from TA Today
The Ride Continues?
In the last look at the markets I talked about the volatility
being higher than usual. That typically takes place when the
market is undergoing a significant correction or a long term
change of direction. So far we have seen a significant
correction develop within the NASDAQ but not overall. The
following chart can give you a sense of the choppy volatility
that has been present of late. Look how we had a period of
tighter and tighter advancing issues versus declining ones. The
market was in balance. Look at what has happened since late
April of this year; right around when the volatility increased
on the markets. Declining issues ballooned and advancing ones
shrunk. Since they we have seen
alternating moves back and forth in this chart which tells us
that volatility is ripe. It will end I'm sure, but there are no
signs of it yet.
The question remains though, is it
a long term change of direction? Will the listed issues undergo
a significant correction before this disturbance is over?
Space and Time
This is an appropriate time to
consider once more where we are in the big scheme of things.
This past week (Friday in particular) we saw nominal new highs
set on the listed issues but they did not hold. I've my thoughts
about why that was so. Let's start with the 4-7 week cycle of
turns. I've shown this chart before and though I continue to try
and perfect my thoughts on this time and space portion of
technical analysis, I've not come to any grand conclusions yet.
I have changed the appearance a bit to show the turns more
vividly. Although not in anyway a perfect timing tool, when
combined with other indicators including the long term 4-7 month
cycle it can shed light on when to be a bit more careful in your
trades. The long term turning point is still another couple
months out, by my calculations, in
case you are wondering.
So the short term cycle suggests
another move. As I've said before, that move can be any
direction; an acceleration of the existing move, or a change in
direction. In the chart above, almost all the moves are
associated with directional change for the intervening period.
Combine the above chart with the
oscillators that we watch. All of these oscillators attempt to
gauge whether the existing directional movement of the market is
about over and, yes, they all are pointed to that being true. As
you know, the existing direction has been to push higher the
past few weeks. Here's a 10 day moving average of the up versus
down volume on the NYSE with an overlay of the SPX for reference
purposes. As can be seen, when the red line gets extended toward
the top of the chart and then begins to roll over as we see
happening now, prices typically come down as a result.
The same is true of the oscillator
that tracks the moving average of the advancers and decliners.
Again, I've overlaid the SPX for comparative purposes. Although
here we do not yet see a rollover of the indicator, it has
stopped moving higher and is poised to turn.
The same indicators apply to the
OTC issues as well. Here's the same chart for the NASDAQ
advancers to decliners. Note it has rolled over.
The above are all short term
indicators. If we move to our 30 day oscillators, they too are
starting to line up for a change in direction or at least a
pause in the current trend. Note that the indicators are at the
top of the chart (bearish) and starting to rollover.
I have recently been fascinated
with the setup that has occurred in these markets for a squeeze
higher. Price squeezes occur when there are too many people
leaning the same way. You can squeeze higher (which is usually
the way it is thought about) or lower, you just need the
conditions to be ripe. Those conditions are primarily found in
the various sentiment indexes such as the Investors Intelligence
numbers as shown here.
These numbers tell us a squeeze
play higher is possible because the number of bears is starting
to reach an extreme (too many of them) as is the bulls (too
few). When there are too many bearish folks two things occur;
there are bears who short sell the market and the only way for
them to realize profits are reduce losses is to buy stocks in
the future; and secondly, if you are bearish on the market you
have probably either sold what stocks you have or are in the
process of doing so. When most stocks have been sold and when
short sales are high, then you have the potential for much
higher prices once the ball gets rolling. Look at the short sale
interest ratio on the NYSE. It's not extreme but heading that
The fact that a squeeze play could
actualize has what has kept me in check with my shorting
activities of late. When such a potential exists, you have to
factor it into your overall strategy.
Where to Now?
So, finally turning to the charts.
Given my bearish near term thoughts tempered with the potential
for a squeeze play higher, let's look at the charts. Friday (Aug
4th) we did see that squeeze play develop just as we worried
about. You can tell a squeeze from a more sustaining move as a
result of whether the move continues. When the move quickly dies
on the vine that tells you that what you just witnessed were
mostly short positions being stopped out.
Looking at a 30 day chart of the SPX, we see Friday's move
pushed right up to the next line of resistance at the beginning
of the day and then steadily decline. When it broke the trend
line it got a bit of a further surge taking the long stops out
and then rebounding into the close. With the Federal Reserve
looming in the upcoming week, it's hard to get too bearish or
bullish in front of the Fed.
I show this shorter term picture
of the SPX because it shows a resistance line honored, a break
of an up trend line and now a push back to the underbelly of
that trend line break. Like anything in technical analysis, it's
not a given that we decline from here but that's the odds on bet
short term. Again, with the Federal Reserve to announce their
interest rate decision on Tuesday, don't expect a large move
either way to stick in front of that announcement. What we are
interested in though is what will be the continuing trend be
once the announcement is made and the price points that are to
be established stick. From the evidence I have shown, I believe
we will see this market trade sideways to down at best. Worst
case we should see the market begin to cave in again and head
back towards the recent lows of June and July.
Sell this Strength
Although there is the possibility
of a squeeze higher such as what was experience Friday, you have
to look to sell strength on these short covering spikes. I do
not know if we will see another spike as a result of the Fed and
my guess is that it will be the last one for a while but if it
occurs, I intend to short into it. The resistance lines are
clear just as the support lines. The highs of Friday are the top
area and the supports areas are shown above.
There is a good risk/reward setup
at these levels to get short. This entire move higher has come
on no volume and it is likely that it will fail. The fact that
there are a lot of bearish troops makes the timing difficult
from a squeeze perspective so you have to sell rallies and hold
steady unless they truly break them higher. That, though very
unlikely, would indeed be a heck of a squeeze as no one in their
right mind would want to stand short on a breakout above 1300.