Above is the Nasdaq 100 QQQQ chart. I presented it today with a longer term view, and with the volume in the sub-graph. You can see the volume pattern on the rally has been on decreasing volume. Even with the near record up move yesterday, the volume was still far less than it was on the way down, at least on the ETFs. The volume patterns on the other broad index ETFs and futures are similar, that is, much lower on the rally back up, and even relatively low on the big day yesterday. Prices on the other indexes are still a ways below the previous high, however, on the Qs prices just about touched the previous high (where blue horizontal line is drawn), and like the bar on July 19th, an upthrust was left on the bar and prices retreated to close under the opening. Momentum is clearly up and it is quite possible that the high will still be taken out. It would be quite bearish if the test of the high failed, leaving a second upthrust in the same spot. It would be quite a double top. I don’t even want to try to guess which way it will go. For now the momentum is up. If the market turns down, then the momentum will turn down and I will follow the indicator, rather than try to guess at this point. I would feel more confident of a successful test if the volume pattern were more constructive.
The above chart shows the inverse relationship between a stock index and the volatility index. For sake of illustration I chose to stay with the same QQQQ chart as in the first chart, and used the more widely followed VIX rather than the volatility index for the Nasdaq. One problem with trading call options on indexes is that as the market advances, the volatility decreases and option premiums deflate somewhat. Call options purchased on the upturn in momentum have advanced, especially if they have become in the money as they should have. But the downtrend in volatility has worked against them to some degree. The opposite is true on market declines, as put option premiums will puff up a bit as volatility increase, apart from any intrinsic value achieved due to price movement. I have found the VIX to be of little predictive value. There had been much attention on this indicator a few years ago and many system were devised on back data. I tested these systems and found the claims to be true on the past data, with profitable results of greater than 60% and even 70% being generated, on the past data. As soon as these system were published on a popular web site those profitable results disappeared. That is no great surprise. It is easy to curve fit a data series. It is difficult for the data series to repeat the past to accommodate the systems.
The above is the gold ETF. Normally I would show the Chicago futures, but the eCBOT was down once again today, and the NY gold futures didn’t include the movement after the Fed announcement. This ETF better illustrates the price action. There is heavy volume following the move up in the ETF. The trend is nicely up with the three day pivots (new article in indicators section) following along just as it should. Today, according to the ETF data, was an inside day, but no indication yet that a reversal is imminent. But this is the gold market, and quick reversals can occur at any moment. With the bullishness at an almost nauseating level, it would not surprise me to see a shake out at any time. As I’ve indicated for several days on this blog, I’m not initiating any new purchases up here. And I’m not selling either yet, but have my finger on the exit button. The dollar index is a mirror image, as it shows an inside day slightly to the upside, with no buy signal in sight. But dollar index is deeply oversold.