What in the world is this?

I have diagrammed out a broadening formation which is taught by a famous trader by the name of Kevin Haggerty. The rules as to how these points are derived is proprietary to him, but not necessary for this discussion. The basic concept is that once these form at key points, often large market moves happen.

There was also one at the high, just for the record, which did predict this downward move. This one happens to be occuring in the zone of the 200 day moving average, which is a widely watched level by institutions. I for one have not found it significant in my studies, but many other very good traders swear by it. Please also notice that the commercials have increased their long positions over the prior week. When you combine these two things, this is a pretty good buy signal. I realize I will get booed out of town for saying anything other than the world is ending, but this is how I see it.

Whether or not we have another huge downdraft or not nobody can know, but the fundamentals are in place for a bounce from here. If you combine this with what was in my last post with the Vix, there is a reasonable basis for an upward move. If it happens, I will be watching my model closely to see if the commercials jump off the ship. If they do, I will jump with them.

NOW WHAT?



It is impossible not to concede that the trend has now turned down. Oddly, the commercials are still heavily long, if we go into a full crash, it would be the first time in history that it has happened when the commercials were positioned like they are. Below, I have a custom indicator based on the VIX index. As you can see, whenever it has hit 100, a major low has been made.



Although this chart only goes back to 2006, all the prior major lows have had this reading. It is at 100 now. As a result, the likelihood of at the very least a good bounce is very high right here. I am waiting for that bounce to then see how things look. If they still look the same with the other things, I will stay long, if they do not, I will sell all my stocks on the bounce. The VIX measures fear, which is why it has historically been a good predictor of lows. The fear is clearly everywhere right now, and rightfully so. It is possible that we have an unprecedented economic event that will spill over into everything.



I do not get involved in investing based on guesses about such things. The above types of things are how I make my decisions. This tells me not to short the market here or sell out here, so I will not. Could we just continue to waterfall, absolutely. Do I think we will, no and the above is why.

No Change

In spite of all of the emotion surrounding the volatile gyrations in stock prices, fundamentally nothing has changed. As you can see, the commercials continue to be heavily on the long side of this market, which is preventing any sell signal in my world from developing.

Keep in mind that this is news driven trading, and we could easily see a 500 pt up day if there were one good news item that came out. Historically, there has not been one single market crash, with the commercials this heavily long. That does not mean that it cannot happen, but it does mean that the odds are against it. As much as I do not like watching my stocks get hit any more than the next person does, I will not get tied up in an emotional exit. On a short term basis, this is a buying opportunity for a bounce out of this decline. I do think there are big picture issues that may take stocks down more. However, I would expect to see a move to the short side by the commercials before it happens.

I have short term buy signals for Friday depending on the opening, which as I type this appears to be setting up to be a weak one. Bonds did not decline much today, which shows a lack of belief on the part of institutions in todays selloff. A flight to quality would normally occur on a day like this in bonds if insiders were really scared. It is curious that it did not to me.

I do not profess to have all the answers, all I am doing is spelling this out as I see it and as I am trading it.

NOW WHAT?

Here we are in the midst of a pretty sharp decline in stock prices. Alot of gloom and doom is out there. I have to admit that the price action does in fact look like a top.. However..... my timing model is not telling me that yet. The commercials are still heavily long, which is significant. If the real insiders are not selling this decline, why should I?



It does need to be stated that I do have a long term upward bias for stocks, and there is a reason for this. No matter how I research timing models over mid term time horizons, all the short signals are very inconsistent. The reason for that is obvious, the long term huge stock uptrend that exists.



As a result, I look more to dodge big declines and buy dips, than I do to short big rallies. That is a suckers game, and I have learned that lesson the hard way over the years. What I have displayed here is what my guess is as to what will happen in the near term. If my system is to generate an exit, it would most likely be with a rally up from here that probably fails to make new highs. If the commercials were to move over to the short side during such an attempt, the system will most likely give the exit signal. Most of the exits ( sell signals ) with my system, have occurred that way in the past, so that is why that is what I expect now. I was on the record as many know that a sharp decline should occur this year beginning in about the beginning of August, I was off by one week unfortunately. I do wish I was out of my trade at this point just off the cuff, but I always follow my systems, unless I find something that is so important that it cannot be ignored. I have not found anything like that at this point.



Just for the record, that buy trade in the last post was stopped out for a loss. I did it with small size due to the volatility expansion. I always trade small when that type of thing happens, so it was a 1% loss, who cares about that.