Even though the $SPX was only down 2.83 pts for the week, it was down about 45pts from it weekly closing high so, okay, maybe this is 2008 all over again. I think the market is going to let us all know which way it’s going to go by the end of trading next Friday, the 9th. For the $SPX that means we’re either going to clear 1230 and head on up to the 50MA in the 1250 area, or we’re going to drop below 1121 and then eventually take out 1100.
Last week, on my other blog, I put up a 60min chart of IWM which employed 13/34EMA’s. The trend line on that chart extended through the week eventually moving up to about the $70.20 area. On Friday morning, IWM gapped down below that trend line and a couple of 60min candles later, the 13EMA crossed down through the 34EMA all of which resulted in two ‘sell’ signals using this strategy. At the close, the RSI 14 dropped to 26 indicating that IWM is extremely oversold and suggests, but does not guarantee, that the bulk of the selling is over and that a bounce of one degree or another could be in the works some time in Tuesday’s session. But just a bounce, at least that’s my thinking at the moment, subject to change at any time. And IWM isn’t the only ETF that gave a sell signal on Friday, but it certainly was the most battered.
Based on extreme oversold readings in key gauges that I track, the market is set up for some kind of pause or bounce come Tuesday. Will the bounce last? At this point I have to say, no.
Here is a list of some of the things that hit extreme oversold or extreme bearish levels on Friday:
P/C Ratio: 1.44. That’s in the range where the P/C Ratio got on 8/17, which was an up day, and 8/18, and 8/19.
$TRIN: Closed at 3.24 on Friday meaning that sellers were dumping shares at a ratio of more than 3:1. As a result, Friday was a 90%+ down day and that used to mean that everyone who wanted to get out did so. But then what happens when all those buyers have second thoughts?
$NYADV: 442. I have a chart set up at Charts-A-Pallooza with lines at 500 and 2400 with the idea being that a close below 500 indicates the market is oversold and with a close above 2400 the market is overbought. $NYADV closed at 2532 on Friday, 8/26, and then closed at 2820 on Monday. And look what followed.
$NYAD, the daily: Closed at -2152 on Friday. This can go lower, like it did on 8/8, but it need not.
Looks good so far; however, neither Zweig Breadth Thrust nor 4 Week New Highs/Lows managed to drop into extreme oversold territory. This could happen on Tuesday but it is always better when all of these gauges are in sync.
I haven’t forgotten $NYUPV or $NYUD:$NYUPV but I wanted to take a longer term view of them.
Since the May 2nd highs, there have now been 10 instances where $NYUPV has closed below 80 and where $NYUD:$NYUPV has closed below -12, with this past Friday marking the 10th time. During the decline of 2010 there were only 7 such instances meaning that we are in a different environment and that a better comparison might be found elsewhere, i.e., the 2008-2009 decline.
During the 2008-2009 decline, which I always consider to have started in September of 08′ and which lasted about 7 months, there were 15 instances where $NYUPV closed below 80 and 17 instances where $NYUD:$NYUPV closed below -12.
To me the above-mentioned data bits are totally inconclusive for the short term and they suggest that there is potential for several more trying months for long side investors. And, of course, I could be totally wrong.
The way I intend to play this now is via the weekly charts. This is certainly a more conservative approach and you won’t get the bottom by following it, but these are uncertain times where caution is the word of the day.
The following is a weekly chart of the $SPX from the 2008-2009 decline.
And this is a current weekly chart of the $SPX. There are several similarities in these two charts and while I don’t have a crystal ball it is possible that the current chart of the $SPX will begin to look more and more like its older brother as time goes on.
Charts courtesy of StockCharts.com
Meanwhile, in another part of town, $BDI is about to go positive for the year after basing for several months, and $CRB continues to look strong.
Unless something drastically changes to alter my current view, it’s not likely I’ll be putting up a post next weekend.
In the meantime, be careful.
You may find some solace in knowing that through the ages only the paranoid survived.
Added Sunday, September 4th:
My preferred trading strategy and the current market environment are not a good fit. I like to study the market, look for extreme oversold conditions, and then take a position with the idea of holding that position until the market becomes extremely overbought and trend lines start to fail. Employing that strategy I can stay in a trade for several weeks and/or months. In this volatile market, that strategy does not appear to be viable which is why I am now looking at a strategy involving the weekly charts. Using the weekly charts would keep me out of the market for perhaps too long, so I may alter my trading strategy in another way until my preferred method starts to work again.
I used to day trade but to make money day trading one has to be willing to take large positions and if you’re wrong it really hurts. So I quit day trading several years ago and have no intention of going back to that. If the market doesn’t settle down in the next couple of weeks, I may start trading using the 60min trading strategy, which you can find back at my other blog. Trading via the 60min charts in this market would mean staying in a trade for 3-4 days or so. If I do decide to go this route, I will let you know.
On the recession:
With the $BDI and the $CRB holding up so well, it is hard for me to believe we’re actually headed into a recession, but what do I know. Sometime in the week of September 12th, Ceridian will come out with their latest report. If that report is negative, then I’ll have to change my views on the recession, but if that report is positive or neutral, then I’ll hold to my current view.
GL in the week ahead.