The Hype of Fed Meeting Days

If we exclude the two days of the Fed meeting from the S & P 500 Index chart, we see a clean down trend channel. Although it is still sliding down, it is much better than the waterfall we saw yesterday afternoon and this morning. And it also gives hope to bulls --- a potential bull flag is in forming, if the price moves above 1055. Good luck, bulls.

Follow Up: The U.S. Dollar

Yes, the U.S. Dollar Index broke up the resistance line, but hey, it comes back down again.

It is still possible for us to witness a downward climax run of the dollar, and a conjugated upward climax run of the S & P 500 Index. Technicals supporting this call are:

1. The sharp bounce offs (blue arrows) mark a strong resistances (horizontal blue line).
2. The dollar had a good rest in the consolidation area (pink box) and could run for a longer distance.
3. A steep trend (blue lines) is formed. The dollar stays on the lower channel longer and touches the upper channel briefly, suggesting the trend is strong.
4. The dollar broke down the support (red line) today (marked by the red arrow).

Yes, the last piece is weak as it only broke the support by 1 cent. So what we want to see tomorrow is a decisive move below the support and, more desirably, stay on the lower channel of the trend in the near future.

At the end, it's noteworthy that tomorrow the Fed will conclude its two-day meeting. All the financial markets are waiting for it to make decisions.

Potential (Downward) Climax Run of U.S. Dollar

Today the U.S. Dollar Index touched the lower channel (blue line) of its down trend and sharply bounced off (green arrow). Both suggests little downside for the dollar. Many may guess that the dollar may start to rise from here. However, I do see a bear flag (green lines) that points to a target far below the lower channel. To reach the target, the dollar needs to experience a downward climax run, which translates to a upward climax run of the S & P 500 Index following recent negative correlation between them. More supporting technical signs are:

1. the sharp bounce offs (blue arrows) on the upper border of the bear flag,
2. the downside break-out of the bear flag yesterday,
3. the retest of the resistance line (read line) after the break-out, and
4. the sharp bounce off (red arrow) on the resistance line.

All that been said, it may still happen that the dollar moves above the resistance line and invalidate all the technicals cited above.

Vaccum, A Bigger One

There is a huge vaccum area on the S & P 500 weekly chart. However, it is every trader's own decision whether the market will be sucked up at this moment.

Driven By the Falling U.S. Dollar

If I didn’t get it wrong, the current theme of the stock market is weak U.S. dollar and strong crude oil and commodity. The latter translates to potential higher profit of companies in the Energy and the Basic Material sectors, and thus higher stock prices. Coincidently, the recent market rally was led by these two sectors, though we see mild consolidations of the two sectors and catch-up of other sectors in the past two days. Therefore it is helpful to know how far the U.S. dollar will fall, as any re-bounce of dollar will jeopardize the bulls in the stock market.

Up until yesterday, the technical of U.S. dollar did not look promising to stock bulls. It was forming a falling wedge, a classic reversal pattern according to StockCharts.com (remember that a rising dollar may translate to a falling stock market). Although it breached the lower border (the light blue line) yesterday, it still closed inside the wedge, which makes it a little bit tricky to call for a break down --- financial market are full of overshoots. As of today it closed below the light blue line, a clear break down was formed and the falling wedge was invalidated.

It now appears that the dollar is forming a down trend channel, and there is still some room for the dollar to drop before touching the lower trend channel (the red line), meaning that the stock market may have more room to rise before heading lower. That said, it is prudent to keep in mind that the momentum of falling dollar is trimming down and risk increased for an unexpected snap back. It would be a good idea to keep an eye on the performance of the dollar tonight.

Less Leeway

S & P 500 Index was detained within a small area bounded by the blue resistance line (the blue horizontal line) and green support line. It will move higher if it can penetrate the resistance area above. As there seems no further resistances above this area, the target could be 1050 as predicted here. The sharp bounce-offs (blue arrows) on the support line and the flat kisses (red arrows) on the resistance line do suggest higher probability for an upward break out.

XLP Leads The Market

Consumer Staples is a traditional defensive sector, so it's hard to believe it could be the leading sector. Nonetheless, this is what I observed.

Whenever there is a divergence between XLP and the S & P 500 Index, the market will move in the direction of XLP eventually. I didn't check whether the same holds for the past years, so maybe this is just for this rally, this year.

