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Stockhaven’s Market Take 2/21/13

I see that quite a bit went on while I was away, some expected and some unexpected. Volatility has officially returned to the market, as the VIX experienced its swiftest 2 day rise of the year between yesterday and today. Moreover, the VIX is now at its highest level of the year and the S&P500 has traded in a 10+ point range in each of the last 4 trading days. With all the hoopla of the last week though, one thing is still true, the S&P500 remains above 1,495.

  • 1,495 is more important than 1,500 — Since closing above 1,500 for the first time this year on 1/25, SPX has not gone below 1,495
  • QQQ remains bipolar — What a frustrating year QQQ has provided traders with so far from a directional perspective, continuing to be channel bound
  • GLD broke — Now that GLD has officially broken down, there’s a few levels to watch going forward that will signal if there is even more downside left
  • VIX better get justified — The near 25% rally in the last 2 days will end badly for the VIX if the bears don’t force a breakdown in SPX here

The S&P500 spent a good part of the day bobbing and weaving around above and below 1,500 today before ultimately settling at 1,502. While 1,500 is a nice round number, it isn’t the one I am focused on in terms of support. That number is 1,495. A quick glance at a daily chart of SPX and you’ll notice that since 1/25 (the first day SPX closed above 1,500) it has came within at least 2 points of 1,495 on 5 different occasions (including today), without breaking below it. Until 1,495 breaks I am siding with the bulls, but if it does I’d expect a move down to 1,470-1,480. If that plays out, I’ll reevaluate then.

Up. Down. Up. Down. Up. Down. No, I’m not talking about the weight you’ve been trying to keep off since Christmas, I’m talking about QQQ’s action year-to-date so far. After finally breaking above $67.50 last last week, something it took all year to do, it gave it all up in 2 days. More than that, it actually closed at its lowest level of the year today. For some QQQ has been a joy to trade, as it is a long near the low end of the channel (like here) and a short near the top end (like last week), but for directional momentum players like myself it has been very frustrating.

Furthermore, QQQ’s lack of direction makes it somewhat unreliable as an overall market indicator. The longer QQQ channels though, the more apt I am to think that the action is actually net bearish for the market. Mr. Market could use a hand in staying above 1,500 and QQQ is not only not helping in that effort but in danger of aiding the breakdown below 1,495.

Now time for a shameless plug, here is what I said before I left in regards to gold (GLD):

“Gold could get sold hard — This is an asset that is owned widely and underperforming the market, hardly a good combination”

“GLD once again settled at a 6 month low. For some reason though, I don’t get the sense that many people are paying attention. There are no dire headlines, no 10 minute dedicated CNBC segments, essentially no panic. Compare this to the recent decline in AAPL, or what the media might be saying if the market was at 6 month lows. There would be hell. I view this as extremely contrarian bearish for the yellow metal….If GLD maintains below $159-$160 then the next most likely destination is $150, and when the fear mongers come out, it will probably be because GLD has already dropped 3-5% in one single day.”
-Stockhaven’s Market Take 2/14/13 

Well that certainly played out nicely as GLD was sitting on a 5 day return of -4.7% coming into today, falling all the way down to $151.50 from just under $160 last week. The drop has now caught the attention of the media, as I am starting to see lots of articles touting golds “death cross” and other analysis that is shining a not so bright light on the shiny metal.

While this isn’t contrarian bearish anymore, it’s certainly not contrarian bullish. For that to be the case the price action would have to improve and do so quickly. For that to happen, GLD will need to stabilize above $155 otherwise $150 remains my first target. Beyond $150 and GLD could easily move to $140 in my view as that is home to the highs of a consolidation phase during late 2010.

Lastly in today’s extended article is my take on the recent rise in the VIX, which has gained nearly 25% since Tuesday’s close. Rises in the VIX are usually associated with declines in SPX, I say usually because there have been instances when the inverse correlation has not played out, but they are in the minority. There is no need to build a case for this, just take a look at a chart of the 2 of them overlapping each other from the last few years and you will see what I mean. Now the market has indeed pulled back from its high, falling 1.8% from the 1,530 high to today’s closing price. However, I’d expect an even greater pullback if you told me the VIX had risen 25%.

With the above said, the market has pulled back 1.8% off the high which is a good sign for people hoping for more out of the VIX. I say that because there were times this year when the VIX rallied without the market making an inversely correlated move lower. The ball is really in the bears court though, the bulls have proved they can defend 1,495 so now it is up to the bears to break it. If they do not do so within the next 5 trading days then the stage is set for a swift bounce back rally towards the highs as volatility would unwind back towards the 13 level in the VIX. Bottom line, I’m waiting for 1,495 to break before I get aggressive on the short side.

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