Friday October 14th, 2016

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Stormchaser80, L.L.C.
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=========SIGNALS=========
401K/Long Positions: No
Short Positions: Yes
=========================

I have identified my BUY and SELL signals for LONG positions, with 1 model member. It will become a lot more robust, and a lot less whipsaws when I develop an ensemble of 999 members this upcoming winter. These signals are the result of several scripts and a very large Excel Spreadsheet on my desktop. So I will post the ‘final answer’ which is what most of you want anyways!

I have found that when the Technicals Model to SPX performance is at or below -200%, this is the only good time to SHORT the market.

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As always, the Monthly, Weekly, Daily, Hourly and so on SPX charts I show are from all hours of the day, and therefore the prices and indicators will vary from charts which only show action during regular trading hours. I believe this method is more robust and encapsulates global sentiment, better capturing trends.

I mark negative divergences in red, and positive divergences in green. Please note that some indicators such as -DI are inverse, so a positive divergence is bearish and a negative divergence is bullish!

First Thoughts…

Welcome to another login free Friday post. And since its Friday, there is also discussion about the SPX Weekly chart. If you would like to see posts like this every trading day, please take 15 seconds to sign up for a free login at the end of this post!

S&P500 Volatility (proprietary)

I developed the S&P500 Volatility Index to help characterize the volatility of the S&P500 market on a scale of 0 to 20. It has nothing to do with $VIX (which shows the market’s expectation of 30-day volatility, constructed using the implied volatilities of a wide range of S&P 500 index options). This indicator serves to rank the volatility of the current market period using market data from 1990 to 8/9/2016.

Why does this matter? In coming up with BUY and SELL signals in any system, you need to know when to flip quickly, vs. times you can wait and see if your signal is a fluke or not. This is a way to limit position flip-flopping.

Score>15 Market is volatile [flip quickly]
Score~10 Transition zone
Score<5 Market lacks volatility [wait out change in indicators]

3-day average S&P500 volatility is scored at: 6.8 [6.1 single day]

Below I plot the momentum scores since 1990. You can see the Bear and Bull markets, but there were also times in Bull markets you needed to trade aggressively (May 2010, 2011, Aug 2015), and periods in Bear markets you could trade with a slower trigger.

MOMO

Technicals Model (proprietary)

The first chart below is the cumulative Technicals Model dating back to 2006. The last negative day was Today (now 10 days in a row)! The last time this occurred was January 2016! Here you can see the model performance (in blue vs. SPX in black) all the way back to 2006! I added the purple 200 day moving average to help discriminate between bull markets vs. bear markets (although fake-outs do occur such as 2011, and either 2015 or currently). I also want to point out that the cumulative Technicals Model has not made a new All Time High in 2016. In fact, it is getting close to falling below the 200 day moving average once again, which would confirm the bounce above this moving average was a false move (ie Bear Market). This is the opposite of what happened in 2011. I have noted that the model did not confirm the last high for the SPX in 2007 (as denoted by red down arrows on the model, vs. SPX green up arrows).

Below the Model and SPX chart on figure 1, I have the performance of the ratio of the two. I have noted extreme readings (green) as potential bargain buy (such as Brexit which was the last extreme reading in green), and extreme Red readings being bearish for the market. Today is the 56th trading day in the row that the ratio of the two is below zero! And with this ratio below -200%, we are at levels where historically shorts are favored!

index_cumulative_all

This next chart shows the daily readings, not in cumulative mode as above. Here you can see which particular trading days are the strongest/weakest technically with the markets as portrayed by the model. Divergences also show up near market Tops/Bottoms. Note that significant deterioration has taken place in the comprehensive list of SPX individual stocks’ technicals in the past 3 months. It appears that the early September Model reading below the Brexit was not a fluke, and we are destined for much lower lows ahead.

Comparing the slope of the Technicals Model vs. SPX today, the Model is much more bullish, suggesting advantage is with the Bulls. The last time the Model was this bullish vs. the SPX was on 9/21 when we closed at 2163.12, and the next day we closed higher at 2177.18. These 1-day signals are not very reliable, but better than 50-50.

index_daily_1year

What is this model? It’s a comprehensive assessment of a good number of technical indicators on each S&P500 stock. This model does 2 things well. First, it shows divergences from SPX price (for example, take a look at the Brexit SPX reaction at the end of June (black) vs. the non-reaction in my model (blue)). Most valuable of all, my model has a lot less volatility than SPX price but does a great job of capturing SPX trend, which should do well with forecasting SPX price movements in the future.

SPX Weekly

w

ADX: Bearish, trading

RSI: Mid range

CandleBearish, but there is some indecision closing well off the highs and lows of the week

Volume: Higher, above the rising 20 period moving average

Moving Averages: 20>Close>50>100>200 period moving averages

% Bollinger Band: Middle of the band

Bollinger Band Width: Narrowing slightly

MACD: Bearish at a positive value, histogram ticked lower for the 10th week in a row

SPX Daily

d

ADX: Bearish, trending

RSI: Mid range

CandleIndecision closing near the open, but more bearish given the long upper wick

Volume: Higher, well above the rising 20 period moving average

Moving Averages: 50>20>100>Close>200 period moving averages

% Bollinger Band: Lower Quartile

Bollinger Band Width: Steady

MACD: Bearish at a negative value, histogram ticked lower for the 4th day in a row

SPX Hourly

h

Near the 2131 pivot.

