Once again SP-500 is lingering near 1260 zone. This zone is a significant zone because 200 day SMA is right around 1258. It is also the point where the index meets the downtrend line(resistance line) connecting the recent market tops resulting into a coiling pattern.
This is the fourth time since October that SP-500 has tried to break this level. During the last few tries it has failed failed miserably, and to add to the misery it resulted in fast paced sharp dagger declines back towards the uptrend support line that connects recent market lows. So as soon as market reaches these levels, lot of institutional bears along with retail bear crowd come out and go short, pulling the market down and that is exactly what we are seeing. SP-500 was trading slightly above the 200-day SMA and the the downtrend line but on Friday close, it went a bit negative below 200 day SMA. Hence we cannot say with confidence that we have a breakout. Also the NYSE volume was not there during the holiday week to give it more convincing look either.
However, a breakout accompanied by volume, leading sectors (XBD, SOX and IYT) would provide lot of convincing power.
Breadth indicators ( the one I follow is developed by Pradeep Bonde ) has been less supportive of this up move and has been like that whole year around. The current rallies from oversold levels on SP-500, from mid-December to now, had a strong breadth reading on 20th December but there was no follow through. We would like to see the Breadth numbers getting hammered out of the park on next consecutive days. This is a negative divergence and is giving a warning that upside breakout might be a fakeout. So we will keep a close eye on these numbers also.
The Volatility index mighty VIX has been declining steadily since October. This it self is a bullish signature. VIX below 150 day MA is usually bullish and we have been seeing rallies. From the above picture of VIX you can see that VIX is trading below its long term MA. Even during the recent sell off on Thursday, it did not cross its 20 day MA which is acting like a resistance now.
As pointed out earlier, I have been watching the VX futures on CFE exchange also to see the direction of VIX options. The VIX futures VX are trading at lot higher prices than VIX itself.
i.e The institutional or smart money traders are worried about Euro crisis and Market tumbles and hence they been buying protection in the form of SP-500 puts and/or VIX futures or VIX calls. This basically has caused the price of VX futures (VIX calls and puts are hedged by its futures as there is no outright buying or selling of VIX index)
One should be worried about this type of setups as Smart monies are usually right. But again we let the Markets tell us and then we follow rather than taking a outright stand. One can take a outright stand and that can be very profitable but you need protective stops just in case you are wrong.
Our trusty indicator $BPNYA is also on buy side as of now. The RSI indicator with $BPNYA is usually telling a sign when $BPNYA is getting frothy or getting flattened out
As many of you know that I don't to get into any market prediction business but I expect markets to give you an overall 11% that historically it has been giving you. There will be lots of up and downs in the year and those are hard to predict but those up and downs are the opportunity times and that is where we have an edge and excel.
Avoid bad periods or even go short and then when the market turns we go bullish. So I believe achieving 20% returns safely is still possible and is the goal for this year.
Adios 2011 and Wish you all Happy New 2012.
