Archive for August 22nd, 2011

Will the market hold?

Here is my observation of the market from a pure technical standpoint using the VIX to measure the Fear in the market as of this writing. Given that my objective is to get an idea of the current state of the market, but more importantly where we have the potential to go from here, I am looking at a much longer term picture with weekly charts – A time frame I very seldom use due to my short term style of trading.

As we can see from the weekly chart of the VIX below, it has approached a level that on two previous occasions confirmed a market that was in very high Demand. On these two prior occasions, we had the completion of not one, but two Inverted H & S patterns which produced a significant advancement in the market.

So the question now is, have we put in a bottom? Can we rely on the Big money to begin to flow into the market to begin a bottoming process as they have in the past? Or is this just a pause before the next leg down? This will only be known over time. I believe it’s to early to call this a bottom because the market hasn’t showed any signs of a bottom yet. However, we are at a place where Demand for a piece of this market was so strong, the result was a 100% retracement of the mid 2008 highs and then some.

As of this writing we are currently sitting on top of the prior Demand level, which is currently around SPY 110. I believe we will drop further into the 110-100 level, which was where the Inverted H & S pattern formed. And if that happens, I can almost assure you CNBC and all the various financial media outlets will be going nuts reporting how the world is coming to an end and the VIX is soaring to extreme levels, which it probably will.

So if I was an investor or managing someone else’s money, I would be putting on small positions in stocks that have shown Relative Strength to the market with a stop below SPY 100. However, if we don’t hold SPY 100 and we don’t form any Bullish reversal candles on a weekly basis – Hold on to your SHORTS folks, it’s going to be a wild ride.

I will re-visit this topic next week after we get a close of next weeks trading to see where we are.

Good trading and keep those stops tight!