Boy, I turned my back to go to Italy for a couple of weeks, and you guys can't seem to keep the market from launching! Am I mistaken, or is that the most vigorous short-covering rally in the history of Nasdaq? I thought I read that it was the most violent rally in Dow, too, since 1932. And unless I missed something, it was purely technical. Where are all those f*cking "efficient market" theorists when you need to kick one around? <g>
So, just a few thoughts from a guy with a longer term perspective than most on this thread:
LONG-TERM (monthly charts)
SPX monthly H&S remains broken. Everything reads exactly like you'd expect from a failed H&S. I see resistance from that structure just slightly overhead at around 950, and I'm easing back into short exposure as we approach that level. The Dow seems to be a delayed version of the SPX, itself a delayed version of the NDX. Where the latter two have failed H&S, the Dow is still bouncing above it. I expect that its H&S must fail before the first leg of the bear can end, and I expect that the SPX must make the measured move off its H&S to complete the first leg, ala 1990s Nikkei. Target: that SPX 600 shelf from 1996.
While it seems like we've been going down *forever*, we have yet to approach the types of widespread bearish sentiment necessary to turn a bear of this magnitude; a couple of weeks of more bears than bulls on IIA doesn't cut it. *Trader* sentiment got there vis-a-vis put-call, but I still don't believe that is capable of producing a cyclical bull exceeding a few months. And capitulation? Give me a f*cking break. After the enormous surge of the bubble, the tremendous volumes traded, capitulation on even this first bear leg should be unmistakeable. Markets move in one direction until they can't possibly move in that direction any longer, then they correct. They are positive feedback driven and burn until they run out of fuel. The fuel for this bear - undying optimism, contempt for cash, insider selling, and valuations - has not yet been exhausted. And the enormous US credit bubble is just starting to crack. I'm truly frightened by what will occur when the mortgage refinancing music stops.
INTERMEDIATE TERM (weeklies)
Technically, we have launched into a bounce from heavily oversold conditions. Any time that happens, I immediately get the hell out of the way, put the safety on the "SELL" button, and wait for the market to clearly demonstrate that it is done. However, we have had four of these rallies during the bear, and this rally has already made more than half the percentage gains of those before it. Prior short-covering rallies have proven to me that the stocks that bounce the fastest frequently make their peak price excursions within the first ten days of the rally, even though the averages will meander higher for many weeks to follow. Therefore, since upside momentum appears to have stalled, I am taking whacks at individual issues that are at resistance. I observe that NDX is displaying substantial relative strength, and Dow relative weakness. I'm focusing now on final-stage bear issues: Dow stocks and other giga-caps, banking, homebuilding, retailing, education.
From an Elliot perspective, I like to take a step back and brush with broad strokes. The first twelve months of the bear was substantially corrected by the six-month rally that followed 9/11. It was around 38% retracement, with 50% duration. Then we launched another four-month leg down. The one month rally from July, while it posted 50% retracement, at 25% duration may have been insufficient to correct that. If this is still part of correcting the second leg down, we are still only in the fourth corrective month. Another whack at the neckline on the SPX is probably an even-odds bet. This all fits in with seasonal market tendencies and money creation. The overall pattern appears to be a double three of sorts, and I place us in "B" of the second three right now. If the four month July rally was all that the market could muster for "B", then "C" could be underway, but I'm not going to bet on that proposition.
What about the notion that we have launched a correction of the entire bear? That would imply at least nine months of rally, carrying back about the neckline to 1180 resistance. Given the sentiment, mutual fund cash, insider selling, valuation, and monetary backdrop, I find that extremely unlikely. Basically, the wrong groups are buying and the wrong groups are selling for this to have legs.
SHORT-TERM (dailies)
This rally has come very far in a very short period of time. We've had a good three years packed into the last couple weeks. Every count I can produce says that there is a very high probability of a 38% retracement of this rally, down to that 850 SPX level. I am playing that. Elliot says early stage pullbacks tend to be the deepest - so anything less than this pullback is a very low probability event. I can count us in "iii" of an ending diagonal here, but regardless, the up has lost its impulsive nature and the odds favor this pullback. Put-calls are finally lining up to support this scenario, too.
Issues I'm targeting: ccu pg hdi ibm ifin mbi mdc rhi ryl wmt
A few techs that have run up enough that I'm interested in selling again: altr, isil, lltc, mchp, molx, mxim, nvls
So basically: selling a few select names, mostly Dow-oriented, in anticipation of eventual H&S failure in the Dow. Wiggle-trading an index short for a retracement of the last 3/8 of this bounce. Then I get flat and wait to see if more impulsive up follows, or if it begins to behave like another C/3 down.
I'm curious to hear criticism of this approach.
BC |
