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February 8, 2009

Bears Beware

It's my turn to play devil's advocate. While I still hold a bearish bias due to the combination of heavy selling-into-strength figures, extremely bullish sentiment (as measured by the CBOE total put/call ratio), horrifying prospects for our economy, and frivolous government programs, it is always prudent to take a step back and look for reasons to be wrong. Here is what I dug up:

Let's start with the industry at the center of our economic debacle: the banks.

stock index chart

Another MACD divergence was posted as the January low was tested this week. The test appears to be successful since a bullish hammer received strong follow-thru yesterday. The histogram also crossed into positive territory in the process. Judging purely by technicals, the banks seem to be set for a further 25-30% rally, minimum.

The chart of Citigroup offers a corroborating tale:

stock chart

Several retailers also appear to be basing for higher moves:

stock chart

stock chart

stock chart

Retailers are certainly one of the last sectors I would expect to do well in a period of rising unemployment. If these issues resolve higher, I suspect the action would only be part of an extended mid-term rally and would eventually offer dandies of shorting opportunities.

stock index chart

Triangles usually resolve when a bounce off one of the bounds aborts before reaching the other side. Therefore, we should have seen triangle failures this week. Instead, equities bounced back up to the 65DMA and did so in the face of dismal news, both potential signs of strength.

On the more esoteric side:

gold/silver ratio

It's only a brief interval at this point, but the fact that the gold/silver price ratio has eased could be a sign that monetary conditions are beginning to loosen. Time will tell whether recent action is just a fluctuation or something significant, but it is an important indicator to observe.

So you see we have a lot of potentially bullish developments unfolding, technically-speaking. I suppose bears can take solace in the fact that when solidly bullish technical patterns fail, they tend to fail miserably. Perhaps our sentiment indicators are signs that such a failure will take place.

Regardless of the intermediate trend, I suspect equities will at least suffer some immediate weakness. We have some hefty selling-into-strength numbers piling up, but more importantly, Friday carved out a bull run:

stock index chart

Bull runs rarely offer a repeat performance, so I am not looking for another runaway move on Monday. Back-to-back bull runs tend to occur at the beginnings of extended, powerful moves or during low-volume holiday periods. The most common follow-ups to bull runs are narrow-range consolidations (which set the market up for a continuation within 1-3 days) or some sort of bearish ending pattern. In other words if the market gaps higher Monday, there is a very good chance the gap will close, and I will be looking to fade it. On the other hand, an NRC would chase me out of my modest short position.

For the second session in a row, gold attempted to regain its trend line and failed.

gold chart

Especially given Friday's spinner, I anticipate a big move coming. I'd love to have a straddle on gold right now, but I don't. So whichever way this breaks is the direction I will be looking to play gold upon further setup.

The bearish pattern on the CRB looks like it wants to break the other way:

commodity index chart

And oil will at some point return to its long-term moving average:

oil chart

Okay, enough. That's my weekend brain dump. Any further deducing privileges are hereby abdicated.

 

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