Bounce Territory

Obviously I’m reaching a little with this title as nobody can ever predict what the tape will do. However the purpose of this weekend post is to demonstrate that we have reached a level of retracement that now necessitates a bounce or equities may be heading for a crater near you. I have collected quite some interesting evidence today but let’s start out on the P&F front.

If you are a sub then you probably recall my time based charts which strongly suggest that SPX 1340 ought to be holding. And my SPX point & figure chart is basically saying the very same thing. What the regular chart may however fail to point out are the implications of a continuation lower here as the bearish price objective currently lurks at 1279. So if we drop below 1340 make sure you’re wearing your helmets, your seats and tray tables are in their upright positions.

Interestingly crude is looking very similar and a breach of 95.0 may lead us quite a bit lower. So this is a great spot to be long with very little risk. And being the promiscuous stainless steel rats that we are we have no compunction about taking the other side of that trade should we see a breach below support here.

Gold on the other hand is getting near its bearish price objective of 1550. Boy, it really sucks to be a gold bug these days. Actually it always sucks to get married to one’s trades – divorces are usually painful and lossy. Always remember – it doesn’t matter where it’s coming from – all that matters is where it’s going. Ponder about that over Sunday dinner tonight 😉

Silver is not too far behind and we have another two handles before we hit that bearish PO.

Interestingly my gold/silver ratio chart has been leading the decline on the equity side. But a bounce (on gold/silver nd possibly equities) seems imminent based on that long term support line in green. Either way – one of those two trend lines is gong to be breached rather soon and it’ll be interesting to see which side wins this one. Are we bouncing back or are we looking at a medium/long term trend breach here? To answer that question I have collected quite a few correlation and momo charts that describe important inflection points that will either hold or lead us to a new episode on the equity side.

Copper has developed into a flag and the natural assumption here would be that of a bounce near 3.6. However, the rule book these days is looking a bit rough around the edges and there are no guarantees that this will happen. The point I am trying to make however is that we have a good potential setup at an inflection point here and that’s all we rats need to know, right?

Now according to the bounce theme wouldn’t it be nice to see a juicy divergence on the junk:treasury front? Except that there is none and that the ratio seems to be leading equities lower. If I have a choice between believing equities or bond traders I usually pick the latter without a second thought. So what happens here at 0.33 will indubitably affect the medium term picture on the equities side – even if we see a short term bounce this week.

NYSE Advancing vs. Declining volume – I think this chart is self explanatory. The part that may be not is highlighted in yellow – I am basically questioning if we have seen sufficient ‘pre-quakes’ (for the lack of a better term) to expect a more pronounced retracement further down the line.

By flipping the ratio we are getting a slightly different perspective. One that suggests we are locked between two opposing forces that are now coming to a point. So what happens in the next week or so ought to be extremely interesting. Thus far the bears have been unable to breach that red diagonal resistance line. However the bulls are not exactly in great shape either as we are back at the sell line without having recovered on the price side. Hope this makes sense.

Trannies vs. the INDU – classic Dow theory stuff – a bearish divergence on one usually spells lower prices for both. We are also at a possible support line and a breach here may spill into the INDU and the SPX.

The SPXA200R chart (percent of SPX symbols trading over their 200-day SMA) shows us plenty of room to spare on the downside. Not a big surprise given that we really have not corrected much yet. We are not even down a hundred SPX handles.

If you put the 200R in a ratio with the 50R then you see some very interesting formations. I have often talked about that huge divergence that yet has to resolve into any meaningful downside. What I’m also seeing now however is a slight bullish divergence and that may give the bulls an angle to get their asses out of what I think is a very tight spot right now.

My CPCE chart however screams bounce territory – seems like retail has been loading up on equity puts again. If I was a market maker I would be salivating whilst looking at this chart.

I hope I didn’t draw too many lines on my Dollar chart – just wanted to point out what looks like long term support now. Plus ole’ bucky seems to have breached out of that flag and is now heading for 80.5 and possibly 81. I’m not yet getting my hopes up however as that cluster has been a brick wall in the past two years.

Volatility has been creeping up and if you look carefully you see that the direction of that Bollinger is shifting. Here is another reason why a reversal needs to happen soon as the dynamics on this chart are about to change. A failure here would swing that Bollinger band solidly upward and thus provide a stairway into higher volatility. Again, a bit early to make a final judgment but I wanted to put it on your map. 21.5 seems to be where the rubber meets the road.

Bottom Line: We are lined up for a bounce here – and even if we weren’t it needs to happen or the longs will find themselves in a world of hurt. An excellent time to get positioned but I suggest to keep position sizes to a minimum as the losing side will be paying dearly. If you are playing the option side then keep an eye on volatility – vega crush can be a real bitch.
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Cheers,