Luna $ Ticks

August 24, 2008

Hibernation

Filed under: Trading SPX SPY — moontrader @ 6:42 pm

“Hibernation is a state of inactivity and metabolic depression in animals, characterized by lower body temperature, slower breathing, and lower metabolic rate. Hibernation conserves energy, especially during winter. Hibernation may last several days, or weeks depending on species, ambient temperature, and time of year.”

For financial bears out there, this is still hibernation time.

On Friday, 22nd, the market rallied to close at the highs of the day. Not only SPY bounced off and away from DMA 25×5, but it also closed above DMA 3×3 and 7×5, confirming a short term uptrend and increasing the odds that we will see new highs before the downtrend resumes.

SPY also closed hitting on two important trendlines (dotted) which means that we might see some weakness on Monday. But DMA’s levels should hold and, on Monday, they’ll be:

DMA 3×3 = 127.65

DMA 7×5 = 129.44

DMA 25×5 = 127.02

To keep it simple and clean, I didn’t add other studies to the chart, but Stochastics is giving a buy signal in positive territory (above 50%) while MACD is in positive territory with an “almost buy signal.”

VIX is already below 20, but ideally it should be below 18 before the reversal. Two important things to notice here.

First. On May 19th, 2008, VIX was below the all-time top of October 11th, 2007. We don’t need to reach those levels, but the point is: if this is a leg up correcting the down movement from May 19th to July 15th, SPY peak should correspond to a VIX bottom. However, VIX is already below August 11th level, when SPY peaked at 131.51. This increases the odds that SPY is heading back above 131.55. I would expect VIX to bottom in the range between 18.63 and 17.56, which correspond to the two immediate short-term VIX bottoms after May 19th, when the trend reversed.

Second. Usually SPX ends a correction with a peak in VIX and, on July 15th, VIX peak was below March 17th and January 22nd highs. This is a strong signal that we’ll go below July 15th bottom before the end of the year. I believe that, from where we are today, there’s much more room to the downside than to the upside, so I prefer to be a bear: hibernating and saving energy (or better, money).

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2 Comments »

  1. Thanks for giving your insite on the VIX. As you stated before when we do break it could be a huge one day decline to set it in motion. I’m leaning to a conflict with Russia as the news story to set it off, but a lot of issues loom. To catch it your probally going to have to be anticipatory and find a low risk entry to manage. Just a gut feeling but there may not be much notice when the fireworks start.

    Comment by Jigsaw — August 25, 2008 @ 4:23 am | Reply

  2. There’s a lot of stuff going on right now, and they might all converge during a short time span. That’s why I prefer to sit and watch, the market has been very tricky but has also been presenting us with great opportunities. Patience does pay off at the end.

    Comment by moontrader — August 25, 2008 @ 9:07 am | Reply


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