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At the close of September the market closed down 5 consecutive months which has only happen twice before 2011. Looking at the chart below which shows the monthly change from the 5th consecutive down month. You can see the market reacts differently each time after 2 months. In 2001 the market rallied about 9 more months while in 2008 the market on rallied 2 months before it dropped.
Yesterday's price action was lot of bark and not to much bite. After opening up 3 points on SPY and 30 on ES the bulls failed to grab any momentum and they let the market drift lower before the PPT or whoever came in and pushed the market up.
Once again the market was lead by some B.S Europe bailout rumor. This sent the EUR/USD shooting up on Sunday night and everything followed through after it. But just like all the other rumor fake outs this one was short-lived. The length of these bailout rumor rallies have been getting shorter and shorter.
Financial stocks have been an interesting sector to watch as of late. For a while it was the sector to watch from 2008-2010, if financial stocks went up the market followed, Bob Paisini loved to mention the correlation. Now it seems financials are either being looked over by the market, when it can be giving a huge early warning sign that a downward movement is on the horizon.
Financials have been slowly declining throughout the last month or two, even as the market rallied. Our post on GS mentioned to watch the key $148 level, after breaking that GS fell to $141. There was a similar support level on XLF that was broken on Friday.
XLF closed below $15.87 a key support level. The support level was created in December after XLF broke out and started an uptrend to new highs. It was then a support twice during XLF's decline, providing a launch pad for the ETF. But the third time this support level failed and XLF closed at $15.77. In addition to this being a support level, the support level makes up the base of a descending triangle pattern. This is a 1.14 measured triangle and this move would put XLF around 14.77ish.
By breaking this key support level XLF is looking very bearish unless it can regain the 15.87 level. It has one last support level to break and that is the 200 ema of 15.77, which it closed right at. A break of this would confirm the descending triangle pattern and the break of support. In addition to this, the uptrend line from August was broken in early May, signaling a possible trend change. If XLF does decline, the next support level that may provide a bounce is 15.61-15.37, still a 1% drop, the total measured move up be more then a 6% drop.
Eventually, the market will take notice of the drop in Financials since the are a "crucial" part of the economy (I was asked by The Bernake to put that in) and either this will cause more selling of the market, which us bears would like to see or they might be seen as a bargain and catch some buying pressure. But realistic the charts are pointing to more downside for XLF and financials. Keep an eye on the XLF this week and watch the $15.87 level.
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On Friday the VIX aka the Volatility Index closed at its lowest level since 2007, closing at $15.32. Support for the VIX has been around $16.90-$15.60, since 2008 before the market tanked. The most recent line in the sand is at $15.60, which was broken on Friday. With the VIX measuring fear and the volatility in the market, this extremely low number in theory represents a complete lack of fear and complacency in the market, meaing very bullish sentiment.
Just looking at this VIX chart, one can see when VIX hit these levels it quickly bounced the next few days. Moving up to the 21 day ema. The longest time it spent at this level was in late 2010 early 2011.
Here is a look at SPX with the VIX. The last time VIX was near these levels, the market topped in May of 2010, right before Waddle & Redd killed the market with their order of sell 10 E-minis. In addition it marked the December 2010-February 2011 short-term top. But more importantly in early 2008 the VIX was near these levels, it was trading around the high $16's and this marked the 2008 top.
Looking at VIX, when it has dropped below support at $15.60 here are the changes in the market over the next 1 day, 5 days, 30 days and 60 days:
The biggest decline came just a year ago, the VIX broke below the $15.60 level and the market tanked for the next 2 months. But looking at the chart we can anticpate a market that does not move anywhere for the next 1-5 day. But after that it will chose a direction, the biggest moves have been moves down. This table does not include, the drop from 2008, since the VIX never broke the $15.60 level.
Now a caveat to VIX being this low is that if it continues lower, it is possible there could be another bull leg. Notice when VIX broke the $15.60 in 2003, the market climbed and climbed.
To sum up, we have a VIX at a very low level and in the most recent past this has marked market tops. The most significant market top was the 2008 high. But VIXs continues lower it is possible to see a new leg up. But the edge seems to be pointing towards a move down.
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