At the moment, everything is still up in the air, so to speak. The rollover into the sub-950 range is still on the table, since a bounce like the last 24 hours on weak internals (such as an advance:decline ratio of well under 2:1) should surprise no one. Despite the lack of oomph here, it is still possible we drift to new highs. I’m sticking with a bearish stance until we see some more strength and breadth on the upside. A sharp drop to fresh lows in late US trading today or tomorrow would not surprise me, and this chart provides a nice stop in case that does not pan out:
Interactive Brokers
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Meanwhile, the zig-zag action in the dollar since Monday looks corrective, maybe a wave 2. Sentiment remains highly bearish on the dollar in the face of a pretty sharp rally. Silver completed a brutal $1.70 drop over 5 days, but everyone still loves it. Oil is conspicuously not making new highs here with that storm out there. Nice short set-up there, since you’ve got a ready-made stop just above these levels.
Copper also seems to be losing its mojo, and is potentially on the verge of a very sharp fall after this sideways correction. Also a nice stop there. Did you read about how pig farmers and other Chinese are taking out bank loans to stockpile tons of the stuff? Now if that isn’t a productive use of credit, I don’t know what is.
Credit spreads (junk vs. quality and corporate vs. Treasury) continued to widen yesterday, further undercutting the integrity of the bounce in equities.
What should worry the bears a bit is the oversold condition in Chinese equities, down 20% from their peak a few weeks ago. But then India’s bubble is just as big and they’ve not dropped nearly as much.
Safest route here is to short with a tight stop or sit in cash. Longs are just tempting fate.
In looking at recent action, I’ve come to think that perhaps a good strategy for shorting is as follows:
1. Wait for extremes of sentiment. DSI, II, Put/call, Rydex, etc. You need optimistic extremes to set you up for a good fall.
2. Watch for clues of trend exhaustion in technicals: MACD, RSI, Fib lines, etc.
3. Wait for topping action — slower rate of ascent, lower lows and/or lower highs, diminished a/d on each rally, solid breadth on declines, and maybe some kind of sinusoidal distribution pattern.
4. Confirmation across asset classes, according to whatever correlations have been working lately.
5. Make your entry AFTER the first convincing decline that is confirmed by breadth and other asset classes. There is almost always a retracement, and that retracement provides you with two things:
a) more information about the directional strength of the market (A/D, price move relative to TICK, etc). If the retracement is weak, it further confirms that the decline is a potential trend change. If strong, it was just a correction.
b) It offers a nice spot to go short, because if the market is going to fall, that move is already partly underway so you won’t have to wait long, and if it is going to rise, you likely have a nice stop price (pick your Fib level, channel line, other recent support, or just the recent high).
MIke,
The Govt. (oh shit, I mean the Banks) are only going to keep on publishing positive economics numbers until the markets reach extreme highs again … in this kind of environment, how can technical analysis be a good guide? All the setups are nearly there but once we get into a slightly oversold postion, lo and behold some more magic numbers of the economy are published and the internals change again … add the fact that companies are falsly producing beat the numbers and what do you get? A relentless uptrend …
I do agree that only go short once the downtrend is established … but for that to happen we would have to srop 700 to 1000 points in the DOW etc … arleady taking us into oversold territory … setting us up for a Bull Trap … this market is not going to go down until the next crisis and the Govt. (oh shit I meant the Banks) know what NOT to say and publish to avoid another downturn in the Market. Honestly, the more and more I think about it, this downturn was created by the Banks themsleves as big ploy to get assistance from the FED and Treasury … they manipulated it all from the very beginning ….
Thoughts?
Thanks!
Pej, you don’t understand TA if you think the markets can be manipulated this way or that by simply fudging numbers.
The way to avoid bear traps is to wait for the retracement (rally) after the decline and set a logical stop, like I said. And when you talk about 700 pts needed for a confirmation, that is silly — TA allows you to judge the strength of much smaller moves, like the decline on Monday and Tues AM and the rise since. If you really want to trade seriously, you have to study TA. If you just follow the news and come up with ad hoc theories of price action that involve manipulation, you’ll never get anywhere.
What you need to get through your head is that the markets are much bigger than the machinations of all the big players put together. They are the record of humanity’s emotions, and those have endogenous patterns.
Before anyone here posts about how inflation is inevitable and coming soon in a big way, please read this post by Mish. He, as I, must be getting awfully tired of explaining the same things over and over again, even as we have been proved right in spades over the last 2 years.
http://globaleconomicanalysis.blogspot.com/2009/08/belief-in-wizards-runs-deep.html
More stats:
Corporate Insider Selling Is An
Extremely Bearish 17 Times Normal