(Edit 12:50p.m. I just noticed that the RSI on the 60min chart for $VIX closed at 20.48 today. The last time the RSI got into this area was on June 19th when $SPX closed at 1357. Starting on June 20th, $SPX began to roll over and did so for about the next three sessions eventually losing 44pts, on a closing basis, before bottoming. At the same time $VIX rose about 4pts from 17 to 21. I believe we are on the cusp of a similar event.)
The 5EMA on that $SPX/$VXO chart has now dropped almost to 14 and the 5EMA on the $SPX/$VIX chart has now dropped below 15 so these are indicating a frothy market. Meanwhile, $VIX closed today at its lowest level in more than three years which is more evidence of market froth. Since I put up that first $SPX/$VXO chart last Wednesday, the 8th, $SPX has climbed a whopping 1.89pts. With the exception of pre or post holiday trading, today’s 1.8billion shares is the lowest volume this year.
Below is another chart that does not come into play very often. The key is the Bollinger Bands. Those BB’s have squeezed about as tightly together as they’re going to. Please back test this chart and you will see that often, though not always, when the BB’s squeeze together they do so at turning points in $NYSI, which often precedes turning points in the market. If we were in a robust, dynamic market with lots of volume and participation from various sectors, then I would say that the BB squeeze would push $NYSI up, but we are not in that kind of market. Instead we are in a market where we are being led around by AAPL, GOOG, and a few others while, based on the low volume lately, most traders are off at Fire Island enjoying the last days of summer.
One thing to note here is the positive divergence in the RSI 14 that took place in May & June and the negative divergence in the RSI 14 that is setting up now. I don’t think that $NYSI is going to climb up 60 some odd points and put in a new high but if it should over the course of the next few days I think it’s doubtful the RSI will put in a new high. The other thing to note is that $NYSI has been wavering since late July and that market strength has been inconsistent since then. The strong moves that brought $NYSI and the markets off the bottom in June are now being replaced by weakness and uncertainty and this suggests that we’ve seen just about all we’re going to see out of this particular rally leg, IMHO, of course.
Chart courtesy of Stockcharts.com
The market is all about making fools of those who attempt to divine its moves so while I am bearish here and looking for a pull back to begin sometime within the next few days, the market may have other plans. However, as I said last week, I’d be careful adding to existing long positions or initiating any new long positions until we get some clarity.
Only the paranoid survive.