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Wednesday, May 12, 2010
TO BE OR NOT TO BE?
Here we have the VIX which as I have said many times before, is the single best barometer of what to expect next in the stock market. This is strictly a short term timing tool, I do not believe it is of that much use for longer term analysis.
You can see on the meltdown day we went past the 3 Standard Deviation Band, which with the VIX is a buy signal for stocks. Remember this is volatility, so in general high readings are buy signals because they reflect panic and low readings are sells because they represent complacency. Those are just general rules, you don't just sell every time it goes down or buy stocks every time it goes up. The point is you look for extremes here and it is a contra indicator.
Now that we have had the dramatic upswing in price off the lows of last week as I thought we would, you can see the trend indicator buy setups( sell for stocks ) This is just a reaction down against and underlying up trend. Once that trend resumes we have a buy here which would in theory be a sell in stocks. The question here then is which is the greater signal, the move off the standard deviation band which was a buy for stocks or this which is a sell for stocks? The answer is that I do not know. My gut here is that this sell setup is not going to develop the way I wanted it to. The reason for that is that the momentum indicator on the SP 500 charts is going up very sharply even though it is still under what could be argued to be a downtrend line. There is some interpretation in how I choose my trades. Usually when there is a conflict I stand aside. There is always another trade.
The problem with all of this is that to have taken advantage of the buy signal in stocks here with the VIX, you would have had to buy intraday when we were down 1000 points in the DOW. That would have been a very difficult thing to do even for me. Even if you had done it there is a good likelihood the exchange would have busted your trades. As a result in reality, that buy signal was not tradeable. If you had waited to the next day the stops would have been immense. Occasionally there are times where even though there are big moves they are impossible to trade, it is what it is.
As I was scrolling through individual stocks last night I found this same pattern, very sharp short term up momentum against a longer term downtrend of that momentum. Once again, that is not really a pattern I look for so I am unsure what I am going to do here. I do know this, at least for today, I am not going to short anything. I just do not have a consistent enough read on things to put money at risk right here. I don't like sitting on my hands, but I do it when it is prudent. I do think overall we saw the sign of coming attractions last week, but it does appear to me the day has been saved for the time being.
Currencies are kind of choppy here the last few days, so I do not see much there. I had been looking to short the Pound, but the setup is marginal. Gold and Silver are flying once again, no opp on either side there that I see. The Yen might be setting up a long entry, that is something I am watching very closely here.