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December 15, 2008

Already Stretched

I mentioned in the comments section this morning that I had jettisoned my ES position due to a couple indicators that were flashing caution signals. It turned out to be a useful move since the futures closed the session down about 16 handles from my ejection point. Let's have a look at these indicators, along with some others that traders should heed.

The primary culprit behind the decision to sell was an indicator that mostly useful when it is at extremes: the NYSE Adv-Dec Volume Index.

indicator chart

I don't care how confident one is in the mid-term rally. A twenty-year high in a reliable indicator has to be respected. I will be reticient to return to an aggressively long position until this indicator works off some excess baggage.

The CBOE Put/Call ratio is also nearing a stretched point:

indicator chart

And bullish percent is nearing its highest reading in a year:

indicator chart

On the other hand, hourly MACD should be turning back up soon:

index chart

And finally, the buck got creamed today to no avail for equities. The dollar has now dropped in 5 of the last 6 days, producing a nearly FIVE point drop in the dollar index. Wow. Over that interval, the SPX has lost 10 points.

dollar chart

Tomorrow brings us a likely 50bp cut in the Fed Funds rate. I think such a move is academic at this point since Fed Funds have been trading close to zero, anyway. Nevertheless, we are bound to see the usually dose of volatility surrounding the announcement. I'm curious to see if the market will hold up or sell the news. The direction embarked upon after the cut will be a valuable clue.


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