Well this rally is trying its hardest to lure people in, but I’m not impressed! In the words of Shania: So you got the looks, but have you got the touch? Well that’s the big question here: Is there any substance to this rally?
As I look at the various charts the conclusion I’m walking away with is that this rally is rapidly running out of gas and we are at a critical juncture here. Here are the key facts: Markets made marginal new highs yesterday on low volume, on weakening RSI, weakening MACD divergence, and worse: All this in context of weaker than already weak internals for the December highs. We have 2 unfilled gaps below and the 50MA is approaching rapidly which I believe will be a magnet test very soon.
A look at the weekly $IWM shows that Monday’s low represented the 6th ping of the lower trend line. Yet look how the MACD divergence is getting weaker and weaker. Price drives the action, but the participation in terms of thrust barely has a pulse. While this week’s OPEX may keep things afloat ( or provide a huge downside surprise, who knows really?) markets will have to contend with the taper question again before the end of the month as Janet Yellen takes over the helm of the FOMC. Like it or not, big POMO days have produced mostly positive market results and yesterday was no exception. Yet FOMC speaker after FOMC speaker this week spoke for an acceleration of the taper as the Fed has come to realize that QE has lost its effect. Coupled with the established market history of an average 7% correction following a change in FOMC leadership the case for downside into January/February continues to hold appeal. Yesterday I showed a comparison to the January 2000 analog. While analogs work till they don’t so far it has followed the same pattern. That pattern would make today a down day and make next week a real challenge for bulls. We shall see.
Mind you I’m simply calling for a sizable correction not a doomsday bear market. This initial correction would be very buyable in my view for another run at highs in the spring. Yet as one looks at the larger picture ($RUT chart dating back to 1988) one cannot help but be awed at the historical disconnect here. The weekly 50MA has been a standard test for the market and the vertical ascent has so far removed the $RUT from it that calling the market ‘due’ for a correction is simply an understatement. I can’t of course call a top here and we may still propel higher, but the evidence is starting to tilt rapidly in favor of a sharp pullback (see further charts below).
My trading plan for remainder of this week is quite simple:
On further strength: I continue to scale into swing shorts and increase put positions as appropriate
On weakness: I’ll be closing out put positions, but maintain swing future positions. For today it might make sense to see at least one of the two gaps fill. If we gap down I expect that down gap to immediately get filled (they always close the down gaps), but within the next few days I expect both lower gaps to get filled.
If we get the first lower gap filled today I will likely close the weekly $IWM puts at whatever price I can get and may also close the 1/24 $SPY puts to balance them out. The upside for today’s trading would be a technical failure at the highs from yesterday for a solid double top. This would be evidenced by a hard break lower, ie. a close below $115 on the $IWM. In that case I’d be inclined to keep the weekly puts running, yet my travel plans would likely force me to close them today anyways.
Looks like a bit of a megaphone pattern on weakening divergence. TL target is the 50MA.
Complacency supreme continues with ISEE over 200% for 2 days in a row. CPC forming largest low pattern in years.
Yield versus $SPY hat tip Kimble