Weekend Update August 15th, 2010
The biggest problem I see for longs at this point, outside of the fact that the charts have “Sell” or “Avoid” written all over them, is the low P/C ratio, which closed at 1.0 on Friday and only went to 1.07 during this past week’s decline. That’s just too low and hints at a little too much complacency. Friday’s low ISEE #’s suggest that puts are being bought left and right, but this is not being confirmed with the P/C ratio. You would think with the $VIX gapping up through its BB’s that the P/C ratio would have climbed up into the 1.20′s, but no. These indicators are sending out mixed messages which seems the norm over of the past week to ten days.
By contrast, the following chart was sending out a very clear message. I only stumbled upon this combination this past Friday and have had very little time to back test it so your mileage may vary. The key is to look for divergence between the # of new daily highs and price action. About 98%-99% of the time, $NAHGH and the $COMPQ confirm each other, but you can clearly see the negative divergence that began after the July 26th high. As of this past Friday, we now have two days of positive divergence. That’s good, but can easily change on Monday.
Oscar is always saying that flat tops lead to market drops and it would be interesting to go back and look at other flat tops using this setup or $NYHGH with $NYA/$SPX. BTW, there was also a negative divergence between $NYHGH and $NYA/$SPX, but it wasn’t as obvious.
Chart courtesy of StockCharts.com
I have no idea which way the market is going to go next week. Option market makers will probably have a lot to do with market direction. But I think one thing is certain: We ain’t going no where until the $SOX index either quits dropping or changes course. Stocks like AMAT, MU, LSI, & AMD have been absolutely destroyed over the last 3 months and if there’s anymore selling in SNDK or if ATML gets taken to woodshed you can kiss the $SOX index goodbye. It truly is the Lost Index and this is going to continue to be the case until selling slows or ceases in the key stocks in the index, INTC, AMAT. INTC only makes up 2.23% of the $NDX but it is an extremely important stock and it is exerting tremendous downward pressure to the $SOX, $COMPQ, $NDX, and to a lesser extent the $INDU. The way INTC is moving it looks certain to take out the July lows and then it’s on to the Feb lows, which are perilously close. If the RSI on INTC’s daily chart drops below 30, don’t be surprised to see INTC trading in the 17′s within a week or 10 days. Since I am long the Q’s via TQQQ, this is something I do not want to see so I am watching INTC, SNDK, & ATML like a hawk.
In other news:
I’ve been mentioning the ECRI #’s over the past couple of weeks and the ability of negative ECRI #’s to predict a recession 6months in advance. This may or may not be accurate based on three other sources. The first is the $BDI, which has been rising since mid-July indicating that demand for container space is allowing shipping companies to raise their rates for the first time since the first of June. Next, railroad data, see the Rail Fax link to your right and be sure to scroll all the way down, is showing good growth so far this year and remains in an uptrend. The uptrend does appear to be slowing a bit but a trend is a trend until it isn’t. Lastly is Ceridian’s last report, which came out on the 11th. This report shows a significant rise in trucker activity in July vs the June period, and this is a good thing. Based on the report, Ceridian projects current quarter GDP to come in around 4%, as long as trucker activity doesn’t slow or change course. Caveat, caveat, caveat.
The following chart of the SG shows that it peaked on August 4th, waffled around for a couple of days, and then began to drop. The red trend line is speculative as the erratic behavior of the SG lately makes drawing a trend line difficult. If the July 19th and 20th lows are taken out this coming week, then a break of the red trend line on the SG is legitimate and ominous.
The $VIX closed back inside its upper BB’s on Thursday and Friday and produced a large black, reversal-type candle on Thursday. To signal a ST bottom, the $VIX needs to close below 25.18 before it closes above 27.21. $VXN managed to close just above its upper BB and for it to signal a ST bottom $VXN needs to close below 26.47 before it closes above 28.95. Long or short, these need to be watched carefully, especially on Monday.
While I don’t really see any reason to initiate new long positions at the moment, I do think, based on the action in the $VIX/$VXN and $NYUPV/$NAUPV and other indicators, that shorts may have squeezed about as much out of this drop as is possible. The one thing that would flip me to the bearish camp would be a break of the swing lows from July 19th/20th. Do that with conviction and the early July lows probably won’t hold and I’ll be doing the Hokey Pokey with the bearz.
GL in the week ahead.
