Advances, Declines, and Retracements
by David Nichols
The market has done something very interesting this week, entirely in keeping with the bear market. The trading action has managed to make the crowd bullish and complacent again, despite lower prices overall.
This is one of the sneakiest things about a bear market. The advances give the illusion of being profound and meaningful -- yet in reality, they are just getting back a fraction of the earlier losses.
I'm not a big Fibonacci junkie, but there is definitely some harmonic mechanism at work in the markets that often brings these "Fib numbers" into play. I just like to look at Fibonacci numbers to get a feeling for the overall strength of a trend -- and to get a feeling for what other traders might be looking at, too (these are widely watched.) Theoretically, if a streaky move is valid for continuation, then it won't give back more than 61.8% -- an important Fibonacci number -- of the move on the retracement.
Yesterday, the S&P 500 (SPX) jammed right back up to this 61.8% retracement level, at around SPX 935. That is, it recovered around 61.8% of the decline from last week's highs to the low reached on Tuesday.
So we need to see if this SPX 935 level is going to keep a lid on the upside. It really should. This has the exact look of that A-B-C type correction I've been looking for. That means we should be looking for another 35 point drop in the SPX, which would take it down to about 900.
The next streaky move down should unfold very soon, in fact. The markets are no win a position to cycle into the next short-term decline phase. Perhaps the looming 3-day weekend will postpone this decline phase until Tuesday of next week. But it's really shaping up for this scenario to play out.
Another interesting note, while we're on the subject of these 61.8% Fibonacci retracements: If you draw these same lines on the weekly SPX chart, you can see that all the hullabaloo about the next bull market may be a tad premature.
Last year at this time the markets were setting off on a huge mid-term decline. How quickly we forget! It's just so easy to get caught up in the day-to-day fluctuations and lose sight of the big picture. The fact is the markets have really struggled to retrace that mammoth decline. The SPX has been laboring under and around the 38.2% retracement level (another important Fibonacci number) for the last 10 months. It would have to get all the way up over 1020 before that decline would be fully neutralized.
Now let's look at sentiment. We've got an interesting bear market sentiment pattern playing out yet again. It's going to take me a second to make this point, so please hang with me.
The markets move in waves and oscillations, with a constant back and forth between advance phases and decline phases. The market never moves in a straight line. The key to examining a mid-term trend is to see how the advance phases are stacking up against the decline phases.
One way to think about a mid-term downtrend -- like the one we are trying to capture now -- is to examine the action closely to see if the short-term decline phases are really outpacing the short-term advance phases.
The way I do this is to look at how the short-term advance phases and decline phases of sentiment are performing, as measured by the VIX. When the VIX is going up, that equates to a short-term decline phase for the markets, as fear is building. When the VIX is going down, that equates to a short-term advance phase. Keep in mind that prices aren't obligated to go up or down in exact correspondence with these phases in the VIX; in fact, it's the discrepancy in performance that gives us an interpretational edge.
So here's how the VIX has looked since last Friday:
There was a low on the VIX on Friday, corresponding with options expiration and a bullish climax. Then we had Monday's big sell-off, and a wave of fear striking the markets. This latest about two days, and then the markets shifted into a short-term advance phase, with the VIX plunging back down to yesterday's close of 21.62.
Now let's see how price responded to these short-term advance and decline phases.
The VIX has recovered much more significantly than price. It's retraced about 75% of the spike of fear, yet price has only managed to get 62% of the way back. This is a dangerous pattern. Price isn't recovering to the same extent as sentiment. It's taking less and less upward price movement to get the crowd into the same bullish mood.
It looks likely that this downtrend will reassert itself shortly. The market could really get hammered when the next short-term decline phase gets underway, which could happen as soon as this morning. SPX 900 is a target that comes readily to mind as the stopping point for the next short-term decline phase.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 6 points to 5% full of negative sentiment on Thursday. The spark of fear flamed out pretty quickly and the SPX rose less than 1%. While the rally had some impressive internals, sentiment is just too darn giddy for its own good.
SHORT-TERM: As we suspected yesterday, the hourly gauge entered an advance phase on Thursday, and ran with the ball all the way into the close. Absent some exogenous event we would expect this to continue into Friday morning. With traders leaving early for the holiday weekend the afternoon could well see the action dry up and calm down.
MID-TERM: The mid-term gauge progressed by 4 points in its decline phase to 16%. However the Confidence Diffusion Index regressed a point to a bearish 1 (out of 7). This is what happens as a mid-term decline phase develops. The hourly advance phases threaten the confidence of those watching the mid-term signals.
LONG-TERM: The weekly gauge regressed 2 points to 1% in its nascent decline phase. The weekly CDI regressed to 0 (neutral).
BOTTOM LINE: See that little bump in the tank that the red arrow points at? Not exactly a wall of worry, is it. More like a pimple of worry on a vast alabaster buttock of complacency. Maybe I'm just not well versed on the subject, but I've never read about markets climbing a zit of worry.
The job of the hourly advance phases now is twofold: to test the mettle of the bears and to create as strong unanimity among the bulls as possible. The snapback rally is likely to continue for a bit, but it is pretty darn likely to exhaust itself by early next week. If the SPX breaks definitively over 965 on volume that could dewclaw the bearish mid-term sell signal.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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