Red Candles For Christmas?

The past week bestowed the bears with some promising red candles, renewing their hopes that a two month ramp in equities had finally ran its course and was ready to correct. Frankly, I’m not sure sure. As I often talk about the ‘path of least resistance’ my main goal this weekend was to assess any downside potential, assuming of course the Dollar would be given a break and allowed to paint a floor.

So, will we see some red candles for Christmas? That’s what everyone wants to know. To answer that question let’s look at some momo charts:

The daily Zero has continued to keep us patient as no significant divergence has been produced since the beginning of September – on the smoothed panel it’s painted a consistent sideways signal. And until this changes I don’t see anything but a quick reversal which most likely will be instantly bought.

This chart promises some hope for the shorts to get their day (or week), but could quickly become a big worry. Look – we have painted a major divergence on the NYSE adv./decl. volume ratio and have now reached the point where equities usually start yielding to gravity. Only problem is this – if we see sideways tape instead we quickly may find ourselves in buying territory, just in time for the seasonal Santa Rally.

Similar situation on the NYMO:BPNYA ratio: There’s a clear divergence which began quite early in this latest stock rally. And just like the previous chart we are now at the point where equities need to follow suit – otherwise any downside potential will most likely fizzle and give rise to renewed buying interest.

My 10-day SMA on the CBOE Equity put/call ratio has also reached a recent sell line. Which however is merely a setup for a moderate consolidation – nothing more. Considering how far we’ve ramped in the past two months I had expected this thing to be way below the 0.5 mark – and the fact that the CPCE has remained in its current down channel is worrisome. As a side note – there was a recent push up to the 0.64 line, despite the fact we were pushing higher. Quite frankly – I was scratching my head over that – seems like a bunch of shorts were squeezed quite hard and then got taken to the cleaners. Unless someone has a better explanation for me.

In the end, it’s all up to the Dollar – and it’s been holding its ground at the very last line in the sand. Thus far that is – the bounce from a long term support line suggests that a floor may be in the works but despite extremely oversold conditions I’m still not convinced that we’ll see a short squeeze situation here before X-Mas. We may just gyrate sideways here, retest that line and then push higher early next year.

In my mind the 80 level is really where the rubber meets the road – if that level can be overcome it’s possible that the Dollar gains traction. Besides, even if ole’ bucky is allowed to rally it doesn’t necessitate an inverse response in equities. Case in point: Just a year ago the Dollar embarked on a six month reversal and it took four more months for equities to follow suit.

Bottom Line:

There is a potential for lower prices across equities in the coming weeks but I remain skeptical that SPX 1100 will be breached. Some of you may remember my SPX ‘football field’ chart a few months back – which features several resistance lines the bulls would have to take out – which in the end they did. And all that resistance has now turned into support. Plus we are miles away from even the top level, which was 1130. It’s doubtful that anything but a fast and almost catastrophic push lower would be capable of penetrating this cluster of support. Which of course I am not ruling out in a narrow market like this – but I couldn’t possibly try to predict it. Equities have been carefully managed ahead of the midterm election and with over a dozen POMO auctions scheduled into early December this is not likely to change anytime soon as there will be plenty of cash available to buy any ensuing dip.

My advice to the bears: Dress warm – it’ll be a cold winter season.

Cheers,

Mole