Welcome To The Wood Chipper

The bad news is that we’re getting ever more extended on the equity side. The worse news is that sideways conditions may prevail far into February. Barring a major event that somehow throws indices across the board into a tailspin the bears do not seem to be able to muster up sufficient mojo to exploit what clearly is a market that has run out of buyers.

Just looking at that hourly panel is giving me a headache and makes me wonder if I wasn’t better off sipping a glass of Michelada at some beach in Puerto Vallarta.

The current formation actually is strangely reminiscent of the one we painted back last summer. Whether it resolves the same way remains to be seen but it goes to show that inability to breach an important inflection point (this time being 20,000 on the Dow) usually comes with a price.

Crude isn’t going nowhere fast and if it can’t convince buyers soon then we probably seeing it near 45 in a week or two. Which I personally wouldn’t mind by the way as a great entry opportunity.

I may have to increase the dosage of my meds as I’m seeing a repeating formation in crude as well. And once again it seems to be pointing downward. Coincidence? Probably but worth watching…

The Dollar incidentally is at a pretty significant inflection point. The 100 mark previously served as resistance and if it doesn’t provide support here then we’ll probably see it drop to 99 or lower.

Now let’s look at our momo charts – please grab your secret decoder ring and meet me in the lair:

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You may remember our bearish inflection point on the NYMO:SPX. We’re still sitting on it and usually we see movement after a second touch. I don’t want to be hasty though so let’s see if it keeps dropping lower. After we love divergences 😉

One of the reasons why I am still hesitant to make a bearish call is that NYSE market breadth is still above our 1.0 trigger point. Which is why we may have to endure a few more weeks of this trading hell. Puerto Vallarta is starting to sound better by the minute!

That’s volatility on the VIX (yes, you heard right) as expressed by the rate of change (ROC). You may recall the recent touch of the lower threshold. Those traditionally are followed by a meaningful correction which we have not yet seen. So this adds to the increasing downside risk but unfortunately on its own does not give us license to start going short.

Finally VIX:VXV – usually a lagging indicator at least the way I’m plotting it here via the SMA(5). Well, we’re getting there – first we had a new high and now there’s the divergence suggesting that we should at least see one first swing lower.

Bottom Line

In my mind the smart play is to wait for that first scare to the downside which is usually followed by a reaction to the upside. As long as that one doesn’t breach major highs (doubtful given the lack of buying interest lately) that would be the place to stage a short position or two. Which may actually come in the form of buying options. I would be tempted to grab some now while the VIX is still gyrating around the 12 mark but theta burn is a bitch as they say. I rather give up a VIX handle or two but then see my campaign resolve while my clothes are still in fashion.

So let’s be patient folks – it’s a virtue for one and always remember that no trader has ever gone broke waiting for a solid entry opportunity.