Potential Upside Reversal
November 2nd, 2009 by John BrasherThe market broke out of its primary trend last week and has declined to test both the 50-day moving average and lower (major) trend line. However, look at the last few reversals to the upside. You will notice that - except in late August, each time the market showed us a large red candle (down day), followed by an indeterminate candle, the market found support and headed north.
By “indeterminate” candle, I mean a small candle that indicated that neither the bulls nor bears had control. In late August, the candle was white, an up day, as it was TODAY. This could indicate that the market is finding support and ready to break back into its trend.
More evidence? Every time the CBOE Sentiment Indicator (VIX) has hit 30 or close to it, it has heralded an upside reversal. This happened in early July (33.05) and the beginnings of September (29.57) and October (29.56) The VIX today hit 30.70, its highest level since its July high.
Despite all the Aunt-Pitty-Pat handwringing on CNBC (remember, Aunt Pitty Pat collapsed and needed smelling salts in Gone with the Wind), it looks like the market could be about to recover back into its primary trading range.
Covered Calls
If this happens it will be a great time to write OTM calls, closing them early for a profit. How much profit? Well, how about 60% to 80% of the maximum possible profit if called out? Obviously, the stock should be reversing to the upside with the market.
For more information on this, please see our list help pages, particular on CallWriter’s proprietary indicators.
Our entry signal will be another white candle and a fall in the VIX to below the 27 level. At some point the market will make a serious retracement (see earlier posts), but if THIS IS NOT IT, then let’s make hay while the sun shines. Don’t jump the gun, though.
November 2nd, 2009 at 7:51 pm
John,
You sure called it on AMZN - thanks for that one. I’m not predicting it, but to me the SPX is setting up for a perfect head-and-shoulders. What’s different this time from the last bull flags is the low, which almost matches perfectly the low on 10/2. I guess only tomorrow will tell.
Jeff
November 2nd, 2009 at 10:26 pm
Thanks Jeff,
What you say about the low last week is true of COMPX and NDX, but the DOW and SPX showed a bit more strength. The SPX difference low-to-low was 10 points, which would equate to about 100 on the DOW. The DOW low-to-low was 238 points, however, a decent difference, indicating a bit more strength in the largest companies. In a pinch, the tech indexes seem to be weaker than industrials. Look at November 2008 for an eye-opening comparison.
I don’t think this uptrend has much farther to go, without a correction or consolidation, but another bite at the apple before then would seem possible.
JB
November 3rd, 2009 at 1:29 pm
Thanks for the analysis John. Will you send an update later today or this week when you see confirmation one way or the other?
Dave
November 3rd, 2009 at 2:00 pm
Hi Dave,
Yes, I intend to, but I will mostly be out of the office on Friday heading for the seminar.
JB