Running With The Bulls

The bulls have been on a rampage and if you got positioned in time (which we all did – thank you very much) and managed to stay ahead of the game it’s been a sweet run.

I think those are Prechter’s underpants dangling from those horns – ouch – that oughta hurt!

But you’re only as good as your last trade, so let’s cover what’s looming ahead. I’ll start with the easy stuff and we’ll work our way up from there:

This was the setup as we painted new lows early October with sentiment pushing bearish extremes and bullish divergences abound. Five consecutive monthly candles lower is a pretty rare situation and statistically speaking the odds for a reversal were high (i.e. in the 90 percentile).

And reverse we did – it’s been one nasty short squeeze since those lows. However, all good things eventually come to an end and we now face stiff resistance ahead. Here’s the AUD/JPY – as you already know it’s very closely correlated with the spoos. Now, I think the 80 mark is going to be a tough one to overcome and most likely it’ll take a few tries to get above. This has been a rapid move up and once we push outside the 25-day BB and above the 100-day SMA the easy pickings are going to be over for a while. It’ll be all elbows and assholes until we get a firm and convincing close above the 82 mark.

And as expected, an almost an identical situation on the spoos – both upper BB lines will be good for a short term reversal. Of course once we reach 1260 the dynamics change considerably as the longs will be running the show again. And if you’re a sub then you may suspect the next chart I’m going to show you as it perfectly lines up with our short term outlook:
[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 or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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That’s right – there’s our treasure map, which I don’t get tired of drilling into your collective rodent brains. The bulls are definitely making a run for it but it’ll be a bumpy one – there is no confidence and little volume along the next 30 handles or so. Now, if I was a market maker I’d be playing this patch of despair for all it’s worth. Expect volatility – which brings me to my next chart:

This is actually not Mr. VIX – it’s Mr. VXV – it represents quarterly volatility as opposed to only front month IV expressed by the VIX. And according to my chart the VXV already pushed outside its lower 2.0 BB line last Friday. Which of course is not a bonafide VIX sell signal (relative to equities) but we may just be getting close.

I don’t look at the TRIN very often but as we are nearing the sell line on this chart I thought I squeeze it in today as well. We also want to see a divergent signal here which would benefit my week 43 theory (more of that below).

The CBOE put/call ratio has been coiling up even more and I am eagerly awaiting resolution – one way or the other. Right now it also suggests that we may see a little shake out once we touch that sell line – the timing is nicely in line with seasonality (see below).

My brand spanking new NYMO (McClellan) Deluxe chart – if you don’t know what it is then please check out last Sunday’s post. I put up that Bollinger for shits and giggles but it’s really not my main focus – rather I am on the lookout for medium term divergences and thus far I don’t see anything (just yet).

Speaking of divergences – here’s a long term view of the SXPA50R (i.e. percentage of SPX stocks above their 50-day SMA) and we are now in a very interesting configuration. Take a look at that steep signal drop that preceded the 2008 crash – IF and only IF we are scheduled for a repeat performance then we should be seeing a signal spike higher followed by a divergence sometime starting Q1/2012. Bear in mind – this is a very long term perspective of course and as of now this chart apparently promises us plenty of remaining upside potential.

Of course – and to quote myself – in the end it’s all about the currencies and in particular the ole’ Dollar. And my P&F chart is not looking so hot right now. We’ve got an SMA that was finally overcome and now serves as support. The chart currently suggests a bearish price objective of 75ish – and given seasonality this may be a reasonable target. Here are two more charts that may suggest a similar scenario:

Commercial shorts are pretty adamant about the Dollar being ripe for a major reversal. This is a chart Volar shared with me on Friday and which really took me by surprise. After a rather mild spike in the Dollar the current sentiment seems a bit extreme and thwarts anything in its recent past.

And inversely we have small speculators massively short the Euro (I hope I read Volar’s chart properly and I think that’s what he meant with this comment in red). Well, you do the math – commercials (i.e. hedgers & smart money) are short the Dollar while small specs (i.e. small traders & dumb money) are short the Euro (and thus implicitly long the Dollar).

So considering this it seems that P&F chart of mine may just be proven right – we shall see.

I finish this post with our seasonality chart (another one I plagiarized from Volar – heheheee). We are now heading into week 42, which is a bit of a tosser in terms of average returns. Quite possible we push up into resistance tomorrow and then bounce back later that week, leading us into week 43. And that one statistically speaking favors the bears plus we’ve got a new moon scheduled for that week. Again, if you want to know more about those moon cycles look no further than Chris Carolan’s blog – he’s the go-to guy when it comes to mapping the tides of the market.

Bottom Line:

Obviously there is some resistance looming above and equities seem to be setting up for a little shake out. It may start this week but I expect some real fireworks the week after. If the bulls survive that shake out with only a few bruises and new buying interest then we should be good to go for the 2012 rally season. I am very much looking forward to that as I greatly enjoy picking those low hanging fruit 😉

Cheers,

Mole