Santa Off The Launch Pad

This season Santa got a little help from an intrepid gang of gnomes over at 33 Liberty. No big surprises here for any of us naughty rats – after all the writing has been on the wall for weeks now.

Up, up, and awaaaay!! Oh wait – that’s Superman – never mind.

The VIX buy signals have been spot on as of late – it’s like taking candy from a baby. I for sure am on the extra naughty list this year. Ooops…

See, the bulls are doing this the right way. Whereas VIX painted a panic move to the upside in late November, thus pushing outside the 2.0 BB (and producing a buy signal) the bears are slowly riding this cart down hill. That’s how you do it and that’s how you keep momentum flowing.

Here’s a little charting lesson for you noobs. See single momentum indicators in most cases have little predictive value – the VIX buy signals on the 2.0 BB is the exception. My SPX BB cross over chart shows you what happens when medium and long term momentum start pointing in the same direction. We had a similar situation early this year and it seems like 2010 will yet again paint a year of deprivation for the bears.

What’s even worse here is that both BBs are now pushing up steeply and breaching them would take quite a poke to the upside. Momentum remains to flow to the upside and in such a situation it will have to run out of fuel on its own time. So even if we get a little reversal (inside both BBs) most likely the dip buyers stream in, we get a another push higher, perhaps a third, etc. until we finally paint a high – preferably outside those two. In terms of seasonality this would tie into my thesis (i.e. fancy word for mental masturbation) that we will close the year around the highs and don’t see a meaningful correction until early 2011.

Copper has been painting a teeny weeny divergence but in the context of the minimal participation right now I won’t read too much into it. What’s more important is that it is not painting a major divergence right now, despite the fact that ole’ bucky has been holding around the 80 mark right now.

Since I’m yapping about commodities let me throw in a chart I have never shown to my stainless steel rats. This is my sweet crude crack correlation chart (love the name). Basically you got light sweet crude in blue and the crack spread (please google it if you don’t know what that is) in black. The past two years don’t provide too much insight to the untrained eye but let’s just say that crude usually follows the crack spread, so if you see a divergence (i.e. in April/May) you can expect crude to snap back in whatever direction the crack spread is leading. As you can see the crack spread is on an overdose right now – no signs of a divergence here either.

My NYMO:BPNYA chart continues to point downward – again it’s usually early but if that divergence continues the bulls will probably see a quick shake out in January. IMNSHO this is just too juicy for market makers to pass up.

Best for last. This is my long term SPX vs. SPXA200R chart (the latter being the percent of stocks trading over their 200-day MA). As you can see in the past few years every meaningful top was accompanied by a distinct divergence. The last one took a lot longer to play out but it paid off if you took an entry in April.

Only problem here is that I don’t see us above 90 right now – plus we are probably months away from coming close to a divergence. So, that may also play into my prevailing doubts about a deep retracement in the near term future (e.g. of the P3 variety). Looking at this chart – and given the obvious accuracy in predicting major turning points – I just have a hard time imagining a deep drop into the abyss here.

Bottom Line:

I have to admit that the contrarian trader in me is quite puzzled. The record bullish readings in the ISEE and other sentiment indicators as of late would have you think that a drop is just around the corner. But then I look at all the charts above and it looks like we may drop and then power higher without any care. Which sucks big time for me as I just can’t justfiy going long here – not because we’re scraping 1250 on the SPX – I just don’t like the setup. So, I’ll probably just have to keep watching this bitch grind higher until I finally get my reversal and a decent entry.

Damn you fucking trend traders – that’s exactly the kind of tape you love, don’t you? 😉

Cheers,

Mole