After nearly a 1% gap at the open, SPY came back to Earth late in the day and ended up closing in the red below the 1 month (21) EMA. Even with a head start, bulls failed to overcome this repeated region of resistance for the third time in this correction. In addition, prices were also thwarted right around 111, much like they were on 5/27, 5/28 and 6/3. Clearly a range is being hammered out between 105 and 111…and it’s eventually going to break. I suppose a silver lining was that prices were able to make it back to 111 instead of stalling and making a lower correction high. With that news, even if prices are to decline again, by the time we get to 105, chances are the market will be oversold and bears will have great difficulty pushing prices much lower.
Even though I went “short” the market today via SDS and VXX, I’m not completely convinced that this market is going to reverse. As I hypothesized last week, I was preparing for a feeble attempt at price moving above the 21 EMA and eventually falling below the average on weak volume. That scenario played out this afternoon, so I decided to put my money where my mouth is. Additionally, the setups I saw for both trades looked good, thus strengthening my conviction. Nevertheless, I will be keeping those positions on a very short leash. If there is any evidence of momentum pushing prices above the 111 region on SPY, I will not hesitate to liquidate them.
In other news, both mid-caps and emerging markets were able to close above their 1 month EMA’s…all is not lost. Right now, MDY and EEM are the strongest of the ETF’s I’m following. If my short scenario does not work out, I may look to start building a position in either one of those two.
MDY
EEM
I feel good about my risk/reward on both trades (SDS and VXX), so it’s nice to actually have some active capital back in the market after being in cash for a bit.
I often fail to utilize the benefits of viewing charts on multiple time-frames. Sure, I glace at intraday charts from time to time to see when volume came into or out of a market, but I don’t usually venture farther out than the daily. Over the years of reading blogs, I have noticed that I am not alone as I have observed very few others incorporating longer time frame charts into their analysis. Maybe this has to do with the preponderance of short-term, high-speed trading that many people choose to partake in. In this case, sure, I understand that a weekly chart isn’t going to provide a great deal of insight regarding positions that you plan on liquidating in a matter of hours, if not minutes. Maybe weekly charts are viewed as antiquated and not really very useful in gauging near term market sentiment. Regardless, I do feel that they (weekly charts) can provide an interesting and balanced perspective to the relative chaos that can clutter a daily (or shorter-term) chart.
In light of the recent correction, I have been increasingly interested in the developments on the weekly charts of the ETF’s I follow. As I have mentioned many times in the past, the daily charts are in need of repair, and only time can alleviate their level of distress. Below is a 1 year window of the SPY weekly chart.
SPY Weekly (1 year)
If this were a daily chart, I would consider this an orderly pullback and actually a decent buying opportunity. There are two weeks of heavy selling, but that has diminished as the market has tried to find a bottom and there was decent accumulation 2 of the last 3 weeks as well. The moving averages are in what I would consider a very bullish pattern, with the 3, 6, 12 and 24 month averages stacked in chronological order. I also find it interesting that the correction in January/February found it’s bottom right at the 2 year moving average…right about where the most recent bottom is as well. After staring at this chart for a while, I was wondering if the recent 12 month crossover of the 24 month held any sort of long-term significance. Here is a chart back to 2002:
SPY Weekly (8ish years)
Since 2003, the 12 month moving average has crossed above the 24 month moving average exactly twice…once in January 2004 and again in late April 2010. Here we find ourselves at a point where just about everyone thinks the market is bound to move lower. Based on the current state of affairs in the national and global economy, I’m certainly not one to disagree with that assertion. However, after looking at this chart, I’m can’t help but think that we could be looking at a decent long-term buying opportunity. Also, the contrarian in me says that when everyone starts turning (nearly) exclusively into bulls or bears, the best bet is to do the opposite.
SPY Daily
Even with this information, I’m still not confident enough to start allocating money to the long side. As I have said a number of times, from a daily perspective I need to first see a higher correction high. That downward sloping trendline looks very bearish, and until buyers can break through, I won’t change my stance. Prices have been consistently rejected from the 1 month EMA throughout this correction. Much like the aforementioned trendline, this is proving to be a significant level of resistance. Nevertheless, the weekly charts present a evidence that this might just be nothing more than an early bull market correction in addition to a potentially strong buying opportunity.
