Oil

There is a funny story about this post. After the last one on the Dow discussing the possibility of a turn, I noticed some things on oil and started to type up this post. I wasn't quite finished when I went out with my wife for a coffee on Friday morning as is our custom. Returning less than one hour later, oil has moved up quite a lot. So this post will be Part I (before coffee) and Part II (after). If you think I am making this up, just check the charts - no rewind on data feed.

Part I
Obviously the decline in oil has been one of the big stories. I think it could be near a decent turn, but whether this is *the low* is hard to say. Maybe a bounce before lower. Still, if oil bounces then stocks will probably rally and bonds drop. 

CL1 weekly on YS1 / 1HS1 combo. Except a 2015 Q2 rally, oil has been dropping since mid 2014. 

Here's another view of the same exact thing with usual MAs, Bollinger bands and RSI. Note - this is the first low that is entirely inside the BB on significantly less selling volume, with RSI holding 30 this time instead of below. This is textbook Bollinger band and RSI divergence - the stage is set for a squeeze.

Part II

I return to this CL1 at 29 instead of 28 from the above post. Here is the daily CLJ chart. Nice divergence on RSI here too, just 1 day slightly below the YS1 and now above both long term levels. This is a spec buy or at least a short cover.


Filters

Pivots work well a lot of the time, but even with a good method there can be some false signals. For example, yesterday SPY looked to be lifting from the FebP. As this was the first change of pivot status since 1/6, this appeared to be at least somewhat bullish - keeping in mind that SPY was still well below the more important longer term levels of the yearly and half-year pivot. That said, with nearly all stock indexes and ETFs rallying from yearly levels, one could have easily thought the bounce would go further. As it turns out, the market will open lower today and while SPY will still be within striking distance of the pivot, SPX and ES are clearly below. 

If you looked at the SPY bar and reduced hedges or shorts based on first daily close above the pivot, then you'd have to be thinking about putting them back on today depending on the close. The main point of this post is to consider ways we can reduce false signals. This takes a bit of work, but those who like to understand the market and have fewer wrong moves will benefit. But if you don't have a lot of time, still I suggest #1 and #2. 

1. All variants of asset
Check all variants of the asset you are trading. This involves just a bit more work, but I think the result is higher confidence setups when they are all clear. For example, I refer a lot to SPY here but the cash index SPX is really the base for the ETF; and there is quite a lot of trading on the ES futures contract. As most people know, these are all related and exactly what I mean by "all variants of the asset." So there is a similar point on QQQ / NDX / NQ; DIA / INDU / YM; the Russell and TF futures; and the list goes on in bonds and commodities. For example, showing the SPY / ES / SPX all below. 

SPY looks more like lifting from pivot support. However, both the ES and SPX look like small blue bars (weak buying) which changes the picture. Weak buying from support is more vulnerable to a break just like weak selling above support increases the chance of a bounce. So if 2/3 of the variants are not clear, then maybe wait a day or adjust positioning in a similar fraction.

2. Volume
Check the volume bars on SPY and ES above. You can see that despite the first of the month which is often active, volume on both was low. In fact, both appear to the lowest volume up day of the year. Now judgement of volume can be more complex at times, meaning sometimes a volume spike is a turn and sometimes it takes divergence (ie higher highs in price with lower volume, or lower lows) but low volume buying is just not what you want to see on a bounce if you are playing for higher.

3. RSI
There are a lot of technical tools out there, but I had to add one it would probably be RSI. I know lots of people use MAs, and they can be somewhat useful, but once you start looking at different timeframes there are MA lines everywhere. Check this hourly chart of SPY and RSI on Friday and Monday was the highest it has been since 12/28. Not a great place to buy in a overall down trending market. 

4. VIX and other safe havens
I like pivots on VIX quite a lot. On VIX, it indeed dropped from the FebP which does look bullish, but bang on to the more important Q1P. So a reason to perhaps wait one more day. XIV really nailed it this time, with resistance bang on the FebP. In other words, using VIX you had a sign of caution (ie don't buy stocks with VIX on larger support) and using XIV you would have correctly NOT changed positioning (either by adding longs playing for a bounce or reducing shorts / hedges). Additionally, sometimes TLT or other bond vehicles can help confirm stock positioning.


5. Watch correlated assets
Obviously there has been a lot of selling pressure due to oil and China this year. Yesterday, oil was down about 7% and below all pivots while stocks were fractionally up and most barely above FebPs. In fact, the broader market only stabilized when CLH6 held its YS1 on 1/20-21. China in the form of Shanghai Class A index (what is available on tradingview) and FXI both below all pivots. In other words, factors that have produced selling pressure were still clearly vulnerable as of Monday. 

Other tools

Obviously I'm a big fan of pivots. What other technical tool gives you trend status, entry, management and targets all in one package? But sure, I look at moving averages and their slope too. Often pivots give the signal first, but when there is combination then it is an even better setup. So, what else to use with pivots for more effective returns?

1. Volume. While not always a lock, a higher volume move off a big tends to work.

2. RSI. It takes some art to use this but i had one momentum indicator this would be it.

3. Sentiment. I prefer a combination approach of standard put-call, ISE and both the AAII Investor and Manager readings. So here's the point:

The ISEE index was 146 at the close on 1/26. That is far too high considering when everyone was looking for Santa on 12/24 it was 144, and the spike high for the last six months was 187 on 12/15. Anything near 150 is toppy and has been near several key trading highs the last two years. ISE readings pointed to people being overly bullish and complacent and the result was a very ugly January. Yesterday everyone thought the market would rally on the FOMC, and today the market looks like it may threaten the 1/20 lows.