The theme I’ve tried to stress over the last few weeks is that
the market dynamics have changed. The momentum high in this rally has passed. It
is likely the market is forming an extended top and this will most likely mean
an oscillating market that traders could look to take advantage of by using
reversal strategies whenever the market stretches to overbought or oversold. In
both my columns last week I suggested a selloff was likely early this week. I
stated a gap up Monday would be the ideal scenario to short. Unfortunately we
weren’t given the gift of the gap up. After some wiggling for the 1st 10 minutes
of trading the market began to sell off hard.
Most attributed this to the selloff in the dollar or the slow sales at
WalMart (WMT | Quote | Chart | News | PowerRating), but I believe it was the natural reaction of a market
that had become too stretched without the benefit of momentum behind it. So what
now?
The S&P 500 has gone from its upper Bollinger Band down to just below its 20-day
moving average (grey line). Since the market began to rally in strongly in July,
every drop to the 20-day moving average has been met with buying. It is likely
that this number will therefore act as at least temporary support as dip buyers
look for another winning trade. Another interesting occurrence today was the
sharp spike upwards in the VIX. It has quickly become stretched above its
short-term moving averages in an area that would typically indicate a market
bounce is likely. If you took the short, congratulate yourself and take at least
some profits. If not, be ready to go long should the market get much more
stretched to the downside in the next few days. And remember, all these trades
are now of the short-term variety. Days – not weeks. This is due to the market
dynamics. You can’t catch a trend that isn’t there, but you can make money on
the oscillations.
Good trading,
Rob
Rob@HannaCapital.com
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.
