Wednesday, November 5, 2008

10.05.08 - Overbought Burnoff

So far S2 has provided us a bounce (SPY $97.20). AD and Tick maybe turning the corner into positive slope, but the 5-Day Moving Average ($98.30) and S1/VWAP ($98.85) will likely provide resistance on the way back up.

11:20AM PST: SPY Price is still near S2, but all indicators are progressively negative. The mean reverting VIX is back up 11% to 53 on the day. Many bloggers have been focused on this topic yesterday and today, here from our archives [VIX Stretch]. Note that the inverse applies as well, but in either case it's best to filter this type of model based on current market dynamics (long-only in bull markets, short-only in bear markets). More on VIX stretches to the downside:

o Vix & More
o Quantifiable Edges

ADP was out this morning (six-year low), Jobless Claims are out tomorrow and the big job report on Friday. The impact of the Jobs Report may be softened unless it surprises to the upside based on this ADP and tomorrow's Jobless Claims. [Add] There will still, of course, be trepidation ahead of it.

12:30PM PST: Directional Vol Lives -- Long Live Directional Vol! I think we may see institutional buyers towards or after a test of the confluence of the flattened 10-day and 20-day moving averages in the days ahead (SPY $93.50-$94.00).

Meanwhile, don't forget that this market has been characterized by fast moves, and directional trades that last longer than you expect/ are able to predict by historical measures.
And, watch for the expected Euro-zone rate cut tomorrow.

Close: Supportive volume spike at the close, covered for the overnight, will reasses in the AM. RSI-2 = 13.90; long way down for one day (97 last night).

Open Thursday: We are already at the identified range from yesterday. Think we could go lower still. Wait for evidence of a turn. (8:00AM PST) Now testing S1/SPY $93. Next stop $90? -- Just keep watching $93 for now. Dollar is holding up post European cuts. All sectors are very correlated on this drive down, reflecting trend strength.

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