This first chart shows the mid-term trends in the SPX since it crashed into the current trading range last July. The numbers on the chart indicate the number of trading days in that particular trend.
You'll notice how the markets have gone through the same phase sequence twice in a row. It starts with a quick down/up move -- the ones that lasted 32 and 30 days on the chart. Then the SPX went into mid-term downtrends, which lasted 33 and 39 days. The uptrend off the October low went 36 days.
And now the uptrend off the March low has also lasted 36 trading days. We're now clearly in the zone for a mid-term trend change.
Yesterday's action was highly consistent with a change of mid-term trend as well. This action is what I call "fibrillation", which is a typical output pattern seen at phase changes in non-linear dynamic systems, such as a human heart, or the stock markets. The market has been subjected to sudden, arrhythmic shocks up and down. Yesterday's violent move down -- and equally sharp move back up -- is entirely consistent with an uncertain market on the brink of a chaotic move.
The implied volatility in the markets is also on the rise. Yesterday the VIX gapped up and started running up on the morning sell-off, but backed off considerably during the afternoon rally, leaving a "doji" candle.
The momentum of the VIX is now on the rise, showing it is now the bulls turn to get squeezed. This also looks to be one of those times when the implied volatility is early in calling the trend change. Remember, the VIX is a measurement of pricing in the options market, and the collective wisdom of traders will often anticipate the rise in volatility associated with a change into a downtrend in the markets. This is exactly what happened back at the top on December 2nd -- the VIX started rising ahead of that top.
But it's also interesting to see that the market made one last big push higher after the VIX started rising back then, which quickly failed. I remember it well. The SPX went from 913 to 940 in one day, and that marked the end of the road for the uptrend. But the fibrillation at the end of that mid-term uptrend cleared the decks of both longs and shorts, and set the stage for the bigger decline.
I think the market is doing this again right now. Its current business is cleaning out as many short-term positions as possible before embarking on a new trend.
That's why I didn't make the call to enter to enter the Rydex short funds during the day yesterday. This fibrillation phase can be very tricky. I'm specifically looking for a down move that has enough genuine emotional selling pressure to last a full trading day. Preferably, the VIX would rise all the way into the close.
Another thing that was really spooky yesterday was the collapse of the e-mini trading system at the Chicago Merc. The e-mini futures contracts are the main engines driving the market, and it was very weird how this contract was down all day long yesterday. Even the back-up system failed. Since it went down at the end of the quick down move, the outage trapped a lot of market players short down at the lows, with no way to escape. It's likely the squeeze back up was exacerbated by those piling on these unfortunate e-mini traders. The whole thing was pretty sordid, really.
The market is getting ready to go into a mid-term downtrend, no doubt. But we may see more of this violent back and forth fibrillation first, and we may even see another breakout attempt. The nastiest thing the market can do right now is suck in breakout players on the long side, ahead of a larger collapse. So we'll continue to wait for this mid-term uptrend to fully exhaust itself before entering short positions.
There is really no rush to get in, as there is tons of "sentiment room" available, with our sentiment tank at only 9% full. In fact, if the pattern from the first chart is going to hold up, then it's likely we'll see a down/up leg over the next 30 or so trading days, with a 20 day down move followed by a quick retracement up. After that we could get the whopper downtrend, heading into the seasonally worst part of the year for stocks. It will be a good idea to keep this time cycle in mind going forward.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: filled by 3 points to 9% full of negative sentiment on Thursday. Intraday readings were notably higher, but we count the closing value.
SHORT-TERM: Hourly gauge made early session noises like it was moving into a full-fledge decline phase. However by the end of the day it was teetering on the brink of going neutral again. Still in a decline phase as of the close, but just barely.
MID-TERM: progressed 1 point in its developing decline phase to 3%. Our Confidence Diffusion Index (CDI) remained unchanged at a bearish ONE. The oscillator on which this gauge is based is a hair's breadth from crossing down below its trigger line. That would confirm the sell signal.
LONG-TERM: weekly gauge remained "unch" at 89% in its advance phase. Weekly CDI "unch" as well at a bullish TWO.
BOTTOM LINE: The tank has just begun refilling with the negative sentiment fuel that could (when it has filled up significantly more) propel the market higher. This is reflected in both the short & mid-term gauges. NOW is the window of opportunity for a decline phase to begin. The quality of this decline phase could tell us a lot about the conviction underlying the recent run-up. If some serious selling begets more selling, then it's "same-o' same-o'" bear market "thang." If the tank refuels and we see worry come into the market while price holds up, then we'll become more bullish on a sentiment basis.
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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