It is a market driven by momentum. In talking with various colleagues, I try to get a handle of how much conviction buyers seem to have. I don't get the feeling that many of those holding substantial long positions would tolerate much of a decline before checking out. Where are the stops? A 10% market decline? If many are indeed acting under this sort of a mentality, a selling panic could easily ensue once this line is crossed.
But that is subject for another day. Today, we have a climbing market to chart. Other than a nasty underperformance this week in banks, transports and the nasdaq, we have not yet come close to satisfying the qualifications I am waiting for.
1. Consecutive daily declines of 2.5% or more. This hasn't happened since the rally began (if so, only marginally).
2. Weaker internals than previously displayed during the rally via 10 day moving averages of a) put/call ratio b) advance/decline issues c) advance/decline volume.
3. A considerable increase in the US Dollar Index. A crossover of the 20 day EMA over the 50 day EMA is something that has not yet occurred since early April.
4. Divergence between major indices. Dow, S&P, Nasdaq, Transports, Banks. We should see significant divergence between some of these indices at a major top. There have been divergences present at various points, but they have quickly resolved themselves. Specifically, I am looking for underperformance in the transports, banks and/or the nasdaq.
5. A complete Elliott Wave '5' down on more than an intraday basis.
The recent push from the early October low of 1019 has certainly been achieved with declining participation. See the divergence below:
The ratio of the Dow to the S&P seems to move contra-cyclically. The Dow underperformed on the way down and now outperforms. A divergence in ratios like this, as well as with the Nasdaq may provide a window to the market's internal happenings.
I'm also watching the ratio between the VIX and VXV. This monitors the premium/discount of 3 month volatility to that of the present. As future volatility gets sucked out of future option prices, the ratio falls. For months, option traders were willing to pay a premium for September or October options. Due to seasonality it seems that many had been forecasting a market turn by either of these months. With October expiry out of the way, any distortions this may have created may be free to resolve themselves.
I do find it interesting that such an enormous consensus exists in utter hatred for the USD. Nearly everyone has been sold the story that the Dollar is destined to soon become worthless. But what is really interesting is that this has occurred while the dollar index remains well above its prior lows. I am anticipating a sharp move higher one of these weeks that will trigger quite a bout of short covering.
Have a great week!
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