I wanted to review my thoughts on the last week, and give a few ideas on where we might be going by showing you what I look at to determine possible market direction. I like to keep my trading style simple, and this includes the indicators that I use.
My favorite indices/indicators/exchanges/ETFs to watch are SPY, the finnies (IWM, RUT XLF and GS), VXX or VIX, IYT, EUR/USD, NYMO, TLT and DAX.
When I look at a chart of the SPY, it appears rather 'toppy' to me, it reminds me of a much more concise version - yet just as dramatic - of the top that we saw in the SPY back in September-October of 2012. The dramatic moves down and up are very much like what you would see in a bearish environment. Volume on distribution days has been very strong, while the same can't be said on the ramps. The FED is obviously pushing this market when it wants to, so any selloff would be minimal. The short term pattern on the SPY is somewhat bearish to neutral, in my opinion. A break below this past week's lows will confirm this topping pattern, and my downside target would be roughly 146. As a side note, many are calling for a potential inverse head and shoulder pattern on the SPY... I doubt it will play out, but it is something to watch.
The EUR/USD is the biggest bear case here. It has been stuck in a clear down trend for sometime now, and on Friday, it broke below the 1.30 barrier (this is more a mental big round number that anything else, no real support - think DOW 14,0000). Next major support is around the 1.22 mark, and any big move above 1.32 (and especially 1.37) would be bullish. For us to see the 1.22 and below area will take several significant events, as well as plenty of time, this will not happen over night. EUR/USD is THEE chart to watch. I believe forex rules all. EUR is bearish, which is bullish for USD. Strong USD clearly means lower equities.
The finnies are all very short term suspect looking, similar to the SPY. They all had a nice move up 2 weeks ago, and have made lower highs since. The sector has been the major driving force in late 2012-2013 dictating market movement upwards. Short term - I am somewhat bearish here as well. GS has been the market leader for some time, if it break... look out below.
IYT (transport index) is the strong one here, and looks very bullish. Other than a fair amount of volatility, I don't see too much, if anything, to be bearish about here. Many believe the IYT is a leading index, I personally don't like it as much as the others above, but its movement is still significant. This is clearly bullish.
VXX or volatility bottomed two weeks ago and has made higher lows since. Yesterday, the VXX stayed green all day long, so even on an up day, some market fear still exists. This again, is slightly bearish.
TLT - for the most part, bonds up = equities down, and vice versa. Bonds have been slightly elevated the last few days... I don't think the bond market means nearly as much as it did in years past. The FED has made it a priority buying long term bonds to lower interest rates so that the housing sector could recover (extremely basic explanation). The end result is that bonds have been the most manipulated asset class and are not nearly as reliable of an indicator as the others listed above. This activity is still slightly bearish, but the caveat needs to be noted.
DAX is the market leader in Euroland. A week or two ago, it looked ready to break down... but never did. It is either in a long term topping pattern or in a long term consolidation zone. I am neutral here.
And finally, the McClellan Oscillator (NYMO) which is back to a neutral reading. I don't really care too much about this indicator until it hits one of the extreme zones, +/-60 points or so.
With all of the above, I lean slightly bearish into Monday. All Mondays in 2013 have been red on the SPY. I am holding long SPXU, PAMT and BTU, short GS, CJES, LNG and EBAY. I am about 30% committed, 80% of which is short.
Take care crazy kids!