After these two down days ensuing after a fairly strong three day rally, people may be looking for reasons to take profits. Here are two things to think about (click the images for live charts):
The percent of S&P stocks above 200 simple moving average is getting into quite a bind here. If you draw a horizontal line from the swing lows earlier this year around 82.5% you get a level this indicator found significance at multiple times this year as well as just a few days ago. Connecting the lower highs puts this into a wedge that is very likely to break down. If/when that happens, 75% level is a high probability level to test. You could also argue it is going to break upward. Fair enough, that tells us just as much about the strength of the market as if it broke down, especially if it took out the previous high. Point is, it is nearing a critical point that needs to resolve and would be wise to keep an eye on it especially in conjunction with this next one.
The VIX has a juicy Bollinger squeeze setup that everyone should be aware of. If you aren’t familiar with a Bollinger squeeze, it is when the Bollinger bands get so tight (volatility contracts so much) that energy is built up and a large explosion typically follows. As it looks right now, most people would say it is heading higher since we are already at $12-$13 and there isn’t much lower it could go especially with this energy being built up that needs to be released. People familiar with a squeeze would say it is going to head a lot higher when the squeeze triggers. I will be watching how it reacts to the upper Bollinger band. If it plows through it and continues strong, well that is probably the squeeze being released. If it hits it and peters out then the squeeze may still be building up and we will just have to be patient for some good volatility. The longer a squeeze is in effect, the more energy is being built up (according to the squeeze theory). This is the tightest the bands have been in years, so it really is something you need to be following. Here is a chart of all the times the VIX Bollinger bands have been this tight: VIX Bollinger History
Both of these internals are in critical technical situations that need to be resolved in the very near term so I thought it was only fair to write a short post about it to emphasize the importance. If both of these explode at the same time (% of stocks down, VIX up) this market could have some serious volatility come into it that no one is expecting and nothing would make me happier. I’m not saying that is going to happen, % of stocks could break higher and VIX just peter out, but still pay attention to them and be aware of what is happening just in case so you aren’t caught off guard.
Trade well,
-Michael
