For a market that's beset by so many problems and so much uncertainty, it's mysterious that sentiment is so neutral .
Indeed, our ace sentiment analyst -- Jason Goepfert of sentimenTrader.com -- said this last night in his daily commentary (available on our web site):
"In looking over all of our indicators and models, published and unpublished, I would have to really stretch in order to come up with something that I think could give us an edge, on any time frame and in either direction....We're simply dead-stuck neutral."
Trading off sentiment is a trickier business than just following the traditional advice to "do the opposite of the crowd." The real fact is you only want to aggressively take the opposite side of the crowd when sentiment is hitting extremes . Most of the time, you actually want to be part of a growing majority, as that means the money will be flowing in your direction. If you can deftly hop on the bandwagon early, and hop off the bandwagon late, then you can make some sizeable profits, while keeping position risk to a minimum.
But you have to not force it, or make things up that aren't there out of a desire for action. Patience is the hardest thing of all to learn in the markets.
But I think we're finally seeing a confluence of events that is galvanizing a herd mentality in one direction -- and that direction is towards rising optimism. As I've been detailing lately, the VIX is giving subtle clues that the market has the same old problem of too much bullishness, and too many believing the "bottom is in."
We saw more confirmation of this yesterday. The VIX dropped again, reaching lower lows, while the S&P 100 (OEX) made a lower high. In other words, it's taking less and less upward price action to make people believe in the bullish case.
This is a pretty confusing chart, but it shows the VIX as the blue line, and the OEX as the candles, on a 30 minute time-frame.
This sentiment footprint is highly distinctive of a bear market. It's like finding a bear's paw print right on the path in front of you. He may not be right there in front of your face -- but you know he's lurking.
The bear is definitely lurking for this market, and will eventually move back in to do his work. But first we'll need to go back up and challenge or even break the recent "war rally" highs. That's just the way these big moves play out: thrust, pullback, thrust.
This third up move looks like it's already underway. Here's a chart from this morning, showing the S&P futures (ESM3):
It's solidly through the line in the sand at 858, and looks to be on its way towards 880, at the least. It'll take some good news to push it up through 880, but the market should now be in a receptive mood, where good news is embraced and bad news is sloughed off.
Another nicely positive development is the bounce at the 20-day moving average, which is very widely followed as the middle band on a typical Bollinger band. Such a pullback and bounce off the 20 day M.A. is a famously bullish pattern.
If you're an aggressive trader, you can go for a long position, but my recommendation is to not hang around if there is a move back below SPX 858 that isn't quickly repelled off that level. That'll keep you out of serious trouble. And you never know, once an uptrend gets rolling there's no telling how far it can go, even if it is "sucking fumes" as far as sentiment goes.
If you're waiting for a lower risk, longer-lasting trade -- where sentiment and price are all lined up perfectly -- then we'll have to wait for this uptrend to exhaust itself. I realize I had been planning to go long the Rydex funds for this leg up -- and now it's starting -- but I was also expecting the pullback to scare enough people to give us a shot at some lower-risk points to the upside. Remarkably, that didn't happen.
For me, Rydex trading is all about low-risk/ high-reward, and I'm always going to be patient to get just the right set-up for that. But I want to let you know what I think if you want to be more aggressive, and as I mentioned yesterday, I think it's worth taking a shot to the upside on a move up through SPX 860, as long as you keep your risk well-defined.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 6 points to "45% full" of negative sentiment on Tuesday as the market rallied. Both the VIX and the Put/Call Ratio dropped. Given the absolute level of the tank, there's POTENTIALLY enough fuel for some upside, to test, or even cut through some, resistance, but there's probably not enough negativity out there to fuel more than some trading rally action.
SHORT-TERM: The hourly gauge has moved into an advance phase.
MID-TERM: The mid-term gauge progressed 2 points to 9% in its newly launched decline phase. We haven't entered any shorts yet on the basis of the mid-term gauge because once we get the initial roll-over it's SOP (standard operating procedure) for the market to stage a short-term trading rally. The thing to do now is to gauge the quality of this rally. If it poops out at resistance without degrading the quality of the mid-term signal, then that's our cue to enter the short.
The Confidence Diffusion Index (CDI) backed off a point to a bearish 1. The internals on our sentiment charts are leaning just slightly bearish right now.
LONG-TERM: The weekly gauge regressed 3 points from Monday's reading to 56% in its decline phase. It remains at more advanced point than at last week's close, which is why it stays in a decline phase. The weekly CDI backed off a point to a bearish 3 (of 7).
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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