Market Analysis

Weekend Charts: Volatility Ahead

volatility-aheadNobody should have been really surprised, but the biggest rally of 2014 coincided with the words of Janet Yellen. Yet the put action prior and ferocious rally that followed speak of a market vastly mispositioned as shorts had to cover and not yet committed folks had to chase the most vertical move of 2014 yet: 5% up within 3 days.

Now I’m not claiming this was easy to trade as markets sold off very aggressively just prior to the meeting, but I outlined our bullish approach publicly prior to the Fed announcement:

On the Verge

which followed our prior correction call case outlined in the most recent weekend posts Weak Foundation and 2015 Trade Strategy

Still it was amazing to witness people changing their tune as soon as the market dropped below 2,000 on the $SPX and suddenly calling for much lower targets getting all side tracked by the misdirect of the month. In October it was Ebola, in December it was Russia and oil.

Yet the set-up was so well advertised: A market vastly oversold going into OPEX week and a Fed meeting to boot. As I had outlined on the public stream ahead of time:

In many ways it remains a Pavlov market: Jumping every time that a central bank either implements policy or talks about it. Let’s be very clear: Every big rally in the 4th quarter was central bank induced. From the Bullard bottom in the middle of October, the big October/November gap ups courtesy the Japanese and Chinese central banks to this week the Swiss central bank reducing rates to negative and of course Janet Yellen excelling in communicating virtually nothing of substance – “A couple equals 2”.

What’s the take away from all this?


First, the main structures of the market remain intact and point to the possibility of vast upside still ahead. Note the monthly $SPX chart shows a market that continues to get its cues from the monthly 5EMA and 8MA: Whenever they fall below they get saved:


A similar cue could be observed in the $DJIA as the index simply bounced off of a key trend line:

INDU weekly

This week not only saw the market put in the fastest and most vertical bounce of 2014 it also came with the largest buy volume, advancers and participation. In short: This market was bought big time as RSIs moved from an oversold sub 30 level to almost 60 in just 3 days:

SPX daily

In summary: If you were positioned well for this move it made your year, if you were mispositioned or worse, short, it could have ruined your year.

Note also this emerging inverse heads and shoulders pattern that we see not only on the $SPX, but across markets.

The $NYSE:


And irony of ironies the fledging $RUT put in a massive performance and is now sporting a sizable bull flag as well with a MACD crossover to boot:


Am I making a massive bullish case here? Actually no. I am however firmly in the camp of further price volatility expecting fast price action in both directions which may bring both significantly higher and lower prices in the year to come. Basically a trader’s nirvana that will have investors and traders jump between euphoria and panic for months on end.

Let me walk you through some of the evidence:

Firstly we can observe that the $VIX is awakening from its long time slumber:

VIX weekly

Despite record prices the $VIX is now increasingly experiencing sudden spikes above the mid 20 level. The reason? Real selling is occurring for the first time in years as evidenced by the high/lows recorded:


While these spikes lower may appear dramatic they are still minuscule compared to what markets were used to prior to constant and global central bank interference:


And, despite all the bullishness and record price action the larger structures continue to show underlying weakness:

SPX weekly

And yet here we are with another new record bullish asset allocation:


As is plainly evident the Rydex bull/bear ratio continues to hover at levels not seen since the 1999/2000 market. But it is not only this bullish allocation and sentiment that shows similarity to that market then, but it is the accompanying price action.

For weeks I have been pointing to a market that is reminiscent of the price action of the ’99/00 market (see also Crescendo): A quick September correction bottoming in the middle of October, followed by a massive rally into November with a peak in early December, followed by a quick dip into the middle of December and then off to new highs. So far this market continues to follow exactly this script and, as the chart indicates, has the potential to shake the trading psychology of most in the months to come:


What does this analog point toward? Continued similar price action could see us as high as 2293 on the $SPX by March/April, but also giving it all away just as quickly.

What does this all signal? Principally what I had outlined on stream:

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