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Tuesday Technical Update: It’s a Waiting Game

  • Written by Syndicated Publisher 432 Comments432 Comments Comments
    October 12, 2011

    The waiting game continues. Bulls believe markets will go higher and bears believe it will go lower. With each passing day exhaustion sets in and more shorts cover as they simply say “no mas.”  In a normal market traders walk into their office each day armed with a plan. Technical support and resistance lines, charts, fibo retracements you name it. Markets make sense and they have the tools to guide them.

    This is not a normal market. Traders still carry those tools into their office each morning but they also carry the emotional exhaustion of the past few months. Neither long nor short is sheltered from this vicious cycle of watching paper profits appear and then disappear. Decisions are being made more on emotion than anything else.

    Those who believe strongly in the next move or too stubborn to adjust are digging in deep. Battle lines are drawn and we all wait for direction. Exactly one week ago today bears were overjoyed at their profits and felt news of a Dexia nationalization was irrelevant (I was one of them) and bulls were on the defensive wondering what to do. Today the bulls are overjoyed and not focusing on risk just like the bears of last week.

    Where the market stands now is anyone going to cover shorts has already done so. Anyone going long has done so. Sure there are a few more stragglers but most have already made their moves and now wait. If and when the market moves lower there is simply less money to put a bid into the market and support it. You need short interest to bid a market higher just as you need longs with cash and or leverage.

    This vicious cycle of wiping out capital in both up and down moves is doing one simple thing. It is destroying future bids. It will result in a nasty move lower quite possibly taking out the recent lows. At that point possibly a true multi week tradable bottom can be put in. This current move has failed in one simple test, it has yet to confirm the bottom of 1,074 on the SPX.

    With that said below are some updated technicals and various other measures of risk and investor sentiment.

    SPX

    Messy chart but there are a number of potential channels in play and many of them are merging at current price levels which should act as added resistance. As of today the market has failed on two attempts to break through the bottom channel of the bear flag pattern.

    SPY

    Below is a 60 minute chart to get a sense of what price is doing in the short term as a sign of any pending change in direction. Please click on the chart for commentary. As resistance levels are approaching (from SPX chart above) this market appears tired and lacking momentum. In fact the entire move higher has been on oversold RSI levels and bearish MACD divergence (30 and 60 minute charts).

    As for other measures of risk

    HYG – high yield bond which has signaled prior market selloffs the past two months was down 1.1% today.

    JJC – copper index was down 2.56%

    Oil (WTI) – down 1%

    10 year – yield up 8 basis points while futures were down. May be related to markets playing catch up to yesterday’s holiday

    And lastly Alcoa (AA) just reported to kick off the earnings season. Appears they have missed on EPS but beat on revenue and the stock is down 4-5% in after hours.

    Images: Flickr (licence attribution)

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