VIXology for Friday

Here's the daily chart of the VIX and Qs one hour before the close today on low, low volume.
Some interesting developments in the VIX this week as the Qs (and SPX, et al) melted up to almost kiss the benchmark SPX 1000.
As can be seen from the upper chart the VIX chugged right along up with the major indices, an anomaly not usually seen multiple days in a row.
The VIX technicals are now looking overbought, a weird situation given the the concurrent new yearly market highs.
Meanwhile, the Qs technicals are divergent with a bias towards a mild retracement.
I closed 60 % of my GE longs yesterday and today and covered the remainder at 13. After over a 10% pop in 2 days I'm expecting some degree of retrace and will consider new longs at that time.
For now I'm setting 90% in cash and flat the market. Reiterating previous comments . . . I think it's too late to get long and too soon to get short, preferring to see which way the market breaks before buying any risk.

SPX & VIX Crosses

While we wait for the SPX to break 1000 and seek clues as to likely momentum thereafter, I thought it might be a good time to review the SPX and VIX crosses that I've profiled before.
In this case we're looking at a 30 day 65 minute chart of the SPX with the VIX overlaid. I use a 65 minute chart in lieu of a 60 minute since the normal trading day is 390 minutes and 60 doesn't divide into that evenly while 65 does. Not every platform lets you customize the bar minutes (I also frequently use 130 minutes or 390/3) and it's one of the features of my Schwab platform that's proved handy.
Note how this simple chart has captured the changes in momentum of the SPX and, while not picking precise tops of bottoms of the cycles, has certainly generated robust signals for the capture of sweet spot gains, both long and short on both an intraday and daily basis.
An easy chart to set up and one that should keep you on the right side of the trend.

Qs Soggy Top

Here's is the inverse of yesterday's Soggy Bottom pattern.
It displays the Qs upward momentum's inability to rise to the R1 pivot and reflects underlying weakness. In this case the 10:00 drop back to the PP pivot was accompanied by the release of consumer confidence numbers and as such has to be considered event driven.
This was a tough trade to enter as the 10:00 down bar dropped .17 in 2 minutes. Unless you had preset an entry for the low close of the previous squat bar formation (39.31) there was little opportunity to enter short until 39.24.
This turned out to be a quick trade as the Qs bounced off S1 at 10:18 and the MACD signal line turned up. I jumped the exit gun on this one as the parabolics had not fired a BUY yet, but I was nervous about holding on. My Schwab platform killed the NYAD live feed yesterday so I was kinda trading with one hand tied behind my back and was being extra cautious as a result.
Net time in trade 10:00 - 10:18 = 18 minutes
Net trade gain 39.29 - 39.06 = .23 for 18 minutes exposure

Qs Soggy Bottom

Here's another example of the Soggy Bottom pattern from yesterday's Qs action.
Just as in the original post, the Qs inability to hit the S1 pivot led to a subsequent display of strength. Just compare the original chart with this one and not the many similarities.
Immediately after the Soggy bottom, the MACD crosses the zero line to the upside.
The MAs cross and turn upslope.
The parabolics fire a BUY signal , and
The MACD (or Signal Lines) cross and head upslope.
All signals were bullish and all confirmed.
For future reference. . .an alignment not to easily dismissed.
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FYI, regarding the VWAP indicator I mentioned last week....the Qs price has closed above the VWAP for the past 13 consecutive days.

Monday VIX Update

I've made a number of VIX related posts lately as it seems to be the subject of considerable blog chatter. My myopic thinking is that it's just a statistic that has no intrinsic value and that those venture into the blackness and actively trade this thing have my admiration.
That being said the daily and weekly charts of the VIX continue on the track outlined last week.
We are now on day 17 of the VIX cycle - -the previous 2 cycles being 15 days each.
The VIX continues to slowly ratchet down on the daily chart, currently riding below the LR30 lower channel band with divergent technical signals.
The weekly chart is not ambiguous and suggests that VIX 20 is coming sooner than later as all the technical are firmly aligned to the downside.
MSFT's dim forecast and the market strength demonstrated following the announcement are a further indication that this market is not eager to embrace the short side.
The VWAP overnight indicator closed positive for today.
As I mentioned last week, I closed most of my mid term longs on Thursday and have no open short positions.
Experience has taught me to wait for the rollover before entering short and that's my current tactic as I believe it's probably too late to go long at this point.

When VIX and SPY Move Together

We were yakking in the chat room yesterday about what happens on days after the VIX and the SPY move in the same direction.
Here's one way of looking at the results and they are actually quite provocative.
Jeff was interested in what happens the following day and those results have to stand on their own as they are the complete inverse of the results here posted.
I was more interested in examining a slightly longer horizon with an eye towards collecting some short term premium by selling calls against rallies or puts against plunges.
Below are the results of my simple code for 5 years and 5 months (just an arbitrary look back period).
While the overall performance stats look pretty benign, things actually start to pick up around trade # 90, which was on 12/07.
Here's the TradeStation 2000i code for those that want to try this out on other ETFs/indices.

Be aware that current versions of TS require slight modifications to the entry/exit command language.

Optimized settings for Len1 and Len2 are 2 & 6 respectively.

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And here's where things start to get really interesting. . . . .

This is the same study, but the look back period has been abbreviated to start in 12/07.

This coincides with the high of the 10/02 - 11/07 bull run and the ushering in of the bearish paradigm.

While the long side chugs along at pretty much the same ho-hum rate as the original longer study, the short side results should grab your attention.

And here's the equity curve for the shortened study with the same Len1, Len2 settings of 2 & 6.
While more work is needed to make the system a more robust. . .perhaps a % change filter or MA crossover confirmation, these initial results certainly appear to merit additional study.

VWAP Forecast

As I mentioned in the Rewind chat room yesterday when Jeff announced he was off fishing, I decided to play a few holes out at my favorite venue Pendleton . Rates are 50% for the month of July so if you're in the area and play, this is an incredible deal.
Here's a shot from one of my earliest golfing forays that gives new meaning to the term" taken to the cleaners".
While we wait for the markets to reach a REALLY overbought level, here's a little VWAP tell that's worked pretty nicely for forecasting the Qs overnight behavior.
And, while not all platforms provide a dynamic VWAP indicator, the good news is that http://www.freestockcharts.com/ does, and in real time, along with a host of other technicals, but alas, not the NYAD on intraday bars.
What I've tracked is the relative position of the VWAP to the price at the close. Over the past month, when price has been above VWAP at the close, the Qs have opened higher and have remained higher than the previous close over 85% of the time when the 2 minute NYAD LR7 line has been upslope. ( I use the NYAD as a proxy for momentum in the entire market, and want to see confirmation there).
The parabolics have also been in a BUY mode on each of the successful excursions and that has helped to confirm the few otherwise ambiguous signals.
Keep in mind that I've just looked at how the Qs behave with the VWAP close and the Qs have been the momentum star lately, so if you what to see how other indices or stocks perform with this little tell, I encourage you to test it out.
For those of you who can't watch the NYAD in real time or don't have access to the VWAP, just link into the site above and check the alignment of the Price and VWAP and the TSF 10/2 and LR7 of the Detrend 30 as shown on the chart above, which closely mimics the NYAD.
I'm still fiddling with the TradeStaion code to backtest the longer term viability of this overnight setup and will post the results when available.

