A couple of charts as promised. I am not a chartist but I do like to look for certain indicators. In the first chart, I am showing the recurring theme of a dual bottom for the VIX and the VIX PCR. The VIX seems to always move up about 8-15% when this happens and market tends to move down anywhere from 6-15% when this situation occurs. But, in this case, it really is not a bottom on the VIX but it is pretty damn close. I will wait for a bit of confirmation tomorrow. If VIX moves up in the morning, I will tend to want to play short positions in the market. If the VIX opens flat or down, I will probably hold off for further confirmation.
The second chart shows the continued narrowing of the upper and lower trend lines creating quite a wedge. Also, the 20, 50 and 200 day MA's are also converging. Something will have to give eventually but with the VIX, this situation can continue in a narrow range for an extended period. Also, this situation happened in August with the breakout of the wedge on the lower side. But it was a head fake and the VIX soon marched straight up as the Lehman failure occurred.
There is not an obvious move in the market this week. But the odds favor bears right now for a couple of reasons.
- Volume over these past 5-6 days in a rally situation has been very low. This is telling us new money is really not moving into the market even though many are claiming this is a new bull market that you don't want to miss. With so much money on the side, if there were conviction that this was a bull market, we would be seeing heavier volume.
- The market appears to be a bit overbought or over extended. Even if this is a wave up, there is a correction that needs to happen. This can be a 5-10% correction.
- The VIX still has not fallen below the lower trend line in an obvious rally situation. This is still a bit amazing but it tells us the sentiment is still uncertain.
- The VIX 20 day MA is only 1.50 pts away. Passing this is relative easy and the VIX can pass the 20, 50 and 200 dma's in one day quite easily.
I would still avoid putting too much into banks on the long or short side. That sector is a mess and being propped up by the Fed and Treasury. While they may be insolvent as a whole, there is a lot of intervention that gives the perception that they may survive. I don't mind playing some puts here but not to much. There will be better indicators and better opportunities in this sector.
I like April puts on AAI a bit more today. I think we will see some interesting activity later in the week.
I like VIX short term calls here.
On the long side, Health care may be the play. I also expect a bit of a bounce back up by GOLD but I don't play that short term.