This was one of the most volatile days I’ve seen, with the indices swinging about 10% in about 3 hours. Mid-day selling pushed the Nasdaq and S&P 500 beneath their October lows. Early on I wondered if sellers had exhausted themselves based on the fact that Intel (INTC) was up on the day. That thesis was looking real shoddy at lunch time but now it seems spot on. That goes along with what I talked about yesterday with regard to the relatively light volume. Today’s probe of the October lows was a great example of a spring / false breakdown:
When is a break of support bullish and the breaking of resistance bearish? When these events turn out to be either springs or upthrusts, the name given to these technical patterns by legendary technician Richard Wycoff.
Both springs and upthrusts are examples of false breakouts and can trap the unsuspecting trader. Both patterns quickly reverse and the stock then often tests the opposite end of the trading range. A spring is a false breakout to the downside. It is so named because prices “spring” back. An upthrust is the opposite event–prices temporarily break out above resistance only to retreat almost immediately after.
The quality of the spring or upthrust can be judged by an examination of the degree of penetration of support or resistance and the volume on the day this penetration occurred.
So the springs indicate that the market is heading to the top of its trading range. The short-term stochastic indicators on the indices are also in favor of the bulls. I think we saw some panic buying (short-covering) by the bears today and I suspect there are plenty of people who are still short and can easily become motivated buyers.
I think the fact that the VIX couldn’t make it to its October extremes along with the indices is a bullish divergence. Its chart continues to look toppy. As I mentioned the other day, I’d take a break of 45 or so as a sign that things are returning to normal.
For all the huge moves the indices are just back to where they were on Tuesday — hovering around those round numbers of 1600 and 900.
Here’s Intel, which put in a one-day reversal:
The indices are still well below their 10-day moving averages, so no changes to the short-term trends yet.
| Trend | Nasdaq | S&P 500 | Russell 2000 |
|---|---|---|---|
| Long-Term | Down | Down | Down |
| Intermediate | Down | Down | Down |
| Short-term | Down | Down | Down |
(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend
*** I’m simply using the indices’ relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.
How many ways can you say “DEAD CAT BOUNCE”??
“I think the fact that the VIX couldn’t make it to its October extremes along with the indices is a bullish divergence.” – MIKE
Hmm, so thats what it means. For sometimes I have been wondering whether that is bullish or just complacency from the bulls.
I hate to be the sceptic, but given recent history I doubt there are a lot of shorts left. If the rs indicator goes above 50% It would look better. This volitility could mean we will quickly be overbought.
Cowman,
Don’t apologize for being a skeptic. That’s what the market pays you to be.
I just found a short interest report which the Nasdaq released on Monday:
“The exchange reported short interest in 7.86 billion shares in 3,142 securities at the end of Oct. 31, down from 8.11 billion shares in 3,139 Nasdaq securities at the end of Oct. 15″
So there are likely still plenty of shorts out there.
Thanks for that report Michael. I suppose there is no way to know how many were covered in the last 2 weeks.
I am no expert on short interest, I just have feel like shorts are not stupid, and many had a plan to cover at the low range.
The market very well could go higher from here. It’s just that the fact that it made a new low is very bearish to me in spite of the short term signals. I think the hedgies may still be selling stock, just not willing to sell at any price.
There’s definitely a distinction be smart shorts and, uh, not-so-smart shorts. There are plenty of newbies who are betting against the market, especially with inverse ETFs. I doubt many of those folks are out yet.
And I’m no expert at gaming short interest either.