Most of my work is based on the internal market indicators and sentiment. Many other folks prefer to focus on the various levels on charts to form their market view.
I tend to focus on well-watched levels. If we break it, what does sentiment look like? If we break it, do the market internals agree or disagree? We often get a better view of the overall market when a certain well-watched level gets broken.
So I do pay attention to levels, but mostly because I like to see what the internals of the market look like if/when we break a well watched level. Over the last week or so, I have highlighted two charts with what I think might become well-watched levels.
The first chart is the (QQQ) . When we first looked at the $152 level, it was because I had drawn in that flat line. As you can see, the uptrend line has now run right into the flat line. In my opinion, I think $152 will become a well-watched level, especially if the QQQs revisit that area.
When it comes to the Russell 2000, we've discussed the 1540-1550 area a few times. I am unsure if it is a well-watched level, but you might recall I had it as a measured target, which for now has worked well (once a target is hit, the chart tends to correct either in price or sideways). But now you can see 1500 is likely to be a line in the sand for many.
First of all, it is a big round number. Secondly, it's where the breakout on this latest run came from. Thirdly, it's where that uptrend line shows up. And finally, that spike low from that wild Friday (Dec. 1) was right around there as well.
If there is any movement down there, I suspect 1500 will be discussed as a line in the sand (i.e. if the Russell 2000 trades under there, folks will turn bearish).
There are also two interesting levels on the chart of the VIX. Everyone talks about how there is no volatility in the market this year. There hasn't been much. But look at the last six months. Every time the VIX dips under 10 (red line) it doesn't stay down there long. In July, there were two weeks before it pushed back up. Mid-September saw a few days before blip up and another move down, which subsequently lasted less than two weeks.
Early and late November couldn't even keep the VIX under 10 for more than a handful of days. I bring this up because, with three weeks left in the year, the VIX scooted under 10 on Friday. Last Wednesday saw the put/call ratio for the VIX sink to 15%.
My experience is that when this ratio goes under 20%, we tend to see a short-term rally in stocks, but often those VIX call buyers turn out to be correct after that initial move down in the VIX (up in stocks). I wonder if they will be right again and if this pattern of not staying under 10 for long continues. A "rally" in the VIX this week could set it up to then retreat in the final week or two of the year. Maybe the Fed meeting this week helps the pattern.
