Are the Bollinger Bands Foreshadowing a Big Move?

Posted on April 4, 2013 by Andrew Thrasher — 3 Comments ↓

It’s fascinating how fast people’s sentiment has been changing, in both directions, over the last few months. Yesterday we had a down day with small caps ($IWM) and Transports ($IYT) showing noticeable weakness. Taking a look at my twitter stream you would have thought the world exploded. I saw numerous tweets of people calling to batten down the hatches, many of which had been bullish just the day before. Can a single day’s price action have this much affect? Or are traders THAT nervous about a correction that just a 1% move makes them change their underpants?

So where do I stand? I still reference the charts that could end the rally and that the equity market is playing a game of Jenga, but it takes more than a one day drop to make me put on a helmet. It would be weird if we didn’t touch the 1576 high in the S&P, but price leads and if it’s helmet time then it’s helmet time, who am I to fight Mr. Market?

The chart I want to share today is the Bollinger Bands around the S&P 500 ($SPX). With the lack of volatility (standard deviation not the $VIX) the bands have tightened. Take a step back we can see that the Bollinger Bands have only been this tight six previous instances on a daily chart since 2006. The most recent time being late-August of last year before the S&P shot higher by about 70 points over seven trading days.

When Bollinger Bands tighten like this it typically precedes a large move in either direction. By just using the bands we can’t forecast the direction of the move, we can just know that a large move is likely. As I said earlier, I would be surprised if we didn’t at least kiss the 2007 intraday high, but the weakening internals may just be strong enough to pull the rug from underneath the bulls before they get the chance.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

Level of Equity Support and A Possible Scenario

Posted on February 26, 2013 by Andrew Thrasher — No Comments ↓

Well yesterday was fun. I’m sure all of you saw the massive spike in the $VIX and the big advance that the yen took. Today also should be an interest day for traders with Bernanke testifying before Congress at 10am and headlines about the Italian election.

We saw the S&P 500 approach its first Fibonacci retracement level of 1486 after yesterday’s drop. This is the level of support I’ll be watching today to see if bulls can defend their ground or if the swift switch in momentum is too much to overcome.

Back in late-September I discussed a possible drop in equity prices if 1430 was unable to hold. I showed a chart of the relationship between the NASDAQ and 30-year Treasury Bonds on a weekly basis. Well yesterday’s price action has caused this ‘risk off’ metric to flip again like it did last fall – giving us another warning sign of investors shifting out of the higher beta NASDAQ Comp. in favor of long-dated bonds. After that post in September equities did rebound and test the previous high before breaking 1430 and taking us to the low we saw in November. Last week I mentioned on Twitter and on the blog that we’d likely whipsaw as the last group of buyers stepped in before the real technical damage took place. We’ll see if this plays out and we get a test of 1530 or if things have broken down already.

Yes The Market Was Negative Yesterday But Don’t Pee Your Pants

Posted on February 21, 2013 by Andrew Thrasher — No Comments ↓

It’s amazing the shifts that take place on days where the market moves like it did yesterday. Those that were calling a top a few weeks ago and then went silent were resurrected with their chest pounding announcements for the Dow to drop to zero….view this as entertainment and not as analysis. They are CNBC and other news sites to draw viewers not to personally make you money. While some technical damage was done yesterday it needs to be kept in context of the bigger picture. I stand by my believe that the risk lies to the downside but we still must be smart.

I’ve discussed the sentiment data that showcased the extreme amount of bullishness that has plagued the market (here here here and here). Typically we see sentiment top out before equities do, and so it seems we can check that box. With each post warning caution I would end it with saying we must watch price and let it dictate our actions. This has been critical since we’ve marched higher in the face of the sentiment warning flags.

Tops are a process. We appear to be seeing further weakness this morning which is exactly what equity bears want to see – but not for the reasons you may think. The market ‘needs’ to go down for those that are on the sideline waiting to “buy the dip” to get excited. This gives the last group of buyers an opportunity to get long and we could very well see this happen a few times. What I’m looking for are signs of market internals cracking with each attempt to recover from the weakness.

You cannot manhandle Mr. Market. He’ll beat you every time. We saw yesterday a near 20% move in the $VIX. This took it to an overbought level on various measurements, this doesn’t mean it must drop but it could signal a breather is necessary. If you’ve been doing the potty dance waiting for stocks to dive don’t get too excited yet. Watch the market leaders, keep an eye on transports, financials, and cyclicals. When these begin to crack, and not before, is when traders will likely begin to get worried.