Friday, August 29, 2014

S&P Emini; Doji Warns and VIX Supports Coming Fall

The September Emini future formed a ‘doji’ yesterday even as the SPX index found a second consecutive session close just above 2000.  This pattern warns of uncertainty and heightens concern that the bullish contingency, although having achieved a break of the 2000 milestone, may not have the interest or determination to drive prices still higher.

There were 12 new session highs without a three session pause before the ‘doji’ appeared.  Today’s  earlier new high adds to that ‘stretched’ or overbought condition, suggesting some room for a correction.  The steady rise from the early August low of 1890.25 has added over 6% to the index and that pace of advance may be hard to defend. 

A lower close today would form a bearish engulfing pattern which would help to support the bearish implications of yesterday’s doji.  Combined these developments would present a powerful reversal that could bring about the removal of much of the gains from August.    

The VIX index is said to have been languishing of late and showing indication of lacking concern for geopolitical, economic and monetary policy developments.  The index has fallen roughly 4.6 points this month from above 16.6.  This is the greatest monthly decline since June 2012. 

There was a bullish ‘hammer’ shown in VIX on the 25th (Monday) which followed a bullish ‘inverted hammer’ from the 21st.  Finally, there was a small bullish window (gap) created yesterday that could be a source for support going forward. 

The low level of VIX along with bullish technical developments there supports the notion that an equity correction is forthcoming.    The recent S&P 500 milestone achievement has attracted additional attention and a lack of follow through; much less a reverse could provoke and even larger correction.

The steady and uninterrupted advance this month has brought about overbought conditions.  The recent ‘doji’ indicates a heightened level of indecision.  This indecision is charged against the bullish contingency as they are seen as controlling the prevailing bullish trend (‘driving the bus’). 

Finally, consider the heightened activities in Urkraine/Russia and note the long holiday weekend in the States.  There is room for additional concerns and movement away from risk assets toward safety.  

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