September 4, 2018

Dow 30 Facing Increased Perception of Risk

The Dow 30’s inability to make new highs leaves it as a major non-confirming index.

This lingering non-com adds to the growing perception of risk measured by %BB of the Dow 30 implied volatility data from the CBOE. On top of that is our in-house measures of volatility.

In general, TEM draws a number of hard and fast conclusions. One of those being the price action investors can expect after a Technical Event Rule #1. In traditional terms, the event is the results of a period of poor or emotionally buying/selling. What I refer to as buying or selling mini-panics, the blatant throwing away for money or shares respectively.

I have found that a Technical Event Rule #1 is nearly 100% reliable as a COT, a change of trend.

However, at the peak in January, the TE #1 was more of an ongoing condition opposed to an event. Where the three TE #1 that came after the January peak are extremes reached by TEM  that are sharp and clear events; and they caused a change in dynamics, a COT. Where in January/February the panic simply transitioned from FOMO buying into panic selling.

The current TE Rule#1 coincides with MarketMap’s cluster of time windows that call for a change, best the bulls can do here – at least with the Dow 30 – is a high-level trading range. But unlike the typical panic low going into a base building trading range, the panic buying signals a market backdrop of a market of eager buyers providing liquidity, and the ability of large positions to scale out. All of which implies a decline.

I expect the first leg lower to be greeted with some new buyers, only to fail in its rally attempt.  It is the second leg of decline where long volatility tactics will be executed.

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