This time last week the media, and traders in general, were in a tizzy over Ebola, ISIS, plummeting crude prices and an explosion in near-term volatility. Everyone, from the active day trader and multi-day swing trader, to mom and pop investors and high-profile gurus, was in a panic. Regardless of who you spoke to, the overwhelming opinion was that equities were in serious trouble.
Fast forward a week and traders are still complaining. This time, however, they're annoyed by the return of the almighty V-shaped bounce. In the span of two weeks, asset prices have gone from plummeting a percent or two each day, to bouncing a percent or two each day. And the bottom line is that anyone unwilling to chase the early morning strength has been left out in the cold.
Where do we currently stand?
We should begin by recognizing that while all major market ETFs continue to trade beneath their 50-day simple moving averages (SMA), the RSI has moved back above the 50-center line on the SPDR S&P 500 (SPY), iShares Russell 2000 (IWM) and Powershares QQQ Trust (QQQ). This improvement in the RSI must be labelled a bullish development.
Major Market ETFs (DIA, SPY, IWM, QQQ)
Source: eSignal
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As far as recent downtrend lines are concerned, we can see above that while the SPY has cleared its month-long resistance line, the QQQ, the SPDR Dow Jones Industrial Average ETF (DIA) and the IWM all still have declining trend lines to contend with. We'll label this as a near-term concern.
Market Breadth -- Daily Chart
Source: StockCharts.com
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Moving along to a few of the broad market indicators we've been discussing recently, we still have a mere 42% of S&P 500 stocks trading above their 50-day SMAs. This has ample room to run before we'd consider labeling it stretched or overbought.
The put/call ratio closed above 1 on Tuesday, and this is obviously not what bears want to see, as it lacks a sense of complacency and bullish froth.
The ratio of S&P Volatility Index (VIX) to S&P 3 Month Volatility (VXV) closed back beneath 1 for a second day in a row on Tuesday. This decline in near-term volatility is bullish.
Lastly, we see that the ratio adjusted McClellan Oscillator finished Tuesday's session a bump above 65. This, as I hinted at in Tuesday's Trader Daily, is a problem. In my view, the McClellan Oscillator should be a major area of concern for anyone aggressively chasing the recent the strength. Put another way, I fear some may now be picking up dimes in front of a quickly approaching steam roller.
It's plain to see the number of crosscurrents traders have to balance. On one hand we have the major indices advancing by one or two percent a day on generally strong participation. And on the other we have strong overhead resistance and an obviously overbought short-term oscillator. So what are we to do?
I believe day timeframe traders should continue to follow value and trade in the direction of short-term value. So as long as day timeframe value continue to rise, an emphasis on buying dips, especially toward value, remains appropriate. Selling short upside (intraday) excess is a perfectly viable strategy, as long as one's timeframe is sufficiently short and you remember that value is still rising to meet price.
On an intermediate timeframe, however, I want to approach the market in a more cautious manner. While price momentum is strong and day timeframe value is migrating higher, I still expect demand to slow materially as the various ETFs approach their downtrend lines and 50-day SMAs. Add into the mix the fact that the McClellan Oscillator is very overbought, and I believe we have the makings for an intermediate-term decline. As such, I initiated a short in the SPY shortly after Tuesday's close, as prices spiked to above $194.50.
Additional Notes:
- For those involved in the First Trust ISE-Revere Natural Gas ETF (FCG) discussed the other week, please note that Tuesday's $15.65 closing price represents the bottom of a price channel I outlined in the original trade thesis. The three areas I am currently tracking as logical areas to reduce long risk are $15.65, $16.50 and $17.75. From an intermediate timeframe risk management standpoint, I favor reducing my position by a third at the $15.65 resistance level.
- Please check columnist conversation prior to Wednesday's open for an updated E-Mini S&P 500 futures (Es) volume profile and daily trade plan.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS.
At the time of publication, Bob Byrne was long FCG and short SPY.