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Thursday, October 5, 2017

Daily update 10/5

Buying panic.

I believe today was caused by excitement over tax cuts.  Congress passed a budget which is supposed to allow them to concentrate on tax cuts.  The blue price bar means SPX closed above the upper Bollinger Band and is extended.  Breadth was +57%.  New highs were up slightly to 244.

The futures are still outside the channel and in accelerated up move mode.  The ADX is extremely high which is very rare for an up move.  With ADX this elevated the high is usually retested before any sizable pullback.  However, on the rare occasion when price reverses in this condition it can reverse sharply. 

The green count picked up a bit, but remains below 65.

QQQ finally made a new high. Now the question is will it stay there.  The volume was not particularly high.  When IWM broke to a new high there was a lot of volume and it saw follow through.   QQQ does not have the volume and it remains to be seen if it will get the follow through.  A failed break out might be worse then not breaking out in the first place.  Those can lead to big reversals.  We still need to watch this.  A close below today's low could bring out the sellers.

Tom McClellan went back to 1992 and found the 20 day average true range of SPX is the lowest in that time period.  The last time the market was anywhere near this low in volatility before 1992 was the 60s.  Odds are pretty good this is the least volatility in about 50 years.  Possibly much longer then that.  We are in one of the longest periods of low volatility ever.  Some day volatility will pick up.  That does not necessarily mean down for the market though.  The late 90s saw a big rise in volatility while the market rose. 

IWM has stalled and is very stretched.  SPX has not stalled yet, but is also very stretched.  QQQ has just finally broken out.  This is an extremely odd situation.  It is rare for QQQ to be bringing up the rear.  The few times it has have usually led to reversals.  I don't think it is quite safe yet to say no year 7 pullback this year.   The bulls would like to see SPX pause to correct the short term over bought condition while QQQ continues higher. 

I think I heard them say you have to go back about 20 years since SPX has had this many record closes in a row.  Obviously a very rare occurrence.  So far this year we have had sizable spurts to the upside they just did not go up every day.  After those spurts the market consolidated for a while then there was some kind of pullback before the next spurt.  Since the mid Aug. low the pattern has changed a bit.  There has really been no pullback worth mentioning since then.  I think this move is likely about tax cuts.  Lately everybody that I have heard asked about it on CNBC has said they thought some tax cuts would get done, but not necessarily before Q1 next year.  I am confident the plan released by the administration is dead in the water.  There is no way there will be enough support to get rid of the tax break for state income taxes.  Take that away and the current plan falls on its face.  This could end up being as tough a fight as healthcare was.  Can we be assured the outcome will be different?  I am not sure I would be willing to bet on it.  Maybe I will be pleasantly surprised, but I am not impressed with the leadership in either the House or the Senate.  I am trying to keep this blog clean so I won't say what I really think of them!  I was never really sure if the market had priced in tax cuts before, but I think that is what has happened since Aug.  If the market gets a whiff they won't happen there might be some disappointment.


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