Comparing the 6 Primary US Equity Markets, VIX Fibonacci Cycles and the US Dollar at a Critical Juncture

 

-    Fibozachi

Relative Performance of the 6 Primary US Equity Markets


As the print and television media continue to fall all over themselves in the race to “report” that the “markets” are at new highs, what they and so many others fail to understand is that the DJIA, while still the single greatest barometer of collective social mood, is far from the best proxy for the US equity markets.

 

And although the Wilshire 5000 comprises the most comprehensive index across the entire universe of domestic equities, the S&P 500 effectively remains the single most representative measure of “the market” as a whole. Moreover, while the cash session for equities (S&P 500) spans from 9:30 am to 4:00 pm EST, the futures market (current basis December, ESZ09) remains open for nearly 24 hours a day. Like the vast majority of professional technicians / traders, we at Fibozachi firmly hold that the S&P futures (@ ES, continuous contract) represents the single most critical equity index the world-over.

 

With only the DJIA notching a new high this morning, there remains a strong non-confirmation across the S&P 500, NASDAQ Composite, NDX-100, Russell 2000 and the Wilshire 5000, since none of them has plotted a new price high that would confirm the DJ’s continued rise. The following snapshot highlights a percent-change comparison between the six primary domestic equity indices since their collective Primary wave 1 (circle) lows of March 9, 2009. Upon examining the chart below, please note:

 

1) how the Russell 2K not only immediately established itself as the veritable ‘tip of the spear’ within the very first few upwardly unison subdivisions of their sharp 8 month corrective rally but also how it has since remained the ‘leader of the pack;’

2) that while the Russell 2K led these six primary equity indices up-and-away from their intermediate-term bottoms in March, we anticipate that the concept of alternation will not necessarily witness the ^RUT lead to the downside so much as it will see traders pile into the last vestige of alleged ‘safety’ within the blue chips of the DJIA. Such nuanced herding would be highly reminiscent of activity first observed within the “Nifty-Fifty” of the early 1970’s and is exemplified best today by the almost 17% current weighting of AAPL within the NDX-100. Since the closing highs of October 19, the Russell has severely underperformed its peers.

3) that since May 27th, 2009, the respective percent gains within these six markets have not changed position relative to each other. In other words, the Russell 2000 has remained #1, with the NASDAQ remaining #2, NDX-100 #3, Wilshire 5000 #4, S&P 500 #5, and the DJIA #6.

4) that today marked the very first time that the NDX-100 has outperformed the NASDAQ Composite since March 9th, 2009.

 

 

 

Since small caps typically lead large caps within the structure of impulsive price action, we at Fibozachi will remain on the lookout for any change within the hierarchy of these six indices. If the Russell 2K cedes its #1 spot to another index (particularly the DJIA) and begins to underperform its peers, it may very well give up the ghost for both the immediate and intermediate degree direction of price action. Such a change within the underlying character of price action across these key indices would serve as a stern warning that the scorching rally of Primary wave 2 (circle) had ended and that a strong downward reversal lay just over the horizon.

 

VIX Double Bottom and NR-30/ID Signals:

 

Today’s early morning double-bottom and subsequent afternoon surge may have marked an important reversal of intermediate degree within the VIX; which may also coincide with at least short-term tops if not much more significant multi-year highs across domestic and global equity markets alike. The snapshot below shows a 5-minute chart of the VIX across both today and yesterday. Note the picture-perfect Hammer candlestick pattern that plotted at 9:55 this morning (see file attachment for a larger view), registering a double-bottom at dueling lows of 22.78. After halting its retest of support just above 22.80, the VIX immediately plotted three consecutive Marubozus to kick off the day’s rally.  Today also registered as an NR-30/ID day; which, for those of you who speak English, means that today’s daily range was the smallest of the last 30 days as well as an “Inside Day” which was engulfed by the previous bar.

 

 

 

VIX Daily Fibonacci Cycles:

 

Over the past few months, the VIX has been a veritable seesaw of price action. Upon closer inspection, we at Fibozachi have identified a remarkably accurate group of cyclic Fibonacci activity across the daily profile of the VIX that is highly noteworthy. The following charts show each Fibonacci cycle separately and then all of them concurrently.

 

 

 

 

 

Yesterday marked the 13th trading day (TD) since the VIX set a low on 10/21/09 … perhaps a 13-day low-to-low cycle established itself yesterday.

 


Head & Shoulders: Quality Pattern or Technical Dandruff?

 

We would simply like to state our opinion about the Head & Shoulders pattern.

 

1) It is a loosely quantified, basic pattern without explicit rules for its specific constitution; whose suggested guidelines, within the daily trenches of effective practice, are often abandoned by traders.

2) Its effective risk/reward ratio is not at all appealing.

3) The actual trading issues of timing and execution are, to borrow a phrase from A-Rod, very “loosey-goosey.”

4) Its high success rate may be largely due to the self-fulfilling prophecy created by the pattern’s all-too-frequent recognition amongst not only traders but also investors.

 

For those of the technical persuasion: please click anywhere in this sentence for a substantial, humourous rant about ... the 'fixed period drop-off effect,' the differences between moving average methodologies, the true nature of the term “fractal” as applied to the structural composition of trading systems, the 'four basic qualities of great technical indicators' and a practical nuance within stochastic calculus that can help you anticipate what others are about to think.

 

 

With that out of the way ... the following charts show how the S&P 500 cash and the VIX have formed opposing Head & Shoulders patterns that may play out down the line. Ideally, the necklines of each pattern should be broken to give a multiple confluence of confirmation between them. One important point to note is that volume has been decreasing as the H&S pattern has progressed, which significantly raises the prospect of its validity. This is especially true of the rally over the past week, which has occurred on significantly less volume than that of recent sell-offs.

 

 

The US Dollar at a Critical Juncture:

 

The US Dollar took a beating yesterday and grabbed a new low at 74.93 by just a single cent. However, this was not a new closing low; therefore, a close below 74.97 is now necessary to continue the downward slide. In order to end the bearish series of lower highs and lower lows, the $USD must push above the 11/03/09 high at 76.82. Ultimately, a close above the upper trendline of its parallel channel would provide a strong initial signal that a momentous short-covering rally could be fast approaching. This upper trendline has already witnessed four separate touches; every single touch effectively serves to further both its strength and importance. When this trendline is decisively broken, it will have extraordinarily far-reaching ramifications across not only domestic equity markets but also global bond, commodity, credit and currency markets. Consider yourself amply warned!

 

Today’s price action within the greenback registered not only a Doji but also a Harami Cross, Tweezer Bottom and Bullish Homing Pigeon (one of our absolute favorites) candlestick patterns; which, if not simply stalling for more time within a fourth wave of very small degree, would effectively bring about the onset of the $USD’s next impulsive leg higher. Due to the extremely large degree of trend, we at Fibozachi maintain an extremely bullish posture toward the US Dollar over the intermediate horizon.

 

 

 

Disclosure: no current position

 

For similar technical takes, market calls and insights, please visit our brand new website, www.fibozachi.com.  There, you can view both our complete body of analytic work as well as detailed explanations of the unique design development and technical methodologies within the proprietary technical indicator packages that we use daily to perform a comprehensive technical analysis of stocks, options, ETFs, futures and FOREX across interval periods of time, tick and volume.

 

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