It was another extremely volatile week featuring sharp rallies followed by sharp selloffs. Fear is in no doubt controlling the market. The bulls and bears continue to battle it out. The charts below cover some important trends and market internals that I pay attention to on a daily basis.
US Dollar Index: Daily Chart
The past two months, the dollar has been in rally mode. The last 14 days, we have seen a large bullish pennant form, and this pattern typically marks the halfway point for the current trend. The measured move for the USD is pointing to 93 over the next few months.
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Gold Futures Prices: Daily Chart
Gold, as we all know, is seen as the major safe haven and the price per ounce has been steadily climbing. On Friday, we saw the major indexes sell down very hard, but both the dollar and gold posted some solid gains. Gold does look as though it needs some time to digest the recent move higher, and it could take a week or two before anything exciting happens, but I am on the lookout for low-risk setups.
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NEXT: Timely Look at VIX, Put/Call Ratio
|pagebreak|Volatility Index (VIX): 60-Minute Chart
This index measures the fear in the market. When fear is high and everyone is selling their positions, we see the VIX jump in price. Over the past month, we can see a possible head-and-shoulders pattern forming. If this pattern unfolds like it should, then we will see the price of equities bottom in the coming week with the VIX dropping below the blue neckline. The old saying is “When the VIX is high, it’s time to buy, when the VIX is low, its time to go.”
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Put/Call Ratio: 60-Minute Chart
In short, when the put/call ratio is over 1.00, there are more traders/investors buying put options than call options. Put options are when people are buying leverage to take advantage of lower prices. My thought/opinion about this is when more people are trading with leverage anticipating lower prices, I figure they have sold all their long positions and are now using leverage to profit from lower prices. Well, if the majority of individuals have sold everything, then in reality, there shouldn’t be much left to sell. So I feel this correction, which started in April, is almost finished.
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NEXT: A/D Line, What's Next for S&P Futures?
|pagebreak|NYSE Advance/Decline Line: 60-Minute Chart
This is one of my favorite charts to look at. While there are several indicators and market internals, and much technical analysis needed to clearly determine if the market is currently overbought or oversold, this chart is one that can help give you a good idea if you should be looking to buy, short, or just stay in cash for the time being.
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S&P 500 Futures Prices: Two-Hour Chart
The S&P 500 has been up and down like a yo-yo with some very dramatic moves. Up 2% or more one day, down 2% or more the next. Very sharp and powerful moves can be very profitable, or very costly if not traded correctly. Last week, we caught a nice 2% gain in less than 24 hours, which was an exciting trade. It looked as though the market was about to break out to the upside and possibly reach the 1150 level, but early Friday morning, there were rumors about some euro bank having serious problems, and that was just enough to cause a domino effect, sending the market lower throughout the entire session and closing on a very strong negative note for the day/week.
That being said, the market internals are indicating that equities are oversold at these current prices and a bounce is due any time. With the panic selling on the NYSE Friday reaching 119 sell orders for every buy order, I think we will see some follow through this week with lower prices, then a rebound once investors finish selling everything they own, at which point we will be looking to get involved again.
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Weekly Trading Conclusion
In short, money continues to flow into the safe havens (gold and US dollar). The major indices are showing extreme panic selling and look ready to move in the next few days. There is a possibility that the market could break down and start another major leg lower, which is a big concern to me. I will be glued to the market internals and support levels for the major commodities and equity sectors in hopes to catch the bottom or avoid another meltdown.
By Chris Vermeulen of www.FuturesTradingSignals.com
