Fear Check (12/13/15)
This is it! All those GDP revisions, job numbers and Yellen’s data dependency measures have led us here – the week the Fed will raise interest rates. Whether that’s a bad/good idea it’s up to smarter macro folks than I. All we can focus us on is how to trade during a news driven week.
$SPX closed the week at 2,012, undercutting a rising 10wma and a flat 40wma while negating a bullish cross of the latter two averages. Adittionally, an 8-week range of ~80pts (purple box) was pierced to the downside. Red flags everywhere.
Crude Oil ($WTIC) continued to dominate headlines and added to panic on Friday as it had its lowest weekly close since June 2014. This decline is now -67%. Last week, we discussed the largest decline stands at -68% (2009)
Question arises then – how do we measure fear? The quick on the draw will point you to $VIX, up 58% in 5 days
If I had to “teach” you about the $VIX, it would be two things:
- In a rising market, the VIX tends revert when outside it’s daily Bollinger band
- When FEAR takes over, #1 goes out the window
Given #1, last Friday was the first “oversold” signal for all major indexes. However, #2 is a major call for caution. During the Aug 2015 decline, the VIX exploded +300% in 4 days ($NDX -12%). We all took a hit during those 4 infamous days. Is there a better way to measure fear then? For me, yes there is.
$NAA50R – Nasdaq Percent of Stocks Above 50 Day Moving Average
The $NAA50R is the ultimate combo measure of market “breadth” and fear. It quantifibly depicts not only the overall market trend but also the severeness of market sell-offs. Since Dec 1st, this metric has declined from 65% to the current 33% in a virtual straight line. However, it’s not all negative. This chart has been helpful determining execellent entry points in the market while the rest is stuck to the CNBC screens.
The following two points will be my sole focus this week:
- The daily RSI for $NAA50R rarely goes under 30. It stands at 31.6 right now – another “oversold” signal. I am watching for a sub 30 reading or any bounce attempts
- Major market bottoms in the last 20 years were all marked by $NAA50R hitting 20% or below. (I welcome you to back test this as good charting practice). We stand at 33% right now. Amind, Oil, Junk Bonds and Rate Hike noise, I am blindly focusing on this metric if it approaches the 20% mark
I’ve intentionally left out individual stock picks on this post. It is not prudent to advice buying on this week ahead. Focus on tools that give you the most edge. For me, measuring Fear is the best way. Trade ‘em well and thank you for reading!
Gianfranco is a member of SwingTradeSetups and often shares his insight with everyone in the day trading chat room. If you like what you see we would love to have you as a member check the join page to become a member Join Now