Tag Archives: bounce

SPX ready to rebound? (updated after the close)

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We nearly have an upward cross on the 30-min RSI:

prophet.net

UPDATE: Of course, the other alternative is that each little bounce gets sold and the oversold condition lasts for another day or so and takes us down another 1-2%, as in the decline from 1100 in early February. The easy answer to this problem is to keep ratcheting down your stops or set a loose trailing stop.

UPDATE 6:20: Well, we got a bit of a bounce in the afternoon, then a sell-off into the close, followed by a rebound in the futures after-hours. If this were like January, we might gap up tomorrow and rally to challenge the highs, but RSI is looking a lot weaker and lots of other markets are acting bearish. Bonds in particular had a very strong day and did not give back any of their rally:

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On the 30-day view of SPX, you can see that RSI is deteriorating faster than in January, so perhaps any correction of today’s drop doesn’t challenge the highs:

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If indeed this is intermediate wave 3 (of minor 1 of primary 3), as a third wave, we shouldn’t expect much in the way of countertrend action.

A rerun washout?

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Once again, fasten your seat belts. We still need a washout to set us up for a lasting thaw. Adam at goldversuspaper noticed the striking similarity between the pattern of the last few months with that of the 1937-1938 “second dip” crash in the Great Depression:

At first I did a double take and thought I was looking at recent history (with a projection of the next few months).

Just read his post for all of the technical reasons for this prognosis. He does a great job covering them. Basically, we are looking for a bottom of the wave 1 of C that started in July or October 2007. This should be the largest bottom to date in the bear market, yet we have not yet had the panic conditions necessary to scare away the premature bottom feeders and permabulls. Watch the volatility index (VIX) and the put/call ratio. When they spike, we are nearing an important bottom.

My candidate for the meaningless but newsworthy explaination/catalyst for this phase of panic is the trouble that western european banks have created for themselves with eastern european debt. I actually just returned from a visit to Kiev this week, where all of the restaurants and cafes suddenly became empty just a few weeks ago. Steel production is down by half this year, and apartment prices are down by 40% in just six months. Things have come to a standstill, the people are talking about revolution, and there is even the fear of another major war, but all is still calm for now. As elsewhere in eastern europe, the currency has crashed, but the housing, auto and credit card debt is denominated in euros or swiss francs. Ugly.

**Note: This post originaly stated that housing prices and steel production were each down by 2/3. A friend in the Ukraine sent me references for the revised figures.

Keep your eye on the bouncing commodities ball

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Here’s a five day chart of my favorite commodities stock shorts:

Click for sharper view. Source: Yahoo! Finance.

I nailed the commodities short at the peak in June, and sold a lot of my puts (GLD, GDX, TCK, NUE, X…) earlier this week as the sector made what may be the first of multiple panic bottoms in a bear market. I like shorting with longer-term puts, so I didn’t close all of my positions, but I built up a bit of cash. Lots of that went into retail and REIT shorts earlier this week, but some of it is waiting for this commodity bounce to get overextended.

This group fell 30-40% over the last ten to twelve weeks, so if this was indeed a meaningful way point, it could take up to eight weeks and a 25% rise for the countervailing bout of hope to play out. If the broader market is on the verge of a strong downdraft to beneath the July and March lows, which seems likely to me, commodities could get swept up in any waterfall and resume their decline sooner rather than later. This might not even be much of a bounce at all if broader market sentiment deteriorates quickly. Crashes do arise from oversold conditions – just ask Lehman shareholders.

The commodities markets are exhibiting a bit of negative correlation with the dollar, so I am also a bit short-term bearish on the currency. Any significant retracement would be another opportunity to get out of Euros, Pounds, Aussies, Loonies or precious metals (or short them again).

Happy days are here again!

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From a brief glance at Bloomberg today, I get the feeling that the bounce has about run its course. The talk is all about being “contrarian” by buying financials (um, wouldn’t that have been to buy them a month ago?), buying retail because the July sales report will probably be ugly, and to buy airlines (up 12% today) because oil is falling. The dollar is strong and even gold is down $33 to a six month low (about $820).

I am not surprised by the dollar’s bounce, and I’ve been calling for gold and oil to fall for some time now, but their decline is not a good sign. For oil to fall after total world production has peaked means that demand is drying up as the economy slows. For gold to fall signals that the credit inflation of recent years is over, and that cash is the new king (though it will be a short reign if Bernanke and Obama’s masters can help it). The strength in the dollar just reflects the weakness of Asia and the Eurozone and falling rates in their currencies.

Other signs that the end is neigh are the compressed VIX (near 20 again) and the ridiculous intra-day and intra-week volatility. Sustainable bullish moves are not this choppy, but bounces are, and particularly so near the top.

Time to batten down the hatches. This was just an eye of the storm, and the strongest winds are straight ahead: hundreds of bank failures and double digit unemployment within a year: