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November 18, 2008

Cliff Dive

Another last-hour reversal has thrown traders yet another curveball. Last Friday, bulls had grown complacent going into the end of the session, with the intraday pattern suggesting a rally into the close before the 3:00 hour swept away 4% of market capitalization. Today's action was showing breakdown and an imminent slump to new bear market lows before the 3:00 hour produced a bounce of nearly 4%. It seems the prudent way to trade these days is to fade the prevailing mood at 3:00.

Sub-850 on the SPX has now rejected price for the fourth time in five weeks. One's first instinct may be to label SPX 850 as a strong support zone and attempt a long from here with the tight stop being offered, but I don't buy it. Experience has taught me that the more often a pivot point is tested, the more likely it will fail, hence the title of today's post. The title looks forward rather than backward.

index chart

We do have the takeaway that volume has been higher on recent up days, but this point is not enough to sway my bias here. Notice how high the up volume was in September just before the crash. Also, banking shares failed to fully reverse today:

index chart

Citibank shares were down another 6% and have now lost about two-thirds of their valuation since the beginning of October. These guys are important to more countries than just the United States. For example, they are one of the most popular depository institutions and credit card issuers in Asia. Could you imagine a coordinated, multi-country bailout for Citigroup? Now that would be news.

Back to equities... another peculiar aspect of the late rally was that it materialized without the requisite drop in the buck. It's hard to say exactly what the divergence tells us, but I'm going to be keeping a close eye on the greenback... even overnight... because if it breaks, the whole landscape changes. In a roundabout way, I can see potential for a weaker buck. Commodity-related equities have been relatively strong in recent days, and they tend to lead directional changes in the commodities themselves. Commodities are not going to strengthen without the buck weakening, hence the strength in those equities may be an early warning sign of dollar weakness.

Well, I said it was roundabout. Even so, I'm just trying to stay a step ahead. Avoiding a whipsaw is worth a small fortune these days.


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