The last time I posted (Nov 29th), I shared the VXV:VIX ratio and suggested that the S&P500 was likely to continue it’s grinding uptrend unless something changed. I also shared HYG as a potential short which I unfortunately missed, but turned out much better than I expected.
As it turns out, the grinding call was the right course of action as the daily 20MA held the following Monday and ground its way back up to the highs again. This past week, price appeared to be doing the same until Tuesday, December 9th which broke the 20MA and delivered a lower low on the hourly charts. Despite the very bullish looking candle, the depth of the decline put me on guard for further selling.
Grinding moves can last for months. In the chart below, I’ve displayed how I interpret and handle grinding moves. First is to recognize the market type and adjust to it. A grinding move IS an uptrend, but a weak one as displayed by its shallowness and frequent tests of faster moving averages (like the 10MA). Grinding moves tend to respect the 20MA and hold it as a floor making it a very good indicator in itself of demand. The 20MA is a good point to enter and hold for short-term trades (just 1-3 days usually) holding only for the width of the range and then exiting near the top resistance area. The first indication that something is wrong with the trend is either a deep test through the average (more than 5pts) or a close below. The deep retracements between pivot lows creates close levels of stops that can turn into waterfall declines once they trigger. The chart should explain the rest.
Looking at the week ahead, I’ll share the VXV:VIX ratio again:
Keep a watchful eye on this as the ratio is back below the lower extremity. When the ratio moves back above, a bottom is usually in place already or in process. I would not be excited about shorts here at all, especially considering December’s tendency to rally in the last half of the month.
Finally, I just want to throw out a long idea. The utilities sector has been very strong the last few months and I believe a major sector rotation has occurred to favor defensive assets. EIX has been strong and has not pulled back with the market over the past week. It has a good channel going and I believe there is more yet in store for this stock. I went long on Thursday in this issue.
Good luck this week, Slopers!