VIX Pivot Bands - II

This is a continuation of yesterday's VIX pivot bands exploration.
Today is day 15 of the most recent VIX SR cycle, a period that has ushered in reversals the last 2 cycles. And, with the Qs hitting a 10 day winning streak, the odds continue to build for at least a short term reversal.
The SPX has already exceed my weekly upside projection so we'll just take it a day at a time for now. So far I've avoided any short exposure so I can't complain. That could change quickly.
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For today. . . to better illustrate the relationship between the VIX and the markets, I've added the SPY data stream on weekly bars to align with the VIX.
As with yesterday, the pivot bands are based on the VIX, not the SPY.
The white vertical bars indicate the pivot band peaks while the green arrows reflect long signals ON THE SPY generated by the LR7 / LR14 crosses on the VIX.
This study only displays results back to mid 2006, although the study runs back to 2002 (not shown to clarify the display size).
In most examples the LR7/14 cross signals lag the pivot band peaks by one or two weeks which could simply be resolved by accelerating the periods of the LRs, but my study goal is not to seek the absolute top or bottom, but to capture the high probability sweet spot in between.
What's obvious from this perspective is that 2009 has been a difficult period to trade the VIX pivot peaks, but a great time to trade the weekly LR7/14 crosses.
That doesn't mean I'm dismissing the utility of the pivot bands. It does mean I'm reviewing the effects of scale in deciphering the VIX pivot band signals. VIX readings that fluctuate between 10 and 20 display signals differently when the range suddenly jumps to 80 and 25 and so my next task is to normalize the range in order to deliver a zero line signal.

VIX Pivot Bands

Here's a look at the VIX using the pivot bands. I've transposed the original Excel worksheet into TradeStation to allow a more robust display. For simplification purposes the lower plot reflects only 3 pivot values of the weekly bars: R4 (green), PP (yellow) and S4 (red).
The indicator lines on the chart itself are the LR7 (yellow) and LR14(white).
I show this simple chart because the VIX pivot bands are following a convergence pattern seldom seen in the past few years.
Late Nov 2006 to Feb 2007 displays the most similar pattern as it concludes a gradual 6 month slide in the VIX, although the scale of the price dynamics at the time was much less dramatic that current conditions if only because the previous VIX high in that case was at 20.
I post this only as a cautionary note to the many traders I have talked with lately who are short, or double short. . . a position I have considered myself.
You can see that the last instance of this pattern was resolved with a dramatic surge in the VIX, a moderate retracement and then a long term climb up the VIX ladder . . . so the logical argument would appear to wildly favor the shorts.
On the other hand, that pattern was resolved from a basically level VIX, while the current VIX is clearly downslope. The point to be made is that the VIX may see further erosion down to the 20 level before the reversal really takes hold.
Now this is just one admittedly limited technical perspective on what may be coming down the pipe, and I've noted ad nausea how difficult those predictions can be.
Nevertheless, while we may see some short term weakness in the markets, I remain hesitant to aggressively pursue the short side. . . preferring instead to wait and see how the the remainder of earnings week plays out.
While the Qs, SMH and many other ETF/indices have recently attained new yearly highs, it can also be argued that there's still at least a 10% upside potential before the next level of overhead resistance kicks in.
Just something else to think about. . .

Monday Outlook

Going into this week it looks like the Qs and the IWM are the ones to watch. While all 4 of the basket are showing similar underlying technical patterns (overbought with impending rollover) the Qs and IWM are unique in that they are resting on the upward sloping LR30 channel mean while the XLF and XLE are resting on the downward sloping upper channel band.
While this is bullish overall for the Qs and IWM, we've come a long way in the last week and at some point the technicals will have to reset, so at a minimum, a narrow range week is a real possibility.
As such, from a tactical standpoint I'm looking for an SPX high of around 950 this week (close to today's high so far) and a potential low of 925.
Also note the VIX update post from Friday.
Earnings surprises of course can change everything, and quickly, but with generally muted anticipation so far, the better than expected results (however suspect) from the likes of GS have served to goose the markets higher.

Friday Wrap - Pushing the Envelope

At Friday's close the VIX was down 1.08 or 4.25% for the day. That's a big move relative to the size of the SPY (down .02%), the DIA (up .23%) or the darling of the day, the Qs (up .54%). I suspect a lot of the move had to do with reconciling Thursday's VIX contra move, and the net effect is to leave the VIX on the now adjusted LR30 channel on a day 12 count towards a reversal. Got that? A bit convoluted perhaps but that's just how I see it right now.

And above are the Qs pivot bands and Impulse Indicator looking at weekly bars. Pretty obvious the Qs are in rarefied territory as they made a new high for the year today and finished only 1 thin penny off the daily high. That's very unusual for a Friday and perhaps indicative of things to come. Just because the markets are really overbought doesn't mean they can't get really, really overbought.

