There Will Be Blood

Last night our RTV Sell signal went bust and I hope you hedged yourself a little as suggested in my previous post. Not that the tape has been moving much – there’s a difference between speed and velocity. Velocity is a vector, so it has direction. Speed is the magnitude of velocity, it does not have direction. For example, if my velocity is -5 mph, I am travelling backwards at a speed of 5 mph. Now if you look at the tape of the past few days then it seems we are speeding around all over the place but thus far we are not going anywhere fast. Hey, did I just blow your mind? 😉

News and rumors are often a catalyst of intra-day gyrations and over time they can affect trading psychology to a great extent. Which invariably leads to trading mistakes as your emotions lead you to stray from your hard set system rules. If you take a step back and look at the chart above then it’s rather clear that despite psychotic market psychology the SPX managed to continue higher until it bounced off our first resistance line. Unfortunately the RTV Sell signal is bust – which of course does not mean that we go higher or that we go lower – it’s simply a setup with preferable odds that is now defunct.

Whether or not we continue higher depends on what happens right here and right now. Being short here near SPX 1356.48 is a great setup until we push into 1356.49. Yes – one lousy tick can matter quite a bit. And that’s really all there’s to be said about this at the current stage – this thing has to play itself out and short of a crystal ball there is no additional information that will bestow us with more clarity at the moment. What can be said has been said here – at least in the realms of technical objectivity.

Long term however the picture is rather different and that brings me to the title of today’s post.

For some reason I had not looked at this chart for quite a while and when I came across it last night I was rather shocked about the magnitude of the divergence. We are plotting a ratio between all NYSE stocks above their 50-day SMA and all NYSE stocks above their 200-day SMA. This gives us a rough measure of the quality of any rally or sell off (yes, it works equally well on the downside but is more expressive on the upside as the downside moves too fast).

As you can see there’s quite a rich history in divergent signals and their invariable resolutions. Considering prior history what we are looking at here is not pretty and this chart henceforth shall be named ‘There Will Be Blood’.

Draiiiinaage, Eli, draiiiiinaage!!!

Sorry, had to turn dramatic there for a moment. Now, please remember that this is a long term chart. Meaning that we may easily push toward 1370 or even 1400+ before this ship finally reaches the black hole’s event horizon. But you should be aware of it and I will be sure to post updates on a regular basis.

Another pertinent chart worth noting is the NASDAQ total volume to NYSE PM total volume ratio. Oh boy – not sure if those readings are going to stick until the close but I am very conflicted about taking on any long term positions. Nothing wrong with a few quick swing trades but I would not want to hold anything for more than a day or two.

Of course if we breach those resistance lines on that SPX chart we may just power higher as previously suggested by my SPX P&F chart – recall we had a price objective of 1390 there. Which is exactly the type of situation that has everyone including the best traders I know scratching their heads right now – we should be correcting but we (somehow) manage to power higher. Trend traders love this type of tape – they know overbought conditions can prevail for quite some time. The rest of us may be better off holding back and just taking on positions when we see clear setups or important inflection points being breached.

Cheers,