Crossing The Rubicon

I have barely followed the weekend news soap opera as I deem it to be an utter waste of time. The drama junk headlines being force fed to a crisis addicted audience represent exactly zero value and should be ignored by anyone brave enough to be trading the swings today.

There continues to be a lot of emotion in the tape however today’s early morning pop & drop suggests that we may be in the process of crossing the Rubicon. That diagonal support line was an important line in the sand, and its breach now turns it into resistance. In addition we now have the 25-d and 100-d SMAs firmly entrenched above, making 1320 a very difficult hurdle if/once the tape is given an opportunity to reverse higher.

The weekly SPX chart suggests some support around 1265 – should that give way we are looking at 1200 as the next logical target zone. The 1260 – 1265 cluster is also key due to the sideways channel on the first chart above, a range we have been stuck in since early January. Effectively equities have not made any progress since January 11 – and the first day of August is usually the start of the ‘iffy season’.

I’m calling it that as major market corrections seem to cluster around late summer and early fall but as Volar’s charts (see one example above) have shown August can also be a bullish month – it’s really 50/50. So, I wouldn’t completely give up on the longs just yet but momentum and price now are starting to strongly point downward.

To that end I do have a few more charts that paint at minimum a fragile picture for the continuation of a bull market:
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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The chart that rules them all – the percentage of SPX stocks below their 200-day SMA has dropped toward the 50% mark. That suggests some continuation here, most likely into the 30-40 percentile. After that we may see a reversal which either sticks or rolls over – we can’t be certain just yet.

What the bulls want to see here is a push above the 70% mark, preferably this month as I think the odds for this to happen in September are only moderate, i.e. September traditionally points downward.

Sticking with the long term them but a more nimble indicator the SPXA50R has been dropping similar to its big cousin. The picture that’s unfolding here is one of steady degradation and the 40 mark is really where bear claws should hit the road. Now this does not preclude equities from suddenly busting higher in the near future, but what you should keep an eye on is what happens on this chart during a little news induced short squeeze (as what may be unfolding over the next few days). If we remain below the 60 or even 50 mark then the bearish writing will clearly be on the wall. In other words – let’s keep an eye on a bearish divergence on the SPXA50 – but you want to give it a reasonable moving average.

McClellan (medium term trend) vs. NYSE Bullish Percent (long term trend) – my rather exotic ratio. I have drawn a green dotted line where dip buying has been stepping in for the past two years. Should we drop below this mark (we only have once recently – i.e. last June) then more trouble for the longs may be on the horizon. But the odds are now ripe for a quick reversal higher – be prepared for that if you are looking to the downside.

I still do not see any divergence on the JNK:TLT ratio. That is further indication that we may see some downside continuation unless it shoots higher along with equities. Caveat – the tape is confused and emotional, so please always leave room for a quick rip higher. If the bear truly roars this fall then please recall the trials and tribulations of the 2008 correction. Trading the downside is not easy and you always need to be prepared for overnight surprises. Always keep in mind that pretty much all forces are fighting against you – politicians, Wall Street, (clueless hindsight) economists, etc..

More short term the EUR/USD is not looking pretty interesting. Last Thursday’s candle now serves as a clean Net-Lines in the sand – a breach of its high is bullish while a drop below its low suggests we drop to 1.4. Seems to me that anyone long here ought to be concerned about that drop below both moving averages – which is eerily reminiscent of what happened over on the SPX.

Crude is now at our first target and I would probably call it a trade and wait for further instructions. The new NLBL is ways away – and even if we get there those two moving averages looming ahead look ominous – little edge there. So perhaps a continuation lower would give us better odds for a long trade – if it happens – again if you were short it’s time to cash out.

Copper suddenly dropped like lead this morning which changes the picture somewhat. It’s been the one fly in the ointment for me, as you know, and a continuation lower would be extremely bad news for equity bulls. There is quite some support waiting below and I’m not too excited about a short trade here just yet.

20-year treasuries – showing the pertinent ETFs here. I showed this chart last week indicating that TLT would have a hard time busting higher. Well, it did anyway – so, that’s how much I know 😉

Despite my confusion as to why bonds would provide a safe haven ahead of a proposed downgrade of the United States (and implicitly its treasuries) what I definitely do know is that we are pushing into unknown territory here, clearly evidenced by the lack of volume in the current regions. But that may quickly change and completely change the dynamics of market momentum, which is a move out of equities and into ‘supposedly’ safer instruments. However, as I said last week – you can hide but you can’t run. It seems with the exception of precious metals there are very few places to hide these days. Traders love volatility – but its poison to the average long term investor.

Interesting times indeed – don’t get emotional and watch the charts shown above. I’ll do my best to steer us through whatever storm may be looming ahead.

Cheers,

Mole