So far I've avoided getting short on the intraday charts, as the NYAD has given scant indication after the open that weakness is forthcoming and it's really saved my bacon this week when that little voice in the feeble old right side brain was screaming. "short".

The Qs Impulse Indicator is now at levels not seen since the big October plunge, suggesting that the spring is poised to unwind dramatically.

At the same time it must be noted that as a result of this week's action the Qs are now flashing a brand new LR30 profile (I'll post on Monday) that has the Qs resting dead on an upslope LR30 channel mean......not negative and not positive, but looking technically tired and overbought.

Finally, if you got caught in short positions this week, don't feel too bad. Some of the best and the brightest (no names please) of the technical bloggers had called for the SPX at 850 (it closed at 940) and I was thinking along the same lines going into the week before euphoria hit.

Next week should be interesting. . . .

VIX Exhaustion?

More than a few traders noted the weird behavior of yesterday's VIX, which actually rose 3.5%, the same % gain displayed by many of the major averages DJ30, SPX, NDX and IWM.
I'll leave it to more VIX savvy bloggers than myself to parse the reasons for this oddity, but the fact that it happened at all is a reason to rethink some of the underlying assumptions about the VIX's contrary predictive abilities.
Leaving that statistical anomaly aside for a bit , the upper chart shows the current position of the daily VIX bars relative to the LR30 channel.
I've highlighted with white circles the reversal pattern that has developed each time the VIX has displayed a similar channel kiss since May.
Whether history will repeat itself by the end of the week remains to be seen.
If I were a betting man I'd say VIX 28 (LR30 channel mean) has pretty good odds.
An alternate scenario is a channel kiss-off to new VIX lows for the year and the formation of a new LR30 channel with a channel mean in the low 20s.
The only technical clue I see in support of that possibility is the brevity of the latest VIX support/resistance/support cycle, which has only lasted 10 trading days.
The previous cycle was 15 days; the one before that 15 days.
BTW, with today's gains the Qs weekly Pivot Impulse Indicator is now flashing an overbought 1.5 reading.

Qs Pivot Bands Update

Here's an update of the weekly bars Qs Pivot Bands that I mentioned last week. We've been tracking this view for almost a year now and over that time time it's provided some powerful clues for impending trend reversals.
If you're interested in how the bands are tracked and analyzed, check out my series of previous posts on the bands as linked above.
The Pivot Impulse indicator (PII), which is a derivative of the bands data has also provided a solid momentum model for the Qs.

The bands have clearly been downslope since week 43 and week 42 on the PII saw it coming. That fact that the PII has dithered around the zero line, as opposed to running up to the 1.5 reversal level is reflective of the failure of he Qs to achieve an oversold condition in that time frame.

This situation, in conjunction with Monday's (technical) Outlook, continues to raise red flags in my mind regarding the Monday rally.

Keep in mind that the pivot bands and PII are based on weekly bars and as such display an inherent lag at the same time they filter out the noise of the daily bars. The bands and PII are part of my longer term trading toolbox and I use them primarily to gauge the relative safety of my various premium decay positions.

I developed a simple short side only daily bars version of the PII back in February, with respectable performance results over the 16 month test period.

As time permits I intend to revisit the SD Signal Line coding, add a long side component, and run a performance update.

Going with the Flow

Turns out my negative outlook for yesterday was a wee bit premature.

Hey! I said it could go either way!

And always keep in mind my Bucket List..............

What's interesting now as we progress into the week is that the VIX is clearly knocking against serious oversold levels on the daily chart, whereas, Monday's post saw the VIX daily set at the LR30 channel mean.
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I'd been watching GE closely going into yesterday's open as Friday's 30 minute bars looked like a possible double bottom (Dolly) pattern.

The possibility of entering GE just prior to earnings was definitely a caution to me, but with the firing of a BUY on the NYAD at 10:18 and a GE BUY signal already underway since 10:16, I went long.

That turned out to be a good decision as the entire market surged up and GE made a nice run into the typical noon divergences.

However, always the nervous Nellie and unable to shake my continuing reservations about the validity of the rally, I exited with the parabolic Sell right at 12:00 for a respectable .42 gain and 102 minutes of exposure. Not close to my expectation of .01/minute but, really, the longer you let these things run, the less likely that level of return.

