Wednesday, December 10, 2008

Update - VIX/XLF

Okay, that was fun… I am now out of my long position for a small profit. Here’s why:

This morning’s rally did not impulse through overhead resistance. It needed to in order to keep the symmetrical time relationship in tact. The impetus to create that wave just wasn’t there - so far.

Also, a triangle I’ve been watching threw over the top, but failed to stay above it and now we’re creating a small megaphone pattern. I mentioned the sell signals earlier on the DOW and Transports, but it is the action on the VIX that has me concerned right now. Here’s a daily chart of the past 4 months or so:

Note the obvious triangle. This morning the VIX dropped dramatically, hit that triangle bottom and launched back up as the markets just broke back down off their highs. Should the VIX be taking a trip back to the top of this triangle, that is very BEARISH, not bullish. Thus, I think caution is advised. For a rally to be sustainable the VIX needs to come down and break this lower boundary.

Should the VIX go back up to the top of this triangle and break in the upwards direction, you will NOT want to be owning stocks, as the target for that triangle is way, way up there (like 120 plus).

So, with that bounce off that VIX bottom, I decided to take a small gain on a very short term trade and not be a pig. I will be a whole lot more bullish if the bottom of that triangle gets broken. That would be a wrong-way break, by the way, as triangles usually break in the same direction they are entered. When they do break the wrong way, however, the move tends to be quick and violent.

While the market went higher, the XLF (financials) moved lower this morning. Below is a 30 minute chart. You can see a clear wedge that looks to be bearish. That said, note that the stochastic in this time frame is oversold, so some bounce on that is expected. Something to watch, the market will have a hard time moving higher with action like that.