Eating crow is my favorite pastime…so…to everyone whom I badgered yesterday for purchasing stock on 6/9, congratulations on your copious profits from today’s advance. I admit, while things looked grim after yesterdays reversal, I didn’t have a strong feeling about the market continuing to decline.
SPY
Today’s advance was encouraging for several reasons. At no point did buyers relinquish control of the affairs. In the SPY, prices reversed only to the point where the market opened (and that was a pretty significant, nearly 2 point gap) and volume came in above average. Even with yesterday’s intraday reversal, I have to say that I’m encouraged with the action since testing the lows earlier this week.
Allow me to temper that optimism with the fact that SPY still hasn’t reached it’s 1 month (21) EMA yet. This area has proven to be the upper bound of any rally attempt since early May…and that is a decidedly bearish scenario. Right now the average stands less than a point above today’s close, so tomorrow could be a most interesting day. Additionally, I’m still wary of the intraday volatility in this market. When was the last time the market failed to move at least 1% within the course of a single trading session? I prefer to allocate capital to try and capture slow and steady gains. You can make a lot of money in a short amount of time in this market…but you can lose it, and more, just as fast. Therefore, I’d rather just sit back and wait. I know, I know…very exciting.
EEM
In reference to the title of this post, lets take a peek at EEM. Notice that emerging markets have pushed through and closed above the 1 month EMA. This development is providing additional confidence that this rally might actually have some legs behind it. If EEM can close above the high of 39.01 from 6/3, that will be a very good sign…finally something is making a higher high. The US markets have been playing “follow the leader” with EEM since the 2008 bottom, so seeing relative strength here is encouraging. I’d really prefer to see some greater volume accumulation in the coming days, especially if it manages to make a higher high. We aren’t out of the woods yet, but at least there is -something- to be hopeful about.
Chances are, you are probably not going to go long the market right at the bottom and make a killing on the way up. Just look at today…things are humming along, for the most part everything is looking good. Next thing you know, prices take a decidedly negative turn into the close. Those people out there who thought: “shit, this market is taking off, this could be the bottom, I can’t ‘afford’ to miss out on this” are now afforded the opportunity to log into their brokerage accounts and see their positions under water. Then again, what the hell do I know? You may get really lucky and this might actually be the bottom.
Like everyone else who tries their hand in the stock market, the goal is to make money. From what I’ve seen, read and experienced, the people who make money over the long run aren’t the people who accurately call bottoms and tops…because that is purely a crap shoot. Yes, you may get lucky once, twice, hell maybe even three times…but eventually it will probably catch up with you. I thought I was smart enough to call the top throughout 2009, and ended up losing money on EVERY SINGLE ONE of those trades. So, in order to preserve capital, I learned how to eliminate those stupid trades from my repertoire. Sure, I still get the feeling like “I’m missing this rally, what if this is the bottom, should I get in?”…but my discipline is far more honed than it used to me. I can’t afford to be wrong and get hammered with 2% daily losses anymore. Currently, a number of events would have to unfold for me to consider moving the bulk of my money to the long side…and right now, that is a LONG way away from happening (no pun intended).
SPY
So, it looked like we were on our way back to try and meet up with the 1 month (21) EMA, then prices stall around 108 and they plummet nearly 2 points into the close. Again, these huge price swings scare the hell out me…unless you have a strategy that is based solely on profiting from crazy volatility, I think a much a more rewarding strategy is to sit back on your cash and just observe. I sincerely hope the bulls can muster more of a rally than today’s pathetic attempt, else it’s only a matter of “when” not “if” the support south of 105 is taken out. Granted volume came in lower than yesterday, but it was low all morning and eventually gained momentum once the market started to drop…not a good sign. The endless days of green candles from Feb-April seem like a distant memory, don’t they? I do seem to gain a sadistic sense of enjoyment watching this volatile market…which probably stems from my unwillingness to get financially involved with such matters. These next few days could prove to be very interesting indeed.
