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Friday Market Technical Review

  • Written by Syndicated Publisher No Comments Comments
    October 22, 2011

    The low volume ramp higher continues. A final 5 minute rally by the ES for why I am not sure is a fitting way to cap another confusing week. Whether today was pure options driven is unclear.

    What is clear is there were a lot of out of the money puts below 121 on the SPY versus calls above. From simple max pain theory the market once again did what it does best. Wipe out the most capital regardless how you are positioned. The SPY was up $2.31 today but in reality $1.25 of that was a gap up at the open. We now have two large gaps fills to the downside.

    Without digging too much into today’s price action I want to simply share a chart of where we currently are as a point of reference and few internals behind the rally of the past few days as why I find it more a sign of distribution versus accumulation. In other words I believe investors for the most part are using this strength as an opportunity to reduce long exposure.

    First where we are. Below is a SPY intraday chart (60 minute candles). Price was contained within the 10 day long channel we have not traded within. Interesting sitting just above is a trend line that is off the summer 2010 lows and contained the QE2 ramp.


    TRIN is a measure of volume on advancing issues versus volume on declining issues. In an up market a sign of health is a TRIN trending lower meaning volume is going more into advancing issues. In a declining market you would expect to see TRIN higher.

    What we have over the past few days looks more like a rising TRIN (a sign of heavier volume on declining issues versus advancing) while the SPX rises. This is why I feel the move over the past few days has actually been one of investors reducing long exposure (i.e. taking risk off).


    Similar to the TRIN you would expect the Vix to move lower as the markets move higher and vice versa. Again over the past few days the Vix has trended higher while the SPX has as well. I view this as investor fear is in fact not diminishing relative to the move in equities.

    So we enter another weekend where anything is possible. The EU may fire the bazooka but first they need to find it. Most likely nothing will happen other than the rumor mill will be working hard. The one risk and one that I continue to believe this market is clearly overlooking is a major “dislocation” in the financial sector. The stresses are there even though they are not telegraphed.

    There are a number of reasons why I continue to stay short. The biggest is I truly believe when the turn happens it will happen fast. It will come unannounced and it will make entry into shorts or exits from longs a dangerous proposition.

    Just look at the fall in early August. There was no real warning sign of a pending collapse in stocks. Getting short in the middle of that move was a very dangerous game. That is why I say getting short when the move happens may be harder than many believe.

    Thanks for a great comment section this week and especially for maintaining civility during a rather stressful time for most if not all. Enjoy your weekend.

    Images: Flickr (licence attribution)

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