Is the Market Primed to Bounce?
The last few days witnessed small caps outperform the larger market, a signal that has foreshadowed rallies all year. We got a large reversal on Wednesday, another very nice reversal on Thursday and big upside follow-through (so far) on Friday. Over the last few days I have covered my shorts and gone long. Given that I am very bearish mid/long term and believe “the top is in” so to speak, this strikes me as slightly crazy behavior on my own part, but I do love gambling and so far it has worked out okay.
On to the charts. Here is the short term S&P Futures chart. I have spot-shadowed three targets that strike me as likely areas of future resistance: (1) the 200 day simple moving average (red dashed line), (2) a continuation of the steep downtrend that preceded the sell-off (black solid line), and (3) the 50 day simple moving average (blue dashed line). I would note that I think (4 – not highlighted) the underside of the broken long term resistance is a possibility is a possibility given how beautifully the reversal pattern is shaping up in the weekly chart. That scenario would have the S&P push past (3) and re-test old highs late in the year, hitting the underside of the old support trendline.
When we pull back to a weekly perspective, we can see a “doji star” with a large bullish wick created this week by the S&P. It did so right at the 50 week simple moving average. On a weekly basis, we’d want to see positive follow-through next week to confirm the reversal.
In keeping with the idea that stocks may rally from here, the 30 year Treasuries ETF (TLT) looks like it topped this week. This week’s reversal put a huge bearish wick on TLT’s weekly chart, and the ETF will likely close the week just under trendline resistance. It is a very bearish configuration for TLT in my opinion. That said, the support trendline isn’t far off, so we’ll see how those elements interact. Maybe it will fall to where both the 50 and 200 SMA’a are dancing, about 8% lower.
I will note one other asset that looks interesting: gold. It has broken long term support and may be forming a (bearish) descending triangle pattern, but for now a multi-year support level is holding, and that level is also a 50% retracement of the 2005-2011 bull market.
Good luck trading in these volatile waters!
**UPDATE : Small caps notably under-performed the broader market Friday. Also VIX rallied a bit, suggesting that despite the big jump in the broad market, risk appetite remains muted. The big question for Monday and Tuesday will be: was this rally just a short squeeze?
Playing the Ponzi 
Looks like if you draw the long term SPY wedge differently starting at 2009 with the 2011 lows as well, we may have tested the underside of the wedge and the 100 SMA. Is that right? It doesn’t look like that matches any of your possible targets.
Yes, I think that’s a fair way to draw it Draft. I see that’s how Chris Kimble has his rising wedge drawn: http://blog.kimblechartingsolutions.com/wp-content/uploads/2014/10/500indexscarydoublekissoct231.jpg. It really comes down to how you incorporate intra-day and intra-week movement. Personally, I like to seek lines that have the most frequent usage. The very steep lower line I’ve used (which probably wouldn’t be re-tested until about 2000) is an example of that. I think if you exclude the intra-week drop in 2011 but go all the way to the bottom of 2012 and ignore the tighter range since, it puts you around this 1950 S&P level. If you include the intra-day bottoms of 2009 and 2011, the line is under 1900 and we never broke it on a weekly basis (though we did for daily close). That difference in interpretation is what separates the art and science components of technical analysis, I suppose. Regardless of where one draws the lines though, the psychological picture is the same: an environment where bulls and bears grow towards increasing agreement on an ever-improving assessment. The very sharp rally of the last week is also very bear-marketish, and has confirmed my belief that we have seen a significant breakdown.
I have taken this opportunity to start laying short positions back on. I have shorted QCOM, Nas and small caps. I have sold some of my ultra-long positions, but not all (yet).
Interesting. Well I guess today’s action so far backs up your view of the rising wedge!