After Friday’s close, we muttered about our current S&P 500 short position – and while the entry was certainly mistimed from a short term perspective, we do expect this position to be a winner eventually. At least that was our thinking going into a nice summer weekend of beer drinking and pool carousing.
And now that we’ve cleared the sun and hops from our heads? I woke up this morning to find the S&P up 10 points after opening – and almost headed back to bed. But alas, we circled the wagons, and rallied the motivation to head into our converted motel room office and get the work week kicked off with a bang.
All told, we got through today’s trading day in fine order. This morning’s rally quickly retreated, showing less conviction or willingness to complete than the Lakers’ sorry bench last night.
So now, with Monday mostly behind us, we’re feeling pretty good about things, as it appears the market has tipped it’s hand. How so? Well here are 3 reasons we think this rally is pretty much toast:
- There’s no volume. None. The rallies have no marbles. Meanwhile the declines boast very strong volume. The past 3 days have been particularly, increasingly pathetic from a volume standpoint. I think the only suckers buying this rally are the jovial commenters bullishly weighing in on our comment thread here (ha!)
- We rallied back to the 200-day moving average – and stalled. A rally back to the 200-day SMA on low volume, after an initial break to the downside, is a classic snapback formula. The next move is usually down. We’ve talked before about the importance of respecting the 200-day moving average. So, as long as we’re below the 200-day SMA, the trend is DOWN.
- We are (back) in our initial target range. From our intraday low of 1040 a few weeks back, we rallied as high as 1108 on the S&P – about midway between our original S&P price target. We’re there. So the market could rally higher from here – but it doesn’t have to.
Let’s see – no volume on rallies…we’re still below the 200-day moving average (blue)…other than that, everything looks great!
(Source: StockCharts.com)
How do we know if we’re wrong? A strong, sharp rally above the 200-day line – on increasing volume – would give us some bearish heart palpitations. But right now, it’s hard to see that happening. This market looks like a complete disaster in waiting.
So get your popcorn, and short positions, ready…we’re excited for the fireworks to get rolling!
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{ 4 comments… read them below or add one }
Brett,
I’m somewhat new to this and have been trying to get a handle on at least rudimentary technical analysis. (I use to be a buy and hold guy also)
So Friday, the Dow had a hanging man candle, today a gap up and a shooting star, it’s still trading below the 200 day, the MACD is way below -0-, and the slow stochastics appear to be approaching over bought at close. This is kinda bearish isn’t it?
I’m hoping I was just a bit early when I bought January puts for VALE, JOYG, and CAT and calls on GLD because they’re all a bit down right now. I’m torn between looking for a high place from which to leap or acting like the lion in the Wizard of OZ (“I do believe, I do believe”)
I’ll let you know how it comes out. Well, actually, if I opt for the high place, I probably won’t, but your post makes me want to keep believing for a little while.
Brett,
Technically you are right. I’m bearish on this market also. There is also Fibonacci replacement level near yesterday’s high.
Thanks Sergey – we’re still in Fibonacci range by my calculations even after today’s run up – should be interesting to see where we go from here.
Hi Rick – certainly a lot looking bearish from a technical perspective…I try to keep it simple myself when using the technicals, as too many can throw me for a loop.
Bottom line for me is that we indeed broke the 200 day decisively to the downside a few weeks back. We’ve rallied on light volume – today was again anemic. And ALL other markets have basically topped and turned down – commodities, certainly the Euro – which looks like our deflationary hypothesis is still in play and relevant.
Next step in the script would be another sharp leg down in the stock market at large.