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January 15, 2009

Reverse Course

I've mentioned a couple times that SPX 818 was the furthest this sell-off could extend and still be considered a correction. I based that judgment on previous pivot points for the index. For a combination of reasons on which I will momentarily expound, I closed my shorts when the S&P was hanging around 820 and went long futures shortly thereafter. Before I elaborate, I must remind readers I am not a fib head. Such mysticism as believing that price patterns will conform to the golden ratio border on dementia in my view. I follow technical indicators for which I can understand the underlying psychological influences. If some brilliant academic were to prove that mass psychological behavior can be mathematically described with the golden ratio, I may be swayed a bit, but until then, I'm sticking with the basics. That said, I do occasionally draw fib lines on my charts. Why? Because when a fib line coincides with real support/resistance, the persuasive effects of that pivot point can be augmented by the herd effect of the mystics.

Perplexed by the recent turmoil, it struck my fancy this morning to draw fibs on the rally off the November low. Check this out:

stock index chart

There's more:

stock index chart

Given this cocktail of support, I played it safe by dumping my shorts a bit early (yes, a whole 2 points off the S&P 500 bottom), and then went long futures when the loop line (<== official, new TA term, coined here) was broken. These patterns also kept me in my long play on DIG despite the fact the shares were straddling my stop price during the noon hour. More on energy in a moment.

The daily S&P chart now sports a reversal off support on a significant uptick in volume.

stock index chart

If a test of the 65DMA should now develop, as I suspect it will, we can judge by the nature of the action whether to position for further rally or for rejection to lower prices. If price creeps up to the MA on declining volume, odds will favor rejection. On the other hand, if the SPX explodes toward the MA on fervent activity, it may not even pause for its usual handshake.

Gold experienced a minor and unconcerning reversal today. As you can see, when these tepid reversals occur off levels that do not constitute support, they tend to fail:

gold chart

I'm still expecting gold to slip to $740, putting it in the middle of that congestion zone from November. Eventually, I'm looking for low $600s, but price should find reprieve off of $740. As for stops, either $820 or $838 would work, depending on risk tolerance.

Since I'm actually posting at a respectable hour this evening, I don't have a chart for crude oil since stockcharts.com has not updated $WTIC, yet. Suffice it to say the chart still looks constructive for a rally, and an explosive one at that. Also, volume on USO continues to run high and posted an all-time record today.

DIG shares also reversed strongly, and did so off support:

stock chart

So the play continues to center around a back-test of the 65DMA on the SPX. Personally, I believe there's an outside chance we see SPX 890 tomorrow, but I also think re-testing 818 is not out of the question, either... much like the January '07 bottom.

 

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