Long Term Perspective

It’s been a few weeks of fun with our daily setups but it’s time again to refresh our medium to long term perspective. And I wish there was a consistent theme I could present today – unfortunately the picture is a bit more tricky. Clearly on a long term basis equities are in trouble and many of my charts below show us various inflection points that will provide us with much needed confirmation of a trend change once breached. But we are not there just yet and on a medium term basis there may be the potential of a shake out on the horizon.

If you follow Dow Theory then you probably know that it requires highs seen in the Dow Industrials (INDU) to be confirmed by higher highs in the Transportation Index (TRAN). And you really don’t need to be a charting expert to recognize a rather pronounced bearish divergence on the trannies right now. Sometimes the picture corrects after a few asynchronous weeks – well, except that it hasn’t and what we are looking at should qualify as a bonafide DOW theory non-confirmation.

Forgive me if I’m a bit all over the place today but I’m trying to paint a picture. For you point & figure aficionados the current high pole reversal warning seems to be in line with an increasingly bearish outlook. 1360 must not be breached and if you saw my recent SPX time based LT charts then you already know that they are well in sync.

And good ole bucky is yet again approaching its diagonal resistance line – somehow that coveted 80 mark remains out of reach. Note the low pole reversal warning – inverse to what you saw on the SPX chart.

Seems that the AUD/JPY (represented by FXA:FXY here) is leading equities lower. Notice that the SPX has enjoyed a rising support line – thus far. However that diagonal support line has already been breached on the FXA:FXY side.

JNK:TLT ratio – also not exactly rosy looking and after painting a divergence near the top it’s been pointing down ever since. Who are you going to believe – bond or equity traders? You know my answer to that.

Now bearish charts like this may look like a great reason to finally dust off our bear hats and get positioned to the short side. However, right now that may be a bit premature and I’ll show you why. If you are a member then please step into my temporary Madrid Ersatz-Lair:

Let’s take it from the top. My Market Maker Mind Reader chart (MMMR1) has us outside its 2.0 BB. Clearly not a spot where I would want to grab short positions.

MMMR2 (flipped into inverse) shows us a similar situation. Admittedly that Bollinger bubble is now starting to point up and perhaps that in itself represents a long term trend change. But right now, meaning the coming week, I think we may see a bit of a snap back. Which means we may get a better LT shorting opportunity. I for one wouldn’t say no to that.

My CPCE chart is also looking bearish but note that we have a convergence of a support and resistance line here. And to me it seems that we may bounce here again – even if it’s only for a few days. Yes of course it’s possible we breach this one right away after which we will see buying interest wait longer to get positioned. It’s a definite possibility but in the context with my MMMR charts I’m a bit cautious here.

The ratio between stocks above their 50 and 200 day SMA also is in a similar configuration – more long term however and much more developed. There is not much space on the downside right now, which makes me a bit skeptical. You may recall from my previous posts that the magnitude of this bearish divergence confused me a little. My point of view was that at some point this thing had to break or all that bearish momentum would go to naught. Perhaps we are on the brink here and the signal pattern here is comparable to July 2011.

If the bears are to take one the liquidity hawks then this chart needs to keep climbing that support line. We are looking at a ratio between declining vs. advancing NYSE issues – and as you would expect it plots inverse to equities. And it definitely supports a bearish outlook at this point.

It’s not so distant cousin, my NYSE declining vs. advancing volume chart also has us in a wedge however. That falling diagonal (in red) has been a consistent buying opportunity. And if you consider my MMMR charts then a possible scenario unfolds – one in which we may bounce soon, thus shaking out a lot of weak bearish hands. Of course that green line is approaching not far from below – which has not been a clear selling opportunity, just for the record. But it may be in the process of building one – so we shall see. In the context of all my other charts that possibility is definitely there.

On the short to medium term side I don’t have much to add to what I already presented over the past week. Except that volatility has been on the rise and what I’m looking for is a touch of the 20 mark. Also note that the BB is now starting to point up – long term that could turn into a huge problem for equities.

Bottom Line: A long term trend change seems to be in the making but we have been fooled before. At this point I am not yet betting on the short side – with obvious emphasis on the word yet. I would prefer to see a little shake out first which deprives the hobby bears of their appetite and gets us in a more optimal setup to take on short positions. While that is happening I would also like to see the technical picture deteriorate (i.e. more divergences and non-confirmations).

Of course if we drop through SPX 1360 and then 1340 all bets are off and we are going down. If those two support clusters have no meaning to you then please check my recent posts – I provided clear inflection points at which we should see buying interest if it materializes.

Keep it frosty and fade your emotions, that means both your fears of losing and your fear of losing out (a.k.a. greed). If you are confused – stay out! Nobody has ever lost money watching and waiting for a clear opportunity to strike.
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Cheers,