25 May 2011 (prior to market open): The S&P 500 (SPY @ 131.95) triggered a sell signal on Monday, closing below its 20 day trailing low. Down volume has been heavier than up volume and the longer term trend is down:
Russia is getting clobbered.
The Euro has been hit hard by Greek debt problems as well as rumors that additional rounds of aid or even debt restructuring will be needed in Ireland, Portugal, or Spain.
Japan (EWJ @ 9.98) illustrates a few things. First: never try to catch a falling knife (guess a bottom). When a market panics following a catastrophe, as it did following the earthquake and tsunami and nuclear disaster in March, buyers appeared as the market approached 9.40, 20% below the pre-earthquake peak above 11.60. But the down gap was not filled (and the top of the gap formed resistance for the rally) and sellers drove the market down to the 9.70 area.
Another rally in late April looked promising and even triggered a buy signal, violating the 20 day trailing high, but it was turned back at 10.64, the same price level the abortive late March rally had failed. The market is now in a sell state but this could change - expect lots of back-and-forth sloppy trading as people jostle to figure out how to discount Japan going forward but the fundamental news is not good and does not appear to be getting better anytime soon, and evidence that if anything the damage to the nuclear reactors was initially understated (so whatever reports are issued now should be treated with skepticism).
Usually when markets fall off a cliff like this, the technical damage takes much longer than a couple months to repair.
Technology (XLK @ 25.72) has also broken down, triggering a sell signal.
Homebuilders (XHB @ 18.12): ditto.
The dollar is rallying and although the intermediate trend remains down, there are several bullish things to note:
- all the price action since mid-May has been in the upper part of its 20-day range after two thrust days up;
- buy signal May 15 after 20 day high penetrated to the upside;
- 3 recent closes above the 50 day moving average.
Please note: if you are US investor, you already by definition have all the exposure to the dollar you could ever want; I track the UUP for illustrative purposes only.
With so many sectors turning south, it should be no surprise that some short funds and ETFs have triggered buy signals. Ultrashort Semiconductors (SSG @ 48.12) looks very bullish here for a few reasons:
- following a protracted down trend (meaning an uptrend in semiconductor stocks), a buy signal was given that led to a small loss - this is normal following a protracted move, and taking the second trade against the prior trend is often far more profitable than the first;
- excellent support at 42.95, the 20-day low;
- Vic Sperandeo 2b bottom with broken downtrend line.
Fundamentals are favorable (meaning they are bearish for semis) with disruption of production in Japan and some signs of a slowdown in economic activity (semis go into everything from cars to computers, which are all highly cyclical).
Real estate looks interesting after a long bull leg up, it appears poised to at least give a good trading rally down (meaning that going short real estate through SRS @ 14.63 could be a good play).
Another beautiful chart.
If you want to short the S&P 500, this is as good a vehicle as any.
Gold is a more ambiguous chart; usually it is inversely related to the dollar but with money fleeing the Euro and all sovereign currencies (except perhaps the Swiss franc) looking shaky, gold may continue its up leg. However, the spike high in April and very heavy volume sell-off in May will probably present resistance as sellers who did not get out then will look for opportunities to get out at better prices. Technically, however GLD is still in a buy state without having its 20-day low violated.
What's not to like about the Swiss Franc? As fears of another EU bailout of Greece and probable restructuring of Greek debt rattles that currency, driving it down to the 1.23 area from above 1.5 recently versus the CHF (something I know viscerally, having just visited Paris and benefiting from my stronger "home" currency), with the United States a fiscal mess following disastrous tax cuts and ideological opposition to reversing them, as well as massive military and now stimulus spending, Switzerland, with a humming economy (with a growing trade surplus) running a very disciplined $3 billion government surplus seems the only game in town if you are looking for a rock solid place to park your money. Some exporters and many trade unions are nervous about the high CHF which may hurt exports and therefore the Swiss economy, but so far this has not been the case, with so many Swiss products value-added ones that have very little sensitivity to currency fluctuations (as may be the case with commodities, let's say). If you want a Swatch or a precision piece of machinery or specialty chemical, you just can't get it anywhere else.
Another rally in late April looked promising and even triggered a buy signal, violating the 20 day trailing high, but it was turned back at 10.64, the same price level the abortive late March rally had failed. The market is now in a sell state but this could change - expect lots of back-and-forth sloppy trading as people jostle to figure out how to discount Japan going forward but the fundamental news is not good and does not appear to be getting better anytime soon, and evidence that if anything the damage to the nuclear reactors was initially understated (so whatever reports are issued now should be treated with skepticism).
Usually when markets fall off a cliff like this, the technical damage takes much longer than a couple months to repair.
Another interesting short idea with terrific looking chart is the Proshares Ultrashort Oil & Gas (one of the most creatively-tickered ETFs, DUG, @ 29.52). You have a long, broken downtrend line, all of the recent action concentrated above the broken downtrend line and the 50-day moving average and up volume heavier than down volume. The April buy signal was false, leading to a short, small loss, which means the next buy signal, triggered in early May, is more likely statistically to be profitable.*
Stay tuned!
* Note that this is NOT a restatement of the gambler's fallacy, the belief that a fair coin flipped heads 2 or 3 times is more likely to come up tails on the next flip (it isn't, since each flip is statistically independent of the one prior and is always 50%). However, markets, unlike coins, have memory because the market participants have memory. Click here for more.
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