in the Afternoon Trading Plan that traders should wait for the 3-Push Pattern to complete before trying any long trades … as can be seen on the above chart, that pattern is starting the 3 piece to the puzzle. I'm thinking that either the 10:30am pivotal trading time or tomorrow's afternoon trade slot will be the best risk/reward for that divergence to set-up properly.
I'm going to wait for the morning update to do any more chart gazing …
Cheers … Leaf_West (visit me at my blog http://blog.tradingwithleafwest.com/)
