In this edition of Bull or Bear, we will consider two possibilities. We are about to drop lower or have we may have hit a capitulation low.
Dow Theory – Transports and Industrials
Transports are an integral part of Dow Theory. For more follow the link. As the companies in the Industrial Sector manufacture and produce durable goods, transports get them to their final destination. Simple.
The IYT sector took it on the chin yesterday, so part of me is saying “get out of the way” and ask questions later. The market seems spooked, as the sudden change in direction leads me to believe fear is either 1) starting to peak or 2) just getting started.
The chart below illustrates one possibility, with a bearish view playing out. Should we head quickly to the 200sma, pivots from the 2016 and November election lows, place 38.2 and 61.8 confluence zones right near the 200ma.
Could we be headed lower?
Maybe we are headed lower, maybe we are not. It all depends on this developing story in the transports and industrials.
The Industrials (XLI) look very similar, as investors hit the exits. RSI is dropping quickly. Rather than post a lot of charts in this daily update, I’ll review the sectors LIVE this morning, in the Pre-Market show. Please tune in for more.
If we are heading lower, we will consider a position in SPXU. Chase Manhattan retirement accounts do not allow long put positions, except when trading covered calls as a protective strategy. Therefore, we look to SPXU to balance our long exposure.
Ambivalence and the need for more data.
Given the extreme conditions in the VIX:VXV ratio, we will assume the low is close. Shorting the VIX is a higher probability trade when extremes are seen in this ratio between the front month and 3 month. This rising ratio tells you the front month is exhibiting more fear than what institutions are anticipating 3 months from now.
Consider the lows in the S&P500 above, lower panel. Extremes in “contango” (VIX higher than VXV) provide an opportunity for the bulls. That said, we need to see price action move back above the 9/20ema to confirm a durable low has been reached.
If you are bearish follow the trend to the end. At some point we will see a capitulation low.
Until then, we need to shift gears and take smaller positions. Until a trend develops, we are wasting our time and resources, guessing what will happen next.
Markets are closed tomorrow, Good Friday.
Happy Thursday – Vinny
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