If you look over the last two months of my blog posts, you will find that I have been 100% bullish. My bullishness in the face of a perpetually overbought market is a result of running study after study, all of which suggested that the bull would continue to run.
I’m at the point now of looking for a study to suggest that the market is slowly cracking. I’m not having much luck.
One study I ran tonight shows a slight bearish divergence. It is a very simple measure of breadth. The study sums the number of stocks in an uptrend. The way I define uptrend is proprietary, but again, it is very simple. These stocks must also meet a simple volume and liquidity requirement and be listed on a major exchange.
As you can see, the uptrends (gray histogram) have not quite reached the highs of September of 2009 or April of 2010, but the market is still chugging relentlessly higher.
While this is certainly not enough evidence to change my bullish disposition, it is noteworthy.
Tomorrow night I’ll go a searchin’ for some other divergences. I have no idea whether I will find any or not.
Crickets…
And the crowd goes….MILD….
you always put up really interesting stuff man, really interesting
Thanks! Glad you find it interesting.
Simple cycle histories demand a pullback very soon. We are entering a period where we could be in for and annual “biggie” but I make no promises.
Certainly gold and silver need to work off some restless energy here.
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I do not disagree Jake. The market cannot climb at a 45 degree angle, with no dips, forever. However, it may be able to sustain such a move for longer than we expect.
Agreud, and I have not yet put on a full hedged position as a result.
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“annual biggie” is going to be the operative theme for the next 1-5 years
It certainly cracked today. I do similar work and wrote the following yesterday for the few people that either love me enough or have to put up with me explaining why I think the market is heading down in the ST.
Volatility
The volatility measure I use to stop trading is a hair below the stop point and has roared up since the YE (that was yesterday, today (1/19) it is above (32) and I’ll be out at the EOD)
Last year at this point the setup was very similar and my measure would have saved me a 10% pullback
The measure is not perfect and I highlight some of the examples in the last three years.
Resistance
We are very near S&P 1,300 which is a clear resistance point
If you look at an S&P chart you will notice more times than not the S&P either stutters or declines on the 100s
At 1,200 it stuttered and this was the day of the QE2 announcement which it crossed 1,200 big on that day and then a small pull back and sideways below 1,200 for 3 weeks
If the S&P were to drop I would put a small pullback at 4% (1,250 support) and a medium pullback at 8.3% (1,200 support)
I don’t expect a large pullback but if where to occur I would guess a 20% (1,050 support) pullback
Overbought
My custom overbought measures show the S&P very OB in the short term and mildly in the LT
Although overbought conditions alone don’t mean much, with the other information they tell me the market has much more downside than up
Relative strength
Finally (and I didn’t put this on the chart) the S&P is up 20% in a near straight line since Sept.
Again by itself there is no reason to fear but there is much chatter about the amazing run, very high bullish sentiment, good earnings and the bears getting whooped.
VIX
The VIX is the markets forward expectation of volatility (again not in the chart)
It generally falls in rising markets and rises in falling markets (or at the very end of a rising mkt)
People trade this instrument. I don’t and don’t plan to. But just as a experiment I would buy the VIX now. And if I knew more about options and futures (I changed my mind, what would I do with myself w/o something in the game. And there is really only one way to learn)
It closed today at 15.84, the lowest it has been since 2007
I have a cool graph that goes along with this I’ll fire off if you send me your e-mail.
Good stuff Ron. Thanks for commenting. My email is woodshedder73 at google mail.