Also worthy of consideration: by noon GE had gained almost 6% off the open, a number achieved only 1% of the time, so the odds were against much of a further push for the day.

When in doubt. . get out.

Monday Outlook

This is a continuation of last week's Time Perspective post.
In today's case I'm looking at the disparity of the daily and weekly bar signals.
Above is the VIX and, depending on whether you believe the daily or weekly signals, the odds favor a bull run (daily) or a really scary bear run (weekly).

This same daily/weekly disparity applies to each component of my little ETF basket.

To add a little spice to the sauce, some big names are reporting earnings this week, and likely to spike volatility.

I typically lighten up longer term positions on expiration week when earnings season is in full bloom, or fully hedge those positions to protect against those gut wrenching implosions that often follow negative earning surprises and guidance lower.

A successful trader and hedge fund manager once offered me a little nugget of insight that has served me well over the years: If you wouldn't buy a stock/ETF/future at its current chart position, why would you continue to hold it long? While this attitude is clearly reflective of an active trading approach to the markets, it's a perspective that works for me.

That being said, after an initial pop at the open momentum going into expiration week remains negative and with earnings season cautions and spiked volatility, I'm looking for the Qs to take a another hit this week with 34 as the first downside target.

Base Building

Today's price action was uber narrow range, and from my daytrading perspective, offered few tempting entries.
Most of the indices showed dojis or spinning tops as the formation of the day and, following my stated bias for the bearish side today, the slight pop at the open quickly faded down to yesterday's closing levels and hugged the VWAP line for the bulk of the day.
What's today's action did change was the look of the lower and midpanel technical indicators.
Although today's price action was essentially neutral the technicals are showing bottoming patterns and an upswing in momentum on the MACD histogram, RSI2 and the 3&7 MAs.
An issue of concern is the brevity of the latest bear cycle and it remains to be seen if we are going to see a rally to the MACD zero line and above.
With the kickoff of earnings season, expect volatility to pick up for the next couple weeks as reality kicks in. For those looking for an excellent prognosticator of the earnings game, here's a link to Zack's, one of the best IMHO.

The Time Perspective

Here are 4 views of the Qs.
Top to bottom: 2 minute, 10 minute, hourly and daily bars.
The same technical settings are applied to each chart and, it should come as no surprise, there's a clear disparity of momentum depending on the time frame.
Negative on 2 minute and daily bars.
Positive on 10 and 60 minute bars.
Those momentum assignments are based on the position of the parabolics, the LR7 and the TSF10+2 indicator on each chart.
In the coming days we'll monitor the performance of the Qs relative to these indicators to see if a particular view offers a more reliable forecast than others.
My gut feeling is that we haven't seen the lows of this swing cycle yet so I'll be particularly interested if a short term rally develops on Thursday and Friday.

VIX Update

Here's a quick look at the current VIX levels on both daily and weekly bars.
I've overlaid the price chart with my usual toolbox of technical indicators to help my feeble old mind put some perspective on what's likely to happen next.
Since last Tuesday's VIX update when the VIX was riding the LR30 channel mean, it has now run back up to the upper channel band.
What's interesting, and a bit confusing, is the relationship of the LR30 channel to price action when comparing last week's chart to the current. Whereas, last week's reading of 25.79 was shown as dead on the LR30 mean, this week's view of 25.79 shows it at the lower LR30 channel band. This is, of course, the result of the changing scale that has developed within the last week. Although the behavior of the VIX relative to the channel is the same week to week, the absolute position on the channel has changed.
This same disparity in views is noted when referencing the MACD histogram, although the RSI2 remains true to form.
These variations in relative position of technical indicators over time have been explored extensively in previous posts when using the VIX or VXN in conjunction with the Qs to gauge momentum and identify high probability trade entries.
Based on this brief snapshot, it's clear that the readings of many technical indicators are both relative and dynamic and need to be carefully considered as such.
Finally, here's a very thoughtful reflection from a trader who's developed his own perspective.
It's fairly lengthy, but it's sincere and insightful for anyone wishing to become a better trader.

