SACO INVEST: Be Prepared for S&P's Tricks and Treats

sábado, 31 de outubro de 2009

Be Prepared for S&P's Tricks and Treats

JEFFREY COOPER OCT 30, 2009 2:30 PM


		A sweet break may be just ahead.

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It’s a dead man’s party
Who could ask for more?
Everybody’s comin’, leave your body at the door
Leave your body and soul at the door
-- "It’s A Dead Man’s Party" (Oingo Boingo)

The above title for tape may not be remembered by some of you, but the tape of the prior patterns of blow-offs from 1929, 1987, and the current tape should be stuck in your memory.

The blow-off from March 2007 to June 2007 mirrors the above pictures. Note that the first high came in June with an overthrow in July 2007, which is reminiscent of the S&P pattern now with a high in September and what looks like a possible overthrow in October.

It's important to remember that the overthrow in July 2007 is a fractal of a larger overthrow of the July peak in October 2007.

The 10-minute chart from the swing high this October appears to be a fractal of the break from last September on the dailies/weeklies. Is the S&P tracing out a hump right shoulder on this snapback, which is backtesting the break from the Bearish Ascending Wedge shown on the SPY yesterday?

I say hump right shoulder because they're often dwarfed and short-lived. Theoretically, if the market survives and holds a test of 1048 to 1050, it could buy some time and extend what I believe will be a right shoulder/backtest.

The market needs a test of 1048ish, but this is a market that's been testless as much as it’s been topless. To be sure, Hoofy has been on the beach in St. Tropez.

The bottom in March wasn’t tested either, which to me speaks to the herd mentality of the market. It's driven by something we can’t quite identify. It's a market that despite the fractals and DNA to past patterns is, in many ways, unrecognizable. One day, everybody wants out at the same time; the next day, everybody wants in at the same time. It’s running on high-octane emotion. And, that makes for a dangerous trading market.

Yesterday, I stated that after an intense sell day (Wednesday), an up opening is usually a sell. Usually -- not always -- that's correct. But there's something unusual about this tape; something that feels synthetic. The clue to yesterday’s trend days was the ability to hold after the first hour and the behavior after the first pullback.

Beat-up names were bought for month-end window dressing as Spyder baskets were run all day to provide a backstop and a tailwind, as the big seller(s) lifted a leg from the severe oversold condition as offered as a possibility yesterday. Was it a one-day wonder? Note the one-day wonder after the breech of support in 1987 just prior to the bottom falling out. The message is clear: Trade below Wednesday’s lows in short order could be an elevator, not an escalator.

The S&P reversed strongly from first trendline support while trendline support from the March/July lows was violated.

Trick or treat? Which is the support line that counts? Is a bigger break just ahead? If history is any guide, I think the answer is yes.

One reason may be that largely unnoticed is the fact that yesterday, Citadel reopened for redemptions by investors who were frozen out last year. Over the next month or so, many funds will reopen their gates as well. After a near-death experience in 2008 and a good year in 2009, will many investors get out? At the same time, for the first time in three months, many funds can "legally" sell stocks. Once fiscal year end on October 31 is past, I suspect they'll be taking your money and be moving to the sidelines as fast as they can. The herd mentality magnified over the last two days with the flood gates opening for many hedge-fund investors, I think the odds favor the downside given the fractals and the dynamics of "year end." But we could just as easily see a new swing high as 950 S&P.

Conclusion: The market should open down and stay down today if there aren't more paint-the-tape buy programs around, which is generally not condoned on month end, but that doesn’t mean they won’t happen anyway. If the S&P makes a new high over Thursday’s high today leaving a Minus One, Plus Two sell signal, will it behave like Baidu (BIDU) did Thursday morning from the same set-up? The market needs a pullback to test the lows, so until that occurs, I think the strategy is to short stocks at resistance until proven otherwise -- especially as I think a bigger break is around the corner.

The dollar is the linchpin under the microscope here. The Dollar Index suffered an outside day down yesterday on the approach to its overhead 50-day moving average. It's pulled back quickly to its 20-day moving average. If 75.25 to 75.50 holds and the dollar turns back up and offsets yesterday’s high, it should explode. I think the dollar should rally for at least three to six weeks and to a minimum of 78.

I wouldn't become too complacent about the smell of paint on the tape going into October 31. If the patterns from 1987,1929, and 2007 mean anything, a break of Wednesday’s low could mean it’s a dead man’s party.