Good news to bulls is that the rally may continue, as XLP is in an up trend. The trend line has been tested for quite a few times.

Good news to short term bears is that for every negative divergence (XLP moves down while S & P 500 doesn't), XLP touches the trend line before developing a positive divergence and moving higher. But this time, it didn't touch the trend line yet, leaving some room for bears to speculate.

I couldn't explain this phenomena any better than the following conjecture. XLP is one of the sector ETF's that have the lowest beta. Although not equivalent, beta is related to volatility, and lower beta implies lower volatility. Lower volatility is good in the sense that the price movement will have less overshoot, thus trend lines and other technical tools may work better.

Another sector ETF having the same beta of XLP is XLU (please refer to this post for all the betas). But Utilities is a relative small sector in S & P 500, so it may not affect the market that much.

Health Care is also a traditional defense sector. If you look at the chart of XLV, you may see similar divergences, but there is no such trend line. My explanation for this is that bio-techs, a highly speculative sub-sector, is a part of Health Care, and it may blur the volatility and invalidate the analysis.

Please leave some words here if you have a better theory for this, or if you see any cracks in mine. I'd like to understand this better to know whether we can exploit this in future.

A Chart Is Worth A Thousand Words

This chart is for both bulls and bears. Take what you want, please.

Midway - Continued

Trading shares is like fighting wars. At the end of the day, commanders are doing just two things, confusing opponents and reading opponents' real intention. Those who got confused will be defeated and victory belongs to those who have a clearer crystal ball. That's why it's being said, trading (and war) is an art, not a science. Nonetheless, the approach could be pure logical.

First a commander will build a couple of potential scenarios based on what's happening and, more importantly, a hypothesis of the enemy's objective. Then he evaluates them and determine, by logic, which one makes the most sense. This will crack through all the illusion and reveal the truth, because illusion might be misleading, but seldom make sense.

Let's try to apply such approach to what happened today in the stock market. The S & P 500 dropped the fourth day. By driving the market down, big players may want to (a) shake out some traders and acquire their shares at a lower price, or (b) continuously push the market down to profit from their short position.

If the purpose was to shake out weak hands, the sell off should be violent but brief. Violence is to generate fear among traders so they will give up their shares. But, it has to be done in a short period of time, otherwise the mood of the market will turn bearish that makes it much harder for big players to pull the market up afterwards. We see many one-day or two-day forceful sell off along the way up when the market was rallying off its March low. As today is the fourth day of the sell off, it appears this scenario does not make much sense.

Now consider scenario (b). Assume big players want to push the market further down. Does a tiny doji, as what we have seen today, make any sense? Shouldn't they keep making big drop everyday and generate huge panic?

Yes it is good to have panic, which will mobilize more traders to sell, and generates bigger panic, and further more traders to sell. But big players still have limited amount of capital and moving the market is a costly job.

The high volume of last four days shows the decisiveness of big players. It also shows that a fairly large amount of their capital was locked in short positions. To continue moving the market down, at some point they have to cash out some short position, better with profit, and free up precious capital. And this is exactly the purpose of today's tiny doji.

The doji is so tiny that it's not exaggerated to claim the market is dead. But this serves its purpose well: the price didn't rise much so big players can buy back shares with profit; also the price didn't drop much so the fear is in control, which is more important as buyers are needed down the road when big players start to sell again --- when selling, you do want to sell at a higher price. This is not an easy job and they have done it well. Maybe too well to me and it starts to smell fishy.

Back to the military term, the doji to big players is as the Midway Island to U.S. Navy. It's an relay point where the force has a rest and gets ready for big leap. The next move is going to be deadly.

What I said above may make a good story, but may still be far away from a good trading plan. And, another thing an experienced commander will do is to constantly monitor the battle field, reevaluate the logic, and change plan if necessary.

Midway

The violent sell-off comes faster than I thought. On the S & P 500 chart, two major supports, the intraday gap on Aug. 21st and the interday gap between Aug. 20th and Aug. 21st (the two blue boxes) are broken in the same day. This is very bearish.

Looking downward, there seems no reliable support above 980 (the blue line).

Today Financial sector led the sell-off. On the XLF chart, there seems no reliable support above 13.7 (the blue line). Both suggest that the sell-off may continue for at least a short while.