Good News And Bad News

In typical Evil Speculator fashion I’ll start with the bad news first (for the bears that is), which is that further upside is almost guaranteed:

Although we continue to be heavily overbought at every measure (and I’ll spare you those charts this week – I mean who cares at this point) the wave pattern looks incomplete at this point. With two more POMO auctions scheduled this week I have little doubt that we will scrape the 1060 or perhaps even the 1080 mark before we see any type of consolidation.

We seem to be gyrating in a fairly clean three month channel which started in July – its lower boundary will surely pose much resistance once/if we happen to drop at some point. The bears will have to make it through two major support clusters (highlighted on the chart) if they want to see a down month after six brutal months to the upside. Theoretically we should have consolidated three months ago and many bears were hoping for the traditional September swing in their favor – but thus far gravity appears to remain permanently deactivated.

That strange sound you were hearing last week was all the vega being sucked out of your long term puts. It’s possible we push towards the 20 mark during OPX week as this would inflict a brutal punishment for any front month put holders. I am starting to wonder if we are going to push into the teens before all the nonsense finally comes to an end.

The Dow is currently bumping against an old 4th wave high which I have pointed out on several occasions last week. As you can see until 10,500 there is only air overhead and if we don’t turn here the highlighted regions mark possible major clusters of resistance.

The appetite for junk is back at 2007 levels and accordingly my BAA-TYX spread chart is not looking very bearish right now. Note how the spread has been impervious to any downside corrections and we are currently painting a base around the 2.2% mark. Let’s get real, rats: Primary {3} is not in session unless we see a distinct widening of the spread here.

So, short and medium term the odds seemingly don’t look so hot for the bears right now. However, there are lights at the end of the tunnel it seems. Worth noting is the S&P bulls reading over at the Daily Sentiment Index, which reached its 90 percent mark on Friday – a new optimistic extreme we have not seen in over two years (June 4, 2007). Which brings me to the good news:

Some of you old timers might remember my intrepid weekly stochastic chart – and you also might recall that it rarely lies. A breach of the 80% mark has traditionally meant that significant downside was looming ahead. On the inverse end of the spectrum a breach of the 20% mark is usually a reliable buy signal for the bulls.

It’s interesting that we have made new highs on all averages whilst seeing a drop towards the 80% line. Please remember however that we have not breached that mark just yet – we are merely tickling it and if you look back to September 2006 you can literally hear the screams of a million bears getting incinerated – so we need to see a breach of this line before the bears might get their shot.

As you know I have been noticing a developing A/D ratio divergence on the NYSE (chart above only shows the SPX but the measure is against the NYSE). On its own it doesn’t mean that much – however:

I mentioned this chart to my Zero subs last week – it’s also showing a slight divergence. In combination with the NYSE A/D ratio it might indicate that we are watching an unfolding blow off top and that a meaningful correction is finally in the works. But after seven months of green candles I believe it when I see it 😉 Also, the daily Zero is relatively new and I cannot point towards a prior occurrence that was followed by a meaningful drop.

Silver is starting to look pretty juicy and I feel a moral obligation to short the heck out of it once we breach the 17 mark – its cousin gold is also looking nice but I prefer silver. Why?

That’s why – I have been waiting for the c leg to complete and the 60 ratio is what I was hoping for. Either we push up hard here or we’ll get a fourth and fifth leg down – since I’m demented I’m betting on the former. I will actually start scaling into SLV puts starting Monday as I expect a drop to be most likely sudden.

Finally, the Dollar has been hanging on so far – so my little bearish wedge (i.e. descending ending diagonal in EWT) is still in play.

And yes – I’m hanging on to my long term puts despite all those conflicting signals – but I will also start legging into October puts over the course of the next week.

This is not going to be an easy week – we’ve got two POMO auctions, which inevitably means much monkey business plus it’s option expiration week (OPX), so it’ll be easy to get your pecker caught in the spinning razor blades they call the markets these days – treat carefully and have a plan.

Click on the image above for an amazing article on the biggest and most secretive gathering of ships in maritime history. You guessed it – it’s a gathering of container ships.

Cheers,

Mole