August 6, 2013

Logical Market Update: First Down Day – The Beginning or Buying Opportunity?

First Down Day For Equities – Just the Beginning or Buying Opportunity?

After Monday’s big disappointment courtesy of a very tight inside day, Tuesday’s trading action brought some welcomed relief.  The optimal word is some.   Refreshing is a word I heard used – It was like a fresh cool drink in the desert another contrarian trader remarked.  I prefer to remark on the increase in trading opportunities in equities, indexes, ETFs, treasuries, and precious metals.

The general mood was to the sell side, which expanded intraday trading ranges and in turn produced a jump higher in the various volatility indexes.  The S&P 500 increased the intraday range from $6 on Monday to $15 on Tuesday, most of which took place within the first couple hours of trade. 

The closing minutes of trade were again flooded with buyers coming in for varied reasons, but the important take away is that the bulls were unable to boost prices, which would raise the probability of Wednesday being another down day. 

Volatility jumped higher on Tuesday, which was expected and there is tremendous upside potential within the volatility indexes for additional gains, since most if not all of these indexes reached 52 week lows recently.  The bond market managed to stage a more solid rally led by the 10-Year Note.  Gold and silver caught a down draft on the heels of a large decline in India’s markets.  The Euro also caught an updraft and for the better part of the U.S. trading session was held to a 15 tick or less range.  The resolution of the intraday pattern suggests a spike higher with a retest of Tuesday’s high at 1.3326 before moving lower again. 

The broader indexes, treasuries, and precious metals have not moved outside of previously discussed parameters – expectations would be for a continued down move in equities, an up leg for treasuries, and additional downside for precious metals. 

Summation Indexes

Most traders are familiar with the McClellan Summation Index as measured by the MACD.  There are additional summation indexes that are tied to the broader indexes.  The NASDAQ Summation Index ($NASI) and the New York Summation Index ($NYSI).  Both the NASI and the NYSI look at the gap between the number of advancers and decliners on the NASDAQ and NYSE to give a net positive or negative number that indicates how overbought or oversold the market is on a given day. 

Many analysts use the NASI and NYSI to work the intermediate term (one to three months) trend.  Both indexes produce buy or sell signals as the NASDAQ or NYSE change directions.  The NASI can be an added signal generator for swing trades in the QQQ, and NQ futures, while the NYSI would be more of a general market indicator for trading the SPX and Dow futures and several equities. 

The following buy/sell triggers will usually determine a change in the NASI and NYSI trends:

  • MACD crossover
  • Parabolic SAR buy/sell signal
  • Stochastic crossover of 20 for a buy signal or below 80 for a sell signal

NASI (click chart to enlarge)


The chart above shows the NASI reaching its highest level just below the 800 level last week.  Currently the NASDAQ remains in extreme overbought territory with a drop below 600 bringing the market down to overbought.  The 50 and 200 day Moving Averages are included to show the levels where a break below the 50-day would suggest a trend change.  More important to take note of is last weeks high was about 22% higher than the June 2013 high which occurred just before the NASDAQ dropped a quick 7%. 

Another observation is that the NASI has not been below the zero line at all during 2013.  A testament to the buy side momentum being very strong, however, it can also be a strong warning that the expected decline (correction) may be more severe and longer in duration than what was seen in June. 

The NYSI (click on chart to enlarge) presents a somewhat different picture:



Unlike the NASDAQ the NYSE has not blasted to new highs as registered via the NYSI.  Although the June sell off did push the NYSI into oversold readings and the break above the 50 MA gave the DJIA and S&P 500 additional fuel to power to additional new highs last week.  I would think the bulls are watching this index closely as a break below the 50 MA would likely accelerate any downside in force at the time. 

The chart below shows the S&P 500 (monthly cash – click chart to enlarge) with Bollinger Bands.



The SPX finished July at record highs and above the top of its monthly Bollinger Band. 

Bollinger Bandsmeasure the “high” or “low” of the price relative to previous trades and are considered a volatility indicator.  Therefore by definition prices are high at the upper band and low at the lower band.  This definition can help in pattern recognition and when combined with additional indicators help to arrive at decisions as to direction or trend. 

The chart above keeps in perspective just how far the SPX can drop before dropping into oversold readings (on a monthly basis) or before a trend change would be suggested.  It has not been a common occurrence for the SPX to close above the upper Bollinger Band on a monthly basis.  Check out the last two times this happened (2007 and 2011) to see what happened shortly after.

While I am expecting a broad market correction, I am not anticipating an over 200-point drop in the SPX, but 100 points is not out of the realm of possibilities.

The way volatility works in the markets can move contrary to what most think in that “normally” when the market moves into a period of uncertainty which can produce a increased sense of movement risk.  Upside fear is almost non existent with downside fear being the force behind most spikes in volatility and the respective indexes.


S&P 500 VIX Short-Term Futures Index –


  • Summary –
    • The S&P 500 VIX Futures Index measures the movements of a combination of VIX futures and tracks changes in the expected volatility based on 30 days forward.  The index maintains an average weighted settlement date of one month by rolling a portion of the position from the front month to the next month out, which is done on a daily basis.
    • The VIX is a measure of the expected volatility of the S&P 500 over the next 30 days.  The VIX is not a traded index, but does have listed futures and options.  The VIX futures reflect expectations for the level of the VIX on the settlement date of the contract.


There are several ETFs and ETNs that are tied to the VIX          :


  • VXX
    • The VXX tracks the VIX and offers exposure to a daily rolling long position in the first and second month VIX futures contracts to reflect the implied volatility of the S&P 500 index at various points along the volatility forward curve.  The VXX future also rolls continuously throughout each month from the front month to the next month out.
    • UVXY
      • The Ultra VIX Short Term Futures ETF looks to produce a return that is 2x the return of the VIX for a single day.  This can and has produced a situation where the returns over periods other than one day will not be as correlated to the amount or even the direction of the target index. 


The updated charts below of the VXX and UVXY include Bollinger Bands and show the sensitivity these indexes will have to a downside move in the broader indexes.


The oversold readings within the volatility indexes and the overbought readings within the broader indexes continue to suggest a period of correction and consolidation is coming up next. 



Indicator Warehouse


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Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 


A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester When implemented it allows the user to:

  • Immediately know the impact of parameter changes. 
  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
  • Performs a wide number of essential intelligence boosting calculations instantly
  • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators


The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 


My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.


The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 


Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:


  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes