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Saturday, April 03, 2010

WEEKEND REVIEW


Here we have the VIX still giving Buy signals, and as you can see we are very close to breaking a well connected trendline. Both of the trend oscillators are indicating an UPTREND. This is a good trade setup for next week. In general this would mean a decline in stocks, but it is not a one to one correlation. As you can see since we made the low here a couple weeks ago, and bounced some, stocks (the green line at the top) have not declined at all. This is volatility, which generally correlates to stock movement. The one other way to look at this is just to watch the trend in it. With the trend solidly down in volatility, that generally does mean higher stock prices.

If you think about this trend being towards lower volatility in options pricing, which is what this measures, it does logically follow that it is a reflection of diminishing worry in the marketplace. This typically accompanies periods of rising stock prices. Everyone feels good and nobody is worried about anything bad happening. Historically, when this lack of worry gets to an extreme, major tops happen. Conversely, when it gets to a very high level of panic, bottoms happen. There are alot of ways of using this, and I suggest readers do their own studies. It is the best single tool I know of to use in timing stock market swings.

Guess what, it too is not always right. There is no holy grail in this business regardless of all the great marketing hype certain people use to publicize things they are trying to sell.



Here is the ETF for the VIX and you can see it is actually quite a bit weaker. This to me does not indicate a buy yet. The last trading day made it's lowest low of the year, and reversed to close positive. These reversal bars although occasionally marking low points, are more often false low points. Conclusion, wait another day or two and see what happens here. There is no entry for Tuesday that I can see. You have to believe the PPT will be buying futures in the electronic session Monday to make sure everyone "sees" how good everything is getting as reflected by the NFP report. As a result, it follows that this will make lower lows before bottoming.



GOLD - I just don't see a damn thing to do at all here. Copper has raced ahead to new highs, with Silver a little behind but stronger than this. In general Silver is a more speculative market than Gold, so it is usually would be bearish for it to move up like it is with this market not moving much. However, I am not sure it means that much here. This is just a range bound market at the moment, and I don't see anything in my world setting up this coming week.



Here we have Crude Oil which has been rangebound for quite some time now. It is threatening to break out of it's trading range here. As you can see each prior time it has reached this level we had heavy commercial selling and small spec buying, which capped those rallies. It is happening again here, so it appears there is a 2 way trade here. You can short against this level with a reverse to a long on a breakout. I do not trade like that, but there are alot of ways to approach this business. There are people who are very successful who trade breakouts. I am kind of rooting for a break out which will give me more ammo to bash the COT report as being worthless. If we were to break out successfully, it would be another example of the COT data having a screw loose. I still use it in limited ways like this, but it is way down in the pecking order now.

One other thing of note  here is the rising open interest ( blue line ). In a trading range this would typically be bearish, bullish if it were declining.



The Dollar is setup for a buy now, and I am hoping for a day or two pullback to setup an entry. You can see the shorter term trend indicator has broken it's uptrend, but the longer term one has maintained it's trend. Also, the weekly chart is clearly in an Uptrend. Technically the POIV (purple line) diverged at the high as well as the Pro Go ( green line ), which is a negative here. However, the Pro Go is now leading ahead of price so will likely make new highs on a breakout so I think we are good to go here. It is very bullish for stocks that they are now trading directionally the same as the dollar. I have mentioned this in the past here. Historically these two markets have traded together, not opposite as they have in recent times. A strong dollar has typically meant a good stock market.

Good luck trading this week.

2 comments:

robert said...

Chris, you say you are short the Russell 2000 but are looking to go long the USD ... and the USD and the stock market are now moving in sync (which you say is normal).

Will you stay with your short RUT until you get a buy signal on the USD?

Is that the idea?

Great blog.

Chris Johnston said...

I handle those independent of one another. In other words I will carry my stop in the Russel short and stay in the trade until either I get stopped out or hit my targets. The USD I will wait for one of my patterns to show up, if it does not I will not go long. The directional comments are based on my reads of larger picture setups, the entry patterns are different.

So net net, even though I try to be aware of market correlations, I rarely trade with them in mind other than adjusting position size accordingly to not overly expose myself risk wise to the same direction.

Hope that makes sense