Saturday, April 6, 2013

Batten down the hatches!!!

    Let me state for the record, today's market action was NOT bullish.  After the market close, one of the recurring themes throughout the financial media was that because the Dow Jones closed down just 40 points after opening the trading day down 170, was that it was a major positive for the markets.  This type of logic is why the common, retail trader/investor has no chance of making money over the long term.  Understanding that over the long term, the market behaves in a manner that transfers money from the masses, to the pockets of a fortunate few, is the first principal every investor/trader should sear into their memory.  In addition to that thought, one has to put day to day market action into a longer term context to extrapolate what the direction of the next major move will be.  That brings us to the following charts. In my previous post, I opined that a previous (intraday) bearish setup appeared to be failing around /es 1542.  /ES 1549-1555 is where I thought the bounce would terminate.  The market touched 1549.25 in the last hour of regular trading and closed extended trading at 1547.
This chart shows what I believe are the two possible paths of the market and volatility over the next few weeks.  I've shown the charts of NDX and VXN. The SPX and VIX also show a similar setup.
I am concerned that a steep, volatile but perhaps very brief drop is likely to start Monday or Tuesday next week. Another bearish chart that confirms this view is the S&P 100 (OEX).
The popular investment theme over the last 6-9 months has been buying the largest companies that pay a nice dividend.  Additionally, said company will ideally have a dividend yield that is higher than a 10 yr U.S. Treasury Note. Voila, the S&P 100 is the index to find such companies.  Well, these folks who have not trimmed some positions over the last few weeks are about to remember what stock market fear is like.  The underbelly of the channel that was tested at the end of March is starting to exert some downward pressure. Rest assured, long term trend lines on major indices, result in large moves.

The next two charts show my intraday price objectives were met in the futures and cash index.  Because these objectives were achieved TODAY, I believe that it is very possible Monday/Tuesday could be a trading day to remember.

 The final chart I  want to show is the CBOE Equity Put/Call ratio with a 5 day exponential moving average to smooth out the data.
What is evident when looking at this chart, is the steady trend higher.  However, what is also prevalent is the divergence that has occurred at every intermediate term market top since 2010.  The grey shaded areas show this divergence in the p/c ratio while the market continued higher.  You can see how the recent break out from the shaded area by the moving average is similar to that of previous market tops. Add this to the negative breadth, waning momentum and you have a compelling reason to be cautious going forward.

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