$TRAN continues to get hammered and I don’t know how much longer the major indexes can ignore this important sector without reacting. Transports are now about 120pts from going negative on the year and if they don’t turn north soon, then going negative could happen this week.
IWM looks very weak and is very close to giving a fresh sell signal in the 60min time frame. This would be IWM’s second ‘sell’ signal in the 60min time frame in about the last two weeks of trading.
$SOX Index looks about identical to IWM.
We now have three key sectors that are showing signs of weakness. Usually about the time weakness becomes obvious, the mad men at the helm move in and we’re off to the races, again. If the mad men don’t come to the rescue soon, then it’s probably because THEY are selling rather than buying, IMHO, of course.
I watch the $VIX:$VXV at times like these when the market is overbought. When this ratio drops down close to or below 0.80 it indicates an extremely bullish market environment that is often not sustainable. But if you look at this ratio alone you will find times when an extremely low reading was apparently ignored by the market, which continued higher despite a high degree of bullishness. If you throw $NYSI into the mix, another picture emerges and it appears that together these two have greater predictive value.
On the chart below, which goes back to March of 2009, you will note that I have marked with a green vertical line all but one instance where $VIX:$VXV dropped to or below 0.82. The black line that is behind the red, ratio line, is $NYSI and what’s important is what happens to the $NYSI either just prior to or just after the green vertical line intersects it.
On the far left of the chart, January of 2010, $VIX:$VXV dropped to 0.82 while the $NYSI was still rising, but within just a few sessions, $NYSI and $SPX rolled over and dropped for approximately 3 weeks. Next , in April 2010, you have another instance where $VIX:$VXV dropped to 0.82, this time the $NYSI had already begun to fall, and the markets would join in the fun a little while later.
On the far right side of the chart, you will see two vertical green lines, each marking when $VIX:$VXV dropped below 0.82. After the first of these two extreme readings, $NYSI continued higher, but prior to the second extreme reading, which came in last Friday, $NYSI had already turned south, which continued today.
The blue vertical line marks what appears to be an anomaly because after a low $VIX:$VXV reading, the market rallied on. The key is, at least IMHO, that just prior to the extreme low reading and the intersection of the blue line with $NYSI, $NYSI had turned north.
The bottom line is that if this chart has any predictive value at all, then it is predicting one of two possible market scenarios. The first scenario would be an extended consolidation period like the one that began in mid-October of 2010 and lasted until the end of November. The second scenario would be a market decline of one degree or another.
Chart courtesy of StockCharts.com
And, of course, the chart above could turn out to be useless VooDoo. It all depends on AAPL.