Well, once again prices tested the 104-105 range today on the SPY for the third time since the start of May, and once again buyers dug in their heels and held the line. How many times can this hold? The market continues to bottom out right around this area, yet continues to make lower highs…therefore the coil continues to tighten. Yet again support in this region came after an extended period of selling, thus leaving the market in an extreme “oversold” state. What if prices advance to the descending 1 month (21) EMA (as they have on previous rallies from the 105 level) then begin to drop again? Chances are the market won’t be oversold at that point, and there is a strong possibility that the levee could break. I’m not big into making predictions, but right now, that is one hypothesis I am exploring…and I will be looking to short the market with a tight stop if we rally back to the 21 EMA. While SPY, DIA and EEM all enjoyed over 1% gains today, the lack of conviction from both QQQQ and IWM is pretty glaring. QQQQ and IWM have been the strongest of my ETF’s over the past few weeks (though IWM has taken a beating as of late), and watching them lag throughout the day tells me that this “rally” may not be all it’s cracked up to be. Granted, both may take off tomorrow, but this lack of relative strength is something to watch.
SPY
On a positive note, SPY did advance over 1% today on above average volume. Great, but taking a look back at the last rally from the 105 level shows almost 35 million more shares being traded (396 mil on 5/25), and we all know where that rally got us. We are going to need to see greater accumulation in SPY and a high volume advance from QQQQ (specifically) if I am going to have any sort belief that the worst is over…making a higher high on the SPY wouldn’t hurt either.
EEM
One thing that I have touched on in the past is how emerging markets (EEM) are performing relative to the other ETF’s. Several interesting observations come to mind looking at the chart. The most recent leg down that led to new ‘correction’ lows in the US markets was not confirmed by EEM. In fact, prices haven’t even come close to the lows put in on 5/25. None of my other ETF’s can stake that claim, with only QQQQ maintaining a higher low (but not to the degree of EEM). Also, it appears that distribution has started to wane a bit, with the emergence of several above average green volume bars (5/27, 6/2, 6/8). Again, EEM started to drop and failed to make new highs in April, well before the US markets…could we possibly be seeing a similar phenomenon here at the bottom? My previously stated hypothesis regarding SPY does significantly hinge on the behavior of EEM in relation to the US markets. This never gets dull, does it?
Eschewing my lengthy nonsensical banter, with this post I’m going to post charts for the ETF’s that I’m following, in rank order. Keep in mind that I use SHY as a proxy for cash, and that is where the vast majority of my money resides at the moment (along with a small VXX speculative position and a bit of cash). Additionally, SHY is my top ranked ETF, but posting it’s chart would be pointless as I don’t perform any sort of analysis on it…I just move my money there when my screen tells me to do so.
This stock market reminds me of when Homer took Bart to the futures exchange and proclaimed “Whohoo, d’oh, whohoo, d’ooooh” after watching his contract make a ton of money then instantly lose a ton of money. Just yesterday the sky was falling and I’m talking about SPY going sub 90, today it plows ahead for a 2.5% gain. This market is crazy…I just can’t see how anyone could feel comfortable holding any sort of meaningful positions overnight in this kind of environment. Hell, we could be down 3% or up 3% tomorrow. I’m sure some people are nimble and smart enough to make money in this type of environment, but I’m sluggish and stupid when it comes to trading stocks. I’d rather wait for the market to make up it’s mind then hitch my wagon to that train for the ride. You could be feeling great one day and being called for a margin liquidation the next. That’s not the formula I hope to employ in order to become a successful stock investor.
QQQQ
How about that…QQQQ closed right at Tuesday’s high. This ETF is exhibiting the best behavior, relative to prior price action of the 7 that I’m watching, having closed above the gap on 5/21 and well into the candle from 5/20. While the price is encouraging, I’m still concerned about the lack of volume for a day with such significant gains. I thought this was of key importance after the advance last Thursday, so I’m not going to change my stance after volume really dried up today on what was a significant advance. The 1 month EMA (21) is about to cross the 5 month EMA (105) to the downside…right up against where prices closed today. Will this prove to be a level of resistance, or, if the price moves above this confluence, could this be a clue that things aren’t as bad as they seem? Sure I’m waffling here, but I don’t have any clue as to what is going to happen, so I’m just pointing out things that I’m going to be watching out for. As of today, other than SHY, QQQQ is the top ranked ETF I’m following.
