Weakness

Here’s the chart on which I was basing my suspicion that there was impending weakness in the market. Again, I had no idea that hot, steaming Grease would fall into my lap. I never get that lucky. (please ignore the Relative Strength lines on the chart below, because this is a chart of the SPY and the SPX is the reference for calculating Relative Strength, so the deviations from 0 are due to the rebalancing times necessary for the SPY ETF to buy/sell the index.)



See the Blue line labeled Support/Resistance. Remember from a long time ago, I said that Farley said that if you find many factors then that will make the S/R point stronger. Here we see an overnight pop, good volume, buyers coming in and the price holding, and we see the Stochastics hitting the 80% point. All good indicators for strength.

Then see on the 31st, where the convergence of the price move and the moving average was happening. Also we see the stochs starting to fall and the MACD plummeting. All weakness signs.

I was watching that weakness, trying to decide whether to gamble going short, when we broke the Moving Average short and medium term lines (the blue and black wavy lines) with an overnight pop on the 31st. We held the Support/Resistance line for 5 hours, but no buyers came in to move the market back higher, even though on the daily chart it looked like the market was on an UpUpandAway move. Then, we see for the last 2 hours of the day, we broke convincingly that Support/Resistance line, with increasing volume. Definite weakness. Look at yesterday’s comments, I posted a comment that I saw weakness in the market.

Then I woke to our overnight pop, when I was expecting a short move to around the support line at 125. Because we had broken the Support/Resistance line at 126.50 with committed volume, I didn’t expect my overnight VXX move would be to the positive side. Reward was high, risk was low.

Where to now? Italy will be making headlines, and the market must price that in. There is a resistance line around 123 which seems to be holding with reasonable volumes, so I went long the vxx again there (at 44.90). Until we cross that Resistance line around 123 with good volumes, I’ll believe we are in a (temporary) decline. I’ll be watching the MA’s and will reduce my positions as we get convergence (like we saw around the 28th.

What will move this market in the short term higher? US Earnings are good to OK which is a stabilizing factor, but I believe investors are bailing out of Euro bonds and into “risk assets” like the stock market, and also into the US T’s. I think they’re likely to choose the US market, as opposed to Brazil or Korea, or Japan markets. So at some time (maybe around 1140 (I don’t think we’ll see 1110 again)) we’ll see the new money come in.

The other thing I’d like to mention is that SKF has been falling from 97 to 59. Have a look at the daily chart. So, with the impending default of Grease and Italy, and maybe Spain, do you think the banks are going to take it on the chin? Do you think you might see a move of SKF, maybe to 80 or so? Or even higher? They can’t dump their bonds after all, who would buy them? So they’re toast. And the US banks won’t be making profits anytime soon because the US Government won’t let them. I shorted the banks before when evertybody said they were in trouble, and made a lot of money.

Trade the tape, and keep your stops tight. There's no shame in getting out and back in again.

Here's a chart of the VXX. Notice any similarities to the chart above?