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Related Article(s)

6.1.13 Video Analysis – “$SPY $DIA $QQQ $XLF What We Can Expect Next 1-2 Weeks“

6.8.13 Market Analysis – “Hammered Out $DIA $SPY $QQQ $IYT $XLF $VIX“

6.15.13 Video Analysis – “$SPY Rise or Fall?“

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6.14.13 Friday

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The Good

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Dow Theory

“Trend is assumed in effect until it gives us definite signal of reversal”

Weekly Chart with 50EMA

Looking for the market crash? Well last two times first sign of market crash was closing below 50EMA (see red arrows) and follow through at least 3 weeks on this weekly chart. Not daily but on the weekly.  As you can see, we are far from even touching the 50EMA so let’s respect the fact that the long term trend is still in effect and we do NOT have any kind of early signal of market crash as of today.

Let’s zoom in and see if we can find any candle sentiment.

Weekly Chart with 10EMA

As you can see on this weekly chart that we have not yet broken below 10EMA as of today.  As long as 10EMA continues to hold, we have to give benefit of the doubt that the trend COULD continue.  Last 2012 July, we’ve formed weekly H&S reversal formation and it followed by very steep decline once it broken below the neckline and 10EMA.  But the level we need to watch in that weekly H&S is that it initially broke below 10EMA (2011 March) but it went right back above 10EMA and rally continued for another month and half (forming the head).   So even if we close below 10EMA next week, we do not know for sure that we are going to form that head level and rally could continue next 6 weeks just like it did back in 2011 March.

And yes by the end of the next week, we can and could close below 10EMA and thus giving early signal of correction.  But as of today, we did NOT break below and because of that fact, I would have to assume that the trend is in effect until it tells me otherwise.

“But its extended, maybe its DUE for a correction.”  Well nothing is DUE in the stock market. Anything can and could happen so in a meantime, we have to respect the trend that it could resume.

Daily Chart with Fibanocci Retracement (Today)

Fibanocci retracement measures possible retracement zone where it suggests that as long as stock remains above the retracement zone level (blue highlighted box), it is assumed that the trend will continue.  However, in the event that we break below the 61.8% level (below blue highlighted box), we have to assume that the reversal is in place and could lead to further bearishness.  As you can see that currently holding above 50% retracement level and today we closed right at 38.2% level.

Why is this important?  Because it happened just few months ago.  Check out the chart below.

Daily Chart with Fibanocci Retracement (April-May 2013)

To be honest, I think we had more bearish sentiment last April and May because we had all kinds of bearish divergences confirmed on MACD and also many reversal signals on multiple indices.  So I was actually pretty bearish back in April and started writing article that we are going to have a correction at this level.  Well Fibanocci proved me wrong. We stayed above 50% retracement level and above 50EMA and this thing never closed below the retracement zone (blue box) or the 50EMA and the trend continued for the next 3 weeks.

Daily Chart with Full Stochastic

Well I won’t be putting too much weight on this indicator as this thing can change direction on any give moment if the price falls heavily.  But again with the data that is given to me as of today, I have to agree with Stochastics here.   Once we find support and start to cross, this thing rallies.  It’s been the fashion and the trend since after the Thanksgiving weekend last November of 2012.  Today, we have bullish cross and pointing up suggesting that the momentum is starting to shift to the upside.  And when it happens, market rallies.  Again, does it have to?  No it doesn’t have to.  But Stochastic suggests that it has high probability that it could.

$VIX Daily Chart with RSI Bearish Divergence

This is the chart you won’t see anywhere else because everyone is hyped up for the fact that $VIX is breaking and rightly so.  But when everyone seems to talk about it and get hyped, that’s when I start to be cautious as it could be in “played out” condition (at least for a shorter term time frame). So as I was doing deeper studies on $VIX and I found this.  Bearish divergence on RSI.

Looking at this 1 year daily chart, we can able to see that we are at the “overbought” status with bearish divergence on the RSI ($VIX moves inversely to the market. $VIX up $SPY down).  As you can see as I have annotated with red marker that last three times when we formed this divergence ($VIX making higher high (or equal high) but RSI making lower high), it was inevitable that $VIX comes back down.  Could it be different this time? Yes anything can happen in the market however as a technical analyst I always look for high probability signals and this is one of them.  Because it happened before and it has high chance that it could happen again.

If $VIX start to retrace, we should see $SPY start to rise higher (for a shorter term time frame).

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The Bad

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$VIX Weekly Chart with MACD Bullish Divergence

Well I would have to say that this is truly a time bomb.

