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Technical Update: Thursday Market Review

  • Written by Syndicated Publisher 37 Comments37 Comments Comments
    October 7, 2011

    Another mind numbing day in the US equity markets. Amazing someone wanted to buy stocks into the NFP report and after an 8% move in two trading days. Based on what stocks and sectors are catching a bid and which are not it looks like forced buying (i.e. covering shorts) than new longs initiating. Still that’s not comforting for anyone suffering here but it’s important to at least keep moves in context.

    Copper certainly did outperform today up nearly 5% while oil was up nearly 4%. Bonds sold off but today was the first Operation Twist where the Fed was selling shorter dated maturities from their balance sheet thus taking bids out of the market. Risk as measured by high yield debt did not catch as strong a bid today (up 1.5% versus ES up 2%). The USD was down .4% while the AUD/USD was up 0.8% yet ES still managed to diverge higher.

    Look at the following moves off the Tuesday lows (calculated as of 20 minutes before the bell). It certainly looks like the highly shorted securities are the ones driving this insane move in equities. That would also explain the below average breadth in terms of advancing versus declining issues since this move began.

    HYG – High Yield Bond fund – up 6.7%

    AAPL – up 6.2%

    BAC – up 21.8%

    GS – up 15.3%

    C – up 21.5%

    SPY – updated 30 minute chart showing where we currently are. The upper channel was violated which may have fueled that late day rally as stops were triggered. Today’s price action does not negate this channel (see how it pierced on the bottom Tuesday intraday). The entire move from the “Dexia bottom” shows extreme oversold conditions on the RSI and a bearish divergence on the MACD.

    The only comfort shorts can find from this chart is the two prior touches of this upper channel were followed by lower lows over a short period of time. I believe the final thrust lower before some sort of a tradable bottom is in will be at such a test of the lower trend line. We still have a bear flag in play with a target of 1,000-1,050 range depending how one measures it.


    I wish I had more insight to offer but we are in an irrational market right now. Nothing really makes sense including technicals. Dexia is getting nationalized yet EU markets were up on the day. Italy was downgraded on Tuesday and somehow that is ignored.

    One aspect of trading and investing that is important to keep in mind is one’s risk tolerance and capital preservation. If you are at a point where further upside can wipe out an account then you need to either hedge your trade or exit. It’s unknown how much longer this move can go on. It is possible there is a mild pullback to work off oversold conditions and then another leg higher.

    Personally I am not seeing that. I do believe we have one swoon to come if not to simply test the Tuesday intraday bottom. Beyond shorts covering I cannot imagine there is enough money left to buy here and keep prices at these elevated levels. Shorts may be getting squeezed but remember longs are also highly leveraged and at some point perhaps the HFT’s will target them next.

    Images: Flickr (licence attribution)

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