SPY
Impressive price, lackluster volume and it’s still trading in that multiday range. I can’t help but feel like this is the calm before the storm. With as much volatility as we have seen since the beginning of May, prices are only going to keep fluctuating with daily 1+/- % moves in a 6 point range for so long before something has to give. I’ve certainly been wrong many times in the past, but I still have yet to see any sort of meaningful rally by the bulls coming on significant volume. Until that happens, I have to think that the break is eventually going to happen to the downside. Hell, volume was well below average today…that’s no way to put some oomph behind a + 2.6% move.
Anyway, I’m going to continue to sit back and make fairly obvious observations, staying patient and waiting for the market to show it’s hand…because right now it’s doing one hell of a job bluffing.
Well well. Since this correction started in late April, the small caps have been able to remain “strong” relative to their large cap brethren. Just last week I was mentioning that IWM and IWC were actually holding up in spite of SPY and DIA getting pushed well below their 200 EMA’s. I viewed this divergence with a hint of optimism seeing that riskier asset classes tend to attract more punishment when the market corrects.
Today that divergence started to evaporate. DIA and QQQQ were trading above Friday’s close for much of the day, but taking a look at IWM and MDY provided a much different outlook. The mid cap and small caps briefly poked into the green prior to 11 AM, however that is the best price they would see for the remainder of the session with both ETF’s trending lower throughout the day. The dam finally broke around 3PM pummeling everything for the remainder of the session.
Again, keep in mind that this is just one day, and meaningful conclusions are based on repeated behavior, not individual events. Having said that, this underperformance by the small caps on a decline is an unusual occurrence in this recent correction. For the most part, the small caps have tended to decrease less on declines and increase less on gains (compared to SPY). Today qualified as an outlier in that recent trend, so it will be interesting to see how that plays out in the coming days.
As for me, I’m getting hammered in BC and will be liquidating my position tomorrow morning for a sizable loss, roughly break even in GSS and decided to allocate my free cash in order to dip my toe into some VXX last Friday based on no sound investment philosophy whatsoever. Translation: there will be little suspense if I have my ass handed to me on that one. Oh, yea, I’m still about 88% in SHY, so while I write a lot of things about these ETF’s and my stupid discretionary trades, it’s nearly all for the sake of ‘learning’, as I’m rather comfortable given the current state of affairs. Let’s take a look at some charts, shall we?
IWM
Taking everything into account that I mentioned above, there are still a few interesting items to take a look at here. First is the 189 (9 month) EMA. Prices have shown a significant aversion to closing below this level over the course of the past month, and this appears to be the proverbial ‘line in the sand’. There have been two intraday reversals (5/21 and 5/25) where prices opened below the 189 and rallied to close above it. I will be watching this level closely in the coming days to see if it can continue to be an area of support.
With the general weakness in IWM today coming off the long weekend, I surely expected the volume to be higher than Friday, but, surprisingly, it actually came in lower (but still slightly above average). Can any information be extruded from this relative lack of selling pressure? Several thoughts come to mind. First, this ETF continues to trade in what is now an 8 day range (bounded by the highs from last week/the gap from 5/20 and the lows of last week). As long as prices remain in this range, I’m not too surprised to see volume coming in on the lighter side, as there is no urgent desire by longs or shorts to liquidate at this point. Even though volume was light, we continue to see little to no effort on the part of bulls to push prices higher (with the exception of 5/27). Once again the bears swooped in to take the path of least resistance and easily pushed prices lower. A similar pattern has played out several times over the past week, where prices would maintain a level of stasis around break even to a little ‘green’, only to see those minor gains quickly evaporate in a bout of late day selling.
I haven’t performed the quantitative analysis or anything, but it would be interesting to see what relationship late day price action has with the general direction of the market. Meaning, I wonder if these recent late day selloffs are indicative of ‘unhealthy’ markets? The possibility also exists that I got this idea from something I read in an IBD book a while ago…as it sounds kind of familiar…so take it for what it’s worth.
SPY
Blech. Volume was down from Friday…so I suppose that’s a good thing. The inability to sustain more than one close above the 1 year (252) EMA is not what I would consider to be healthy behavior. Once again, the 104-105 range looks destined to be revisited in the near future. How many times can prices be supported at this level? Right now, the answer is 4. With a seemingly large quantity of long positions anchored at this point, a mighty effort indeed on the part of the bears will be required to push prices through this level. If prices do break, the possibility exists where there is enough downside momentum to take SPY below 90…effectively erasing almost a years worth of gains. Stay tuned.
