Groundhog Year?

This morning I came across something rather interesting and it ties into the fact that thus far January is starting out almost exactly like 2011. So will 2012 turn out to be a groundhog year for us stainless steel rats?

Well, I certainly hope not – like Mr. Groundhog the Mole managed to call the seasonal shifts rather well last year. But let’s not kid ourselves, 2011 was a brutal go-nowhere piece of shit year and I am not looking forward to an encore.

Anyway, as I don’t make the tape and only report it here’s what I’m talking about. The NYSE A/D ratio has been climbing a diagonal support line in the past few weeks and that is rather unusual. As you can see on the rest of the chart you traditionally get a little reset here and there where the A/D ratio swings below the 1.0 mark (thus creating > 1.0 readings on the D/A panel below). Now, this looked rather interesting to me and I parsed around for a previous occasion of such a formation:

And there you have it. So, when did it happen? You may have guessed it by now. In January of 2011! And what we got then was a drawn out systematic short squeeze pushing well into February. Which of course is a seasonal anomaly – traditionally February is a brutal month for the bulls.

Now all this is happening while we see extreme bearishness on the Euro side, plus an inverse H&S setup on the SPX, which seems to be in the process of resolving. However, there’s also the VIX range issue I brought up yesterday and that gives me pause plus a whole number of divergent momentum indicators. Let’s take a look at the spoos and the SPX to get an idea of what price is telling us:

The spoos continue to point up and both Bollingers are starting to rise as well – that’s pretty bullish on a daily basis, especially after a successful retest of that NLBL at 1280. Keep an eye on that 1267.25 NLSL, which admittedly is rather far away at this point.

The long term SPX charts show us plenty of space for advancement on both the weekly and monthly panel. The latter now suggests established support in the form of that descending diagonal. If we get a retest it will most likely hold around 1250 which is where it meets that diagonal plus we have the 25-day SMA on the daily spoos chart (please consider fair value). Also bear in mind that starting Monday we’ll see a new weekly NLSL at SPX 1248.64. I like how that’s all lining up – as you know I enjoy order in my trading universe.

Making things a bit more interesting is the latest AAII sentiment update – which continues to be überbullish. That is simply ridiculous and strongly suggests an impending piggy shake out – at least on a short term basis. I for sure would not complain as I would like to see a retest of that diagonal on the monthly SPX chart.

On to the Forex side – I have been watching cable lately and was waiting for a touch of those two lower BBs. Well, we got it and now it’s time for cable to decide whether or not to bounce back or to pull a EUR/AUD on us. I am long here with a stop below those two lower BBs.

The AUD/JPY keeps hemming and hawing around but is running out of time. Sooner or later – meaning by next week it’ll either fail or breach all that resistance hovering above. Or maybe it’ll just wait out that daily NLBL. Again, I find it a bit peculiar that this one is showing so little luster in the face of equities pushing higher. Usually when I have to choose between equities and FX I tend to believe the FX side. Which is another reason I am scratching my head a little about what I’m seeing on the NYSE A/D chart shown at the beginning of my post.

Okay, I strongly urge you to put the 30-year treasury futures on your watch list. It’s been about as decisive as a teenage girl when asked about her weekend plans but a failure of that NLBL may be finally what breaks the camel’s back.

Why am I so excited about bonds? Well, this is why – watch the weekly and imagine that diagonal support line turning into resistance. We are not there yet and maybe this will be nothing but a reload for the bulls. Also keep an eye on the monthly chart – an inside candle at the end of January may be just what the doctor ordered in February. Again, this is a medium to long term play – no reason to jump on this today.

Bottom Line: Equities are doing their thing in spite of seasonality and accruing divergences on the momo side. I am really a bit in a bind here. I don’t want to be long on a medium term basis but I am also seeing signs of a possible vapor rally just like we got in early 2011. Also remember the extreme Euro bearishness right now which is a contrarian long signal for me. But then there’s that super bullish AAII survey and I don’t even want to be short term long seeing those numbers. So the best option I can offer is to continue playing it very small – perhaps taking out some OTM call options. VIX is pretty low, so even if we see a surprise drop there should be a damper due to rising vega.