Never Overstay Your Welcome

I have to admit that I was a bit nervous about making that DEFCON 3 call the other day. For one the tape has been volatile to the extreme plus we are heading smack into pre-X-Mas volume limbo. Which basically means anything can happen anytime and making binary reversal calls even at normal times is a precarious endeavor at best.

But lo and behold – ole’ Mole got lucky once again as equities followed lower. The S&P 500 just bounced near the magic 100-day SMA mark, which is pointing toward 1200 at this point. So, what lies ahead? As usual I do have some thoughts on the matter:
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If you’re reading this then you are (hopefully) a sub and in that case you already know that the real play is on the currency side. Here are you looking at a left chart of the SPX against UDN – a bearish Dollar ETF. As is rather apparent equities were able to stave off some strengthening on the Dollar side but finally relented right when it matters the most, which was right here:

Seriously, you couldn’t make this shit up. We now have ourselves a very well established diagonal resistance line down – on both the pure numerical (i.e. the P&F) as well as the temporal/numerical chart. Plus at the same time we seem to be building an inverse H&S that could be resolving to the upside after 1245. On the other side of the equation we have ole’ bucky pushing up strong – but before you pawn your wife’s wedding ring to take on more short positions you may want to look at this chart:

Here’s UDN again (UUP is the antonym if you care) – this time I’m wrapping my two Bollingers around it. Seems a bit extended at this point, hence the title of this post. Never overstay your welcome – yes, we could potentially squeeze a few more days out of this down move but is it worth the potential risk?

So are we going to push up higher here in a jiffy? Well, I don’t if we WILL – but it would be mighty bad medicine for Santa if we didn’t. First up we have that 100-day SMA which I do not think the bulls want to find themselves below of again. Then there’s that inverse H&S which would most likely be horribly disfigured if we start accelerating lower – in particular if we find ourselves below 1200.

Bottom Line: I think this should be contained near 1200 – unfortunately I do not have updated readings on the MMMRs yet, but if it looks like we are continuing lower I will follow up here. Either way I would want to be long if we touch 1200 – and very short if we manage to push below it. Again, watch the FX side – that is usually where you get an early peek at what’s in store for equities the following session.