By John Reizner |
The S&P 500 index declined further today from its recent high of 2079.47 and closed at 2026.14 as sellers took precedence and the "buy on the dip" crowd did not step in to reverse the selling tide.
With oil prices in free-fall (a sign of deflation, decelerating demand and Saudi oil price manipulation), European economies stagnating, and a strong dollar placing downward pressure on some emerging economies - players might do well to wonder whether today's decline may be the start of a more serious correction in the American stock market.
Or perhaps this decline represents just another short term volatility spike in the S&P and represents a good opportunity to "buy on the dip?"
A very reliable trend-based indicator, Alexander Elder's onset trend detector, is about to flash "end of uptrend" in the SPX, S&P mini-futures, and SPY on daily charts. I have previously utilized this particular indicator to determine the optimal S&P 500 range to hedge potential market declines by buying SPY puts while maintaining my long term portfolio positions.
Note: in the extended market after normal trading hours after this post was written, the early onset trend indicator flashed a confirmed "end of uptrend" "sell" signal in the S&P mini futures.
Meanwhile, another trend indicator, the parabolic SAR, that has a very good record of calling tops and bottoms, albeit with occasional whipsaws, already flashed "sell" or "hedge” on these three markets yesterday.
Consequently, as an aggressive hedge, I bought today in the money SPY puts to trade a potential downtrend - and out of the money puts as a hedge.
What market developments may determine when I close out these puts should the stock market continue to fall: whether a potential decline from this point may last three days, three weeks, or three months?
I have previously used another reliable set of indicators to determine at what level the S&P 500 may be bottoming. Plotting Camarilla pivot points on the upper chart and relative volume standard deviation on the lower daily chart on a yearly time frame, one may come close to picking the termination range of a market's downside move.
Bear in mind that reversals from any bottom in the market can be dramatic and swift: necessitating forceful action on the hedger's part to close his put hedge position for the greatest possible profit.
Please let me explain what the two indicators mentioned in the preceding two paragraphs mean in order to hopefully demystify a little what may appear to be arcane indicators and how I may use them to determine a potential bottom in the stock market.
Camarilla pivots points have a look back period of 25 days when the indicator is set to daily pivots and represent lines of defense, support and resistance levels in the market. They are not suited for intraday trading and are best suited for a market in a trading range. Each pivot level is where order flow flows through at a greater rate and each is like a magnet to price. The idea is that you buy at a support pivot and sell at a resistance pivot. The S&P mini futures traded through S1 today and is midway to S2 in the 2015 range. You look at volume for confirmation of price at a given pivot level.
Relative volume standard deviation is plotted as a histogram when there is extraordinary volume, volatility and defense in the market. When the histogram reached two standard deviations, then that is an important level and is known as a defended price level.
In this case, we would be looking for such extraordinary volume histogram bars at a bottoming level in the market. Such two standard deviation histogram bars are often clumped together at these important levels in the market and can be used with the Camarilla pivot points to potentially pinpoint equities market bottoms when the two standard deviation bars occur.
This combination of indicators did a fairly good job of determining the bottoming range of last October’s market swoon.
As the today's close, there is no two standard deviation histogram bar in the relative volume standard deviation indicator. The market by this measure is not resting at a defended price level. So I would surmise that there is not yet a potential sign of a bottom in the mini S&P futures market. I see the potential for a greater decline ahead in the S&P 500. Stay tuned.