Technical Update 3.09

I have recently come to the conclusion that blogging and modesty are incompatible. A prerequisite of writing your thoughts for others to see is the belief that others actually give a damn. However true that may be, I will continue in my attempt to avoid coming across as some arrogant jerk, screaming for attention.

Sometimes I'm right, sometimes I'm wrong. I've made a decent living the last few years being more of the former. But from what I understand, that is no feat in itself. Many, if not most, can claim a similar record. Others will simply convince themselves of righteousness. In fact, I'd be willing to bet that nobody believes they are wrong more often than they are right. Just like 90% of people grade themselves as above average drivers.

So what does this preamble have to do with technical analysis? Everything. Wall Street, Bay Street, High Street and many others to be sure, are littered with the corpses of those who thought they were god. If nothing else, this current crisis is testament to that. Only this time they weren't playing with their own accounts and livelihoods. They were playing with everyone's.

One of the toughest paradoxes I've had to confront in doing what I do, is to reconcile differences with time horizons. Most of my analysis is done on a very broad, macro scale. Yet most of my profits come from short term speculations. And depending on your definition of "short term," that is what everyone else is doing also. If anyone tells you they are a long-term investor right now, they are probably lying to themselves. We're all "renting" stocks to a certain extent. The days of investing for the prospect of dividends is essentially gone. Even today, when confronted with an opportunity to buy a company with a robust dividend, we are more or less speculating on that company's ability to survive. Very few robust businesses are paying robust dividends.

So please try to view these technical updates through the appropriate lens. My sentiments here may contradict sentiments expressed elsewhere due to the time horizon I am dealing with.

The S&P 500 is my primary benchmark for market direction. But I like to see confirmation in other indices like the Dow and Nasdaq before I draw my conclusions. The Dow has been a laggard over the last week as earnings disappointments hammered some of its components. The S&P had to drag the Dow along with it when it broke above resistance at the 840-850 level. As of Thursday's close, the major indices are at a very vital juncture. Any sort of follow through of Thursdays action would portend very poorly on weekly and monthly charts. I will be watching Friday carefully.



As can be seen from the chart above, the S&P is looking vulnerable after a potential "price too high" rejection of the breakout. Fast moves follow failed patterns.



Here is a weekly of the Dow. The considerable underperformance could even see the average post a weekly drop for the fourth consecutive week in January.



Above is a chart of the 10 day moving average of the NYSE market breadth. That large spike above the red line early in the year was one of the signals I used to start getting short. We have now rebounded back to the historical area of "overbought" and are falling again. An oscillation down to the -1000 mark would undoubtably see the major averages surpass their November lows. I expect this to happen.

Another one of my trusty indicators for market sentiment is the put/call ratio. It also gave an extreme reading early this month and has nearly revisited those readings on this shallow rally. This should be a very concerning divergence for bulls. See below:



Suffice to say, I expect lower prices in the immediate future.

As regular readers know, I have been wrong on the recent rally in gold. And I mentioned last week, that if any rally could hold above the $900 level, I would have to re-evaluate my stance. On Monday morning, gold opened higher and continued to rally. I'd like to share the following psychological process I went though, because it is one that often leads to losses. As gold opened higher, one of my requirements for higher prices had been met. For fear of it running away, I thought about buying it. Regardless of the fact that there was no reasonable levels of support to make such an entry with defined risk. I didn't want to miss "it." "It" being the run-away prices of $2000 or higher that many gold bugs have talked about, and that I have warned against. "What if it happens and I miss it!"

Luckily I caught myself. Fear of missing profits was not on my list of legitimate reasons to enter a trade. I had the feeling that others were going through a similar process, so instead of buying gold, I shorted it. I covered near the open on Thursday for a decent profit. Today, I see gold up sharply in European trading, near it's highs from Monday. However, it has been trading down every day this week, only to open flat or higher in New York. (side note: don't expect gold bugs to decry price manipulation if gold is being bought every day before the open - they only see it when it happens the other way).

I don't know what gold is going to do here. If it is indeed in a "long-term" bull market, it "should" correct further and for longer prior to any further upside. I'll take a wait and see approach before drawing any further conclusions.



I don't consider myself as one of those screaming about a bubble in treasuries. I think if inflation was calculated properly (as an aggregate of total money and credit) we would see that real interest rates were high at anything above 0. Clearly, prices got ahead of themselves in December. But I wouldn't be surprised to see even higher prices if the stock market goes in the tank again and people flee for something "safe." I like the 122 area with defined risk on the 10 year.



That's all for now.