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Wednesday, March 18, 2009


Updated indicators -- Pullback soon

This weekend, we posted a number of charts with indicators illustrating how this recent low looks very different from other significant lows in recent history.

Yesterday, we posted a paper showing why this time may be different, and the recent low may have been a major market turn. If it is a major turn, the weekly and monthly charts are so oversold, the market could go a long way in a bear market rally or new bull market:

There are bullish divergences on the above weekly chart, with buy signals hitting or about to hit on that timeframe (keep in mind the week isn't over, so that can change).

In the weekend post, we also posted a chart showing that in the very short term, a pullback was likely because of a bearish rising wedge on the 60-minute chart and extended indicators. We got that very short-term pullback Monday afternoon into Tuesday morning to reset those indicators, and used that pullback to cover a portion of our shorts.

From the Tuesday morning low, the market rallied sharply on decreasing volume into a volume climax this afternoon on the Fed announcement, forming a new rising wedge:

The SPX rally also ran into resistance at January's low, the downtrend line from January's high, and the 50-day moving average. If this afternoon's spike was both a short-term volume and price climax, the S&P 500 should pull back in the short term to relieve the stretched technicals and resolve the bearish divergences.

The below chart of the Tick 10-day EMA readings shows that extremely high positive readings have previously preceded sharp selloffs:

The current level of the Tick 10-day EMA is extremely high, increasing the likelihood of a strong pullback very soon. The December 1 selloff doesn't look that sharp on this chart, but that one-day loss was one of the biggest in history, with the SPX down 9%. That selloff was later fairly quickly recovered, so if we do get a sharp selloff now, the same could happen this time.

Here's the updated $CPC Put/Call ratio (10-day EMA) chart, with the SPX (S&P 500) chart for comparison:

The 10-day EMA is now at a multi-year low, and as we said this weekend, based on recent history, it's "at a level that has preceded selloffs, not huge rallies. There's way too much call buying (usually a good contrary indicator) for us to be comfortable thinking that the market will have a huge rally from here."

Here's the updated NYMO chart, with the SPX chart for comparison:

We said this weekend that "It has room to go still higher, but it's starting to get extended on a historical basis" and "We still have a ways to go to get to" the levels at the November and January highs. Now, after the last 2 days of rallying, it has surpassed the November level and doesn't have much more room to go higher on a historical basis, since in Stockcharts' database, only in early January has it ever gone higher.

Here's the updated chart of the Nasdaq vs. the SPX over the last 8 years:

The chart hasn't changed much since this weekend, but the Nasdaq/SPX ratio has come down off the peak a little. As we said this weekend, "You can see that all the significant lows in both the Nasdaq and SPX have come after spikes down in the Nasdaq/SPX ratio, where the Nasdaq had been underperforming the SPX. Now, this ratio has spiked up, to a multi-year high, which has been a sell indicator in the past, not a buy indicator."

Finally, here's the updated NYSE Summation Index (cumulative NYMO) chart:

As we said this weekend, "NYSI is coming off an extremely negative level, and has lots of room to move on the upside. However, it also has room to move on the downside if NYMO turns around." NYSI is a lagging indicator -- it will continue to move higher in the short term, even if the market sells off, as long as NYMO, currently over 105, remains positive. It would take NYMO several days to turn negative, even in a sharp selloff.

In sum, based on the technicals, we're looking for a fairly sharp pullback to start very soon, and we believe it will be a buying opportunity for a strong rally over the intermediate term.

For speculative traders, we will remove the "short gold to hedge" phrase from our open positions. We added it on February 20, the day of gold's peak over $1000, but now that gold dropped well below $900 today before bouncing back, we believe the gold hedge against long-term gold and mining positions has served its short-term purpose. Today's announcement from the Fed increases the likelihood of high inflation coming, which is great news for gold and mining stocks longer term.

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