Now What Is The Stock Market Going To Do? (VXZ, UUP, TBT, SPY)

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August 23, 2010 12:43pm NYSE:SPY NYSE:TBT

This post will contemplate the direction of the S&P 500 early on this week using the True Strength Index (TSI) and Money Flow Index (MFI) indicators with analysis of the S&P 500 ETF (NYSE:SPY)

, the NYSE $TICK, (NYSE:TBT) which is a short ETF for the 20+ year Treasury Bonds, the VIX volatility ETF (NYSE:VXZ), and the US Dollar ETF (NYSE:UUP).

This has been a fun project as I have brought in so many different ways to view how the S&P 500 is setup for opening trade tomorrow (Monday) morning.

Let’s begin with a peek at the S&P 500 ETF (NYSE:SPY).  Using the TSI and MFI indicators I decided to use the 1 hour time setting so as to pick up a signal….which in the case of both indicators, is a BUY signal.

Next, let’s look at a 4 hour chart of the NYSE $TICK indicator.  Using a little cut and paste magic, this chart has the TSI (7,4) readings displayed across the bottom of the chart and the SP-500 roughly correlated in time above the indicator.  Not surprisingly, when the $TICK indicator reaches an extremely negative reading, the S&P index has become prepared, at least temporarily, for a change in trend to the upside.  

We notice that last Friday’s trade indeed pushed the TSI evaluation of the $TICK to an extremely negative reading.  This suggests, based on previous occurrences, that we should have a day or two rally to work off the extreme oversold condition.

Now let’s look at the long bond and see if we can figure something out.

This is a 4 hour chart of (NYSE:TBT) which is a 2X short ETF of the 20+ year Treasury Bond.  

(NYSE:TBT) will fall when interest rates are falling and when the demand for owning 20+ year Treasury Bonds is rising.

In this chart we note the two buy signals given by the TSI momentum indicator and the Money Flow Index indicator.  So I would imagine that (NYSE:TBT) will now rise, which means that the demand for owning Treasury Bonds will fall.

Further, if the demand for owning Treasury Bonds falls, where does that money go that is taken out of the bond market?  Well, some of it goes into the stock market and so, I think we may have another confirmation that the S&P should rise early this week.

Here is a chart of the VIX volatility ETF (NYSE:VXZ).  Generally, when volatility increases, stocks are falling in price and, when volatility decreases, stocks are rising in price.

While (NYSE:VXZ) does not yet have a trendline break in place, it does sport a negative divergence between its price movement and the TSI momentum indicator.  In my book (that I have not yet written), that is a solid SELL signal.  And, the trendline breaks look to be not a matter of if, but when.

It appears that (NYSE:VXZ) is on a sell signal.  If (NYSE:VXZ) falls in price, then the S&P 500 should go up.  Wow, we have now gotten the same bullish signal for the stock market by looking at this 4 different ways.  Surely the stock market will go up on Monday and maybe even Tuesday.

But wait!  Now enters the biggest baddest elephant of the entire circus- the US Dollar.  This is a 4 hour chart of (NYSE:UUP), the ETF proxy for the US Dollar.

The US Dollar has been on a tear northward lately, causing the stock market all kinds of grief.  Let’s see if this bad boy is ready to fall, and give stocks some relief.

Hummmm  Let’s see.  Sell signal in the Money Flow Index.  That did not bring the elephant to his knees.  A negative divergence between the TSI momentum indicator and the price movement of the US Dollar.  That should do it.  

But no trendline break yet, darn it.  And the US Dollar has made a 38.2% retracement of its fall from glory, but what if the elephant has just enough wind in those mighty lungs to scream out a dying cry for the 50% retracement level?  

Surely it is not going to do that, is it?  I mean, if it does, all the people in the stock market are going to panic and sell, sell, sell like the sky is falling for sure.  And the smart money is going to take the dumb money’s stock and pick their pockets like they always do.  Oh, I hope not again this time.  I really hope the elephant just lies down and takes a long sleep (but I’m not counting on it, just yet).

Written By John Townsend From The TSI Trader

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