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October 26, 2008

Uh, Oh

Friday was ugly. Despite the fact that a crash was seemingly averted, the session was abound with bad signs, not the least of which was the failed attempt at recovery. I actually had a few buy orders cocked and loaded in anticipation of a positive finish, which would have signified a material shift in momentum. Instead, I found myself shorting at the close, and the more I think about it, the more short I want to be. It seems wave 5-of-3 is prepared to take its full point quota. I fervently hope I'm wrong because another 20% drop here means this country is in for some pretty hard times.

index chart

index chart

The good news is that despite the morning scare, the October 10 low is still in place. Last week's plunge can still qualify as a bottom-testing process if we get a reversal day early next week. A reversal does not seem likely, however, in light of the most recent COT report, which shows the commercials piling on shorts in both the big and small spoos. Of course, the data are from Tuesday, which sports a close about 10% higher, but shifts in commercial positions tend to lead the market by several weeks. I doubt the big boys were going more heavily short just to test the bottom.

Just so we don't leave the equity discussion with too much gloom, note that there are several significant divergences occurring among momentum indicators:

indicator chart

indicator chart

indicator chart

A primary component of the de-leveraging process has been the unwinding of the yen carry trade. In fact, the yen is one of the few currencies to have been appreciating versus the dollar recently. It's recent action looks toppy. Let's hope it is:

currency chart

Precious metals appear to be putting out feelers for bottoms. Silver cracked below $9 for the first time in nearly three years before recovering strongly. Similarly, gold printed sub-$700 for the first time since the beginning of last fall's monster run, then recovered to about $730. I'm not terribly excited about rolling big dice on the long side just yet, but I am considering writing OTM puts. Volatility premiums are high, and if I'm right about bottom being established soon, time will work on my side, as well.

As you can see, the coming week may be one of the most important financial periods in the history of our country. As chance would have it, I will be taking a mini-holiday, traveling just for a change of scenery. Although it will be a working vacation, I may not be so diligent with my posting schedule. Apologies in advance.


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