Sunday, January 17, 2016

Jan 17 - Winding up for a potential bounce

Friday showed some promise of a short term floor but things are still precarious.  There are many possibilities long and short and many present a lot of risk.

Positive indications
1.  VIX/ VXN/ VXO etc all printed reversal candles that penetrated the upper Bollinger.  Unless we are heading to a massively oversold event like 2008, 2011
2.  Small caps printed a hollow reversal candle and exhibited suprising strength relative to the other indexes.
3.  Treasury yields may have set a short term floor
4.  SPX maintained (barely) a long term trendline
5.  SPY strong accumulation on Friday

Negative indications
1.  Oil continues to crash
2.  VIX is not elevated
3.  The intraday range isn't increasing more which is a problem as volume is ramping up.  To see a typical capitulation, you would like to see more intraday range and panic.  The lack thereof could indicate the market could continue to dribble lower.

Potential scenarios-short term

Option 1.  50%  We bounce from here starting Tues/ Weds and establish a short term bottom, maybe for a few weeks, maybe a couple months.  We could bounce and then fall like Friday but the action would be a carving out a low that would be established this week.  The action could be extremely choppy and difficult to swing trade.  Afterwards, a retest of lows which would probably be broken.

Option 2.  30% We break through support and continue dribbling down on steadily increasing volume to potentially seek out the 1700's in SPX.  Given that there is not enough capitulative fear (although fear is elevated) there isn't a sense of exhaustion.

Option 3.  20% We break through support then bull step in triggering a massive short squeeze.  This could be the max pain scenario as many bulls would capitulate and bears would be blown out of the water.

Odds are not great in either direction although I did take on a small IWM long at close as IWM was showing good relative strength and a very promising hollow reversal candle sitting on the lower BB.

SPX barely held to close right at trendline support.  The question is whether this is more like event 1 where we ground lower to move back up or event 2 where the churn finally gave way.  It isn't clear.
 5th time the hourly is signalling bounce.  The last 2 signals have bounced but only for a day.  For sure the positive divergence is winding up and at some point we will have a big bounce or the bottom will completely fall out.
 HYG also tapping its lower trendline signalling a short term bottom but the indicators such as stochs, RSI, and CCI haven't hit extreme levels so any bounce here might be followed but another move down.
 IWM hitting RSI/ MACD levels that are multi year lows.  This looks promising.
 CPC also spiked Friday and looks like 1-2 days until we see a big bounce.
 Treasuries caught a fear bid Friday similar to the Aug low so a strong chance Tues represents a low according to the flight to safety.
 Slight negative divergence in VIX but nothing to get super excited about.  Like SPY we have an hourly signal this time a sell on the CCI.
 VXO showing stronger negative divergence
 Reversal candles galore but the range of the candles is small so suspect.  If it was a huge black candle well north of the upper Bollinger, I would have more confidence going long equities
 Negative divergence on the daily

 VIX not quite where we would like to see it, but it could be a top.  The level of panic selling isn't quite at a clear point which makes it possible for equities to continue to sell off.

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May 15 - Closed out IWM puts for +120% and picked up DAL and HD Jun calls

I'm going to let the market do its thing this week and probably stay away from new positions until Friday unless something very good pop...