Where We Stand Today

Good morning, Team. Today should be an interesting and pivotal day in the market. If you saw last night’s videos, then you know where the market stands.

Lower low in the Dow Jones Industrial Average.

A break of the key 50-day moving average for the S&P 500.

The Nasdaq 100 still hanging in there, pulling back along with the rest of the market, but still within an upward trading channel between the middle and upper Bollinger Bands (yes, I see the potential “double top” in the NDX — from the mid-May high and last Friday’s high).

But one thing that I’m not sure I mentioned is how volatility in the S&P and the Nasdaq is actually declining. While it sure feels like it’s been expanding — up…down…up…down…etc — you’ll note that the Bollinger Bands (which are a direct reflection of volatility) are pretty tight. What about the Dow 30? Well, those are expanding! check them out. The volatility squeeze that we see in mid-May has now resolved into a downward expansion. In fact, the move has been so abrupt and deep that the upper Bollinger Band is already starting to move lower. (This is typically something that occurs much later in a breakout (or, in this case, a breakdown) because it takes a while for the 20-day moving average to drop into a steep slope. This time, you can see a big turnaround in the 20-day moving average. (Note — this is something I’ll delve into just a bit in the Workshop. But the important point is simple: the distance between the middle and upper Bollinger Band is always the same as the distance between the middle and lower Bollinger Band. Why? Because the upper Band is 2 standard deviations above the current value of the 20-day moving average, and the lower Band is 2 standard deviations below the current value of the 20-day moving average. Since the 20-day moving average is one specific data point, the distance is the same. So, when the price move is dramatic…and sustained…in one direction, you’ll see some rapid movements in the Bollinger Bands.

The only reason I’ve gone into this topic is to make you a bit more aware of the information you can glean from this key indicator.

So where do we go from here? Right here…right now? Well, the VIX (volatility index) is starting to move higher from an extreme low reading. That’s indicative of a declining market. Also, the T2108 indicator (% of stocks above their 40-day moving average) is making lower highs and lows as it corrects from a fairly extreme upside reading — also indicative of a declining market.

How about sentiment? SentimenTrader.com’s Smart/Dumb Money Confidence Index reflects the true picture — both groups (“smart” — the pros who are generally right about the market; “dumb” the amateurs who are generally wrong about the market) are pegged at 50! That’s smack dab in the middle, indicating that nobody really has a clue about what’s going on.

Can you get a more confusing market??

The XLE (Energy ETF) is at a “make or break” point — the current price of $84.65 is back down to the April high ($84.58). You’ll note that the April high was followed by a pullback to $80. That correction ended quickly and the XLE then ran right through ~$85 on its way to $90!

I’ve just described a snapshot of the series of higher highs and lows that mark an uptrend. But the first shot across the bow of an uptrend is when a pullback falls below the prior peak. Why? Because it reveals the absence of eager buyers who have been laying in wait for a pullback to the breakout level ($85) so they can do what they failed to do last time — BUY! If those buyers aren’t there (as revealed by a breach of this probable support level), the price falls and the next question is asked: Will the prior low at $80 (set on May 1st) harbor latent buying pressure from those who missed the last dip?

This last question is only relevant if the XLE drops below $85 in a meaningful way. But if we get a bounce today, we don’t really care about what might have been.

If you consider carefully what I’ve written, I’m really describing what might be the start of the “Slope of Hope” — the downward slide of prices in a series of lower highs and lows.

So, to avoid writing a small book this morning, I’ll just wind it up with this: I’d be very careful about buying energy related stocks today. I remain a long term bull in the sector, but I’m sure not feeling bullish in the short term? I think the sector is in the early stages of a correction. There will always be standouts in a correcting sector, but you are best advised to watch the group as a whole. Those stocks that you really want to own just might be in the process of giving you a chance to buy from lower levels.

Be mindful of timeframe. Review the differences between the Decision Timeframe and the Action Timeframe. They matter!