Saturday, May 16, 2009


First, I am 25% short (QID, TZA, FAZ, SRS) and 8% long (MRGE). I am net short with a neutral-bearish bias. Once/If I get to the 50% short level, then I am "committed" to the dark short side.

I would like to note the New Highs-New Lows Index and the VIX. The ones below are for the NYSE and the NASDAQ. Do you see a problem on the chart? I do. We had the biggest rally (+30.5% so far) since the bear market started yet we can't get a noticeable uptick in new highs. This, among other things, tells me that the bear market is not over yet. There is no improvement here if we look at the 2-year picture.

The VIX is forming a bullish wedge and I am expecting a breakout to the upside or at least to the top of the wedge's channel. Obviously, this correlates with my bearish stance. The VIX also found support at the July 2008 high yesterday (Friday).

Now, the COMP, RUT, and SPX. All three have broken their uptrends. As the COMP was the first one to reach the 200-day, so shall it be the first to lead the decline, and it has. Some people say that the lack of volume has been an issue. If you noticed, we didn't get high bursts of volume in the beginning of any of the previous declines. We did get larger volume towards the end of the capitulation/exhaustion stages.

The most important market volume indicator is the COMP. Take a look at May 7th (red highlighted volume bar). This is the day that the COMP failed the 200-day MA, and it is also the biggest volume for the COMP in all of 2009. You may also notice that volume remained weak during previous declines. Price action should be your most important criteria when determining direction.

The RUT also has a pronounced breakdown, and it is very obvious. Currently flagging between 470-485, the RUT has the potential to reach the 50-day MA which should be above 450 in the coming days. There is major support at 470, so I do expect a lot of whipsaw on the daily.

Both indices are below both the 15- and 20-day SMA's, which is short-term bearish and serve as trend break confirmation.

Did you notice the "stick sandwich" 3-candle formations on the COMP and RUT? The textbook will tell you that it is a bullish pattern, but it is wrong. It's all about the location of it. The R-W-R (Red-White-Red) stick sandwich in my book is a continuation pattern to the downside (or if the candles were W-R-W, then bullish). If you need more examples of a stick sandwich, then let me know.

Finally, we come to the SPX, which is testing the 20-day. Of course, there is strong support at 875, a level which has acted as a barrier for months. So far, it is holding extremely well. The SPX's strength is the reason why I am not committed short. If we close below 875, then we could see a move to 840. We'll know if/when we get there.

As always, don't forget to exercise caution when shorting stocks.


Scalpwiz said...

Nice post, and yeah this market isn't looking too positive anymore.

Cliffynator said...

JL, I was just noticing the falling volume on the SPX this week. I see several potentially bearish indicators, but it still seems it could go either way. So I started wondering about this volume action.
Wouldn't that be a bullish indicator as we approach a support or resistance line? Does it depend on the previous trend (continuation)? And did I just eat a shit sandwich?
Also, XLF (for FAZ) is also around support, but it looks more bearish to me.