Monday Forecast

Here's a snapshot of the market daily bars updated as of 8 am pst.
Last Wednesday and Thursday flashed a negative signal all around as the RSI2 (lower technical panel hit overbought levels and crossed down through critical resistance.
With the mid panel technicals now uniformly downslope but only 2 days off the zero line, I'm expecting more of the same.
While the RSI is quickly reaching oversold levels in all 4 ETFs, a quick glance at the charts shows that we typically seen bottoming and base building behavior prior to a resumption of an upswing, so that has to be factored into any optimistic views for this week's action.
Finally, the bearish channel kiss off shown by all 4 ETFs doesn't bode well with the 3, 7 &14 SMAS 0n the price chart all running downslope in sync.
If we break support from 6/23 (done already in XLE) then the next likely support level is the May lows.
We are seeing some base building as I write this, but those consolidations are at S2 levels, so not a lot to get too excited about. Today's close should be a good tell for the rest of the week, so....
Time to be cautious IMHO.

Market Thumbnail

Here's another little tool that I use to monitor what's leading and what's lagging. Although I could easily expand the Indices watchlist to include some of my favorite ETFs, this abbreviated list tells me at a glance how the markets are moving in relationship to one another.
In conjunction with the 5 indicators in my trading toolbox that I profiled yesterday these 2 dynamic lists that update on a tick by tick basis help me determine likely momentum.
The Indices list includes the NYAD, VIX and TICK and in the blink of a eye I can see the relative strength or weakness of the whole market.
The DJI, SPX NDX, and IWM % Change values tell me if the markets are moving in or out of sync. The % Change is really the only number I'm interested in. . . the other values tell me little of the market component relationships.
When the DJI % change is 2 and the NDX % change is .5 at the open, the odds of a leveling of the 2 indices is extremely high at some point in the day.
I also closely watch the Qs 3 Fingers list as, per the 3 Finger lead and Reverse systems that I've discussed in many previous posts and, as with the Indices list, the % Change values are what really catch my attention, especially AAPL, GOOG and RIMM. It's perhaps surprising how the on-going % Change in these 3 stocks provides a highly reliable indicator for Qs behavior, but from my perspective of watching this list for years, it works.

Great Expectations

This is a screen shot of yesterday's Qs action and I mention it because it clearly shows how the Qs play off the pivots and how the pivot range provides a corral for intraday trades.
Let me just back up a bit and review the major technicals in my daytrading toolbox:
1. NYAD. . . and I have posted on uses of this must-follow indicator.
2. Pivots. . . if I just had the NYAD and the pivots I could trade the Qs intraday just fine.
However, being old and of feeble mind I need all the help I can get. And so I rely on the confirmation of several other technicals to trigger trades. . . these include:
3. The Schwab new daily high count/ lo count rollers. . . which I have also mentioned frequently.
Unique to Schwab, this invaluable gem will never let you enter the wrong side of short term
momentum.
4. Parabolic SAR. . . I adjust the settings depending on the time frame. . .2,10 or 30 minute, but
I seldom trade against their signals and time and time again they have proven their worth in
calling short term momentum turns.
5. A series of moving averages both on the price chart and the NYAD. Typically I use 3, 7
and 14 SMAs for the Qs based on several TS optimization studies that I posted a few months
back.
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That's it in a nutshell and I'll post some interesting (to me) pivot range studies next week to validate my heavy reliance on their behavior.
If, for example, you knew that the Qs would display an R1-S1 range 75% of the time, a R2-S2 range 7% of the time, and a PP-R2 or PP-S2 15% of the time, would that help you tactically approach a day that opened at the PP with the NYAD at R1? It would sure help me.
And, it would also be interesting to monitor how that range behavior varied over time.. that is, are the Qs displaying greater or lesser range activity... which was the point of the pivot band and pivot impulse indicator studies begun some 40 weeks ago and still kicking out directional signals of merit.
For the present time these studies apply only to the Qs although I'll eventually run similar forensics on the rest of my little ETF basket to try and discern any unique patterns there.
As always, this is a work in progress.