Sunday, March 8, 2009

Technical Update 8.09

Another week. Another round of losses for the major averages. That makes 8 out of 9 losing weeks to start the year. The S&P 500 briefly lost 10% on the week as it touched on The Number of the Beast (666) before staging a last ditch rally in the final frame. Although I'd like to claim that "Satan's work is done," I still feel we have a little bit of room on the downside. I do think a violent short covering rally is possible before that happens. A sharp rally back to around 750 early next week would set up nicely for a plunge back to new lows and the final bottom of this downleg. Gun to head, I'd say we're closer to an intermediate term bottom than the next intermediate top, but I'm not acting on that. I'm still carrying a some small short exposure and "feeding the ducks" as we constantly break new lows.

I will add, though, that as the market continues to grind to the downside, the probabilities increase that this is "something else" than most are assuming. It is imperative that we see a relief rally soon. Think of it like a rubber band. Stretching, stretching, stretching. The more it stretches, the higher the probabilities are that it will snap back. However, it also gets to a certain point where any more stretching could cause it to break altogether. I'm afraid that we may be nearing that point now.

I've been doing more digging around on the long side. Last week I posted a list of stocks I am watching as catalysts for a rebound in "On Bottom Fishing." Although I still believe those are the best bets for people looking to start building long-term positions, I'm not there yet and would likely not be using those as vehicles for an upside trade. I still think I can get them at much lower levels . If I do see a low-risk entry opportunity for a 4-6 month rally in the near future, I will likely be looking toward buying calls in the "dying, but not dead" financials. JP Morgan, Manulife and General Electric come to mind. Just sharing my process.

Let's take a look at some charts.

A two year lookback of the S&P with the put/call ratio superimposed below shows the carnage and the unwillingness of options traders to "capitulate."

There are still major discrepancies between the various sentiment indicators. The AAII (American Association of Individual Investors) Bull minus Bear reading came in at the second lowest ever this week. This discrepancy is one of the leading reasons I am worried about the rubber band 'breakage' scenario.

Another one can be found here. Notice the behaviour of the Advance/Decline line (smoothed as a 10 day MA). Typically when it consolidates below zero, like it is now, we see a sharp move higher. That didn't happen in October. It "broke." Will that happen again?

A positive that bulls have carried on their shoulders throughout this decline has been the relative outperformance of numerous benchmarks. I summarized that on Feb 26th as:

Holding: S&P 500, Russell 2000, Nasdaq Composite and 100, Discretionary Sector, Healthcare Sector, Materials Sector, Emerging Markets, Nikkei (Japan), FTSE (UK), ASX (Holland)

Broken: Dow Industrials, Dow Transports, Financials Sector, Staples Sector, DAX (Germany), CAC (France), MBI (Italy), SMI (Swiss), IBEX (Spain), Eastern Europe and Russian markets

AORD (Australia) and TSX (Canada) are both debatable.

The only remaining holdouts from the top list are the Emerging Markets and the Nasdaq Large Caps (100). But the Nasdaq 100 did post a new weekly closing low, so that may disqualify it. Everything else has broken indraday lows and made new weekly lows on a closing basis.

(edit: The Nikkei in Japan has not quite broken the 7000 level of support)

Gold has made a two day rebound after suffering 8 days of consecutive losses. I expect this bounce to terminate in the 953-966 area before continuing lower.

That's all for now.

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1 comment:

Matt Stiles said...

Continuing the theme of sharing my process: I took a position in JPM calls this morning. September paper.

I now 'feel' market neutral. That is, I don't really care which direction we go from here.

If financials get a strong bid and we see SPX 750 or thereabouts, I'll take my profits and reevaluate. This is not a long-term position.

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