Is Fear Driving the Market or Churning Volatility?

Is Fear really driving the markets? The debate and answer to that question could go on for days, but I will say it is definitely growing with the small investor. However, on the institutional side we still see signs of buying when the dip is low enough and hits the entry points for big money to move. Until the institutional money moves I would expect more of this intraday volatility driven by quant trading. It will be very clear on the charts when fear is driving the markets.

State of the Market:
The major indexes for the third day were trading places with the previous day in the opposite direction. Friday rallied back from Thursday’s selling and Monday’s trading sold off Friday’s rally and the net change isn’t much. That isn’t ¬†a negative comment it is a simple fact that the uncertainty around what Congress is going to do is driving the speculation… up and down.¬†The pressure is being put on the market by an outside event, the budget and debt ceiling, thus applying technical data relative to momentum isn’t going to result in the most accurate indication (my view) short term. However, the longer this game is played the more likely the downtrend is to play out regardless of what actions they eventually take.

Starting with the weakest index, the Dow broke below the support at 15,100 last week and remains below that level as creeps towards the uptrend line near the 14,850 level. The index continues to lead on the downside and the one to watch going forward. 14,775 is the previous low from August and the level to watch along with the trendline. Stochastic is pointing to ‘oversold’ (hate that term), but it is still to early to say this is a buying opportunity as the indicator can remain at that level for awhile before a bounce occurs. However, DXD has played out nicely in our pattern trade picks.

The NASDAQ moved to a new high at 3817, tested the move lower and has consolidated near the high. Some selling, but no threat to the trend in play with the index. This is still the leader along with the Russell 2000 Small Cap index. If they were to break support near term they will confirm what is happening in the Dow and S&P 500 index on the downside.

The S&P 500 index has moved below the 50 DMA again and tested the next key support level at 1670. The uptrend line is coming into play and a break would only validate further the downside move. Is it time to be short this index? I am not going to say being short doesn’t make technical sense, but a break of the 1670 level is going to be key near term. Remember we are being driven lower by a outside event and that keeps me more guarded about the short trades.

The VIX index however offers a way to play the noise and get the benefits of being short the index. The index jumped to 19.4 on Monday and above the August high of 17.8. ¬†Welcome to trading in an uncertain environment. If there is fear in the market this is where we are seeing the anxiety on a chart. ¬†If Congress doesn’t find some middle ground they can both work on moving back to the June high of 21.7 on the VIX will come into play.

Looking at our sector rotation chart below with the September 18th pivot point, the sectors saw some acceleration on the downside from Consumer Services, Healthcare, Basic Materials and Financials. Real Estate and Telecom were the only two sector to close on the plus side. Ugly is the only word that comes to mind.


Chart of the Day: iPath S&P 500 VIX Short-Term Futures ETN (VXX) Repeat from Last Week

The lows established last week gave way to the rise in volatility. The move above $14 has been interesting short term as a trade opportunity, but a move above the 50 DMA and $15 mark show¬†uncertainty building in the S&P 500 index, and that is not good news for stocks. Thus, today’s move above $16 is even uglier for stocks looking forward.


We have discussed the need to respect and manage the risk of the choppy markets and keep you emotions in check. Let your trades set up and never assume anything. Monitor your stops to protect the principle and stay focused on your discipline! Let the charts validate and confirm the trades before you put your money at risk. The example above of VXX is exactly how we want trades to set up and confirm the upside of the trade. Stop on the position should now be at $15.50 in the event of a reversal or good news from Washington.

As always there is plenty to watch and trends to follow. Keep you eyes open, your ears tuned and your stops in place, they will keep your crying on days like today.