Old Wall Street saying. “Bottoming is a process, not an event.”
I’m treating market events that have taken place over the past three weeks as a bottoming process. I have plenty of misgivings about treating these events as a bottom, but then I always have misgivings. Primarily I’m concerned that the timing is way off and that the market shouldn’t be bottoming until August/September or maybe October. So while I’m looking for the market to rise off this so-called bottom, I will be keeping a weary eye on future events with the full expectation that any ensuing rally is destined to fail sooner rather than later.
It is my humble opinion that market dynamics have flipped from bearish to bullish and Friday’s rally appears to be confirmation. Until recently, the strategy of buying dips anytime and anyplace has led to pain for those employing this mindless strategy. However, just about everyone who bought dips going back to May 18th is now in a positive position, as are those who bought at just about anytime this past week. This kind of positive feedback and instant gratification will embolden others and the market should rise as a self fulfilling prophecy, or famous last words.
Evidence that supports the theory that the market has bottomed is as follows:
First and, at least to me, most importantly we had a 90% up day on Wednesday, June 6th. This 90% up day followed a 90% down day on Wednesday, May 30th and another 90% down day on Friday, June 1st. These two 90% down days can be seen as capitulation events, though there were a couple of indicators that I follow that didn’t quite get into extreme oversold territory. Still, a 90% up day in a downtrend often signals a change in market dynamics and I am taking this event as such until proven otherwise.
Secondly, $VIX has given a ‘sell’ signal per the 5/10 method. It’s going to be important to the expected rally leg for $VIX to remain in sell mode through the close of next Tuesday’s trading. Should it do that, then it will probably drop down close to the mid-teens by week’s end which will mean less volatility going forward and less volatility is always bullish.
Third, we have positive divergence in $USHL5. Note on the chart that while $SPX has not pushed above the 1334 area from late May $USHL5 has put in a new high as well as putting in higher lows since it bottomed on May 18th.
Fourth, $NYSI is trying to give a ‘buy’ signal in the daily chart. Now, in late April $NYSI gave a false ‘buy’ signal so it’s going to be very important for $NYSI to climb above the 20EMA which is now sitting at -344. You can also watch the ADX on the linked chart as well as the Stochastic for further confirmation of an expected confirmed ‘buy’ signal late next week. When the worm turns, you have to go with the worm.
Fifth, both $NYA50 & NAA50 are now higher than they were on May 29th, in more signs of positive divergence.
Lastly, and, perhaps most importantly, as you can see on the chart below, we have positive divergence in the RSI 14 on the daily $SPX chart. The fact that the RSI 14 dropped to about 23 would be signal enough that some kind of bottom was at hand, but that the RSI 14 failed to put in a lower low even as the market did just has to be seen as a positive going forward. Take a look for yourself. Go back as many years as you like and look for times when the RSI 14 has dropped below 30 and the market reaction that takes place afterward.
But it’s not all cookies and milk. We have signs of negative divergence in $NYHGH & 4wk New High/Low Ratio. When it comes to putting $$ at risk, I like to have all breadth indicators in sync, which is not the case at the moment. The fact that these two indicators went backwards on Friday is a concern so these two will need to get back instep with the markets on Monday/Tuesday. As long as they do, then we should be good to go.
I did buy some TQQQ & TNA on Friday. I consider these to be high risk trades, though not as high risk as my previous SSO trade. My positions in these two 3x’ers are small for now. I will be watching next week for the 9EMA to cross up through the 20MA on the daily $SPX chart before I consider adding to these positions.
IMHO, for now the least risky trade will be on the long side. I don’t know how long this will last. The wheels could come off Monday based on news over the weekend out of Europe.
Be careful. This is not your father’s market. We are held hostage by news events and HFT traders. While volatility may lessen in the short term, it is not going away. The strategy of buy-n-hold is an anachronism. Switching from bullish to bearish as the environment changes and taking profits when you can is the only way to survive.
GL in the week ahead.
Oh, yeah, so the bastages closed SSO at what price on Friday?