Price Stabilized Friday

by Faces in Cabs, Zentrader

About 9 days ago, the markets experienced a 300+ point shock event down. However, that shock event’s price appears to be stabilizing after Friday’s large PPT reversal bounce (which began 4 hours after the Japan market open, when the Nikkei was down over 400 points). I would note that Friday’s large bounce came on average volume, so large volume days consistently remain associated with selling (distribution) days at present. As long as $SPX 1930 support holds, the bulls have an edge up to next resistance at 1942-43 and then 1955 (the 50 MA). After that, it will take a special effort to go much higher on this low volume (imo). If the volume profile changes (e.g., accumulation), then of course the trend up can resume (easily), but until it does I am more likely to eventually re-short into the noted resistance levels of this blog post.

Assessing Recent Damage

Dow Pull Back (Friday’s PPT reversal came on lower to average volume)

After Friday, we are now retracing back up. However, I want to take a moment to show how the recent pullback introduced technical damage to the long 2014 climb of the markets. First (see chart above), after a 5% pull back the $INDU’s trend is being challenged. We have a 17-43 crossover (which is suggested as a trend change signal by author and trader Jea Yu) on the chart. Here are some of the other market weaknesses I see developing.

• Transports (a 9% pull back) saw an exit from the sector on volume (that’s distribution)
• Semi’s tumbled 7.6% (a clear correction) leading the tech sector down.
• Many market internals remain negative, for example the NASDAQ New Highs / New Lows is still well below zero line (a very negative signal)
• Banking sector ($BKX) has crossed below its 200 MA

I am flat. After holding short for last week, I was stopped out on Friday. I may test a couple of longs beginning Monday, but my trading focus is (mostly) on determining the next major market swing now that the market shock event appears stabilized. The markets can retrace up here (and possible resume the rally above $SPX 1955), but the pull back’s damage has NOT been undone (yet).

Bond Market Bingo

One reason why I am individually negative on the equity markets is the current deflationary move by the bond yields. Because bonds are often a counter investment strategy to the equities, the bond yields have a history of moving in the same direction as equities. The noted deflationary-inflationary relationship (see 4th chart below) between the bond yields/US Dollar and equities has ONLY been accelerated under Fed’s market interventions (quantitative easing). As of this last week though, we are technically at a critical support for the 10 year yield. That’s why I am speaking up now.

10 Year Yield (approaching CRITICAL support as the 30 yr makes lower lows)

30 Year Yield (already below this historic support, which originally was a QE intervention point)

Bond Performance (take your pick, because if yields fall further then all bonds go up)

A Bond-Equity-USD Relationship (and some traders wonder why the markets recently fell)

The current divergence on the 4th chart (Bond Yields / US Dollar relationship to Equities) is what has my attention. Over the spring and summer, equities got overextended (e.g., just buy the dip) in their relationship to the bond yields / USD, no wonder we saw a correction on higher volume in the equities over the last two to three weeks. Now, the 10 year yield could accelerate that divergence further by breaking a key support for bond yields. Furthermore, we also have a stronger US Dollar (e.g., now that the Euro is finally pulling back after getting Draghi’d a couple of years ago).

I would finally note that this support level (just below 2.4 or 24.00 on the chart) for the 10 year yield was an intervention point for the Fed in the past. And now with the Fed’s clear commitment to tapering to $0 (zero) by September, this is why I suspect that the bond yields will most likely go down before they can go up significantly.

Short Trading Ideas (into resistance)

IBM (Big blue has lost its leadership. Looking to short into resistance, probably this week)

IWM (As a sector, small cap’s remain on my short radar. Down 11% from highs)

I wish you “Good Luck” with your own trading (Luck = Preparation + Opportunity + a little Risk).