Thursday I wrote “The lows this morning occurred with easy to identify and consistent positive divergences vs. the low on 10-11. A significant retrace (bounce) is very likely.”

And after the bounce we saw weakness during Friday afternoon, closing near the pivot. There are really no negative divergences to develop yet. So this looks like a positive setup for Bulls in the very short term.

VIX Hourly

vix

No positive divergences seen at the lows signals another low due in the $VIX. Would not be surprised if $VIX dips to the lower Bollinger Band or pierces it a bit.

SPX Breadth

breadth

High-Low was +0 today. The McClellan Oscillator was negative for the 10th day in a row, but at a higher low Thursday, which was positive divergence (bullish for SPX). If/when the summation index falls below zero, that is when shorts will become quite fruitful when short term signals align.

SPX %above MA

ma

The stochastic indicators have signaled a SELL for 3 of the 5 indicators. Huge negative divergence seen on the Full Stochastics (red arrows) since March.

4 of 5 of these show positive divergence vs. Thursday’s low (compared to early September). Will need to watch if these hold.

TLT:TIP Daily

tlt_tip

Thursday I wrote “Deflation fears gapped higher but finished with a bearish tone for Deflation. This could be beneficial to the SPX in the very short term.” No change in line of thinki

TLT:TIP has shown weakness after the record high for deflation fears occurred on 7/11/2016. Note we are still way above the 2008 crisis levels. This does not even consider that SPX is near All Time Highs, nowhere near 900 when the first peak occurred!!!

The bond market Deflation vs. Inflation metric (iShares Barclays 20+ Year Treasury Bond Fund vs. iShares Barclays TIPS Bond Fund). The previous peak was 10 Feb 2016. Values late in 2014 and pretty much all of 2016 are showing higher Deflation fears than even 2008-2009.

From this chart you can clearly see when the FED stepped in (when this ratio was nearing 1, except things got out of control at the peak of the 2008 downturn until the FED figured some things out).  Clearly things changed since late 2014 and the FED has stepped aside leading to the Deflation fears building beyond the 2008 crisis.

HYG:IEF Daily

hyg_ief

HYG:IEF ratio had a nice positive day. I’d like to see a final high putting in negative divergences on the technical indicators, before the trend reverses lower for good.

HYG:IEF ratio is a way of looking at Greed vs. Fear in the more sophisticated bond market.

Oil Daily

oil

We saw negative divergences before the 10/10 high, but really not yet too significant. So 1 more minor high in Oil is possible before the change in trend lower occurs. However a collapse is still possible based on negative divergences since summer in the technical indicators for the end of 2016.

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Summary: Bulls vs. Bears

Final Thought: There is no significant change to what we said yesterday. There continues to be significant evidence that a tradable bounce will occur in the short term for SPX (such as Friday morning). This is supported by the proprietary Technicals Model on Friday being significantly more bullish than the SPX. The last time it was this more bullish was on 9/21 with a close of 2163.12, closing at 2177.18 the next day.

However, there remains a lot of evidence with the Technicals Model that swing traders should remain comfortable with short positions. This is also supported by the Weekly chart analysis.

Bullish

  • Number of New Lows near zero
  • Above the 2131 pivot level, barely
  • SPX Daily above  200 dma
  • HYG:IEF hanging around 2016 high, though a bit off that high
  • Oil  hanging around 2016 high, though a bit off that high
  • $VIX in downtrend

Bearish

  • Technical Model negative for 10th day in a row, last occurred in January 2016
  • Long term trend of the number of New Highs decreasing
  • The Performance of the Technical Model:SPX ratio has been negative for 56 straight trading days!
  • Daily scores from the Technical Model negatively diverging through the months of July-September
  • New Highs near zero
  • SELL signals on 3 of 5 of Number of stocks above their 20/50 dma
  • SPX 20 dma below the 50 dma for the past 22 trading days
  • SPX Daily below 50, 20, 100 dma
  • After 3 weeks in a row closing above Top Weekly Bollinger Band, it failed to do so for the past 11 weeks
  • Lower high on SPX Weekly MACD Histogram, histogram weaker last 10 weeks
  • Weekly MACD is a SELL
  • Monthly technicals very favorable for a stalling market
  • Cumulative Technicals Model has not made a new high in 2016, and may be trending toward going below its 200 day moving average

Levels to watch

  • 2131 pivot level
  • 2116 is the next pivot level lower

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Feb-March 2016 Posts: https://stormchaser80.wordpress.com/ 

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Note: I want you to know that although I have taken the steps to start the subscription business, I will continue to offer the free service through May 2016. I want there to be a good record of (hopefully) accomplishment. Plus I don’t want to spring anything on anyone unfairly. I thought 3 months was enough lead time. I also want to present something nice, and well worth your visit (and subscription).

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