What a difference 5 mins can make!

If you thought the market started off the day bad, it ended much worse. Its hard to believe but the day after a follow through day (IBD marked it yesterday), the SPX fell 1.5% today, most of that in the first 2 hours, but then brutally in the last 5 minutes.

The TRIN went crazy today showing selling was wide spread and on heavy volume. It closed at 3.17 a level not seen since September 1st, but was even higher intraday.

Again, the SPX sits around this 2040 level, an important level because it acted as support last Wednesday and acted as the gap area last Friday and again Tuesday.

After the 1% loss in the morning, the SPX bounced off its lower Bollinger Band on the 15-min chart and rallied a bit (see arrow in the charts above). At that point I bought some TNA and TQQQ. The rally only extended to the mid-line on the 15 min chart and then slid down with the declining line. Then everything broke loose about 5 mins before the market closed. 

So, instead of picking the bottom, we have an issue of trying to repair a trade that when wrong. This can be handled with options on those ETFs. We need to sell some OTM calls, and, if the market is weak, use them proceeds to collarize the ETFs with some put buys. Hopefully, we can limit the downside further and wait for some rebound. 

With the TRIN so high, I cannot see much more than 1 day selling. but that maybe a pretty dismal day! 

The SKEW came down today, but still remains above 130. Tomorrow is option expiration. For the major players the options expired today, and tomorrow is just clean up with settlement prices. It can be a bit of a mess in the morning! 

IBD calls a Follow Through Day

Today markets rose on strong volume across all sectors. Investors' Business Daily labeled it a Follow Through Day. This designation creates the basis for a bull run that would need several down days on high volume to stop. Based on a trading program worked out over many years, an entrance into leveraged ETFs for Russell 2000 and Nasdaq stocks is warranted on the open tomorrow.

In addition, my trading friend Erin pointed out that a statistic she watches signified a intermediate bottom was in place on Monday also. She looks at the percentage of stocks that trade above their 20 day simple moving average. When less than 20% of stocks are trading above that moving average a possible market bottom has occurred. On Monday, only 16% were trading above their 20 day SMA.


Major news stations pointed to how traders took the FOMC meeting decision as a bullish signal. However, the VIX signal and Erin's research showed that the bullishness started long before this afternoon's rate hike decision. Lets watch to see how bullish the markets can get. SPX 2100 is the first number to break through.

VIX signal works magic

The VIX buy signal worked so well, there was really no time to trade it. The market got so bullish so fast, moving 20 points in the first 3 minutes of trade, that I would have had to make the trade yesterday for a reasonable fill. In hindsight, that was the obvious trade to make!

After the initial thrust the market created a trading range between the low of last Wednesday (around 2040) and the close of last Thursday around 2055, from which the markets gapped lower last Friday. This 2040 area on the SPX is interesting as it remains a pivot between bullish and bearish sentiment.



With tomorrow's FOMC meeting on the deck, put buying continued in an excessive manner. The SKEW traded up again, holding above 140 for the 3rd consecutive day. High SKEW readings can signal a coming pullback in the SPX, but usually when the market is already in a strong uptrend. A two day bounce does not qualify. I would expect the SKEW to give us a more normal reading after the FOMC.

VIX gives buy signal

Over the last few days, the VIX has been running up. It went from around 17.5 last Tuesday to an intraday high today of 26.8. This 9+ point move qualifies as a VIX spike (a +3 point move happening over 3 days or less).

The spike itself does not give a reason to buy SPX. However, today's closing print of 22.7 does! As the SPX made a solid move off its lower Bollinger Band line on a 15-minute chart around 8:30 AM (not shown), the VIX just crumbled. The VIX closed more than 3 points from its intraday high giving us a buy signal on the SPX.

In similar fashion the VIX Friday closed above the VXV (a longer term measure of the volatility of the SPX). This is a set up for a bullish move in the SPX if the VIX then closes below the VXV, which it did today!

Today's SKEW, however, is far from supportive of this bullish sentiment.  The VIX did close down sharply from the crazed levels of Friday, but still printed a stratospheric number at almost 141. This is hardly a place to launch a bullish run from. However, with the FOMC getting out of the way as early as tomorrow, the SKEW could fall dramatically and let the market take off into the Santa Claus rally that everyone expects.

Further, I find the RUT's lack of ability to close in positive territory as somewhat disturbing. The RUT really needs to start moving up if the bulls want us to believe that the lower highs and lower lows of this pullback are over.

SPX whacked at 2100

Today we had a rather rare situation for bull markets: a complete reversal of a major move up move from the prior day.

The Stochastics are saying this can go much further lower as we just pulled out of the upper region (second graph on the picture below) and even more damning is the RSI graph below. In Early November, the SPX failed to get into the upper overbought area, and on this move back to those highs on the SPX, its RSI is posting a lower high.



The RUT looks most concerning as it took out its support levels of late. Its Stochastics are falling sharply from overbought levels and the RSI never made a new high to support the price high in the index.

 

VXST is now above VIX which is short term bearish for the market also. I think some bearish positions are warranted here, as the SKEW is still above 130 and the SPX cannot get traction above 2100. We may see a move to 2040 on the SPX.