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October 25, 2012 / redman59

I Will Not Partake in Tomfoolery; Seeing Conflicting Market Signals

As the title suggests I have no interest in partaking in this market here.  Right now I have many conflicting signals as far as the direction of the market.  Basically they all same the same thing in that we are oversold, a bounce is expected, but overall the market is not healthy and further downside can be expected.  Last night I posted about a short term technical indicator I watch that shows that a bounce can be expected; I still expect this.

I am truly conflicted here.  I do believe that a bounce is expected but selling into the bounce seems reasonable, notably the 1430 area in the $SPX.  On another note it is hard to ignore the QE stats and that there is usually some ludicrous action after QE announcement followed by a run a higher and that coupled with presidential election year seasonality suggests run into the years’ end.  Many of the macro indicators I watch suggest further downside and room for further downside, they include:

  • Bond:Stock Ratio w/a 65-SMA, this has recently crossed above suggesting downside action
  • US Dollar Heiken-Ashi chart with a 42-SMA, this inverse-market indicator confirmed upside market action on 8/7 and just confirmed downside action today
  • NASDAQ:SPX  ratio with moving averages, this suggested downside action on 10/2 and remains bearish
  • Premium service showing that a majority of the $OEX stocks are in downtrending patterns (measured on pure O-H-C action)
  • Distribution days as measured by Investors Business Daily

Now that the doom and gloom is out of the way there are some things that suggest a bounce is due.  One indicator is a premium service that suggests that we are highly oversold and a bounce is expected, another is the current McClellan Oscillator reading comparing to previous levels, and the $VIX.

As far as the McClellan Oscillator reading, looking at the chart below we can see that we are near levels that have historically recorded bounces.  Look at the highlighted boxes but one thing that is different rather than early on is that we are seeing lower lows instead of higher lows, something to take in consideration:

The other thing that I like to pay attention to is the $VIX and closes outside of the Bollinger Bands.  This essentially measures the volatility of the move on volatility.  I like to watch closes outside the upper and lower bands as extremes.  The chart below shows the $SPX on top and the $VIX below.  The $VIX arrows show closes outside of the Bollinger Bands.  The $SPX shows yellow lines in where the $VIX closed outside of the upper Bollinger Band, essentially an extreme $SPX move to the downside.  Note the $SPX price action after we see consecutive closes outside of the upper Bollinger Bands on the $VIX.  This is a favorite timing indicator and the best way that I use this is to wait for the $VIX to close back below the upper Bollinger Band rather front running an extreme.  As you can see, there are occurrences where volatility continues to “walk” the Bands:

So like I said I am not interested in partaking in the tomfoolery of the market here.  I highly believe in mental capital preservation and today I closed out my positions (previously stated in blog posts) in $AAPL and $GOOG and I am now flat.  This leaves me in a relaxed state of mind and allows me to work on watchlists and track the market without position bias.  If we see more downside action I will stay in cash but not look to short and if we see upside action I will look to see how the breakout stocks are acting (if sticking) and look to get in bullish positions.

I have learned through time that sometimes less is more and right now I am feeling that this thought needs to be put in to practice, at least for me.  Never forget that mental capital can be as precious as monetary capital.

4 Comments

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  1. Adam / Oct 25 2012 1:19 am

    Sounds like the perfect situation for a calendar spread.

    • redman59 / Oct 25 2012 8:31 am

      Calendar if playing for direction but if playing options for income or delta-neutral strategy there would be no edge here on a volatility basis as the VIX and VVIX are at high readings and volatility would be expected to come in so would prefer to sell volatility.

  2. Alan-Michael / Oct 25 2012 1:42 am

    Oversold is a bad indicator, as stocks can stay oversold as long as they like. A bounce is only expected at key support levels, and should never be expected twice in a row at the same level. Conflicting signals are often a sign of “too many indicators” syndrome. All that matters really is price. It trumps everything.

    If SPX has a down day it is more probably it will have a down day tmrw. If SPX holds a key support level, it is likely to have upward movement. If SPX breaks a key support level, it is more likely to go through it the next time it revisits that zone. If a stock is making lower highs and lower lows, the trend is *down* and past support levels are more likely to be violated.

    In other words, you dont really need indicators for anything. The less you use the better. Examine the price movement, see the support/resistance levels, observe whether higher highs are being made or lower highs…trade in the direction of that trend.

    If a stock is going side ways, buy at the previous support level, sell at the previous resistance level. None of those things require an indicator, just your eyes. The only indicators I use are moving averages, and that’s just to get a good idea of likely support/resistance levels as well as overall trend direction, or a change in trend through violate of significant averages.

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  1. Staying Light and Earnings Trades in $AAPL and $AMZN « redman59

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