This thing has been forming this bullish divergence over 1 year and three months. That’s a long time! And you can see it on this chart that once it breaks out, ready for FIRE WORKS! $VIX breaks out, $SPY will tank.  But here is the thing about it. When will it break out??  Again it makes it that much ambigus for the fact that it’s a weekly chart and because we have been forming this bullish divergence for so long period of time.

We also have to note that we have RSI bearish divergence on daily chart so if that starts to play out, we could just continue to grind like this for few more weeks?  I do not know.  It could break out as early as next Monday or it could be 2 months from now.  It’s been grinding like this for so long and no-one truly knows when it will break out. But this is definitely a warning sign that we can’t ignore because when this thing gets out, it could be a bloodbath on the indices.

$SPY (blue) Overlay with $VIX (black) Weekly Chart

As you can see once $VIX starts to create higher highs, thats when the trouble comes for the equities.  We are currently forming higher lows on this weekly chart and when it does, correction usually follows looking at this overlayed chart. So far we had minor pullback but no sign of corrections yet on $SPY looking at this weekly chart.

The thing about this $VIX chart is that last 2011 $SPY formed H&S reversal formation while $VIX started creating these higher lows and we have similar formation this year but we don’t have any major reversal signal as of today on $SPY.  I think that could be really bad or just simply neutralize the whole warning signal.  Regardless, it’s a time bomb ready to explode.

$SPY (blue) Overlay with $FXY (Jap. Yen) Daily Chart

Here is the chart many are talking about recently.  Many are believing that the market will have it’s correction because Japanese Yen is breaking out so the theory is that the US Equities should tank if Japanese Yen starts to soar.  Yen broke out of downtrend line but $SPY continue to trade above trend line. If this is true, Yen is suggesting that the $SPY should start to breakdown here.

I guess because they have been moving inversely like clockwork since the early 2013, it may that $SPY is now “due” for a correctional move and move opposite of the Yen.  Again another huge warning signal that could lead to some explosive move.

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Keeping It Simple

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$SDS Daily Chart with 50EMA

(S&P500 Ultra Short ETF – Completely inverse to the $SPY)

If you are a chartist/technical savvy or not, this is a pretty simple chart to read.  We have been in this downtrend for sometime now and as long as 50EMA (pink dotted moving average) continues to act as resistance, chart is suggesting that this downtrend could continue.  So here is the simple way of looking at it.

• We break above $42 level = Bullish momentum could start
• We break below $37 level ($38.88 for more aggressive traders) = Bearish trend will continue

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Final Thoughts

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Well here is the thing.  Yes, there are many speculations and fear in this market as it started to come down from the highs recently.  And yes bears are attacking that 50EMA and with $VIX warning signals, many are expecting correctional move.  I think it might be true and possibly the correction will come as early as next week.  But I have learned over the years that Dow Theory stands true in any circumstances.  I mean if we break below 50EMA and the uptrend support early next week (On $SPY daily chart), I will change my stance on it but for now with the data that has been given to me, I would have to wait for a confirmation before start to get in short positions.  I did have many short positions when we had this recent bearish run.  But when I saw that we bounced off of 50EMA twice on daily chart and 10EMA is still protected on weekly chart and Fibanocci retracement level intacted, I  would have to assume that the trend is still in effect as Dow Theory suggests that we do.

For many, it might be a good idea to just sit in cash until further resolution of which way the market is headed. It might be good idea to wait for confirmation and for that definite reversal signal (break below 50EMA, uptrend support, and Fib. Retracement zone on daily). But for more active traders, I would have to say that I would respect the trend as long as we are trading above daily 50 EMA and give the benefit of the doubt to the bulls because we do not have any reversal signal as of today.

If you are looking for STEEP, market crash type of correction, I don’t think it’s just going to start tumbling down from this level.  As I have shown on this article (very first chart) that we haven’t even begun to hit 50EMA on the weekly chart.  And I don’t think bulls are going to just throw out red carpet to welcome bears so that the bears can catch that 50EMA on the weekly chart but it will take time to form that peaks of possible H&S pattern or some kind of triple top formations (go back and look at your $SPY weekly chart).  Once those peaks starts to build and move sideways, thats when weekly 50EMA will have chance to catch up with the price. That would be when you would see some type of steep market correction warning signals such as H&S formations with weekly divergences of some kind.

But at these top of the mountain level, I don’t think we are going to have inverted V pattern and come straight down. If you study your chart on $SPY, that NEVER happened.   With steep correctional move, you would always find some type pf reversal pattern with peaks such as wide H&S pattern or double/triple top formations.

My only suggestion would be that we stick with the trend until it proves us that the trend has been shifted.  We don’t have to worry about getting in early and be hasty about shorting this market. There will always be plenty of time to get in as the market doesn’t go straight up or down.