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Technical Update: Wednesday Market Review.

  • Written by Syndicated Publisher 32 Comments32 Comments Comments
    October 6, 2011

    I continue to remain mystified as to what is keeping this market up. Based on the most recent NYSE short interest data it does not appear to be that of a simple short squeeze as short interest actually rose (source Zero Hedge found here). It is possible stronger shorts are entering while weaker ones exit. We know of record low cash levels among mutual funds while leverage in margin accounts remains at September 2008 levels right before the great de-leveraging.

    We have seen this game before since the May 2, 2011 highs and yet each time words cannot describe the emotional roller coaster of watching paper profits vaporize. It’s human nature to begin to question whether you are doing the right thing. In that sense it’s pretty understandable why so many investors will finally become exhausted of their trade and capitulate.

    It was only 24 hours ago that the market was truly set to crater on a second retest of the intraday lows earlier in the morning. If not for a rumor later refuted as was the Leisman EFSF rumor of last week the market would be in turmoil right now and CNBC would be running such a show. The selloff in AAPL yesterday would have forced countless margin calls alone.

    When I look at the market I still cannot see any reason to exit the short sided trade. As for what I have seen over the past few days here it is.

    Risk is not being priced in outside of select equities and ES futures. Advancing issues over the past two days have been extremely low, far below that of a healthy 6% move higher in the SPX in 7 hours. That does smell of a squeeze among stocks such as financials with high short interest and not among leaders like AAPL. Would explain the rather small advancing issues.

    HYG High Yield Bond fund was up 1.2% today after being down 11% in 10 days. Now that is an oversold market yet it was only half the gains seen in the ES futures.

    Copper another sign of risk on and global economic growth was up 1% today after being down over 25% in a month. Why are the truly oversold markets not catching a bounce like equity is? Does not look like true risk on in my eyes.

     

    Below is how I see the equity markets as viewed by the SPY. Look at the “news driven rallies,” look at the oversold RSI and the bearish divergence on the MACD.

     

    Bottom line I see a market that is slowly falling to pieces. A market desperate to convince others to not run to the exits ahead of them. I see leaders across the world making stuff up as they go along. I truly see a market that when it falls will follow the path of AAPL intraday on Tuesday. For the most part AAPL went bidless yesterday as people rushed for the exits.

    Periods like the past 24 hours are painful for those short. But stay focused on the patterns both technical and your emotional one. The market is trending lower and you should see your account trending higher. The emotional “squeezes” are painful but less in duration.

    If the market was flashing risk on I would cover shorts. If credit was backing off its economic doom forecast I would buy equities. If leaders were truly proposing solutions I would probably use margin. None of that is happening. All shorts can do right now is enable their trades time to stay in the game. This market will rip lower as it did in August. It will stay oversold as it did in August. Once that selloff begins it will be too late to get short.

    The SPY chart looks like this emotional squeeze is nearing an end. With Friday’s NFP report possibly showing job contraction the timing of this SPY topping is beyond coincidental in my view. Trading capital markets is not nor should it be an easy job. Lots of money can be made but it involves hard work. It involves patience. Most important it involves reading beyond the headlines.

    Rather than simply do what you are being told, study and do what is right.

    Images: Flickr (licence attribution)

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