Bears Giving Up
Friday's sentiment activity was notable, as the VIX dropped down out of its tight recent range. We've had a breakout in bullishness, but not in prices. This is actually typical of tops throughout the bear market.
What this signifies is that all those traders attempting to short the rallies, and buy puts, are finally giving up. There was no urge to buy puts for the weekend; in fact, judging by the collapse in implied volatility into the close there was a mad scramble to buy calls, or sell puts (both bullish strategies).
One of the main things holding up the market has been the desire by the marginal, fast-money players to short the rally. It was the "obvious" thing -- to go short right at big resistance. In such an environment, where prices are banging up against obvious resistance after a nice run, it's also difficult for longs to hang onto positions -- but since they have a nice profit cushion, there has been less impetus for them to liquidate.
Tops are usually long, drawn-out affairs, because the market needs to work through all these obvious urges, to be in a position to confound the largest number of people at the end of the mid-term trend. That is, if we are in a situation as we are now, where no catalysts have emerged to galvanize the emotions of traders.
This is also a reason why tops, characterized by a low VIX and prices rounding at resistance, are a tricky thing. But it looks like with Friday's big red candle on the daily VIX, we're getting some more clarity.
What we need to be on the lookout for now is growing bullishness without much in the way of upside price movement. This is the hallmark of a market that's getting ready to sell-off fiercely. It's got to make a believer out of everyone first. I'd even look for our Sentiment Tank to now drain all the way to zero, and maybe even stay pegged down there for a while.
If the VIX stays low, and our Tank stays pegged at the bottom, yet prices can't power higher -- or worse, start drifting back down -- then we'll know that the bear market is forming a traditional, garden-variety top. We can confidently step in on the short side if prices start falling against the majority and they simply don't care (no rising VIX), once prices trigger a sell on our daily timing model.
Conversely, if we get a "spark of fear" from these levels, then we'll also know that there are many longs in a position to get squeezed, and we can also enter shorts with confidence at that point.
So we have a good game plan in place if the market is going to sell off. One thing I should note is that it would be unusual for any fierce selling to get underway this week, as it is options expiration week. Expiration weeks are usually flat to up, even in a bear market. Our contributing analyst Tom McClellan has a top signal coming in on May 16th, which is this Friday, so we should also keep that date in the back of our minds as a potential inflection point.
But the bigger question on everybody's mind is what should we do if this really is the "next bull market", and all my fancy-shmancy bear market logic should just be tossed out the window. What about that, smart guy?
Well, it can't be a bull market if prices can't even take out the last swing high . That's just a fact. You can't have a bull market that doesn't make a higher high. And remarkably, despite all the bullishness prices haven't done that yet.
So there's a really simple way to solve this dilemma, and that's to go long on a solid break above the last swing high. Just hold your nose and buy. You can catch some "mania points" this way if we're going to build another mini-bubble.
I've put the line in the sand at SPX 935, and I like to give 3 points of room to not get faked out at that point, when all the stops there get hit in a rush. Prices have to stay above SPX 938 for a full 30 minutes before we know the market can power higher from there.
So you can go long above 938. If this is the new bull market that everybody wants, then there will be plenty of points -- hundreds, even -- above there to capture. We won't be left behind if I'm just flat-out wrong. In the markets, it's absolutely necessary to stay flexible, and have a contingency plan in place.
But here's the thing: Get ready to stop-and-reverse that long position into a short position, on a move back down through 935. I would just do the same thing in reverse, and put my short entry at 932, a full 3 points below the line at 935. So for six points of risk (938 - 932), you are putting yourself in a position to capture major moves in both directions. That's the only long-trade I can live with, when sentiment is so extended on the bullish side.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 6 points to 3% full of negative sentiment on Friday.
SHORT-TERM: The hourly gauge moved into an advance phase, driven by the VIX's break below 23.
MID-TERM: The mid-term gauge remained unchanged at a raw reading of 95%. Because the oscillator has flattened out it's in a neutral posture, which gives it a duel reading of 95/5. Our weekly CDI moved up to a bullish 4, indicating that the stage is set technically for one more rush up toward key resistance.
LONG-TERM: The weekly gauge progressed W/W by 10 points to 99% in its advance phase. The weekly CDI moved up to 5. The weekly advance phase is long in the tooth but could run a bit farther before it gives out. We'll watch for deterioration in the weekly CDI to check for that decay.
BOTTOM LINE: The fact that the vehicle keeps chugging forward despite its almost exhausted supply of fuel suggests either imminent collapse or a real phase change to a more bullish orientation. This is tricky business because tops often take quite a while to form. They like to draw in as many hopeful dollars as possible before giving out to the downside. I continue to expect an intermediate decline phase to get significantly underway very soon.
However, given the strength of the index OVM lines, the Up-Down Volume, New Highs, and Breadth (as well as the huge store of money still on the sidelines, the declining quality spreads, and the Fed's girding of loins against deflation) the odds of the coming decline phase's doing significant technical damage to the market have markedly decreased. Does that mean that the secular (or long-cycle) bear market is over? Not necessarily but it does lend some credence to a more bullish scenario over the coming months.
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!
#forex4u - chat forex MIRC
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
