December 28, 2012 (12:30 pm)
Here’s an update on where we stand with the current market. Fiscal cliff rumors have created tremendous volatility in the market. I love this environment, since it brings the technicals to extremes. And those extremes allow great entry points for quick swing trades, which we’ve taken advantage of over the past few days. The evidence below points to a rebound in the SPY. Are these technical indicators foreshadowing good news on the fiscal cliff discussions?
Coming Off Oversold RSI
Yesterday, the 60 minute RSI dropped to a 23. The red line on the chart below illustrates this level, and each arrow points to the instances where the RSI dropped to that level. If you look at each instance, it corresponded to an immediate $1.50+ gain on the SPY. That’s why we were comfortable going all in with the SPY portfolio at that level and riding the $1.50 gain that came just hours later
If you’re curious, there are four other important patterns on the chart above.
- The head and shoulders pattern (green) toward the left side had a price target of approximately $138, which was met and exceeded.
- The falling wedge (blue) in the middle had a target move of $5 ($145 top to $140 first bottom). The wedge saw a false breakdown with capitulation, which then reversed to the upside. The price target from where it broke out was $144.50, which has since been met.
- The inverted head and shoulders pattern (green) toward the bottom right had a price target of $143, which was also met and exceeded.
- The last pattern is the rising channel (blue) on the right side. We’ve since broken down. We’ll explain our thoughts on this below
The chart below shows the top trend line from the rising channel since mid-November. You’ll notice that we hit the top trend line four time in a row, establishing a higher high on each touch. Typically, before you see a strong reversal, the shares should attempt and fail to re-test that trend line. We have not yet had a re-test, which is why we took an additional position (3,500 shares) of SPY this morning at $140.55. Only after a re-test and a failure to touch the trend line should the shares see a reversal to the downside.
The VIX chart below shows that volatility has recently spiked. It has opened and closed several days in a row above the upper Bollinger Band. This has typically called the top in volatility, which tends to correspond with a near-term bottom in the markets. Further, the RSI at the top of the chart is extremely high. The red vertical lines show the previous instances of the VIX RSI hitting the 70 level. Each has been the volatility top and preceded a rally in the SPY (which is shown at the bottom of the chart).
Buy SPY on 4 Consecutive Down Days
Lastly, I got the following chart from Cobra’s Market View. Each arrow points to the fourth down day in a row on the SPY. Green arrows mean that buying at the close on the fourth day was the absolute bottom. Blue arrows mean that it was close to the bottom. Red means that there was more down to come. If the SPY does close down today, chances are extremely high that we’ll see a rally in the coming days.