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Thursday, May 15, 2008

Gravestone Doji And Cool Correlations: Volatility, Yen

We may have a Gravestone Doji here on the S&P 500 (SPX).

In a bullish trending market the gravestone illustrates an unsustainable bull rally where price drives up to new highs in trading on day two, but sellers take control by market close.

Although this formation is a moderate to weak in signal strength, it is a warning for longs that the uptrend is losing momentum and bears may retake the market soon.

Since prices have fallen out of the rising Bear Wedge and have now rallied and tested the previous high of the 1420 area, the Gravestone Doji is more relevant than usual. Today's price action must not exceed yesterday's high and preferably result in a down day...

Using the ProsShares Ultra Short S&P 500 (SDS, candle) to represent the inverse of the S&P 500 and plotting the price action against the volatility (VIX, grey area) the positive correlation between the two becomes crystal clear. As VIX falls, the market rises. Conversely, extremely high VIX readings in excess of 30 tend to set bottoms (in the case of SDS, tops). A reading of less than 20 on the VIX now, probably represents extreme complacency for this time of environment. I would therefore expect and look for general equity weakness.

Using the ProsShares Ultra Short S&P 500 (SDS, candle) to represent the inverse of the S&P 500 and plotting the price action against the Yen index (XJY, grey area) the positive correlation between the two becomes crystal clear. As XJY falls, the market rises. Conversely, as the Yen strengthens it confirms risk aversion as Yen Carry Trades are unwound and risky assets, such as equities, are sold.

Putting the two together results in a set of nice leading indicators at best and confirmation at worst. For example, not sure if a decline in equities will stick and last a few days turning into a significant correction? Check to see if VIX has risen from a low enough a level to give it reasonable room to run and check to see if the Yen has shown strength and is technically poised to rally further.

If you want to get really crazy, pull them both up on 5, 15, and 60 minute charts and use them as intraday signals.

10 comments:

Anonymous said...

Dude,

I've been looking at your blog for a bit now, and I have to say: Your blog is awesome. Thanks for sharing your thoughts and putting up such great marked up charts.
Keep up the good work!

-Trader666

Bill Luby said...

What Trader666 said. And I think I was here for your first or second post...

Regarding the VIX and the SDS, I have done something similar with my VIX:SDS ratio, if you don't mind the link to my blog.


Keep up the good work, Ben.

Cheers,

-Bill

Ben Bittrolff said...

Bill,

Feel free to link away. Good stuff like that should always be spread around and shared.

The VIX:SDS ratio illustrates the point much more clearly...

Ben Bittrolff said...

Trader666, Bill Luby,

Thanks.

Anonymous said...

Great Site! Your technicals are outstanding.

Looks like nothing will bring down the markets. Bad news is good news and the bulls want it higher.

This market is dangerous and not trading on fundamentals.

At what S&P level do you become bullish?

Thanks

Anonymous said...

The S&P is going to 1450 or so the gap in SPY will act like a magnet. That is where I'll start to get short on this scam although I don't expect to many fireworks until we get closer to the election.

Ben Bittrolff said...

"The S&P is going to 1450 or so the gap in SPY will act like a magnet."

That is definately possible now. Crazy, but technically possible and looking more and more likely.

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