In a nutshell, two things move the market-supply and demand? Yes However, there are two things behind supply and demand and those two things are Fear and Greed. As I have said, when a chart is read properly, it shows human emotion and that helps us understand what sentiment is in the market. Sentiment could be described as the dominance of wither Fear or Greed. A quick way to gauge sentiment is to use the CBOE indicator the VIX. The VIX is referred to as the “Fear Index” and it tells us whether investors are fearful by registering high numbers (because of recent volatility over the past few years, those numbers are subjective and best looked at in terms of relative extremes) and when investors are fearful we typically see a rally. When there's a rally underway, investors tend to get complacent and then we see low reading in the VIX and when that happens, typically a sell-off is close. It can almost be described as contrarian thought. Here's the VIX
Today the VIX registered extreme complacency with a reading not seen since early May, “22”, a one day drop of 6.38% While the VIX can go lower, in relative terms it seems we are near a reversal to the downside.
There has been a pattern playing out on the up days I've noticed the last week or so. We see an early move up, which I believe is retail traders placing limit orders before heading off to work based on some news event. The market makers/specialist widen the bid ask and run price up without anyone on the institutional side having to commit finds to get the market higher. This is why we see this early in the day, it's why most pro traders rarely trade the open unless they have a specific strategy and it carries on until the orders are triggered and filled. By afternoon we see a trading range develop:
As you can see, “1” is the early morning run up, “2” is the trading range as a lack of buyers in the market keep prices relatively stable within the range and “3” is the afternoon run-up which I believe is created by an minimal investment by institutional money at the right time, in the right stocks. This run up keeps retail traders believing the rally is alive and well, however, there can be no healthy rally without increasing buy side volume and without institutional support.
Why would institutions do this if they are not bullish and buying?
Because like anyone, they want to and are able to sell positions they may have purchased within the last few days, into higher prices. If you are selling, you obviously don't believe the rally has much left in the tank, otherwise you are a buyer. As you can see in the chart above, the blue arrows represent the intraday price trend, the red arrows represent the intraday selling by institutions. Even TSV in the lower window shows the selling and has closed below it's moving average in a negative divergence so it's not just my indicators as you will see.
The next two charts represent what I was concerned with when I wrote last Friday's article about a possible Inverse Bottom Head and Shoulders.
The one thing that is most important in confirming a H&S Bottom is volume-do not underestimate the need for proper volume to confirm real pattern from a false pattern or just random pattern. What is needed is an advance in volume s the right shoulder rallies from it's bottom. Really any rally after the head is formed (to the right), should see a marked increase in volume. Furthermore the breakout above the neckline/resistance level must see a big increase on the breakout. As shown in both charts, volume has decreased, not a marked increase-the breakout was on even less volume today in the DIA and SPY-traders, despite this extraordinary breakout, are backing off from buying. You'd think such a breakout would create a tidal wave in buying?
If You Want To Make Money, You Must See What the Crowd Missed...
What did the crowd miss? Perhaps the falling volume? In an effort to see what the others have missed, I rarely use indicators in the way that the masses use them, for example, here's a MACD Histogram which is half the length of the typical MACD used by countless traders and found in countless books.
This is a momentum indicator, in a healthy trend it makes higher highs with price, in an unhealthy trend it makes lower highs as price makes higher highs. As you can clearly see, the MACD negative divergence, in all cases on this chart has led to a reversal in price. The yellow arrows represent positive MACD readings, the red represent divergence/negative readings and on what should be a “milestone day” with these breakouts, look at MACD, it's not increasing-IT'S DECREASING!!
The Mystery of The IWM and NASDAQ?
The market is rallying, putting in breakout highs, yet the IWM, besides gapping up with the market, which tells us nothing because the market largely moves together, put in a Doji Star which is at best a total loss of any momentum and at worst a reversal candle. The NASDAQ 100 severely underperformed the price pattern of the Dow and S&P as well. Remember, MARKETS LARGELY MOVE TOGETHER!
And For the Killers....
In the chart above, I'm using the influential 1-day chart with 4C on the DIA. There was an overall positive divergence between May and June, marked by the blue arrow. Each of the red arrows show a negative divergence and subsequent price reversal off the highs of the trend. This indicator should be heading toward the sky the last week, but instead... another red arrow with a relative position below that of the June highs-another divergence. This divergence has shown distribution since the July rally started!
The chart above of the SPY 10 minutes, shows 3C in a leading negative divergence! This should be in a leading positive divergence!
FEAR IS STRONGER THEN GREED!
Want proof? Look at the 10 day decline in June-it wiped out 10%, at the same time the July rally-about 20 days-gained the same 10%. So it took half as long to wipe out the same gain we just saw.
Now, there are positive indications in the market still, they are simply overwhelmed by the negatives; here's why. There is no one single economic release that can undo the damage of the GDP report. It would take months of positive releases with almost no negatives to convince smart money that the economy is turning. Right now the fear is stronger then ever that we will enter a double dip recession and it is well founded. Bernanke's senate testimony made this clear. The GDP number came as a shock, if it wasn't a shock, then the Fed would have warned that we would see this slowdown, that it was a natural part of the recovery-they didn't-not to this extent.
The market is all about manipulation and what better way to get money into the market, into a trap then creating this breakout? So, while we can always be wrong, and if we are, then risk management will kick in and do it's job, I seriously doubt that we are wrong. I do not doubt their ability to create a few more days of upside volatility, but over the long haul, I see this market heading to new lows eventually.
Today's Stats:
All 30 Dow components closed up, with P/V relationship nearly even with Close Up Volume up at 17-this is bullish, but when so many close up on such diminished volume, it's a contradiction and commonly (good is bad, bad is good) it can signal an overbought market just as the VIX did.
The NASDAQ 100-59:34 except this time, 59 was close up on diminishing volume. Remember I talked about the IWM and NASDAQ underperforming.
The S&P-500 248:226 with diminishing volume edging out advancing volume.
Despite the internal P/V relationships, every major average closed on lighter volume and all are trading down in after hours.
That's the daily wrap, check back as I scout for trades.....
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