Extreme Market Internal Readings

Well … the third time certainly proved to be the charm. After yesterday’s anticipated bounce filled an open gap at 1060.25 on the S&P futures (ESZ09) in response to an insanely oversold McClellan Oscillator reading of -381.49, the markets appear to be resuming their impulsively downward voyage back to reality; today’s internals registered even more bearish readings than Wednesday’s, which is an extremely negative omen for the future outlook of the markets. While the TICK did not register a reading that surpassed -1400 today (intra-day low of -1396), we did witness the VOLD relentlessly plunge to a new extreme closing low of -1,408,903, which now marks the lowest closing low since that of 9/02/09.

The importance of the VOLD reaching new intraday as well as closing lows is very straightforward; significant changes in volume typically precede significant changes within the underlying character of price action. And while this concept is debatable when it comes to specific equities, it is simply cut and dry when referring to the entire NYSE Exchange. Such a low VOLD reading, which signifies an extreme desire to sell on the behalf of institutions and investors alike, is a definite warning sign that effectively poleaxes any remaining bullish intent.

From our article entitled “Extreme Market Internal Readings” on 10/28/09 we stated the following:

“While 12 separate TICK readings exceeded -1000 plotted over the course of today’s impulsive price action, the VOLD also spiraled towards its lowest value since approximately 10/01/09 and 9/01/09; finding exact support at the trendline that connects the two. And while that may sound interesting in and of itself, the most noteworthy item here is that both 9/01/09 and 10/01/09 marked days that directly preceded temporary bottoms, each igniting bullish reversals to new Primary wave 2 (circle) double zigzag highs. By connecting a trendline on the $INX (S&P 500) from the bottoms established on 9/02/09 and 10/02/09, it is clear that today’s close decisively broke that support and now approaches the next trendline near 1036, rising approximately 1 point per day. And while the DJIA remains above its up-sloping trendline from March, the DJ-20, Russell 2K, Value Line and XBD indices have each already broken their respective 10/02/09 lows after absorbing increasingly impulsive bouts of distributive pressure today.

On the other end of the spectrum, the VIX exhibited full throttle liftoff today, plotting a White Marubozu candle that carried just over three points from 24.83 to 27.94. However, the true test surrounds the 30 level where it has repeatedly failed to breakout from, once again, the very same two days that we highlighted earlier, 9/02/09 and 10/02/09, which plotted respective double-top highs of 29.57 and 29.56. In examining the VIX’s most recent assault on 30, will the third time truly be a charm?

We at Fibozachi believe that it will be after an initial series of 1’s and 2’s holds firm in the mid 20’s and anticipate that today’s extremely bearish market internal readings are but a preview of what lies in store for global equity markets over the next few months at the very least. Global equities had been notching continually higher highs and higher lows over the past several weeks and as key market leading sectors such as the brokers, transports, REITS and biotech began to register serious negative divergences, important inter-market metrics such as the TED Spread, VIX and $DXY have also begun to make noise once again with extremely bullish technical developments.

By early next week wave (v) of i (circle) for the SP-500 cash should likely find itself hugging the critical lateral band of support that comes into play surrounding 1020. Taking out this low would put an unmistakable end to the series of higher lows and break important trendlines in the process. In the process of patiently waiting for a multiple confluence of high probability signals across various technical methodologies to confirm the onset of Primary wave 3 (circle), we at Fibozachi would like to observe the VIX not only penetrate but also close above a 30 handle while the key support level that surrounds 1020 is successfully broken to confirm our bearish bias.”

Update as of 10/30/09: Meanwhile, the VIX exhibited a significant follow through day to the upside as it surged from 25.21 to an intraday high of 31.59 at 3:21 pm, notching a 23.95% daily gain. More importantly, old double top resistance at the 29.57/.56 level has been decisively taken out and should now begin the process of morphing from a formidable cluster of resistance into a strong pocket of support should the VIX experience a pullback over the next 2-3 days. The sharp corrective bounce that the markets enjoyed yesterday now looks feeble in comparison to today’s price action, which nearly engulfed the entirety of yesterday’s trading range while establishing a new low since the upper price extreme of 10/19/09.

In our previous article Wednesday, we discussed how the lows of 9/02/09 and 10/02/09 each established temporary bottoms that immediately led to new price highs. Yesterday’s attempt to follow suit was resoundingly trumped by today’s ferocious selloff; suggesting that the series of higher highs and higher lows will soon be tested at the 1020 level. While price may find some support on its first visit to 1020, this level should soon be taken out as the character inherent within price action undergoes a marked shift in trend from correctively bullish Primary wave 2 to impulsively bearish Primary wave 3.

Today’s close decisively broke a “key” trendline that connects the lows of 9/02/09 and 10/02/09 while just holding above the other “key” trendline extending from 8/17/09 to 9/02/09. And even though today gave us a thrust in the VIX above the 30 level and one of the two “key” trendlines was broken, we at Fibozachi will now be patiently waiting for a close under the 1020 level to unabashedly confirm the initial onset of Primary wave 3 (circle) of cycle wave c. Until this cluster of support surrounding 1020 is decisively broken, the bullish trend is still “technically” intact. Therefore, when this level does finally give way so too will almost every remaining argument that “the market remains in a bullish posture,” which should result in yet another torrent of selling pressure … and we can already smell those delicious donuts that surround 1000 fast approaching. Such price action would coincide with our personal belief that financial markets may have put in a significant high last week that may not be revisited again for several years, if not decades to come.