The return of the Yo-Yo market!
One day down, one day up, and both on above average volume.
I was happily away from the market all day. Examining the charts after market close, I was greeted by 2 pieces of news, one good, one bad. Good news was that my short position had not been stopped. Bad news was that my short position had not been stopped.
My plan was to hold my initial short position until stopped higher than the high of Thursday. My rationale was that if Thursday’s reversal drop had indeed been the beginning of a meaningful pullback (or decline), index would have had to go lower in a 5-wave move, leaving the Thursday high intact.
It is very likely that index is about to extend its wave structure. If so, it will be a sign of gathering momentum – not necessarily price or breadth momentum, but crowd momentum. We MAY (I underline the word MAY) end up in a situation where people trample all over each other not to be left behind. It is very dangerous for a bear to be short in that situation. On the other hand, a situation like that can be extremely rewarding for a patient shorter who can wait out the madness of the crowd.
One, of course, never knows when the frenzy ends. Also, we still cannot say for certain that Thursday’s high was not the top of this rally.
But given the strength and breadth of Friday’s move, and its deep (almost 100%) retracement of Thursday’s drop, chances are high that the current rally is extending.
For now, any sustained move below Thursday’s low (900) may be a first signal that impulsive wave extension has come to an end. If, on the other hand, index rallies above Thursday’s high (931), then, I will not be a shorter of the index, and will move aside and observe.
I am not in the habit of arguing with the market. Next week is another option expiration week. Many banks and brokers are in the process of finalizing new IPO shares that they want to dump on anyone who might now like them after such glorious stress test results, and would love the highest price they can get.
So, I will stick to my plan (will let myself be stopped above 932 or so), follow my road map (60-minute chart I have been posting every day), and trade if I can.
No new long or short positions for me to take home for now. What I have is good enough at this time. In fact, had I been around the market on Friday, I would have probably reduced a few long positions to take profit.
This is the 60-minute chart of the index – my road map
Notice how we have been getting a new series of negative divergence after index moved above 875. That is exactly what I meant when I said a move above that area might create a ground zero for the bulls.
Because we may be dealing with extended waves, the internal wave structure of the rally can be counted in a variety of ways. Also, if the buying frenzy hits the market, waves may multiply faster than rats on viagra.
I think it is best to concentrate on the channel, support resistance levels, and larger waves for now, and worry about the minutiae of internal waves later. I will also be paying attention to volume and may regard inordinately high volume accompanied by sharp spike in price as a possible sign of a blow-off top.
I am not saying any of this would happen, just things I will have in mind to look for.
I shall keep an eye on Nas100 which has been weaker than S&P in recent days. That of course makes sense since it is the banks that bankers are pumping not the techies.
It seems like the market has made it its mission to either kill all bears or convert them into bulls in one single uptrend. Take a look around you, read headlines, blogs, talk to friends, colleagues, neighbours – seek out the guy who finally admitted his losses when the bear was at the peak of its rage. Has the mood not changed from 2 months ago? Market fools most of people most of times. The more bullish frenzy we see, the closer we are to a turn. It may not be the turn, but a turn.
Of course, being contrarian does not necessarily mean being reckless, or entertaining a one-on-one fight with the market. Every one of us can be successful in the market, but no one, other than liars, can beat the market as a whole.
It’s all about playing the odds, taking calculated risks, and erring on the side of caution.
For the day, volume was above average but less than the day before. Daily breadth was excellent, but McClellan oscillator hardly moved and is still stuck in doldrums.
So much has been written about the lack of volume in this rally. Well, we have had three back-to-back high volume days. I am afraid that it may not be good news for either the bears (as they are being creamed every market minute) or the bulls (as they may be stampeding into a blow off top to be followed by mass slaughter). I hope I am wrong and one group comes out of this happy. We’ll see.
Nas100 has been having a tough time
Please read the annotations on the chart as I think they sum up the situation.
Notice the recent sharp decline in performance versus S&P; as I said it is the banks that need pumping not the techies. This does not mean the Nas100 rally is over or the techies are doomed, just something to keep an eye on.
Volatility has been contracting sharply, and that is in general good for the market and bad for option buyers, especially put buyers betting against the rally may be feeling quite a pinch
I will be looking to see if trend of VIX continues on the way down or not.
To wrap up:
Index seems to be extending its wave structure upward.
A Monday break of Thursday’s low (900) to the downside may indicate the rally is over, pending confirmation from a change in short term trend
A break above Thursday’s high (931) keeps the short term uptrend intact and may indicate a continuation of the rally
The long side of the market is getting crowded. I shall either dance close to the door or stay outside enjoying fresh air.
It is very dangerous to go all-out short at this point.
Last week, so-called market experts and gurus of all sorts were calling a brand new bull market – late as usual – two and a half months late – 30+% late – the danger of a buying panic and a melt up has not ebbed away, in fact mass guru calls may set it into motion sooner rather than later
Next week is an option expiration week and bankers like high share prices, especially since they are in the process of offering freshly printed share certificates to enthusiastic buyers.
Resistance is 935 (Jan 2009 top). Support is 920, 912, and 885 neckline
Short term trend is up. Mid-term trend is up. Long term trend is down.
I will leave you with this daily chart again
This is not a broken index, far from it. It is overbought, but overbought can become more overbought. There are multiple levels of support to hold it and create a bounce. It now has the support of 144 MA (897) in addition to 21 and 55 EMA
Notice that Thursday was a big outside candle, Friday was a big inside candle in the opposite direction. What does that mean? I am not sure, but I do not like it
Food For Thought: I have in the past mentioned that junk bonds are one important key to proper analysis of markets.
There are two corporate bond ETFs that I avidly follow, one of them is regarded as high quality. To me, all corporate debt is junk (all government debt is junk as well, but that’s a different discussion altogether)
Both ETFs have been doing very well.
This may denote a shift in market psyche towards risk. That is in principle supportive of the stock market.
The questions are:
How much of this rally in junk has been out of desperation for yield and income?
Can junk prices sustain or improve current heights?
We can only know the answers after a correction in the broader market.
Have a Nice Weekend!