Monday, September 15, 2008

Turn The Worm (Say Awe)

While there wasn't really panic in the broad price-action today, there was at least a cascade in hope and good cheer. The chorus crowd on the market ship is tilting dramatically to one side.

And you thought it was all bad.

Earlier in the month we had too few positive factors to begin looking at getting long, not the least of which was the calendar month (historically the weakest of the year). But now mid-way through September we have a few important features for a potential market turn; and counting.

I continue still to trade short-only for the time being, but that could change any hour now, depending. Every TV head right now is telling you: "don't be a hero," etc., etc., but if you've been short you can afford a few heroics when the time is right. Interest rates are driving lower again (IRX, TNX), and this includes home mortgage rates (no chart). Fed fund futures today began to indicate the Fed will cut rates at tomorrow's FOMC meeting. And they'll throw the State of Kansas at you, if you know this Fed, so I would expect full-tufted Fed butter; nothing less.

As far as technicals, I look for three general factors to turn before doing anything more than covering shorts (prior to going long). Below is a brief outline of those factors and where they stand. I can't spend a great deal with this tonight, but if I had a few hours I would write up something most entirely useful, complete w charts, timely suggestions of individual stocks, industry groups, mouths of foam, three green clovers, etc.

Positive Divergences: Ok, the S&P 500 is at a fresh 2-year low tonight. Naturally, the Financials (XLF) are in worse shape, right? Well, they are worse than they were 2 years ago, but the group is actually well-above the July 15th low. In fact, the lovely SKF, which is the Financial's double-short, shoot first and shoot-harder tool for the Street, spiked dramatically higher in July than it is now. Everyone should glance at the SKF chart, because you won't believe me otherwise; At the same time, the Nasdaq and much-more so the NDX (which tend to lead the broad market), have made lower-lows on this wave down. [Edit: the Russell 2000 is also well above previous lows]. Unfortunately, the Semi's have continued to draw lower-lows, but this is probably not the beginning of an important new economic cycle anyway (and we'll probably end up re-testing, perhaps not even successfully any lows we make Tuesday), so I'm less impressed that the Semi's don't show a positive divergence; Momentum, as measured by any reasonable tuning of the MACD (moving average convergence divergence line), is well-above any previous lows on any and all indices right now. In other words, momentum is set to make a higher-low vs. prices (which would be resoundingly bullish from a short-term perspective).

Sentiment: Negative sentiment improved dramatically today, although many of these indicators are still off of extreme levels; Put-to-Call ratios at the CBOE spiked-up, but they were coming from relatively complacent levels and therefore the 5 & 10-day moving averages are not yet extreme; The volatility index (VIX) surged, but it too is well off any records (not yet bullish); But importantly, the financial media swooned ugly today and Main Street was at attention; At least from a quick-trade perspective (potentially more) the succinct, low-flying mood in the air right now tastes awfully interesting (it is undeniably bullish once prices begin to show life*).

Price/Volume Action:
Volume surged today, but it was nowhere near a record (which is not bullish); Declining stocks out-numbered advancing stocks on the NYSE by 19-1 today. Black Monday 1987 was closer to 16-1. Suffice to say, outside of a few names within only a few industry groups, we have not yet seen positive price and volume action on the tape. This can change quickly, in the span of a few hours on a high-volume reversal day in fact, so you have to be on your toes if you plan any heroics.

The last 90 minutes tomorrow are going to be crucial. Indeed, if a long-side trade is setting up now, we will see buying late in the session and the FOMC timing will have an impact fueling this. Look for positive divergences and vastly improving internals before venturing. I would not commit a dime late in the session if the internals look anything close to today. And I would commit money earlier in the day only with very tight stops.

OK, I looked-up a piece from the past where I have better outlined what to look for for a reversal and how to interpret the likelihood. You'll notice today did not exhibit the internals necessary (especially at the important time-of-day inflections, and you'll see a better explanation of positive internals and the emphasis given to time-of-day, etc.)...
From January 8th: Some things I look for from the market for a potential reversal, from this type of deeply damaged tape.

Finally -
don't do what I do - Don't be a hero Mr. Billy!!

*I say "once prices begin to show signs of life" because sentiment will be extrememly negative in a market crash and it does nothing to improve the situation; rather it exasperates it. Thus, the improvement in price action, which must include a positive final 90 minutes of trading, is mandatory before clearly negative sentiment is a good thing.

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