New Week, New Plan
Remember the battle cry from last week, "Short Every Rally"? It worked like a charm until the final hour on Friday where shorts began an orderly, albeit low volume, covering rally. While volume remained merely low to average, there is no denying the clear-as-day point gains across major indexes that had bullish reversal patterns forming on the charts today. So in a nutshell, as Austin aptly pointed out in today's Market Pulse, we now ought to be looking at points of support to go long.
Make no mistake, this in not a battle cry for the bulls, but it may morph into that over the course of weeks only to be met on the other side by once again hungry bears. While the shorts may be covering with few bears selling into the rally, the low volumes of Friday and today (1.14 bln NYSE; 1.55 bln NASDAQ) tell us buyers are on strike too. For the time being though, the Mother Of All Put Opportunities (MOAPO, or "MOPO" for short) will again have to wait.
Speaking of which. . .a few Index SkyBox readers have asked me lately about my fundamental outlook on the economy. Thankfully, we do not have a venue big enough or a soapbox tall enough for me to jabber on about the state and future of the world economy. In a nutshell, I can only guess. That makes my bearish prognostication no more valuable than anyone else', bearish or bullish. Though I still fall to the economic bear camp as a "buy and holder", as a trader, I could care less. I just want the equity markets to move, and I believe they will move in fits and starts, up and down for months perhaps years. The raging bull is dead and consolidation rules. But there will be mini-bulls and mini-bears, all tradable to the best of our abilities.
So, my revised thinking on MOPO - not going to happen. There are simply too many people hard-wired to think bullish thanks to the last 20 years of bovine action. Yes, one by one, they will throw in the towel and realize that yesterday's tech darlings will never again have their starlet allure. In the words of Eric Clapton, "She's gone". But dreams die hard and once again, the price re-alignment of businesses owned for the purpose of earning a return becomes a process, not an event that takes place overnight in one big drastic price move. MOPO is a wish by a bear, much as AMZN $1000 was a wish by a bull.
To that end, I'm still of the belief that excess leverage and fictional accounting - read that, huge debt - world-wide deflation, even greater declines in the Japanese economy, and recent demand for gold suggest all is not well in the world, which I expect will lead to falling equity prices in the long run. My ballpark take on it all? 100-point lower highs and 100-point lower lows on the Dow for months, maybe years, to come.
Even so, that will not stop the equity markets from moving in harmony with the ebb and flow of human emotion, which we can thankfully read in the charts. As traders we don't have to guess. We just have trade in the direction of the prevailing trend, and that trend appears to be reversing to the bullish side for now.
Shall we take a look at the charts of human emotion to see where we might be headed next? In the end for us traders, charts should be all that matter as long as we carefully measure risk and reward. Bulls, be ready to TRADE (not INVEST). First up, the Dow.
Dow Industrials Weekly/Daily/60/30 (INDU):
Big picture: The Dow weekly/daily chart stochastics are aligning in bullish reversal. However, coupled with low NYSE volume and a midstream change of stochastic reversal, rather than emergence from oversold tips the markets hand that bears are scared to stay short, but "buy and hold" is not gaining any favor yet either. Noticeable absence of institutional buyers here as the magenta 50-dma line of resistance looms near at 9914.
Also note that today's candle at 9884 is a full 300 points above Friday's low of 9580. That's a long way to run, and deserving of some giveback - exactly what the 60/30 chart stochastics suggest will happen. Support is at 9750, a full 120 points down, thanks to today's stratospheric trajectory - up. Scalpers can likely expect some downward action tomorrow. But pullbacks to support can be tested for profits on the long call side.
NASDAQ Weekly/Daily/60/30 (COMPX):
Same story, different symbol. But if you can believe it, a bit more strength thanks in the COMPX, which actually reached overbought shores on the weekly/daily charts before attempting to cross the stream back to overbought, as it is now wont to do.
Daily/ weekly stochastic is now pointed up, and would thus look for support at 1830 and 1815, the latter being today's low. However, the rocket-trajectory of the 60/30 charts all but assures a pullback. Scalpers can take a whack at puts down to support given that volume is not supporting the bullish move
S&P 500 Weekly/Daily/60/30 (SPX):
Very similar to the Dow, the SPX weekly stochastic has halted its slide mid-course (lots of speed, no horsepower) while the daily stochastic has reversed from a true oversold reading. This speaks to near-term strength in the charts, but the lack of volume tells us that there is an absence of resistance rather than huge investor desire to stampede the bull higher. Nonetheless, we won't argue with the numbers. Take it to mean an overall emerging bullish environment for a few days or couple of weeks. But for scalpers, oversold 60/30 stochastics portend a little cap on the head until oversold oscillators again turn up. Ideally, this happens at 1198-1102 support. A move under 1098? Look for 1090.
Any information to be gleaned from the VIX or VXN? Perhaps. The VIX is already approaching a lopsided bullish stance at 23.27 and falling fast while the VXN is similar, falling to 46.41 just off its all-time low of 42.46. Both of these low reading suggest the bulls have already (mostly) staked their claim - a contrarian sign that ought to have bears scratching again soon at the honey pot. The point is that by volatility standards, most traders are already of bullish persuasion, which again lends credibility that the recent advances are weak, though still sustainable.
The point of all this? The already bullish outlook, but with low market volume has me thinking the 300 Dow point we have seen in the last two days are without much staying power. It seems that those points are more short covering than anything else. Investors desirous of owning interests in on-going concerns are still hesitant to step up in droves and appear to be on strike, while short sellers seem scared of their own shadows. This is not strength, but lack of current weakness.
That said, expect a modestly bullish movement during this expiration week with only the light breeze of news willing to shove markets in either direction intraday at the slightest provocation.
Still not an investors market - but traders can scalp the dips. Long-term investors can sell into candle strength or shore up some of last week's damage for modest recovery
See you at the bell!
INDEX TRADER SUMMARY