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NET
COMMERCIALS AND BACK TO BASICS
by James
West
buythebottom.com
forever a student of the markets
February 20, 2007
Volatility
Index
VIX
[ http://www.buythebottom.com/vix.html
]
Commercials were sellers of volatility once again, which for
now is telling me that the VIX is not ready to break-out (above 13). And
if that is indeed the case I would not expect the stock market to do any
major damage on the down-side just yet.
Broad
Markets
However,
even though the VIX is a great indicator as to when volatility is most
likely to make a come-back and potentially mark a top in the
stock-market, it is critical to understand that price remains the
primary timing tool with COT setups. From the SPX chart above it is
very clear that since the June/July lows the trend has been UP.
So what is an uptrend? The classical definition of an uptrend is
a price pattern with higher-highs and higher lows. Notice from the chart
above that after the SPX bottomed in June, every subsequent low (marked
by the blue lines) has been higher than the previous; and similarly
every subsequent high (marked by the red lines) has also been higher
than the previous.
So
let’s recap, the trend is clearly pointing up. And we all know that
‘the trend is your friend’, so why should we fight it? We
shouldn’t.
That
is not to say that there is no reason to worry about this marketing
topping, as recent COT data has been clearly bearish. On the other hand,
it is a dicey strategy (in terms of risk-reward) to front-run the
market. A trend is a very powerful indicator; it shows you the path of
least resistance in a particular market. There are exceptions, but
usually it does not make sense to guess
ahead of time when a market might reverse, instead it is much more
prudent to look for reversal signals. Reason being: even though markets
may be setup one way or another from a COT perspective, these setups may
take some time (a day, a week, a month, more?) to translate into price
action. Hence, it makes sense to trade reversals in a market that is
setup to reverse. Playing the market before any signals are even
present will not yield a high percentage winning-strategy.
S&P
500 [ http://www.buythebottom.com/spx.html
]
Looking back at the S&P 500 chart above, if this market broke
below 1431 that would probably mark the top for this index. A
confirmation of this top would come if the SPX subsequently failed
to make a higher high above 1458.
With
this idea in mind, let’s look at the other markets.
Dow
Jones [ http://www.buythebottom.com/indu.html
]
The Dow Jones (INDU) looks
virtually identical to the SPX. Both charts have a tight up trending
channel, so if/when the top is in, the breakdowns should be easy to
spot. The most recent-low for the INDU is 12530
and the most recent high is 12780.
Similarly with the S&P 500, a break below 12530 would be indicative
of a top, and then a failure
to move back above the 12780 high would serve as confirmation.
Russell
2000 [ http://www.buythebottom.com/rut.html
]
The RUT has very significant support in the 800
range, a break and close below this level will be very
negative for this index. A confirmation of a top would then come if we
fail to move above recent highs at 819.
(These highs were broken today, so whatever the new high is, that is the
high to go by for future reference)
NASDAQ
100 [ http://www.buythebottom.com/ndx.html
]
The Nasdaq-100 is still
struggling to confirm recent-highs made on the other 3 indexes, as they
race to new yearly-highs. For all I know the trend for this index may
have already reversed as there has been repeated failure to take out the
high of 1848 set in
mid-January of this year. This non-confirmation cannot continue
indefinitely, we will probably see a resolution - either to the upside
or downside - within a few weeks.
As
I’m typing, I see that the markets had a big reversal today - to the
upside; some are challenging their recent-highs. This confirms this
week’s VIX setup in the short-run, and more importantly demonstrates
why it is so critical to respect the trend of a price-pattern on a
chart. It is the gravity of the markets, and it is a wise practice to
adapt to markets…not the other way around.
Commodities
Crude
Oil [ http://www.buythebottom.com/wtic.html
]
Oil has been consolidating for two weeks now, with resistance just below
61 and support at 57. I maintain that this market is setup to go higher,
as long as support is not broken at 57. It is important to note that
commercials were sellers last week, nothing
too major…for now, unless the selling persists.
Gold
[ http://www.buythebottom.com/gold.html
]
Gold has been trading sideways last week, meanwhile commercials were
sellers for a fifth consecutive week. This market is setup to decline; I
think a break below 665 could mark an intermediate term top. Important
note: gold has very strong support at previous reaction-lows: 605, 570,
550 & 540. (This market broke support at 665 today, so quite
possibly we just saw a top, as long as we do not move back above this
level)
Currencies
US
Dollar [ http://www.buythebottom.com/usd.html
]
The dollar is starting to show signs of weakness as price breaks
below 84.5. The setup remains to the downside.
Regards,
James
© 2007
James West
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CONTACT
INFORMATION
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when
sending your email)
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opinions of FSU contributors do not necessarily reflect those of
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