Here is the weekly chart of the S & P 500. For those of you that attended Larry's Art of Trading seminar, you will know what the indicator at the bottom is. In the interest of protecting his interests, I have covered the label of this graph. It is a trend measuring tool, that as you can see has shown we had been in a steady uptrend for awhile, and now have rolled over into a downward trend. Also, we have followed the seasonal very closely here in recent months. When I put all of this together, it tells me to still look higher through the end of the year, but also that it is not likely that we will get a big rally. As I mentioned last week, I have been building a short position in the SPY over the last 2 trading days, and did add to it about 15 minutes before the close Friday. I had actually hoped for a stronger close than we wound up with. The good news was since it was weak, the add on closed in the black already. That of course means nothing. One more bullish story of another loan to someone who can't ever pay it and we could have a big rally. I wonder if a loan was made to a qualified buyer if that would tank the market?
There is going to come a time, when loaning money to people who can't repay will be a bad idea as it used to be. The story of Elmer Fudd otherwise known as Barney Frank not seeking re-election last week, and what his legacy would be was ironic. He is certainly the single biggest proponent of loaning money to people with no money or credit. It was ironic that we once again got another big rally on such a story going on over in Europe. Other than retiring to chase that pesky wabbit, he should be misremembered for what he was so instrumental in doing. He also should probably be in jail, but so should most of the rest of them and it is not going to happen as we know.
The stories coming out of Europe are going to continue to play havoc with the markets going forward. My overall view is now to try and catch a short for a few days down sometime in the next few days, which will setup a buy to carry into the end of the year. I don't expect a huge rally, I think it will be a slow creeper after we get a retracement here this week. Maybe a story about another bad loan being made will shoot this higher, but without that, we are really overbought here and in a down trend. That should lead to some type of a dip. After the dip it is a buy for the year end up and into January, then things could get interesting.
The next chart is more support for a dip. I have mentioned in here previously that the best way to time stock market swings is the VIX. There are a lot of ways to go about doing this and I have no idea if the way I do it is the best. However, look at the next summary of a system I have for buying and selling stock indexes, based on the VIX.
If you look at this just from an overall standpoint it is pretty good. The draw downs are a bit high, and there are a few other things that make this not just good enough to blindly trade without anything else. However, what it does tell me is that there is a bias we can get that is about 80% for a direction, and that is awfully good. Keep in mind that this system does not have a stop, it has an exit based on levels of RSI so that is why the swings are so big. I think the best way to use it is too look for ways to trade in the direction it indicates, not just go in at the market as it does. It generated a sell signal late last week, which is why I started legging into my short, and also exited the long I had been in. When this sell signal showed up, and I also looked at the trend measurement which still shows down, it told me fading an overbought condition was the move to make.
The next chart shows why there is a sell signal here. We are extended on the down side past the bands that generally contain the price. Just like anything else, there are a few places on the chart where you can see the signals were inaccurate, hence being wrong 20% of the time. I could care less about that, 8 out of 10 is good enough for me.
The next chart is a market I have been talking about the last few days, Natural Gas. It does appear to have a setup now with a pretty small stop due to the smaller ranges we have worked into here. There is a nice trend line coming in here that would break if we took out Friday's high. I show the stop which is about a grand on the chart.
Please go back to last week for the other setups, they are still all the same and there is no point in just regurgitating all of them.
Good Luck this coming week