Stocks on Fumes?
Here we have the daily chart of the VIX, my favorite tool to predict short term market swings. I have some bands displayed here. There is no magic to them so no sense getting hung up in the calculation of these. You can use Bollinger Bands or standard deviation lines, etc.. The whole point is to get a short term measure of extension in one direction. We have breached these on the downside, which is actually a buy in the Vix which conversely means a sell in stocks. But hang on a minute. In the other panes we see the momentum indicators here are solidly in a down trend. If you look at the last time we had a similar situation, we needed to wait for the momentum indicators to cross their trend lines, indicating a momentum shift to support the buy signal/sell in stocks. We had a 5 day lag last time, so that is at least a possible outcome here. That is to say we crawl up for a few more days, then rollover in the S&P 500.
I do believe that is what we will see due to looking at alot of individual stock charts. There are not alot of sell signals or divergent momentum patterns. We need several more days in many of them to set them up if they set up at all. As a result, I will be looking for short entries towards the end of this week/beginning of next week. This is also tying into several things I have posted previously, including the Bradley Model and Larry Williams Will Go Long Term indicator. They both have been indicating a turn down at the end of February.
Ironically, we have across the board commercial buying in many commodities markets. Since we have been joined at the hip with stocks in almost every market that exists, this is a very interesting development. We do know often commercials can be very early or out right wrong also. It is hard to imagine a big commodities rally if we get a significant stock decline. However, in the past that could have easily happened, so maybe we will finally return to a normal world, but I would not hold my breath. So far extreme commercial selling has failed to stop the Dollar rally, which is in itself bullish for the Dollar. If it can break out again in the face of the record commercial short position, we could see a sharp move up that coincides with a similar sharp move down in stocks.
This is eerily similar to Gold at the end of last year, with the small speculators having a huge long position. That is rarely the right bet to run with them over a long period of time so it will be very interesting to see how long they can bid this up. I personally think not much longer, but have openly stated I am looking to buy a dip in the Dollar after shorting this rally. An up close in the Dollar tomorrow could give me a short setup for Wednesday.