Relief rally coming?

We’ve got a clear divergence on RSI now, as each impulse lower over this week has been weaker than the last. This is a sign to tighten up stops or close shorts. You could make a decent case for a quick long trade here with a stop just under the lows, but on a wider time frame market risk is still very high.

Here’s a chart of SPX futures:

TD Ameritrade

Time for a bounce? (euro, stocks, copper, oil)

Here’s ES, 1-min scale:


RSI could use one more low, ideally at a higher level than the last to increase the odds of a rally.  The Nasdaq has diverged from the S&P 500 already though, and copper has a clear upslope in RSI:


EDIT: Here’s that higher low in RSI on ES that I was talking about and breakout from the downsloping trend:

There’s that weakness in ES

The short-term weakness in futures yesterday morning produced a 20 point drop overnight, and also painted a declining pattern in the 1-hour RSI. I covered an ES short in the low 1070s, since RSI is already into oversold territory with a double-bottom:


It would be nice to see a weak rally now to set us up for another big wave down, but we’ll see what happens.

Also overnight, CHF and EUR made new lows. I bought some CHF near the bottom and sold for a quick trade. GBP held up pretty well in comparison, by the way.

ES update (edited for clarity): stock futures still strong, but watch RSI for signs of weakness

We don’t really have waning strength yet on the hourly scale in SPX futures, but I can see the possibility. If this current rally leg (from Friday afternoon’s low around 1083) fails to break 1107 (Friday’s high) or does so on weaker RSI than the last rally, it will be a hint that the entire move up from 1036 is coming to an end. A fresh wave of selling will be even more probable if hourly RSI makes a lower low after a lower high.

Watch for weakening rallies and strengthening sell-offs to telegraph impending declines, even if prices are holding up (to be clear, we don’t have such weakening yet — I’m just watching for it). Prices often do stay elevated right up until a nasty break, like we saw from mid-April to early May (see chart below, ES 2-hour bar). You can also see the strengthening rallies and weakening declines since the bottom last week (the bottom was less strong than the preceding wave down, which is a classic buy signal).


Here’s the ES hourly. Still showing strength, but it would be bearish if this current wave does not get at least as powerful as the last.


And 15-min bar… this one shows weakness, but it’s too early in the wave to be sure.

All charts from TD Ameritrade

Today is a trading day for most of the world (and US futures are trading, though on a cut schedule), so don’t think that prices will wait for 9:30 EST Tuesday to make any important moves.

Remember, we have a rather neutral set of conditions on the daily chart, but the Elliott Wave crowd is looking for a hard third wave down anytime, and last week’s action could serve as a perfectly functional 2nd wave. If there is a third wave coming, it will be more powerful than the decline from 1220 to 1040, possibily taking us under 900 very quickly. Judging by May 6, the market has signaled that it is capable of such a move, and relentless declines are common following bear market rallies. Also in favor of such a move are the continued dollar and yen strength, anemic rallies of the euro, chf and pound, and the fact that the commodity complex is looking broken.

If you can’t tell, I am ambivalent about stocks now and positioned appropriately flat at the moment. These are not good junctures to trade, since the signals are so mixed.

Closed equity & currency longs, short metals & oil

SPX futures are looking wobbly, and gold and silver are looking downright weak. I took profits on my equity, euro, CHF and GBP longs and JPY short and have built a modest short position in crude, copper, silver, gold, palladium and GDX (gold stock etf).

Here’s ES as of the open (1-hour scale). A set-back today may be likely, but I would still probably expect stocks to recover and inch higher a while longer. RSI is weak on a 5-min scale but still strong on the hourly.

Do we have a bottom?

It would be nice and tidy if this morning’s 1036 print on ES turned out to be the low for a couple of weeks or even a month or two. Stock indexes made a price extreme unaccompanied by new highs in the VIX or yen or new lows in the euro, pound, copper, silver, gold and many bellweather stocks. The later rally was fast, furious and broad.

Here’s how this week in ES looks to me in the scheme of things. A right shoulder would be beautiful here:

TD Ameritrade

To re-iterate, I’m a huge bear for the 6-18 month horizon (my SPX target is an indecent number well under last year’s lows). I’m bullish for the 1-6 week horizon — I anticipate scaling back into a heavy short position in stocks, copper and oil on any rally here.

Enough sell-off for now?

SPX futures are looking pretty oversold here, and you could say there’s a bit of negative divergence on the hourly:

TD Ameritrade

The US markets are actually among the least oversold around the world. Japan, Australia, China and lots of Europe are down a lot more, which tells me there’s room for a corrective bounce here.

Here’s Australia’s main stock index, for example:


Of course, I think all stock indexes are going to make deep new secular lows in the not-so-distant future, and the land down under will finally be welcomed to the depression as its real estate bubble pops and commodities decline again.

Bonds vs. stocks

New lows for stocks overnight, and new highs for bonds (man, do I wish I hadn’t gone flat yesterday afternoon). By the way, that fractal played out, since the small decline into the close yesterday foretold a greater decline overnight.

S&P futures in white, 30-year treasury futures in blue here. You can see that they have each formed a megaphone pattern. We’ll see if they respect them today or slice right through in a panic.

Source: Interactive Brokers

And for those who are waiting with baited breath for the long bond to collapse, consider this 3-month chart of futures for 30, 10, 5 and 2 year treasuries. They all still move together, and they all go up as stocks go down.


But of course risky debt moves opposite to treasuries — just when you most need bonds for safety, it trades like the stock market. Here’s a 3-month shot of TLT (blue, 20-30 year T-bonds), JNK (red, junk bonds) and HYD (green, high-yield munis):

Source: Yahoo! Finance