I'm not going to even mention the VIX today, except to say we're seeing a great example of why it's a good idea to wait until you see that "spark of fear" before using the VIX as a trigger for short positions.
Instead I want to talk about chaos theory, as yesterday's price movement was very interesting in a chaotic sense. But before getting to that, we've got to go over a few definitions. In the study of chaotic, non-linear dynamic systems, there are strange attractors, which is a complicated idea, but can be defined as "the limit set that collects trajectories" in a chaotic system.
Chaotic systems are especially interesting because they are unpredictable, yet at the same time follow patterns. So chaotic systems are strange and unpredictable, yet at the same time they are attracted to certain fractal output patterns.
Think of a magnet swinging back and forth on a pendulum between two other sets of powerful magnets. If you give the pendulum an initial push of energy, it will move chaotically between both magnet poles -- it is both attracted to the magnets and repelled by them, in an unpredictable way.
The stock market is the most fascinating chaotic system of them all. It is unpredictable, yet at the same time exhibits clear repetitive patterns. When we look at charts of the stock market, we're really looking at the visual graphs of the chaotic output patterns of price movement.
Interestingly, at the end of trendy moves in the stock market, prices have a tendency to "go parabolic" towards a strange attractor. Once touched, these attraction points cause a bifurcation, and immediately become strange repellers. Price is both attracted and repelled by a certain price zone, causing very rapid movement in both directions.
I've noticed that such "hot" price movements are very strongly associated with the end of mid-term trends in the market. Let's see how this has looked over the past months, checking out the end-stage of the recent mid-term trends on a 30 minute chart.
I'm bringing all this up because we now need to be on the lookout for an end to this current mid-term uptrend. We are reaching historically overbought readings on a bunch of indicators -- both sentiment and otherwise. If you haven't seen Jason Goepfert's comments on sentimentrader.com, then I urge you to check out his daily commentary from yesterday, available for subscribers on our web site. His unique sentiment and price indicators are reaching historically overbought levels in the short-term.
When prices went parabolic to the upside yesterday, it was a clear sign that the mid-term trend could be coming into its "hot zone", and we need to now be on the lookout for a sharp reversal, leaving a spike top in place. This is a very strong repetitive chaotic output pattern in the markets, which you can see over and over again once you're tuned into these fractal patterns.
Of course, this may not be the end of the line for this mid-term uptrend. If prices sort of meander around -- pulling back here, consolidating there -- then it will indicate that we haven't reached the strange attractor/strange repeller bifurcation point for the mid-term trend. It will then likely come at a higher level, and if you're feeling brave you may even want to do a very quick trade to the upside.
With yesterday's rally, prices are above the crucial 40-week exponential moving average, which stands at 904 on the SPX. However, going over it and finishing the week over it are two different things. If prices collapse back under this level -- especially on a chaotic bifurcation as described above -- then that will be a sign that the mid-term downtrend is underway.
So my humble advice is that if you're dying to take a shot to the long-side -- if you're worried about "missing it" (I'm getting tons of emails, which has me on alert) -- then don't hang around if price moves below 904 on the SPX. That way you can't get into too much trouble.
It's just too risky for my taste, especially for Rydex trading. But if prices can meander back down to this 904 zone, and hold above it, then it's likely we could see another chaotic push higher, which would just serve to build an even greater bullish majority.
But some time soon the bullish majority will be left staring at a move that is repelling sharply away from them.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 1% to 9% full of negative sentiment on Tuesday. That means that during the past year there has been less fuel in the tank than there is now on only about 22 days. The last time was last May 31, '02 with the SPX more than 150 points higher than it is now.
SHORT-TERM: The hourly gauge remains in an advance phase of surprising unbroken duration.
MID-TERM: The mid-term gauge was unchanged at 99% in its advance phase on Tuesday. Our Confidence Diffusion Index (CDI) clicked up a point to 4 (out of 7). As this gauge hangs around near 100% we'll watch the CDI for clues as to whether the market wants to change phases into a true bull market, or if it's just running up for a vigorous test of overhead resistance.
LONG-TERM: The weekly gauge was unchanged at 81% in its advance phase. Our weekly CDI remained at 4 out of 7.
BOTTOM LINE: The strong breadth and volume numbers are functions of a pervasive level of bullishness in the markets right now. Yesterday's afternoon breakout looks very positive on price, volume, and breadth charts. The dashboard tells us, however, that this market has extended itself on a "momentum of sentiment" basis, and that it's either going to have to pull over, re-fuel.
We should find out very soon whether or not we're in a market that's trying to don some genuinely bullish horns.
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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