I'm going to walk you through some charts that will demonstrate that we are most likely going down, far, from here. The futures are up 4% overnight, and that has no bearing on this interpretation - up days will happen.
We're going to drill down into the daily chart of the S&P 500 futures above. All I want you to take note of above is the red trendline from June/July, and then I'll walk you through why we're going down, not up, from here.
The first chart highlights the daily full stochastics.
First, notice that the stochastics suggest that the S&P is getting oversold. However, then haven't really turned over to suggest flattening from here. If you look at the last time the stochastics were this low in early October, that was the period where we began to develop the descending triangle that we blew out of on Tuesday. Also, take a look at how the stochastics made new highs on November 5th/6th, as compared to August 12th, September 2nd and September 24th. Note that on all three comparisons, the November 5th/6th price was lower while the stochastic was higher. This is bearish and foretold the drop you can see on the chart from November 5th to today, which doesn't look like much because of the scale, but that drop was 25%.
In order for this chart to develop a bullish divergence, the current stochastic line has to go "not as low as" the bottom on October 9th/10th. It probably will go lower, and I'll show you why below. Just take away from this chart that we're getting oversold, but we could stay oversold for a while before an extended pullback, and that the last "pullback", from October 28th through November 5th (where the stochastic line goes way up) produced a 20% bear market rally (where stocks go up for a while before they resume their bearish downward trend).
Now let's look at the MACD.
The MACD "crossed over" (the blue line crossed the orange line) in a meaningful way on November 19th. The last time it did that was September 5th. That started a precipitous run from 1,246 to 837 - about a 30% drop in 35 days.
Let's look at RSI.
The RSI is bouncing around 30 - crossing below 30 is considered bearish. The little bump up over 30 is the overnight trading for today's session. Take away from this chart - you see there are no RSI values above 70 over the last six months, and several periods where it is below 30. This told us that "down" was more likely than "up," even when we had little rallies like late October. If it doesn't cross 70, it isn't a real rally. Using divergence, if it doesn't cross that recent peak of about 60, the bottom is definitely "not in."
Now look at Aroon.
I don't hear day-traders talk about Aroon, probably because it tends to be a pretty late indicator. But typically the Aroon cross is highly confirmatory when used with other indicators. If you wait for Aroon to cross, you might be a little late to the party, but it signals greater confidence that the trend will continue. On this chart, you'll see the yellow circles where the red Aroon line crosses the green, which is bearish. It happened September 2nd, and again November 13th. You could say that Aroon called the fall from 900 to 750. It doesn't tell you how far it will go, but as long as those two lines are both pointing down, going down is the plan.
Last two - PPO and Williams%
The PPO has to cross zero to become bullish - the last time it did that to the upside was early August, and it didn't cross with conviction, as it went back below in early September.
The Williams% has to cross -50 to become bullish. You see it is more jerky, so it is important to look at other indicators as well.
Let's put them all together. In early September, we had a bearish cross of Aroon and PPO, and Williams% spend more time under -50 than over, and RSI never go near 70. Today, stochastics are bearish showing no retreat, Aroon is bearish, PPO is under zero and getting lower (bearish), MACD crossed downward (bearish), RSI is dancing around 30 (bearish) and Williams% is well below -50 (bearish). There isn't a single bullish indicator right now. From the charts, it looks a lot like the beginning of September, and we're down 40% since then. Another 40% from here puts us at, say 400-450 on the S&P?
So, today the portfolio is gonna get killed because it's all short and the futures are now up 4.4%, but I'm all-cash. So, I'll be looking for new entries on the short side after the rally gets weak. One suggestion that I'd make would be to start shorting anything on the pick list if it gets to it's recent high (since last Friday) and add more shorts if anything gets to it's 20-day EMA. If you average in on those two price-points, you'll have a nice gain the next day the market tanks. And it will. If nothing else, we have new lows to test now (fun!), and new lows get tested at least 3 or 4 times over a period of months before you can declare a bottom. You haven't seen the last of 750 on the S&P. (But you probably have seen the last of 900.)
Joe
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