Thursday, November 13, 2008

A Key Reversal Day?

Today was another example of the types of big single-day moves you see in the market with the volatility index (VIX) as high as it has been. Most of the big days have been to the downside, but we have also seen several huge upside moves as well, and today was an example.

The S&P 500 broke to new lows for the year this morning, but a late day rally quickly brought it back to even, and then a buying stampede led to huge gains into the close. The SPX finished the day +6.9%, quite a move. To put it in perspective, the Dow rallied back 900 points from its intraday lows.

Moreover, today looked like a key reversal day. No rallies lately have held, so its hard to get too excited about today, but one of these rallies attempts will stick. Who knows, maybe it will be this one. On the chart below, you can see that the market made a lower low (vs. yesterday) this morning, but then rallied and closed at a higher high. Volume rose sharply also, which means there was some conviction behind the move.

There was no real catalyst to speak of, but that is how it often is on days like today. Tomorrow is the G20 meeting in Washington, and it may have been that bears wanted to take profits and cover their shorts ahead of the meeting, in case heads of state make any big announcements. Most rally attempts start with short-covering, but we will need real buying to sustain it.

One other chart I wanted to show was that of the volatility index (VIX) below. The line I've drawn represents the uptrend that the VIX has been following early September. At the beginning of November, the VIX broke through this uptrend line. Since then, it has risen back towards this trend line, but has not broken back above it.

Today, despite the market breaking down to new lows, the VIX never came close to making a new high. It then staged a sharp, downside reversal, falling -10% on the day. This is another promosing development, but we need to see the downside confirmed by more lower lows.

The next piece of the puzzle that needs to fall into place is that the uptrend in the Yen needs to be broken, but I will save that for another day.


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