Being almost exclusively in cash, days like today are really tough to sit back and watch…because that’s all I’m willing to do…watch. The urge (likely spawned from early childhood experiences) is to get in on what it seems like everyone else is getting in on. Here I’m watching this market, and there it goes, advancing over 3%, it’s difficult to shake the feeling like I’m missing out on something.
This feeling is compounded when my speculative long positions in GSS and BC sit around and don’t advance with the same vigor as the market as a whole. I realize that my trade in GSS probably isn’t going to move in lockstep with the major averages…so I’m mentally prepared to underperform with that during these rallies. But BC, what the hell is your excuse? You were supposed to “tie the room together”…instead you are like the Eagles to the ears of a Mr. Jeffrey Lebowski. Someone really needs to recover those Creedence cassettes, or you will be entering a world of pain. Stop pissing around with that 63 EMA and throw the bag full of cash, not the ringer, out the window. Maybe I’m out of my element.
Anyway, my screen is still telling me to stay in cash. The backtests I’ve run using it over the past 5 years have been pretty accurate at keeping me out of harms way and in boring-ass SHY. Compounding my frustration on a day like today is the fact that my SHY position is now a losing trade. Granted, it’s a minuscule loss compared to the size of investment, even still, I have that to watch as well.
Looking around at the ETF’s, I can’t help but be impressed with the price action on the day. The ‘gap’ recipe as of late has been that the open marks the high (on a gap up) or low (on a gap down) and the market reverses….several percent. Savvy daytraders (read: NOT me) have probably been making nice money on this recently…then a day like today comes along and says: “no matter how smart you think you are, over time, daytrading is a losing proposition and you are going to lose lots of money trying to do what makes statistical sense (i.e. fade this move)”. The bulls held steady throughout the session, pushing most of these ETF’s to intraday highs at the close. Nice work buyers…let’s take a closer look and see if these charts can tell us anything.
SPY
In spite of my insistence that the 252 EMA held some sort of significance, SPY decided to blow right through it today and nuzzled right up to that 189 EMA at the close. Additionally, the Thursday/Friday gap has been filled. What I want to know, and this was a recurring theme for the day, where is the volume? If prices are going to surge higher like this, I’d feel a lot better about higher stock prices in the future if buyers were more willing to step in and buy stock on days where there is little resistance from the bears. To illustrate this point, today was the 2nd lowest volume “green” day since before the crash on 5/6. Maybe I’m crazy, but that kind of volume puts a bit of a damper on, what, by all accounts, was a promising day. I have the feeling that there are a number of people out there who initiated positions in the 111-115 range that are going to be happy as a pig in shit to have the opportunity to break even in the coming days, so we should probably keep our eyes peeled for whether or not bullish traders swoop in at this level to accumulate shares or the bears smell blood and use the ‘break even relief’ momentum to push prices lower again.
IWC
The microcaps posted a very bullish looking candle in addition to closing the Thursday/Friday gap and almost piercing the 63 EMA. Once again, delving a bit deeper reveals that volume has been downright pathetic the past two days, so that is tempering my enthusiasm. If prices continue to rise, they soon will be entering an area of EMA confluence with the 1, 3 and 4 month lines along with what could be considered a decreasing trend line connecting the highs from 4/30 and 5/15. Right now that line lies around 45-45.5…and it will obviously be decreasing as time moves along. I think that any break above this zone on above average volume should be considered a bullish sign, and I would then look to the highs around 47 on 5/12 and 5/13 to see how price performs in that region.
QQQQ
I’ll quickly mention that the Q’s said adios to the oft-mentioned 189 EMA on light volume.
EEM
In what might be the most encouraging sign of all, over the past 15 days EEM has been outperforming all of the ETF’s I’m following. I know that I’m waffling on the statement I made a couple of days ago where I mentioned EEM getting “hammered”. I should have delved a bit further into the data, because, like I’ve been saying for a while now…EEM is a key component to higher stock prices. Even though the ETF only broke through the 252 EMA today, it did so on above average volume that surpassed the previous two declining sessions. Also look at the relative price compared to that of SPY or IWC. IWC has yet to even sniff prices from last Thursday, while EEM has already started to chip away at losses from earlier last week. I like how the EMA’s are more ‘collected’ than SPY or IWC…hell, EEM could be flirting with the 21 EMA tomorrow.
