S&P 500 has been in a pretty steady uptrend all year. But then FOMC happened on 7/26 causing sharp up and down and up again action then it gapped up the next day. I generally regard an increase in volatility to be a bearish sign (even if you are up), but on the morning of 7/27 I really wasn’t sure which way we were going. Would we be continuing our strong and long uptrend or is this all a bad sign and we’re about to go down. Either way, I felt that we were in volatile times so it wouldn’t be outlandish to expect a big move in either direction.
7/27 turned out to be a very negative day gapping up, then plunging all day to the low of the day. The next day the market gapped up to the middle of the range, then trading sideways for three days. This made for a very strange pattern on the chart that I surely felt was bearish. Sure enough, on 8/2 we had another big down day. Today we started (post AAPL and AMZN earnings) up, but then mid day we took another big plunge which reminds me of 7/27.
I said before that I consider high volatility to be a bearish sign. I look at the activity from 7/26 to today and I really don’t like it. But here’s the question. Is this really bearish and are we at the start of a downtrend for the rest of the year? Or is 7/26 - 8/3 simply a consolidation pause and we will soon be continuing the 2023 uptrend? I’m thinking that it is the former and we will be trending down. If this period is a consolidation, the volume is all wrong. However, I will also say that on SPY, volume is not really indicative of true supply and demand because SPY is tied to an index where you would actually have to look at the charts of all 500 (or at least the top 20-50 market caps) to get a good feel for the actual volume.
I say that I’m biased in favor of a bearish view, however, I am not going to trade only to go down. I like to trade strangles where I can possibly make big profits no matter which way it goes so my risk is under control and I don’t have to care or think about what is happening. I did this on the morning of 7/27 and made a profit of a bit more than 100% (doubled my money).
Now that I think about it, my observations on S&P (SPY) probably apply as well to many of the large market cap players like AAPL, META, TSLA, MSFT, GOOG, even AMZN and NVDA. The index cannot experience an extended downtrend unless the biggest market cap members also go down. Looking at all of these, I have to say I don’t like what I see. AMZN looks best, but still not perfect. They can come down from here (and went down most of today) and still do better than most because they gapped up so high.
Thanks, Doc. Of course all of this is looking backwards which may or may not have any relevance to the future. Now it is always more likely for the recent trends to continue rather than reverse. But on the other hand it is exactly when everyone and every indicator is looking green that things suddenly turn red.
Right now, I’m looking out for a strong rally leading into a bear market. Bear market rallies are often the strongest due to high volatility. Long term bull markets are generally tame (climbing the wall of worry) until the very end when everyone tries to jump in too late. This is the time (end of bull and through a bear) when volatility goes up and strangles and straddles work very well. I’ve been doing these almost exclusively the last 10 days and I’ve literally had 110% overall profit on my trades. Of course, I’m not trading nearly all of my money, but I do now have more money in my trading account so I can increase the number and value of my trades.
I feel like SPY was pretty volatile today bouncing up and down and even within individual minutes trading in wide ranges making long candles in a 1-min chart.
As I’ve said before, I consider volatility to be a bad (bearish) sign. And it appears that this observation worked well, at least today.
Looking at some longer time frames, the following are some 30-min charts of SPY. The first shows SPY from 6/26 at the end of this year’s uptrend culminating in the July FOMC meeting which marked the “end” of the uptrend. From this chart you can see that the price action was relatively organized with smaller candles but this ended on the afternoon of FOMC when the market whipped back and forth.
The next chart is another 30-min showing the time from FOMC to today. You can see that the volatility went up noticeably which is indicative of bear markets and continues to today. High volatility in bear markets generally means that you get exaggerated moves both up and down, including relatively long candles. Some of the best long (bull) trades occur in the middle of bear markets.
