S&P 500: Churn And Burn
Dr. Duru | Jun 16, 2013 01:38AM ET
: 36.1%
VIX Status: 17.1
General (Short-term) Trading Call: Play the wedge – breakout or breakdown
Active T2108 periods: Day #4 under 40% (underperiod), Day #16 under 70% (underperiod)
Commentary
Incredibly, the tightening wedge on the S&P 500 remains mainly intact.
For 10 straight trading days the S&P 500 has effectively bounced between its 50DMA at support and the 20DMA as resistance. Right in the middle of the action is still the bear/bull dividing line providing a neat pivot. I have redrawn the downward trend excluding Friday’s action showing how in the last week this line has further constrained training. This churn is burning anyone who maintains a strong opinion on what the market “should” be doing. But space is running out in this wedge, and we should finally see a breakout or breakdown in the coming week. Conveniently, the Federal Reserve is announcing its latest on monetary policy on Wednesday which should provide a perfect catalyst to push the market into its next phase.
If I had to vote based on the VIX, the volatility index, I would vote for a breakdown. The VIX remains resilient and is now staying “aloft” for its longest duration of the year. For 10 of the last 11 trading days the VIX has closed above the 15.2 pivot. While the S&P 500 has churned, the VIX has strengthened its resolve. This resilience should be warning us of elevated concern for a resumption of the S&P 500′s correction.
If I had to vote based on T2108, I would vote for a breakout. On Thursday, T2108 touched 30% before launching higher and closing at 39.3%. In recent years, 30% has often served as a floor for T2108, not quite reaching official oversold status at 20%. On Thursday, the S&P 500 cracked the 50DMA by a hair before turning on a dime and bumrushing right into the downtrend line. This move frustrated a lot of bears: for a hot minute, it looked like the S&P 500 would finally serve up the breakdown they have been expecting.
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The most entertaining sequence has come from money manager Adaptive Boosting or AdaBoost ). If the preponderance of votes lean in the direction of the main prediction based on the close, I will increase my confidence in the prediction. I hope to make this adjustment in the coming weeks. In the meantime, I will stick with the current method and try to do some manual sensitivity checks that will include examining the decision tree for the classification model for any quirks that would make the current prediction prone to instability.
In summary, I expect the S&P 500 to break out of this wedge in the coming week, most likely driven by a Fed-inspired reaction and/or counter-reaction. Out of respect for T2108, I am leaning bullish, but I will instantly turn bearish on a CLOSE below the 50DMA that gets follow-through. NOTE WELL – I am not likely to trade on that bearishness, at least not on the S&P 500, because at that point T2108 should be rapidly approaching oversold conditions. I am VERY eager to test out the TTM and my overhauled T2108 methods on oversold conditions. Just as I did not get automatically bearish with overbought conditions (thank goodness!), I will not get automatically bullish with classic oversold conditions. I will run the numbers and respect the odds…and the technicals.
Finally, two more important trades I announced on twitter: I am again long puts on Caterpillar (CAT) that turned out well-timed as CAT failed to break resistance at its 50DMA. I also dove right back into puts on First Solar (FSLR) after it cracked $45 (I really should have just stuck with my previous put spread and stayed as patient as I was coming into the sell-off – they did not expire until July).
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Be careful out there!
Disclosure: long CAT shares and puts; long FSLR puts; long GLD
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