Yesterday was a big trend day down, which is a distinct change of character for this new bull market. Indeed, the most forceful argument that the new-bull-market crowd has had in their favor is that prices just "don't seem to want to go down." It will be interesting to see how this argument morphs as prices do indeed start to go down.
Back on June 6th, the market made a spike high to 1007, followed by a swift intraday reversal to the downside. The next trading day I came out and said it was extremely unlikely that the trend was going to continue, as the fractal dimension of the daily S&P 500 (SPX) chart had reached a level that almost always stops trends cold. The fractal dimension is a unique indicator that measures the linearity of a chart, to determine whether it's trending or non-trending.
Sure enough, since that June 6th spike high, the market has stopped going up, and is in a period of congestion. That spike ended the impulsive phase of that trend. But now the market is fully congested and ready to rock again.
If we drill down to the hourly chart of the SPX, we can also see that yesterday's big trendy move down is likely completed.
Often when the hourly chart looks like this you'll see a quick continuation move the next morning which quickly simmers down, as the market starts to congest this hourly chart. What I expect from years of watching this fractal dimension in action is that the market will now congest back up to the 20-period moving average (the red line), sending the fractal dimension back up over 55, and only then will the market be in a position to make its next streaky move.
If this is the start of a deeper pullback, then such a drifty move up and sideways over the next few days will be setting up another large streaky move down. In a bigger downtrend, the trendy moves will hit the market like waves in a set, one after another. Conversely, if the market moves back up through that red line on the chart and starts a trend up, then it's likely we'll revisit the recent highs yet again, and this pullback was just a "one-off".
Either way, the market is now in a position to coast into the Fed announcement tomorrow at 2:15pm. By that exact time, the markets should be ready to start a big move.
Turning to sentiment, the VIX showed a "mini-spark" of fear hitting the collective market psyche yesterday. The VIX jumped off the lows of its recent tight range in the low 20s, making its way towards the high of the range.
If the VIX pops up through that upper line, then the market will be embarking on a potentially major downtrend. You'll hear lots of talk at that point that it's just a "healthy pullback" -- and indeed it might be -- but the plain truth is that nobody knows what such a downtrend will ultimately end up looking like. Once the conditions of growing fear are present, all sorts of chaos can ensue. Exogenous events can have a profound impact on market participants while they are already in a vulnerable frame of mind.
The sentiment pattern since the recent high is also showing a glimpse of that ol' familiar bear. The VIX and the SPX have been declining in sync, which shows a lack of fear and a "buy the dips" mentality on the part of short-term speculators. The market rewarded this particular sentiment mix with an accelerated drop yesterday, just to stoke up at least a little bit of fear.
If the market is going to remain true to its recent bull-market form, then this little bout of fear will be the springboard to even higher highs. It's certainly possible. But we aren't seeing the kind of ravenous hunger to short this market that we saw from the "hot money" earlier in the trend. That desire has been squelched, as those betting from the short side have been thoroughly chastened. Ironically, this actually puts the market in a position to pull back significantly, now that few are willing to bet on it.
But before the next act in this drama can play out, we have to get the Fed meeting out of the way.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled by 0.3 to 0.3%. The VIX jumped , which had me thinking that the we'd get a stronger signal than we actually have. Why didn't we get one? Well, the VIX's jump merely took it back up solidly into its congestion band between 21 and 24. And the 20-dma of the Put/Call Ratio is still declining. So, we may have the first stirrings of a major sell signal but it's not quite there yet.
SHORT-TERM: Cycled into a decline phase. The afternoon bounce flattened out this hourly decline, however, and the gauge is now susceptible to cycling back into an advance phase.
MID-TERM: Progressed 3 points to 64% in its advance phase. However our Confidence Diffusion Index (CDI) ran to a BEARISH 2. The gauge's second derivative (momentum of the momentum) is slowing (progressed 3 points as opposed to Friday's 12 points) and one sharp spike of fear will likely send the gauge rolling over into a decline phase.
LONG-TERM: Progressed from Friday's NEUTRAL 95/5 reading 1 point to 6% on the bearish side of the gauge. The weekly gauge continues to flirt with rolling over, but a one-point move doesn't quite cut it as a signal. Our weekly CDI moved to a bearish 2. The gauge is leaning toward a sell signal but hasn't given a solid one yet.
BOTTOM LINE: The CDI's react more quickly and often lead the gauges, which are smoothed over time. The CDI's are pulling on those gauges toward bona fide sell signals, but they're not there yet. The tank remains at a very low level. A move up over 15-16% on the tank would be a sizable market sell signal. (That level is slowly creeping higher as the tank normalizes itself to the past year, currently sensitizing itself to smaller fluctuations as high readings of a year ago are falling off the back end and being replaced by current low readings..)
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