Ever since we breached the 23.2% retracement of primary {1} on April 29th, SPY has been range bound between 88 and 93. It has gone up and down nicely in channels, as is evident on the 30 day hourly chart seen below.
At the same time, if you would observe the daily chart (below) for the same period, one will notice how the stochastic is come down from overbought to almost oversold in this time period. So, the overbough conditions are being relieved with sideways movement. This is what sideways consolidation is known as.
We all know and agree that what we are witnessing is a bear market rally. Its just of a different nature.. different from the ones we witnessed all year long in 2008. The depths of March were reminiscent of what happened in 1930’s. When the market bounced back.. there were instances where the move from the bottom was as much as 80% in some cases. So don’t be surprised if after some more sideways consolidation we start going up again. The first leg of this move up was fueled by financials, then the commodities.. IMO big cap is going to move up next. Please don’t forget to share some love.
There seems to be some lack of understanding about decay in the leveraged/inverse ETFs that happens because of chop up and chop down. SRS, known as widow-maker not without a reason is my example of choice to illustrate this point. Today (May 22, 2009), IYR closed at $31.71. In past 6 months, I have identified three other data points for IYR when IYR was near or about $31.71:
Point1: Nov 11, 2008 – IYR’s low of the day
Point 2: Dec 11, 2008 – IYR’s close
Point 3: Feb 3, 2009 IYR’s open
Point 4: May 22, 2009 – IYR close
These points have been shaded yellow in the IYR chart. The SRS chart shows the value of SRS at these 4 points.
Point 1: $151.20
Point 2: $88.43
Point 3: $57.72
Point 4: $22.73
You can see that even though from Nov 11, 2008 to May 22, 2009, the underlying IYR has been unchanged (disregarding the moves up and down in this period)… SRS has gone from $151.20 to $22.73 – OUCH OUCH.. So, here’s the message – DO NOT HOLD leveraged ETFs for long period. If they go against you, GET THE HELL OUT.
Here is the 5min chart for ES for today (May 22 2009). The pink line in this graph is the cumulative VWAP study on ToS charts.. See how ES has bounced off of that VWAP all day long – we think that the action is random, but it isn’t. In the morning, it touched vwap-2 and bounced back sharply from it. Combine this with TICK (I will do a more detailed post later) and you have a gold mine. For now, all I will say is that you need a very strong positive/negative TICK to push the price across VWAP onto the other side.
