Charting Stakato

I’m a bit pressed for time on this beautiful Sunday as I am preparing for a short business trip early next week. So, since many of you know the drill and are somewhat familiar with some of the themes I post here over the weekends I will dispense with any long winded explanations and just present the evidence I am able to produce. I think many of the charts are pretty much self explanatory – where they are not I am happy to throw in my point of view.

Boy, where ever that is – those guys sure know how to par-taaaay!! 🙂

I will mostly focus on the long term this time around – and how the short term may support the overall long term trend, which in my view continues to be to the downside.

Long Term Momentum

I started to post this exotic ratio recently. The first version suggests that there may be more upside until we start touching that tan channel line. What I’m trying to say here is that the true test of Primary {3} will be whether or not we are going to make new price highs after we made a signal high.

My second version is a bit more simplistic and suggests that a touch of the upper trend line should result in more downside.What I find interesting is how much upside progress we have made on the signal line, which is really not reflected in price advance on the SPX.

A recent addition to the evil lair, my rendition of the percentage of stocks above their 50 SMA has been making the rounds on the blogosphere lately. This is my original version which mostly focuses on the long term. And on that basis the line continues to point down.

As I’m not one to get complacent after making a discovery, here’s a more short term version (i.e. 13d SMA). Which shows interesting divergences on its own, but it suggests that if we happen to make new price highs this year (hey, don’t under estimate the bulls’ ability to drive this thing up) then we would have to continue to see a lower reading on this chart to support to the Primary {3} outlook. Otherwise something else is in the works. Well, this is mostly mental masturbation for now, but keep an eye on this one.

There was quite some talk about the record TRIN reading on June 4th – some of the pundits insist that the coin side of such a high reading is that they usually first result in some upside before they turn into downside. So, you can actually use them as a warning shot that a drop is looming in the medium term future. A turn may be weeks away – or months like in 2007 – but admittedly those were different times. I agree with this on a short to medium term basis, but I don’t think we are talking months.

Perhaps my 2nd version of this chart can offer more clarity. It took me quite a while to properly interpret the signal here but I think I may be on the right track. What I’m seeing here is that the recent spike was part of slowly increasing bearish sentiment during Primary {1}. You can clearly see where the bulls got squeezed all the way towards the end of 2008.

Then we got a breach of that red line and buyers simply kept buying. This officially initiated the new up trend, which we have labeled Primary {2}. And then the tables were reversed – again clearly visible is the line where the bears were now getting squeezed every time until April.

Then again we saw a breach of that squeeze line, followed by a monster ramp up (accompanied by lower prices on the SPX). This may be the starting signal of a trend change. Well, if this turns out to be confirmed later this year then it is supporting evidence that simply reading momentum signals without context can be misleading and may lead to losses. My money is on the second chart – it is also difficult for me rationalize how a 175 handle drop on the SPX can equal a 900+ handle drop.

This is a slightly different version of my CPCE Deluxe chart. Question I’m wrestling with is whether or not we are going to the upper red line first or are now starting to reverse back down the blue green one. During a trend change situation we may indeed do the former and that would then followed by a rally into Intermediate (2). Frankly, Im not sure yet…

My adv/decl NYSE volume chart painted a serious spike which I have not seen since early last year just before we embarked on Primary {2}. So, it’s justifyable to ponder whether or not we are so oversold at this point that we’ll see another rally hurlding us toward new price highs? Quite honestly, I’m not sure how to read this one – is this a bearish signal or is it implicitly bullish?

JUNK vs. SAFETY

This chart was brought to me by one intrepid SSR whose name I unfortunately forgot (sorry!). What I find interesting here is the little dip down here on Friday.

Which is supported by my own JNK:TLT chart. But what’s also quite interesting was the divergence at this year’s SPX low. Let’s keep an eye on this stuff, shall we?

I would have liked to post my BAA-TYX spread here as well but my usual sources won’t have an update on the BAA for me until Monday. However, Hochberg mentioned that very spread in his STU and it appears that it is at minimum remaining above the 2% mark. I have it at 2.05 on last Wednesday and since then treasury yields have slightly pushed higher from 4.09 to 4.14 on Friday. If the BAA pushed above 6.19 then we would remain at our recent spread high of 2.05. Hochberg’s chart seems to indicate that but I prefer to collect my own data.

Commodities/Metals

My cooper futures chart is pointing up – so I expect there to be more upside until I see some divergence at minimum.

Well, this is really not so much about the metals as it is about the SPX. We actually turned almost precisely at that green upper trend line produced by the gold:silver ratio. Question now is – will the bears have to wait all the way back to the red one?

Medium Term

Mr. VIX finally made it through the center line of its 2.0 BB. I think it’ll probably manage to stay below for a little bit – perhaps we even see a VIX sell signal – wouldn’t that be sweet?

Wave Count

Soylent Green needs to start turning almost immediately – I give it a few more handles to the upside but it we push much past 1095 chances for Orange are starting to increase rapidly. If we push over 1105.67 (by the penny exactly) on the SPX then we are talking a whole new ball game which is Soylent Orange. And that may reverse all the way to 1130 or perhaps even into 1150/1175. No, it’s not impossible for this to happen – despite weaking Zero signal and diminishing volume readings in the futures and in the cash indexes. Let’s never forget that the bulls have a lot of help out there – drops are always considered to be negative which is why they are being fought every step on the way.

Bottom Line

None of the above tells me that we are about to drop right away and I’m 50/50 on Green vs. Orange. Reason being is that we are actually less oversold now then we were a few days ago – yes, you read that right. These massive drops usually happen in very oversold tape and the conditions were ripe early last week, but the bears squandered it. Now we have painted a double bottom and I would be surprised if we turned right away – I am willing to consider it as my wave counts offers me that possibility. But I am not ‘feeling it’ – if that makes any sense. It’s also possible that we stay inside of Soylent Green and spend a week or two painting some double zig-zag – who knows – these things are hard to predict.

The Dollar is also close to painting a multi-week or multi-month correction and that would favor equities as the Euro would gain some much needed strength. Everyone is hating the Euro right now – which is probably why it will snap back at some point.

Long term this market appears to be in the early stages of a primary degree correction. I am fairly confident that I am interpreting the tea leafs properly on that end as there is much supporting evidence. Which is why I am going to hold my long term puts into any counter rally – I have not changed my stance on that and probably won’t until the market tells me that I am wrong.

Public Service Announcement

I will embark on a brief business trip on Wednesday [updated – I will not be gone Tuesday], so I will be pretty quiet on that day (will post comment cleaners if we are getting to Sparta). If possible I will offer a quick update in the evening but I can’t promise that. Expect me to be back in full force on Thursday after the bell.

Cheers,

Mole