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July 1, 2008

Reversal of Fortune

The shape of today's action in equities had a familiar ring to it. Check out the blue arrows on the S&P chart below and tell me if you notice a pattern.

stock chart

Given the huge reversal, spike in volume, and the fact that RSI (and several other indicators, for that matter) are coming off extreme levels, I'd have to venture that the odds have swung highly in favor of a bear market bounce here. Look how far beneath the 65DMA the S&P currently sits. That's a huge gap. Now, I'm reading a lot of banter about how the jobs report this Thursday is going to spur heavy selling and/or mark the capitulation phase of this down move. Maybe that will happen, but everyone seems to be thinking the same thing, so I'm not placing any bets on it.

I also want to emphasize that any bounce here is likely to be a bear market bounce. I am ultimately looking for much lower levels. The S&P 500 has tried and failed three times this year to close below 1275. Once that price level is firmly broken, we'll see those much lower levels, and fast.

The following chart shows what the TICK looked like at mid-day (blue arrow) as the S&P approched the March low.

tick chart

As you can see, the moving average, which I use to smooth out the noise, was at an extreme low while we were sitting on major support. So, I did the unthinkable and {gasp} bought calls on this index. I told myself that if the SPX managed to recover and close near its high, I'd hold on to 'em, and so it did. Lest there be any confusion about yesterday's statement that I did not intend to hold any overnight positions, that intention applies to a direct play on index futures. My potential loss on an option play is limited, and in this case it is a fraction of a percent of my portfolio.

After my morning post on the metals, the PMs kept running higher. It was a pretty good day for the Docfolio. If I'm not out galavanting later, I may post a follow-up.

 

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