So, since FOMC we have definitely been going down. The question is how long will we be going down? Is this just a short bear which amounts to just a pause on the greater uptrend, or is this going to be a more significant correction? The last daily chart shows the last 6 months. This one actually looks bullish to me in the long term. But then I consider my long term investments and my short term trading to be two totally different things that have nothing to do with each other. When you are investing in the long term you shouldn’t really care about bull and bear markets.
When I look at the chart of the SPY, I just don’t see a recession. Its always possible and the news is full of scare articles but the chart doesn’t lie. Below is the 2 yr chart for the SPY and its not looking bad. The bottom chart is the percent change which also looks like its in a range. Its a dip so far but not too bad IMHO…doc
I dunno, Doc, I look at your charts and come up with a different conclusion. What is the chart on the very top? Is it an RSI? In any case, look at my lines on your chart for SPY. The exact same analysis applies to QQQ.
You see, on the left when prices reached their peak, the upper chart showed a lower peak which is a bearish sign. Then in the middle of the chart when the prices reached the bottom, the upper chart showed a higher low which is a bullish sign. then at the end (today) when the prices reached the higher high. the upper chart reached a lower high which is a bearish sign.
This is how I often read the RSI on my charts, but I don’t know for sure that what you are showing is actually an RSI or something else that performs a similar read. When there is a divergence between prices and the indicator this is generally a sign that the market is running out of steam and there may be a reversal coming.
I guess I should also say that as with any indicator, while it may *often work, they do not always work. If there was something that was 100% correct then everyone would be a millionaire.
That upper chart is TSI (The True Strength Index (TSI) is an oscillator that fluctuates between positive and negative territory. As with many momentum oscillators, the centerline defines the overall bias. The bulls have the momentum edge when TSI is positive and the bears have the edge when it’s negative.)which is similar to RSI…doc
Welcome Bronweis! I’m not sure what to make of the market currently either. I have seen stories in both directions. It seemed like most were predicting a recession for this year, but have pulled back on that.
Yes, that sounds similar to RSI. I don’t think that the main thing is whether it is saying bullish or bearish based on the center-line. I think it is more important if it is more or less bullish (or bearish) than the last peak or dip. If you have dipped a bit lower but the oscillator shows less bearish then this is a divergence and you may be reversing from bear to bull. Likewise, if you have reached a higher peak, but the oscillator shows less bullish, then this is a divergence and you may be reversing from bull to bear.
That is what I was trying to show with my lines in your graph.
Hey Doc, just wanted to point out that you likely would have said the same thing early January 2022 but your TSI was screaming that this was the top and the start of a downtrend. It seems that your TSI divergence seems to predict (at least the last couple times) an 8 or 9 month move. If so, there goes the Santa Clause rally,
Yes, the TSI RSI has 20 20 hindsight. I’m not sure it predicts anything other than the current trend which right now is heading south. Lets see what the inflation numbers are and what the FOMC says at the next meeting. I’m hopeful that this is just a move down since the major indexes are still all up for the year…doc
Personally, I really feel that we have definitely been in a bear market since FOMC which is pretty much a solid month. Will this prove to just be a long term flag on the chart or will it be the start of a months long correction downward? I’m not really sure, but I lean towards the bear market just because of the volatility. I also believe that a lot will be determined by the NVDA earnings announcement this week. I don’t remember the last time one stock held so much sway over the entire market, although I suppose one can argue that AAPL started this bear when they got clobbered on 8/3. I believe that if NVDA disappoints on Wednesday, the entire market (not just techs) will be hurt because they are one of the biggest companies on the S&P so have a relatively high weight in the average.
As for options, I was in a seminar last week for a company selling training on their option trading strategies. They use tastytrade, and showed the app live; It looked really good for showing the possible outcomes for options in all their permutations - straight, strangles, etc.
I’ve also read that thinkorswim has great options analysis, and shows all the same graphical analysis of how the trades could go.
I tend to only buy the occasional long / Leap so I used the very limited functionality available to me with my existing brokerage accounts.
