Medium Term Support

Equity futures are heading down this morning and there’s one chart that I would like to bring to everyone’s attention. I don’t talk about the Dow often but as it’s the weakest among the three major equity indices it may be paving the way for the two others.

In particular the weekly panel has grabbed my attention as we are now in earshot of the 100-week SMA. Hell it’s been a long time since that happened – last time we touched it was in November 2011. By the way the chart looks a bit different on my NinjaTrader (there it’s at 16,939) – so I guess it depends on how the indicator is implemented and of course on the data feed.

Be this as it may – what happens near the 17,000 mark will be rather significant in that it will determine the tone of the market for the remainder of this year. I wouldn’t rule out a quick dip lower to scare the children followed by a dip buying frenzy in order to push things back over the edge. What follows after that will be crucial and I’ll be watching intently. Of course if we don’t even descend that low or if the 100-week SMA remains relatively unchallenged then there’s probably nothing to talk about, at least for the remainder of the year. As I keep telling you guys – tops take a long time to form. And then things fall apart rather rapidly.

Timing all this – well that’s as much art as science – isn’t it? What I am seeing right now are that the bulls are feigning injury and have been letting the tape descend this far. Clearly we are not seeing major weakness on the spoos or on the NQ just yet. Death crosses and all that notwithstanding I have not seen one single session in which the bears were able to inflict any meaningful damage. Major support lines continue to be held – single session sell offs are being bought back almost instinctively a day or two later.

What that means for us is that picking a direction here is still a pretty precarious endeavor and I would advise against it. It’s fine to play the swings and take on positions where you see the odds in your favor. Declaring this bull market dead however would be a bit premature. What many over eager market participants often forget (or are unaware of) is that the initial phases of bear markets (or major corrections) are plastered with snap backs. You get sideways tape that drives you nuts for weeks on end. Then suddenly buying materializes out of nowhere and robs you of your profits overnight – squashing the VIX and stomping on option premiums at the same time.

Does that remind you of anything? Unfortunately the problem is that the very same symptoms can be attributed to medium or long term sideways corrections. The proverbial purgatory for directional traders (which is most of you guys). So we could easily be in one of those and we won’t really know until major support levels give way. And that does not mean it will be too late to play whatever correction may lay ahead – you really need to give up on that idea of picking major highs or lows. It’s a psychological affliction that over the past century has transferred trillions of Dollars from retail rats to professional players who know how to simply bet one hand at a time.

Not much on my radar this morning. Things are either blasting off or are stuck in sideways churn – the one exception maybe being cocoa futures. After the obligatory dip lower it may be ready to resume its course upward. I’m waiting for a few more ticks to the downside before I’ll dip into some long positions here. My stop would be well below the 100-hour SMA – so the lower entry you can snag the better.

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Cheers,