Wednesday, November 11, 2009

1101 Broken in the S&P; I'm Waiting to re-Short on Weakness

My sincere apologies to you all for posting so late on a very important day. I have not been feeling well this morning, either due to the Thai Chicken I had last night or because I saw the S&P broke above 1101 today. I'm still not feeling well so I'm just going to run off some things I think are important for today:

I share in everyone's frustration today in seeing the S&P give us yet another fakeout, and making a new high. I solidly believed that 1101 would hold for a long long time. I was clearly wrong. However, with that said, the long term bearish case is still well intact as long as the S&P trades beneath 1576. Obviously that doesn't do traders much good, but I'm saying it so I don't lose sight of the bigger picture just because I was wrong on the short term picture. The composition of this market rally is that of a correction, a bear market rally, i.e. declining volume, choppy overlapping waves, optimism extremely high after only retracing 50% of the previous decline, and the fact that the rally followed a clear 5 waves down from the 2007 lows. This all tells us that the 1576 S&P cash level will hold, and that 666 will be broken in the coming months. The extremely challenging task has been to "call the top", and assessing the short term structure.

With that said, the market remains very fractured, and although the main indices confirmed the Dow's new daily high today, the Russell 2000, XLF, NYSE and Dow Transports and Utilities still have not. So what I said yesterday still holds, the Dow is "running the wrong way" and it appears the S&P and Nasdaqs are just slowly peetering along for the moment. Keep in mind that the Dow only has 30 stocks in it, so a 30 stock index is leading a stock market that is composed of over 5000 stocks. You can also see that the last two rallies to new highs in the S&P have been done so on declining volume from the previous declines (see attached chart). So the masses come in and sell, and a small amount of bulls trading a small amount of stocks, push this market up higher. This is classic topping behavior.

So there you have it; I was wrong on the short term picture but still remain bearish on the market, with the same positions in that I had all week. With no clear signs of a top in place right now, and no real stop loss level clearly defined, I do not want to make a short term bear call right now. So right now I'm short term neutral as far as forecasting goes. My plan is to let the market play out in the coming days and wait for weakness to return again. When it does, you can be sure I'll be here again, pounding the table making the case for the best positions I see available.


adan said...

nothing bad about being wrong, especially when conscientiously so, and more especially when monies-forces greater than many of us combined, have repeatedly come in to "save" the markets -

i say, hey, what about us ;-)

as an extra note, adding to your observation about how the dow 30, with, by definition, few components, was so easily driven to try and lead an entire market, is this important tidbet from ew's stu today (free today? not sure...) :

"Fully 70 percent of the Dow 30 components have yet to accompany the index to a new recovery high above the October 21 extreme. So less than 1/3 of the Dow’s stocks have dragged the index to new bear-market rally highs...."

so what to do other than what you yourself chose, let the market come around to something recognizable by a real person ;-)

Todd S said...

Hey Adan,

I'm surprised not more people are talking about the divergences between the Dow and other indices and sectors right now, and the very low volumes on the past two rallies. At least EWI has taken note of it. That's amazing that 70% of the stocks in an index didn't make a new high, yet the index did in fact make a new high, and then some.

Oh well, the market will do what it wants to do as long as it wants to. Right now I think it's best to stand aside and wait for weakness before trying to call another top. I'm still holding my options positions though. I assume you're doing the same.


Gustavo said...

Hello Todd:

I wish what you feel good very soon.
If I only was trading strict rules and what I can see in my charts, until now I could be in cash and waiting for an entry, but because I was hoping about one turning point in every one of the last days I tried to catch the top and fail with this.
My mistake and a new lesson I receive from Mr. Market.
The decision to entry was only my and I cannot blame to others with this.

What I see now is the aussie making new highs and still not breaking your trendline up, and the EUR/USD or USD/CHF the same, and not one of this pairs have lower lows until now.
Then I wanted anticipate the turning point and I not get it.

Sorry for my English:-)


Anonymous said...

Hi, this is Rached.

The S&P Transportation industry group has made new high, the Dow transpo not!!! so, rely on which one.

and thanks for your post.

Todd S said...

Hi Gustavo,

Thanks for the well wishes. Feeling a lot better today. As I'm sure you know, catching tops are very difficult, and normally I wouldn't even try, but this upcoming wave 3 or C decline is going to be so fast that it might be difficult to get an entry point if you wait for confirmation.

The dollar really does seem key to holding up the stock market, so I agree with you in watching the dollar currency pairs for signs that the stock market topped.

So now we play the wait-and-see game and watch what unfolds in the coming days/weeks. One thing I do know is that Mr. Market will do everything it can to make it as hard as possible for the bears to catch the wave 3 or C.


Todd S said...

Hi Rached,

You can rely on both. It depends on your trading style and reasoning. I follow the DJ Transports because it's tied to a well known Dow Theory signal, i.e. if the DJ Industrials make a new high in an uptrend, and the DJ Transports do not, then it generates a sell signal. Plus, I believe most traders follow the DJ Transports anyway. So it becomes a bit of a self-fulfilling prophecy.

Talk to you later Rached,