Weekly Candle …

Today the SPY ETF pushed below the 200 daily simple moving average of $276.28 and made a low of $273.91 … a close back above or around the 200 SMA will be a bit of a victory for the bulls but it would be best if we did not make another lower low today.

As I discussed in yesterday’s blog post, the weekly candle needs to close somewhere off of the lows when we close for the week tomorrow.  The 50% level of the current weekly range is $281.385 and the 38.2% level would be $279.62.  For me, a close at or above those levels gives me more confidence that there is not a lot more selling right now.  Things can change with a new Presidential tweet next week, but that kind of close for the week would be good.

Cheers … Leaf_West

Market Comment …

The market today inflicted a lot of pain to the long bulltards … many of them probably were taken out with margin calls late in the day.  Is the short-term selling over?  Let’s take a look at the market indicators.

McClellan Oscillator – Daily Chart

Ok … I like to keep track of the McClellan Oscillator to tell me when markets get at extremes.  Below -100 on the Oscillator generally marks an oversold market, and below -150 usually is seen only during wicked capitulation selling that is seen only occasionally.  The indicator ended today at -148.36 and is the second lowest reading group seen this year.  Only the early Jan/Feb carnage generated readings this low.

I mark on the above daily chart the four extreme readings, and then marked those same periods on the weekly SPY chart on the right.  You can see that generally, those were great times to step into the market to buy the dips.  Can we say that same thing here again?  Only time will tell, but let’s look closer at those four candles to see what additional information when can garner.

Remember, those price candles are weekly candles and therefore, the look of the current weekly candle will not be determined until the close on Friday.

Candle #1 … see how the candle bounced off of the low and closed closer to the middle of the weekly range?  That showed strength to close the week and as it turned out, price continued to bounce for about 5 more weeks.

Candle #2 … that weekly price candle ended right on the lows.  That shows selling right into the end of the week.  The next week saw a rather large range price action, but it was an inside candle that stuck to the bottom 50% of the bigger losing candle.  You can see that we actually made another lower low on the 2nd week that followed the bigger sell-off candle.  Then we had a bigger sustainable rally that benefited traders willing to wade back into stock positions.

Candle #3 … That weekly candle bounced off of the lows and finished the week around the mid-point of the candle’s range.  Again, that shows strength into Friday’s close.  The market bounced hard out of that low.

Lessons for Candle #4 … so what can we garner from the other extreme readings seen this year?  I would suggest that the next two trading days are important – if the market continues to see more selling the next two days, then I think we are still likely going to see some volatility for the next little bit.  Maybe we push to new lows right away, or maybe we get a half-assed bounce and then a new lower low with positive divergences in many momentum indicators.

Bottom-line will be to be patient and keep your trading time frame intra-day until we get more information about a low being made over the next 5-7 days.

Let’s look at the VIX to see if it will tell us anything …

S&P 500 VIX Index – Daily Chart #1

I had a trend-line alert set for the VIX index … that was a nice level to watch for a warning.

The 30-Day VIX / 90-Day VIX ratio is a great indicator to help traders find extremes in the short-term fear of the market.  We are well into the 1:1 ratio extreme zone here at 1.11x so we are getting near the end of the extreme fear in option premiums.

S&P 500 VIX Index – Weeky Chart

When you back out to a weekly time frame, you can see that we are at levels on the VIX that typically mark a level where support will typically be found.  Remember, these are weekly candles, so lots of daily anguish can be felt in the interim.

S&P 500 VIX Index – Daily Chart #2

I pushed the second daily chart above by pushing the illustrated days to early 2018 so that traders could see the wild daily swings that we can typically seen when the market makes these large outsized moves.

Bottom Line … Be safe, don’t be a hero, but don’t be paralyzed either.  Know what could happen and how oversold we are becoming.  Trade accordingly.

Cheers … Leaf_West