What in interesting two days in the market. Yesterday a huge selloff and then today the huge fed-induced rally. I thought we still had a fair amount of room to go to the downside up until a couple of hours ago, but now I believe it is time to be long hunting again. My reason: all four of the indexes put in pink extended range candles today, many of them engulfing too.
I’ve noticed that all too often trends start and end with a big blow-off pink extended range candle. The lows of today are important – above and I am long hunting, below and it is all bets off again.
For anyone casually watching the market via daily newspaper quotes of the $SPY or $DIA, you’d think all is well and the market continues to fly. But if you scratch a little deeper you’ll find that all is not well, and it has been a very tumultuous two months for the markets.
Both the $QQQ and $IWM have been weak, with $IWM down 10% from the highs, officially putting it in correction territory. And moving away from the averages for a minute, a cursory glance at most charts will reveal some ugliness.
That hints at a large part of the story, which is the lack of correlation between the indexes. For example, the correlation between the $SPY and $IWM right now is 0.43, up from 0.14 (almost no correlation at all) only three days ago. That is very low considering the indexes probably average out at about 0.80 I would think.
It is a very tricky and testing time to be in the markets, so it is important to keep perspective. I’ve marked off the percentage moves on each index chart and will be watching those, and of course will honor all my stops if they get hit.
Many people will be watching the $IWM as the canary in the gold mine, especially the head and shoulders that is developing on it. That is right at the neckline now and has a measured move to $95, approximately 20% from the highs.