Need I Remind Anyone This Is A Dangerous Market?
Be honest. How many of you thought today would be a down day based on yesterday's chart? If you thought today would be down, you didn't think very hard. Where did I say it would be a down day? One person got it right. I posted the original chart at 5pm yesterday. The futures market had already popped significantly in after hours pointing to a high probability up day. In addition the S&P was still in an uptrend on the intraday chart and S&P buying pressure was increasing. Smart traders follow the S&P. The selloff in the Nasdaq at the end of yesterday was very weak. In addition, every single time in the last year buying pressure had reached this level of oversold, we had a rally even if it was a few days. A commonly used and readily available data point, RSI(5), was below 30 nearly guaranteeing a rally in an uptrending market. Down 5% in a week? That's a drop to zero in a month. The market is a deceiver and I might be as well. In order to beat the market, you need to free your mind and think.
Original Post
Ok, I said it would be the end of the week or next week before my next post but I had just a few minutes here so I'm going to put up a telling chart in the interim.
The tone of the market has changed significantly starting in late October. In fact, the tone has changed more than one could begin to imagine looking at generally available data. Now, this situation has happened before. Two times I've seen this same situation occur were mid way through 2003 before an assault on new highs and the other time was at the peak in 2000. This could be a repeat of either situation or neither situation. And, since I don't give investment advice or share my proprietary work, I'm going to refrain from giving commentary on what is happening. But, I will give you something to think about.
Below is a chart of the Nasdaq 100 ETF. It is the first time I've thrown up an intraday chart and you won't see this too often as I focus on the long term. Overlaid on the chart is the buying pressure calculation I've referenced on daily charts. As you can clearly see, it was screaming sell well before the recent market dump. I thought the bulls would respond given some data points I was seeing in the futures market but they didn't. Not only is the direction of buying pressure important but so is the expansion or velocity. In other words, the extremely weak rise on the 19th and today likely means only retail investors and the medium & small investment firms are participating in these failed rallies while big money is dumping. The cumulative buying pressure of the underlying Nasdaq 100 stocks, which isn't on the chart, is showing similar weakness. Hence there are no large buyers in the ETF and there are no large buyers in the underlying stocks.
This doesn't mean the stock market is going to zero tomorrow. But, remember this is a dangerous market. The Nasdaq 100 is down almost 5% in a week. This is a sign of increased volatility I said would come to pass. With oil all over the map the last two days and gold following today, we can expect all markets to chop up the inexperienced investor and a few experienced ones as well.
By the way, who ever said you couldn't predict the future? If you would have looked at this chart on the 16th, where would you say a high probability move would be? Up or down? Based on this chart, what is the probability of tomorrow's action? Now, I'll preface this by saying intraday movements sometimes whipsaw but more often than not, they don't.
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