Indexes Confused – Trapped

May 16, 2008: 8:25 PM CST

Today marked a day of relative indecision for the US Stock Market.  The Dow & S&P are trapped just beneath their 200 day moving average, and formed a strange doji pattern at this level, while the VIX reached new lows for the year.

Let’s look at these developments:

S&P 500:

The NASDAQ actually closed higher than its 200 day average, while these two indexes found resistance there.  Dojis (where the close and the open are almost identical) are signals of ‘indecision’ and can precede short-term reversals in price.

The only issue is that there is seemingly strong support beneath price via the rising 20 and 50 day moving averages on both indexes.  Volatility has been contracting and price swings have narrowed.

Also, one could say ‘fear’ is leaving the market due to the VIX (Volatility Index) making new lows for 2008:

One could imagine the complacency at these levels as hedge positions are unwound.  Also, the market has risen quite steadily since early March, and traders may be lulled into a potentially false sense of security.  Let’s see if the bears can have their say, since the bulls (buyers) have been rather victorious for the last few weeks.

As always, check out the Market Club for additional resources and ideas.

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Comments
  • Anon,

    You're right. The difference in a dragonfly doji and a hanging man is slim, but technically you're correct. I follow the Dow chart more than the S&P; (personal preference and custom) and it formed a doji at resistance. Both signals are similar and often precede a short-term reversal.

    True, I don't follow the Put/Call ratio as closely as I follow the VIX but it also made a new low on the year which confirms the complacency or potential optimism in the marketplace.

    I thought about mentioning the divergences setting up but I didn't want to come across as too bearish :)

    To be honest, I'm puzzled whey the market hasn't tested lower levels yet but true energy and materials and select commodities have been strong which prop up the indexes... now especially because the 2 of the 30 stocks in the Dow are oil stocks (Chevron and Exxon Mobil). Interesting.

    I'll look at the A/D Line in the next post.

    Excellent observations.

  • Jack,

    True, the S&P; formed a hanging man at resistance - that would suggest indecision at best and a likely reversal at least to test some lower price levels before potentially heading higher. There's a lot of empty space beneath the price which I could see easily filling. Will be on the defensive next week.

  • Anonymous

    isn't $SPX formed a hangman not doji? Or I'm being anal? You forgot to also mention that CBOE pu/call is the lowest of the year, is only second to last december low...

    But then there's so many divergence whether be daily MACD Histogram or RSI... like you said, 20ma is so strong and the trend channel support line is very strong, everytime it hits it, it just bounce right away! So we shall see... market internal is also unhealthy... rally are all prop up by energy and material... look at financial, limp.. can't even get up while $SPX rallyed past few days... Yet with all these divergence (A/D line diverging too), market simply won't go down... $VIX doesn't do much if we are indeed rising and forming a new bull market... look at last bull market $VIX stay pretty much around 10 or below for all eternity...

  • Jack

    Today's candlestick looks like a hanging man. I expect a pullback monday or tuesday.

    Weekly Chart looks good.

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