Wednesday 11 January 2012

Patience, Bears.

The force of correction is being held back artificially to lure in more late stage bulls. It is like a overflowing dam which now is now ready to burst and sweep away everything in its path. The market is way overbought and way out of schedule for correction. I expect that prices will correct more than normal to bring it back on the track.

In the morning post ( ) I said if for whatever reason the correction does not starts today do not be disheartened if you are short.  I said it will make another attempt to re-test the high and so it did. Although technically SPX closed in green, it did not take out yesterday’s high. And SPX is showing seven consecutive green hourly bars. Also VIX and SPX both closed in green today. From past experience I think the selling will start very soon, may be from tomorrow.

 The charts which I showed in the morning are still in play. Dow is still within the trend line and symmetric triangle and unable to break the long term resistance.
Stochastic RSI is severely overbought.

SPX is also unable to break the long term resistance and ended up with seven green hourly bars, with overbought Stochastic RSI.
The McClellan Oscillator is overbought as well and every technical indicator is screaming bloody murder. If anyone thinks that SPX will go to 1400 from here, s/he must be drinking some cool aid! ( I know my gracious host Tim is a bear, so this line is not for you TimJ )

After I closed my long position on January 4, I was complaining that I am unable to find direction. For almost seven trading days, the indexes were moving within a range. The price action of yesterday has cleared the direction going forward. In the hindsight I am short four days early and eleven SPX points wrong. I should have been short today. Today was the perfect set up for being short. But then hindsight is always 20/20.

One of my indicators is interest rate for bonds. One easy measure of interest rate on bonds is TNX. SPX and TNX move in the same direction. When TNX rises, SPX rises. When TNX falls, SPX falls. That is when things are normal. But in a trap, that correlation is broken, like now.
Either interest rates will have to come up and catch up with the stock market or the stock market will have to come down and meet interest rate. Knowing that Uncle Ben is not going to raise interest rate anytime soon, the anomaly will be resolved only one way i.e. with a major correction of the stock market.

According to my timing model, we will see a bottom by January 20-23rd. And a hundred point plus corrections in five / six trading days would be something worth waiting for. The seasonality factor also agrees with me. January 16 is MLK day and a market holiday. I now quote the following from written by Mr. Frank;

“Table I below shows all occurrences, the S&P 500s performance during Martin Luther King, Jr. Day week ( 1 to 4 sessions ), and the maximum gain and maximum drawdown – on a close to close basis – during the period under review, assumed one went long on close of the session immediately preceding Martin Luther King, Jr. Day in the past (like on close of January 14, 2011).

Probabilities and odds for a higher / lower close one and two sessions later (Tuesday to Wednesday next week) are more or less evenly distributed, but are heavily tilt in favor of the downside at the end of Martin Luther King, Jr. Day week (day #4). The S&P 500 closed at a higher level at the end of the week on only 4, and up 1.0%+ only once, but lower on 9occurrences, and down -1.0%+ on 7 occurrences. The median weekly change since addition to the list of exchange holidays is -1.41%, and the S&P 500 did not manage a single close above the previous’ end-of-week close during Martin Luther King, Jr. Day week on 4 out of those 13 occurrences.
If the market is really ‘due‘ for a short-term correction, the next week might provide a favorable (seasonal) opportunity for the bears. “

The market is due for a correction and that seasonality fits perfectly with my cycle analysis which is showing a bottom around that time frame. So, to those of us who are short (before time) I would urge patience. We have been here before. Yes, there is a bit of sweating but I can tell you, it will worth it.

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  1. So what is your line in the sand for SPX that if crossed would alter your plan on the short side?

  2. Only thing that would alter my plan is if SPX goes up and up from now till 20th Jan.
    Then I would stop blogging.

  3. Interesting suggestion to compare the SPX with TNX. Question: Why should the move in the interest rates be correlated with the move in the stocks market? Naively I would expect the opposite: If the interest rates are low, (1) investors are less attracted to invest their money in bonds and (2) companies can easily borrow money - both should result in rising stock prices. But comparing the historical quotes I clearly see the correlation - so, what part am I missing? Thanks!

  4. Ringo, When the interest on bonds go up, the yield goes down and bond prices go down. When bond prices go down, money moves from bond to stocks. So stock prices go up. In other word, bond interest and bond prices are inversely related and bond interest and stocks are positively correlated.
    Hope this helps.

  5. yes, helped - thanks!

  6. ps: but it should be interest up, yield UP, bonds downs, spy up - correct?

  7. I like your confidence, BB. Thanks for the post, TexEx.

  8. bb- please don't stop blogging. I just found your blog and really like it. we'll see 1310-1320 ES, I'm pretty sure, but then we'll get your 70 point drop.

  9. Thanks Win. It seems we have got ES 1300. But I do not see any more upside.
    Thanks TexEx, Ringo.