Sunday, October 27, 2013

October 27th 2013: Unadjusted vs. adjusted charts

This morning, I woke up and I had this dreadful feeling that I posted the "adjusted" chart of SPLV and not the "unadjusted" chart.  (Does this ever happen to you?)  In case you are not familiar, unlike most charting programs, stockcharts corrects for dividends, splits, etc. in their standard charts.  For stocks that are dividend-heavy, this can make a big difference in their longer-term charts.  There is a vigorous debate over which format is the "most correct".  For most of my work, I don't care either way.

However, in this case, I feel like the "unadjusted" chart is more accurate albeit somewhat less compelling.  The song remains the same:  watch the low-vol ETF to determine if the rotation away from high-beta is happening or not.


Saturday, October 26, 2013

October 26th 2013: Low-volatility vs. High-Beta Stocks

There was a very interesting development in the markets this week that you might have missed if you just looked at the broader averages.

The stocks that got us to these lofty levels (china stocks, solar stocks, select tech, etc.) are rolling over here -even the small caps closed down on Friday.  In short, high-beta, high-growth is in trouble.

When this happens, there are 3 possible outcomes:
1.  A pause that refreshes and high-beta takes off again
2.  A rotation into low-beta, low-volatility, high-dividend boring stuff (like this Spring)
3.  A decline where the high-beta roll pulls everything else down with it (like the June and August dips)

We're clearly overbought.  $USHL5 just spiked 5000 - which if you follow Alexander Elder is a big red flag and often a leading indicator.  The percentage of stocks over the 50-day SMA is over 80% (which is high, but not extreme).  It doesn't really matter which metric you chose (RSI, MACD, CCI, stochastics, etc.), they're all extended.

So, where are we going next?  I have no idea, but I do know what to watch:  SPLV.

SPLV is busting out of a huge consolidation and could play catch up to SPHB which has enjoyed a good romp for the past few months.  If we take out this week's low in SPLV, all bets are off.  But right now, it looks like all systems go for SPLV and I'll be buying dips.

If my interpretation of the charts is correct, then scenario #2 above is the correct one.

Here's a chart of SPLV and you can decide for yourself:


For more charts and to read a disclaimer, please see my public chart list on stockcharts.com...

Sunday, October 20, 2013

October 20th 2013: Volatility crush drives markets higher

It's been a while, so I feel like I can point out that ignoring the noise/news and trading the charts worked again!

As much as I try not to let the noise (news + opinions) influence my trading, I am aware of some of the prevailing views by other traders out there.  One of the things I heard alot of this week was the "sell the news" trade.  In other words, markets were going to "tank" once a deal was announced.  It seemed like everyone and their brother were ready to jump on this trade.  I have to say that sticking with the trend and watching the charts & patterns worked better than the opinions of others.

(OK, OK - enough on that topic....)

In $SPX land this week, the real keys in my mind were the ability to hold the $1695.93 low, the bull-flag breakout, and the follow-through the next day.

Another factor that I think many people miss is the importance of volatility crush.  Volatility crush is usually associated with the decrease in options pricing following an earnings report.  In this sense, I'm using volatility crush to describe how volatility responds following some "crisis" in the markets.  Once this "crisis" has passed, volatility squeezes out of the market like air rushing out of a balloon.  In this environment, it's very hard for stocks to go down as put buyers and volatility hedgers get squeezed providing rocket fuel for natural buyers of common stock and calls.

Here's a chart of VXX which illustrates the "volatility crush" this week...
- Last week, we had price stalled at the top of the box
- Last week, we had NegD with FORCE vs. price to set-up the fall
- This week, price broke the bottom of the box with FORCE and volume
- Keep an eye on VXX because it can go a few points lower which would help push the indexes melt up further


For more charts and to read a disclaimer, please visit my public stock charts list on stockcharts.com...
http://stockcharts.com/public/1109955