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November 1, 2006


As if on cue, the selling began not long after the market opened for November. It was quite gratifying for bears such as myself who had been building short positions into the end of October. Indeed, it was a strange but relieving feeling to see every bounce sold instead of the other way around.

Looking at an update of the SPX chart posted here yesterday, we see that the index finally violated its two-month rally line.

stock chart

I remain cautious, however, because it is typical for such breaks to result in an oversold condition which then leads to a back-test of the trend line. A clue to this oversold condition is seen in the RSI momentum divergence (though MACD doesn't agree). While I certainly wouldn't bet on a back-test rally, one would not surprise me.

Tech stocks bore the brunt of today's selling. A favorite short of mine, Nvidia, is showing signs of exhaustion. As pointed out on yesterday's NDX chart a high-volume gap to a new rally high, followed by a higher-volume reversal of the gap, very often signals a trend change.

stock chart

I've been eating crow throughout October on the NVDA short, but added to my pile of puts near the end of today's session.

Adding a bit of spice to today's tasty bear feast, precious metals zoomed 2% higher, boosting the prices of Newmont Mining and Pan American Silver shares. Why miners in general did not rally, I don't know (the XAU was flat), but I plan to watch their action closely. I think that miners will either consolidate some of their recent gains or just absolutely explode from here. In other words, I don't think they will just trickle higher. These expectations favor a call option strategy, so I am contemplating a shift of some of my equity exposure in that direction.

As much as any day I can remember, today's action felt like the start of the harvest season for bears. Given the contemporary mindset for short time horizons, my expectations are for any real sell-off to accelerate quickly as everyone tries to beat everyone else out the door. I suppose the latent effects of buy-the-dip mentalities will mitigate the decline for now, but as soon as it becomes apparent that a dip is not being bought, the trap door will spring. As a very good friend of mine so eloquently put it, "Everything that has happened the past three months is going to unhappen."

Disclosure: None


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