Beware Of This Stock Market Rally
I have 2 charts today: that of the SPY and the VIX. You can see that the SPY has rallied right up to the downtrend line formed from the April top. The Dow has also rallied to its downtrend line but the QQQQ hasn’t quite made it.
Volume has been steadily declining since the April top, the MACD is under 0 and has stayed there since May even though there have been counter trend rallies, and the stochastic is in overbought territory. If you compare the stochastic movements to the SPY price movements, the stochastic has been a reliable timing indicator for market turning points.
The VIX has dropped to the uptrend line formed from the April low and it has also formed an equilateral triangle. According to the stochastics the VIX is in oversold territory. While it is not shown in the chart, the VIX has pulled back right to it’s 200 day moving average.
The problem here is that the VIX has never really dropped to more normal levels during any of these rallies. This indicates that the professional traders are not buying into the rosey scenario currently being announced by the talking heads at CNBC.
While the market did reverse to the upside from below the neckline of the head and shoulders pattern, I suspect that this rally is just about done and another right shoulder will be formed before the market plunges.
Due to good earnings being announced by Intel and other companies, I would not be surprised to see an initial move up tomorrow followed by a larger move down. The problem with earnings is that it is past history that is already priced in. While intel did give good future guidance on chip sales, that guidance has not been affirmed by the computer manufacturers.
Tomorrow looks like an excellent day to put in some short positions on any of the major indices. A tight stop should be used just above the downtrend line to minimize any losses in case the market breaks through to the upside but based upon the current technical conditions of the market that seems unlikely to happen.
