It is one of those times when I can make pretty good arguments for both the bullish and bearish case - short-term and medium-term. This means we could be in for some choppy trading the next few days, weeks or even months. On the bullish side, sentiment seems to be quite bearish right now. First, the Hindenburg Omen dominated the weekend. Indicators often stop working when they become too popular. Second, many pundits are wary as we approach the September-October period (me too). Third, the CBOE Put/Call Ratio ($CPC) surged to its highest level since the July low (red arrows). Traders appear to be loading up on puts. This is either as a hedge or as a bet on a decline. While this surge in the put-call ratio suggests excessive bearishness, notice that the 10-day EMA (pink) turned up and broke above the red dotted trendline. A similar breakout preceded the May decline in stocks (red dotted lines). Also notice that stocks advanced as long as the 10-day EMA of the put-call ratio trended lower. At this point, I would view the action of the put-call ratio as more bearish than bullish.
As detailed in Wednesday's market message, the island reversals are vying for control of the short-term trend. The first island reversal was bearish and has yet to be fully negated because last week's gap has not been filled. The second island reversal is mildly bullish, but SPY has traded indecisively the last two days. Notice that the candlesticks have small bodies (open-close) with relatively long upper/lower shadows (high-low range). Tuesday's gap up is holding, but we have yet to see follow through. A truly strong gap and surge should feature a long white candlestick with a strong close.
On the 60-minute chart, SPY broke above 109 with a gap and then consolidated the last two days. The resolution of this consolidation will trigger the next signal. A break above 110.5 would be short-term bullish, while a break back below 108.8 would be bearish. RSI is also at its moment-of-truth as it trades in the 50-60 zone. A break above this week's high would turn momentum bullish, but a break below this week's low would be bearish. Jobless claims will be reported before the open and this number could produce a gap that breaks the two day range.
Key Economic Reports:
Thu - Aug 19 - 08:30 - Jobless Claims
Thu - Aug 19 - 10:00 - Leading Indicators
Charts of Interest: AEO, AKS, AMGN, EIX, ETR, HD, MRK, RIMM, TJX
This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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