At this point, I think the most likely course of events is for prices to either consolidate in the EMA confluence zone or rebound downward again. Prices have advanced over 7% (7.11) in the past week, so I would think that kind of performance is highly unlikely to continue. Just to put things in perspective, the ETF (that I’m following) with the closest performance is IWC at 4.91%. Again, I was just basing my misguided opinion of EEM’s (lack of) relative strength solely on the chart…when the numbers actually tell a much different tale. So there you have it, I think this might be the first post I’ve been able to end on an optimistic note. Though, knowing my ability to read the market, one could probably use this as a decidedly strong “contrarian indicator”.
That’s exactly what I would be saying if I had any sort of meaningful capital involved in the market right now…long or short. This looked like it was going to be the day bears were finally going to be squeezed and forced to cover. Alas, as I mentioned in a post this morning, that gap from last Thursday/Friday is still looming overhead for almost all of the major market averages. If that gap is filled with any sort of vigor to the upside, we could be in for a temporary respite from this uncertainty. From the looks of it, trying to go heavy, long or short, in this market is just going to end up chewing up your account without much to show for it other than indigestion. I see a lot of people trying to time trades at these levels, and I say “more power to you”. Maybe at one point I thought I was smart enough to outsmart and outclass a market like this. Now I’m older, lamer and dumber with my 90% stake in SHY. That’s not going to stop people from trying to pick the bottom…the lure of “being right” and “huge potential profits” is too much for many to ignore. I tried to pick the top countless times over the past year and was bent over and rudely violated each time…that’s when I realized I’m either a) dumb or b) stubborn…and probably a combination of both. I don’t know when the switch flipped, but I have absolutely no desire to try and trade this market to any degree. Sure, my I have my 9% combined in BC and GSS, but those are purely for my own amusement. If I get stopped out, who cares? Ok, enough of this nonsense, lets look at some charts.
SPY
That 252 EMA is looking kind of ominous, no? As I’ve mentioned in previous posts, until prices are able to get through that level (preferably on above average volume) I’m going to find it difficult to have any sort of optimism in regard to SPY. Volume did shrink from yesterday, but looking at the intraday chart shows heavy selling driving prices lower late in the day…much late in like Monday’s session. Here’s one slice of optimism…at least we have been range bound for the past 5 sessions. As I’ve said before, those EMA’s continue to consolidate, and the closer they get together, the better this chart is going to look, but right now it looks stupid.
QQQQ
Remember what I said a couple of days ago about the 189 EMA? Down-up-down-up-down. Really, I pretty much pull these EMA’s out of my ass (21 days ~ 1 month), so it’s not like I’m polishing some sort of secret market code here…but it is interesting that prices seem to be very attracted to this particular EMA at this point. At least QQQQ has filled the Thursday-Friday gap and, unlike SPY, has maintained a level above the 252 EMA. Right now QQQQ comes out ranked right in the middle of the pack of the ETF’s I’m following…you can see that it hasn’t reached the February lows yet, so finding footing at the 189 EMA, which is currently a few points higher than the February lows, is a positive.
IWM
IWM is currently ranked #2 in my screen, but since I haven’t written about it yet, I figured I’d give IWC a break because no one really gives a shit about that anyway. I mentioned yesterday that I like how IWC and IWM have been holding up better than SPY, DIA and QQQQ. Typically stocks in the riskier asset classes (small and micro cap) will tend to decline (and ascend) at a greater rate than “safer” large cap stocks. The decline from the April highs has seen the opposite take place. IWM is clearly in better shape than it’s large cap counterparts…holding steady above the 189 EMA. If you read yesterday’s post you will recall that I was a bit discouraged by IWC’s inability to outperform the SPY during yesterday’s advance, however, today saw an opposite stance. IWM most certainly held up much better than either SPY or QQQQ…and in a market that’s predominantly moving down, I’m apt to be more encouraged by relative strength on declines versus advances.
A Sequined Sash 