Bull Market Continues...

Most indicators are in line with the current market move. The market has moved up, and the indicators are are bullish, although VIX is still elevated.

The SKEW shows that put buying is back to normal levels and that the market (so far) has room to run higher. The chart on the left below shows the current state of short term moving averages on the SKEW are very low (bullish for SPX). It also shows that the SKEW usually signals sharp breakdowns in the market by spiking higher (above 130). These areas are bubbled and are overlapped with the SPY chart on the right.

 

The SPX needs to break above 1950 and stay there. The market will most likely trade sideways and choppy for awhile, before it breaks out higher or fails and tests the previous lows.

Not just another sell off...

This market is down strongly for the week. Since last Thursday's close the SPX is down over 4.5%, which is still better than the 5.5% it was down just two hours before the closing bell. All this seems just a bit extreme.

A ray of hope for the bulls came when rumors OPEC was considering a meeting to cut production gave oil a late day rally. This created a few bullish signs on the chart of Light Sweet Crude Oil Futures (/CL). First a hammer like doji candle pattern appeared. Second, a bullish divergence set up is in place using the RSI indicator. Oil futures are at a new low (a 13-year low actually), while the RSI is at a higher low and beginning to curve upward. Third, stochastics are in the oversold area looking to be curving up also. This all suggest that further downside is limited in the short term.



So, if oil settles down, maybe the market will also. That would be a huge difference from what happened so far this week, with the VIX trading around 30 again, and intra-day price swings of more than 1% occurring regularly.

With markets down so much this week, and signs of bullishness in oil, I sold the 1775/1765 SPX put spread expiring tomorrow for $1.05. By the close today it was worth 40 cents.

I also looked at the NDX and started marking up the graph. A couple of items stood out. First, I measured the NDX recent high price to the recent area of support, about a 700 point move. As support broke, expectations should be for a similar move from the previous support level around 4100 to around 3425, where previous long term support exists. We may also expect some support around 3715, as shown on the chart below.

 

The NDX is set up is similar to the SPX with stochastics in the oversold area and curling up, and a bullish divergence in the RSI. So, I sold the 3660/3650 (you read that correctly!) NDX put spread that expires next week (Friday morning) for 80 cents. That is 300 points (7.5%) lower than today's price at the close. The last time we had a big move like that was the third week of August, but the set up was much different then. We have a shortened trading week next week, so really the trade should come through quickly.

Today, McMillan noted that Put/Call ratios on the SPX had turned bullish from very high levels. This usually marks a 100 point move in the SPX. I may need to jump on that very quickly.

1872 Retest, TLT set up

Today the SPX followed through on yesterdays negativity, even though crude oil went higher almost from the start of the trading day. Its worthy noting that Crude Oil is now finding a support level around $29.50. Today's 9% move from yesterday's close, really pushed the oil stocks hoigher in the SPX.



SPX has some support around 1870 now also. This is the area where the market closed last Thursday, before the BOJ interest rate announcement.

 

All these areas are now becoming clear support, and if they are broken, then very sharp declines can be expected. However, if they hold, the market can essential put together some form of relief rally from the steep declines in January.

The SKEW came in around 122 today. Again, this gives a bullish tilt to the market. All in all, the market has some resilience, but not much strength.

On a side topic, I want to take a quick look at TLT - the twenty year bond ETF. This is showing a set up for a bearish trade. Yesterday, TLT closed above its 2 standard deviation 20 day Bollinger Band. Today, it closed back below that band with a large shooting star candlestick pattern. Also, the stochastics have been extremely bullish for an extended period already, which in the past has led to decline. Likewise, the RSI has reached the overbought area, which it doesn't hold for long.



This set up could lead to reversal back to the 125 area very easily, with a further target down to 121. If TLT does fall, we may have more bullishness in the stock market.

TRIN above 2 and SKEW falls

The small caps led the market lower today. Oil lost more ground and energy stocks really got hit. However, bullish signs are signalling. First, the TRIN traded above 2 from 8:45 AM on. This should be significant enough for a one day rally tomorrow. Second, the SKEW actually fell today to below 120. This is a huge divergence from what we saw for the entire trading year so far. This bodes well for the market finding a bottom in the near term, as long as the SKEW does not get above 130 again.

Volatility Indexes jumped along with bond prices. The short term volatility indexes rose a bit above the longer term indexes, but not to extreme levels by any means.

After the market closed, the futures fell further, but are currently regaining ground to close out the loss. We may see some follow through from today's pullback in the morning, but this pullback looks to only be temporary.

With VIX above 20 and less than 3 weeks to February expiration, bull puts look like a good trade going forward if the market shows further signs of bullishness after this sell off.

Volatility and SKEW confirm bullish move

The market is bullish again. Now its a matter of how long it will last. The bullishness is outlined well by Urban Camel in his latest blog.

The number of stocks above their 20 day moving average has bottomed and jumped up rapidly. It sis still far from being in overboughy territory.

The volatility term structure is flattening and the short term measures (VXST) are again below longer term measures (VXV). Volatility is still high, so there is plenty of upside to the market if the VIX can start trending lower.


But most importantly the SKEW printed a 120 reading after Friday's close. Although not extremely low and super bullish, this 120 SKEW is a big divergence from the high numbers that had occurred all of January. The SKEW jumped back up to 126 today, but still this is a normal range for a bullish market.

If we can get a couple days of the market moving nowhere, like today, or even pulling back a little, this would be a real gift for us to get long. I look forward to slipping some trades in on Wednesday. A 40 point move on the SPX is about 2%. This would put the market of the range of 1980 to 2000, which should offer resistance for the bulls, at least in the short term.