The Battle Cry Goes Out. . .
Short every rally!!! At least that's the trading picture. But what about the long-term investor? Yep, long-termers too ought not to get too comfortable that there's a monster bailout rally coming. But oh, what a target-rich environment for those with no bullish market bias. Put nuggets are everywhere to be found if only investors would ditch their bias. In the long-term, this is a bear market until proven otherwise.
In the short term, call it "Enronitis", as the media has chosen to do. I mention it often but opaque accounting practices cleverly disguised as the innocuous-sounding "pro-forma" earnings will not disappear overnight, and they will continue to cause heartburn in the investment community. If you try to pet a rattlesnake, odds of it biting you are pretty good. The tendency is then to be leery of all snakes. Much like Maslow's law that says, "When you are a hammer, everything tends to look like a nail", everything now tends to look like an accounting snake. Gopher Snake or Cobra, the market makes no distinctions.
For those few who think that the market will make the distinction soon, I would disagree. Very few will educate themselves to the distinctions, and those who do will have a difficult time getting the financial information they seek. If they are successful, having the accounting forensics background necessary to make that distinction will make the position of sidekick to "The Crocodile Hunter" a safer endeavor.
In short, there is not way to tell, even for the most sophisticated of investors, without hours of research that don't always' yield the answer before it's too late. Let companies that postpone earnings announcements to rework the books, or companies that disclose they made $4 bln in previously UN-disclosed acquisitions be our guides. Surprises will happen every day on that from because all that is information that has been intentionally withheld from public scrutiny. It is impossible to know stuff about companies that they do not want us to know. That fear of getting bit will keep investors away from stocks, reasonable or not.
More to the point, those surprises will continue with new ones disclosed or uncovered every day. Such is the nature of a bear market.
But don't despair. The past does not equal the future. All we need do is the same as hockey great, Wayne Gretzky. Instead of skating to where the puck is (or worse, has been), skate to where the puck is going. There is no need to lament the passing of the bull, dead for nearly two years now, as long as the future holds so much promise for put nuggets. Be a market agnostic and get on the right side of the trade. As is so often stated in these pages, the market is not right or wrong. It just IS. Skate to where the market leads us and profit. Or skate to where you WANT the market to go and bust out.
Big picture: recognize the bear for what it is. Profit from knowing that it is the greater trend.
Great, Buzz. "So how do I trade it?" Glad you asked. Even though Fundamentals Guy, dominates my personality, Fundamentals Guy would be dead without Chart Boy, the tactician of the two who puts practical application to timing entry and exit. So what do the charts say?
Dow Industrial chart (INDU - weekly/daily/60/30):
Starting with the Dow, we've noted for some time in this column that 9712 was pivotal as a point of support/resistance. Looks like the 50-dma (magenta) and the 20-dma has composed primary resistance over the last three sessions though. Support? Who knows? But with a weakening in daily stochastics, as the 5-period makes a wobbly-kneed attempt at overbought and the candles falter, doesn't exactly suggest any level of support is ironclad. True enough, the 9700 fell again today. However, for those brave enough to scalp calls, the 60/30 stochastic setup is bottoming while the candles are in no-man's land with the meaningful support at 9550. That candles have hit lower Bollinger band extremes too. But as can be judged by the 30-min chart, lower Bollinger has done nothing for the bulls lately. A better high odds entry awaits those put players who wait for the 60/30 stochastics to cycle to overbought, then short the rally.
Relatively speaking, the Dow is in better shape than the broader index SPX or NASDAQ thanks to a defensive component mix, which is perceived as "safer" in this environment.
NASDAQ Composite (COMPX - weekly/daily/60/30):
The NASDAQ on the other hand has some serious chinks in the armor. It closed at a new low today since its November breakout, and its daily stochastic has just rolled over from its luke-warm rally to midfield. While the 60/30 charts are oversold and begging for upward release, the bigger weekly/daily trend will keep a limit on upside action.
S&P 500 (SPX - weekly/daily/60/30):
Same thing for the SPX - a new closing low since November, with wobbly stochastics perhaps ready to take a dive. Nonetheless, they may have to wait for the oversold 60/30 charts to fake a rally at the very least. While scalpers may be successful with calls, the next high odds trade appears to be waiting for a put opportunity with overbought short-term stochastics and the candles at SPX 1100.
VIX? Highest close since December, which suggest that investors are dumping calls in favor of puts. But at 26.85, the figure is inconclusive. A healthy dose of accounting-born fear is entering the market, but nothing should be gleaned from it as it is far from extreme in either bullish or bearish territory.
And how about tomorrow? I haven't a clue. But here's how I get my brain wrapped around current conditions. First, the bigger trend is fundamentally down and the technical charts back that up. That is the primary trend. Intermediate, the daily charts have broken down with stochastic values rolling down with them, but not convincingly bearish. Trading timeframes though suggest a scalpers trading bounce could happen until oscillators reach to or near overbought again. In short, no high-odds trade setups as of the close tonight.
I can't imagine the news that would catalyze this, but a pop in the first half hour with the SPX reaching to 1100 then rolling under today's close would a pretty strong signal to go short. But anything is possible.
Remember, when you hear analysts talk about the great day on the trading floor and CNBC is bullish (for the day or the moment), the market is shortable. We need only wait for inevitable failure to make a bearish entry. Sure there will be trades in either direction for the agile. But the primary trend is down. Short every rally.
See you at the bell!