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Pivot Week

These are some really beautiful charts along with market analysis, posted by Naufalsanaullah at ZH.  Click on charts for a full page view. – Ilene

Pivot Week

By naufalsanaullah, courtesy of Zero Hedge  

The stock market showed a significant distribution day on Tuesday, as big volume selling dominated the day. The SPY ETF showed its biggest volume day since April with 321 million shares exchanging hands, with approximately 80 million shares traded between 10:40 and 11:40 AM, where the selling really picked up as the support trendline connecting July and August lows experienced a breakdown. SPY’s volume’s 20DMA is around 189 million shares, and Tuesday showed a 70% relative increase in volume. This is highly suggestive of big players dumping shares, which puts the 30-1 insider sale-purchase ratio last month (and 62-1 ratio in its last week) in even more perspective.

Tuesday’s big volume divergence from most of the rally since March is evident, being the biggest differential from the 20DMA since the beginning of the January-March 2009 sell off, and is analogous to distribution days in late May/early June 2008, early September 2008, and early-mid January 2009. The SPY chart below has volume with its 20DMA and the line defining two sigmas away from 20DMA volume. Tuesday was a marked exception to the trend since March, and especially since the 87.5 breakout in May, as volume on Tuesday was well above two standard deviations greater than the 20DMA. The analogues provided above (late May/early June 2008, early September 2008, and early-mid January 2009) also show volume spiking well over two sigmas over the 20DMA and beginning a reversal in price.

S&P

Below is a chart of SPY with volume and standard deviation of volume. As volume contracted since March (and especially since the May breakout of S&P 875), volume’s sigma has stayed in a tight range, with no big volume breakout days with low volume consolidation days or any of those bullish market internals. Instead, the market has rallied with no volume confirmation. Fall 2007, summer 2008, and fall 2008 also show similar patterns. The difference for the current sigma tightening is in its length, occurring over several months, which makes sense in the context of the paradigm shift in trading to almost exclusively momo-chasing daytrading. The three comparable situations in std dev of vol in the chart below led to volume expansion and price sell-off, with one or two big volume distribution days bearing the bad omen of what’s to come. Tuesday’s volume expansion shot volume sigma up too, and it appears to be ready to surge up again. That implies volume expansion and price contraction, unless volume comes in big on the buy-side, after a greater than 50% rally in equities. Accelerating insider sales as time has elapsed during this rally don’t suggest the volume will be on the bid. At least to me.

Big volume down days in the midst of low-volume rallies are highly suggestive of major distribution, and in the context of current market internals/illiquidity, insider sales/purchase ratios, and of course the general state of the economy, Tuesday’s expansion of volume on the downside is a harbinger for forthcoming bearish price action.

Volume greatly expanded on positive price movement, however, in gold. The day after the big volume sell-off in equities, gold broke out of its symmetrical triangle (which I have been posting frequently) on massive volume expansion, as shown below in GLD’s chart. Lots of gold miner equities also surged. The big money appears to be leaving equities for safe havens. Treasuries have been on the move up since June, and now gold is breaking out, approaching its formidable $1000/oz resistance, from where it should go to the moon.

I’m short-term deflationist and long-term inflationist, and have been touting the short financials/long precious metals and short oil/long gold trade for a while now. Volume seems to be backing that thesis.

This week showed some broken trendlines in stocks, volume coming in on the downside, a breakout in gold prices with volume confirmation. September is historically the worst month for stocks, and its first week in 2009 is suggesting more of the same.

 


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