Equities: Reaching The Danger Zone

By Nic Lenoir Of ICAP

There is one signal we have been pushing consistently when it comes to picking equity tops and that it buying (selling) on bearish (bullish) reversal candles in the Vix outside the upper (lower) Bollinger band. The Vix daily chart attached shows recent history and how any such signal has generated at least a 5% percent move in S&P. As the Bollinger bands for the Vix have been narrowing of late we have been beating that drum impatiently. Today marks the first day we have an outside candle below the lower bollinger. Ideally we would close today above this morning's open at 15.67. If that is the case then no doubt it is time to sell equities without much hesitation. I have attached for confirmation the charts of the Dax using 3-hours and daily intervals. We see we have a potential 5-count on the Dax completed calling for  reversal, and there is strong Stochastic and RSI divergence on the 3-hour chart. On the daily chart we see we should technically at least retest the 100-dma envelope, currently at 5,836, and the daily stochastic is showing a lot of saturation on the upside.

Concurrently, if this reversal does take place it would reinforce our bullish recommendation on 10Y Treasury futures in the US. As can be seen on the 3-hour chart we are close to triggering an inverted H&S at 116-10, and on the daily chart we see the major resistance in not until 117-10. We think ultimately this resistance will be bypassed.

One last parallel we want to draw is with Gold. We first initiated a buy recommendation at 1,080/1,090 on March 24. We then had confirmation after bypassing the neckline of the inverted H&S at 1,135. We have now reached the intermediate target at 1,165. This is the last resistance before making new highs basically. While the price action has looked very bullish, today we have an indecision candle right on the resistance. Gold has decorrelated fron EURUSD completely of late, but if our call in equities which is our main conviction/focus upon triggering the reversal on Vix pays out, it will be a true challenge for Gold to push higher to new highs. Since we are so much in the money on the buy recommendation we would let it play out and stay long if the resistance is bypassed. On the flip side, if we close with an indecision candle tonight watch for a gap down tomorrow morning and a close below 1,156.8 which would trigger an evening star. Given that a lot of the turmoil has been driven by sovereign credit concerns it is well possible to have a change in the positive correlation between stocks and gold observed for 1.5 years now, but we leave it to the price action to confirm whether it is the case or not.

Good luck trading,