Wednesday, June 10, 2009

Technical Picture - Box Play - Day Eight

The markets gapped up in the wake of overseas momentum, but it quickly turned into a fade as anticipated, when the VIX bounced on the first test of support (blue line segment). Up until the last two hours of the session, we had a wide range bearish engulfing stick, but institutional investors continue to buy pullbacks which accounts for the large number of late day rallies in recent weeks. Still today's bar is the widest of the eight day trading range touching the upper boundary and coming close to the lower boundary.

We have a golden cross between the 20/200 DMA's. Normally, crosses are lagging indicator's, which occur after price has taken out the most recent support/resistance. So this cross is suspect in that we've been range bound for an extended period of time.

A reader pointed out after yesterday's post that the VIX is in a clear downtrend and wanted to know if I saw an impending reversal. No, I don't see an impending reversal, but there are small clues and divergences starting to creep in signaling that the rally in stocks is exhausted. That's not to say the VIX will reverse. It will likely be low key throughout the summer doldrums, notwithstanding a major catalyst.

But as long as we continue to see late day rallies, it signals that institutions are buyers at these levels. Why? Because most institutions were not fully invested for most of the V bottom rally, now they are window dressing for Q2. We are still in a bear market until we can take out and hold the January reaction highs on the S&P on a closing basis.

And finally, if we do break higher, we need the financials to participate. One other clue that I'm watching for is high volume pullbacks from leading stocks. Over the weekend, we mentioned that GOOG and AAPL had carved out 9 successive higher closes. This week they are pulling back, but volume thus far, has been average.


john said...

The heard of institutions now believe in inflation sooner rather than later.

TJ said...


I didn't finish my economics degree. How will that belief affect their window dressing strategy going forward?

john said...

I agree that they feel under-invested and don't want to be caught at the end of the month. I was just suggesting that money has moved into the market because of inflation fears opposed to when they were concerned about recession and deflation and thought that treasuries were cool.

So I think that this may go beyond window dressing If they're right about inflation, they'll want to stay in the market but maybe differentiate a bit more - heaping a bit more disfavor on suppliers of non-essentials to US consumers for example.

TJ said...

Thanks for elaborating John,

Makes sense.