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February 16, 2009

Erosive Decline

Equities are not looking very healthy. All attempts thus far to recover from January's slide have been tepid at best, and both daily and intraday views currently project lower prices. Just after the crash last year, I postulated that we would see a strong mid-term rally followed by a much more insidious decline that would erode prices slowly rather than clobber them. The rally has been nowhere as potent as anticipated, but the corrosive decline is still in play, and I think those demons may be sneaking into action presently. I also noted that a profitable way to play such an environment would be to sell OTM calls into each rally. I have done so successfully so far this year, and intend to continue.

On to the charts...

stock index chart

The daily S&P 500 chart speaks volumes. After Tuesday's bashing, we have a 3-day narrow-range consolidation on lower volume... very bearish. We should see immediate weakness this Tuesday, likely on about the same scale as last Tuesday's drop. This view is supported by the fact that we got a close below the triangle on very weak volume. Why do I highlight the weak volume? Because that's the way triangles are supposed to break to be valid (see your Edwards & Magee).

There is always a caveat, and in this case it is a repitition of a guideline I've stated before: whenever a pattern fails, the move in the other direction is typically more powerful than in the direction projected. In other words, if price breaks higher in the face of such a bearish setup, we could see quite a rally. Fortunately, a prudent stop is not so far away. Price should not break the high of the 3-day NRC if the bearish case is to be valid, so stops can be placed just above SPX 840.

The 60-min view reveals a sideways consolidation that took a very bearish shape:

stock index chart

Anyone who understood the reference gets free points, not unlike those awarded on Whose Line Is It, Anyway?. The formation projects price to the November low.

As for precious metals, I don't have anything to add to my latest musings other than to say that when I begin building positions, I will probably do so in the form of a couple of miners. My favorites are Silver Wheaton (SLW) and Franco Nevada (FNV.TO). Both have business structures that basically make their shares options on the prices of silver and gold, respectively. They both also have warrants trading on the Toronto exchange for those of you who like a little something extra in the punch bowl. Heck, maybe I'll just go ahead and buy some SLW Tuesday. My entry in this move should be a cue for the market to reverse. Then I can take a bigger position at lower prices!


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