Well the short trade lasted all of a day as the bounce that started just before 12:00 pm est on Thursday carried over into Friday. The S&P500 captured a new 5 year closing high and the NASDAQ managed to close at a 12 year high. The Dow also rallied, but finished below 14,000 which means it actually closed slightly lower on the week. While I took off my short since SPX broke 1,512 I do believe we’re in the advanced stages of a short term topping process.
If a short term top is indeed being made, I believe you’ll see the following play out over the next few days:
- QQQ proves unreliable — QQQ closed at its highest level of 2013 on Friday, but will give up these gains and move back below $67.50
- SPX ranges stay wide — Watch for the daily ranges on SPX to stay in the 10-16 point vicinity
- VIX maintains a floor at 13 — The VIX will stay around/above the 13 level
Until QQQ closed near $68 Friday, it had remained a closing basis channel between $66.50-$67.50 for the year. Friday’s close represents a breakout on the chart, but 2 other similar instances so far this year proved untrustworthy. Following those 2 days, QQQ immediately gave up the gains. If this move higher in QQQ is to be trusted, then it should show the ability to stay near $68. QQQ is an important ingredient to a continued market advance, given the already strong performance of other leading sectors like the financials and consumer discretionary .
Wide daily ranges in the S&P500 is associated with volatility, which works upwards and downwards. Usually upwards volatility is most displayed when the VIX elevated above 16. If you think about the 150-200 point up days in the Dow of September, November, and late December of 2012, those all came with the VIX around 16. Given that the VIX is on average 15% lower than those instances, the wide daily ranges could set up for downward placed volatility this time around.
Turning completely to the VIX now, the above paragraph outlines why the VIX maintaining a floor at 13 is such an important factor in a topping process. Reason being, if the wide daily ranges sustain, but the VIX falls much lower below 13, it will open the door for a move to the 10-11 range. This is why understanding the concept of “volatility working both ways” is so important, at 13 in the VIX, recent comparable history suggests that downside volatility is more likely. However, if the VIX rallies 3-5% and SPX still stays above 1,508-1,512 then that again opens the door for more upside volatility into the 1,520′s.
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