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With both The PPT and the McClellan Oscillator signaling short term very overbought conditions, in addition to the prospect of a parabolic move higher from the failed head and shoulders top–think July 2009– this market is presenting us with an interesting situation. On the one hand, it seems as though the consensus view is to either move to all cash, or put on some shorts here. Therefore, it follows that the contrarian play would be to press longs here, typifying the pain trade.
On the other hand, betting on a parabolic move higher again from the failed head and shoulders does not offer a favorable risk/reward profile, in my view. The daily charts of the broad indices indicate that we have retraced the move back to the “scene of the crime,” where we rolled over and headed straight down, starting on June 21st of this year. Basic psychology dictates that the concept of overhead supply is likely to cause a period of consolidation, at a minimum. Many of the longs who bought or added in mid to late June, thinking the correction was over, have endured a wild ride down. They are more likely to sell than to hold or buy more, when they are finally close to being made whole again.
To illustrate the intraday volume, I am including an up to date chart of the $SPY. See my notes on the chart below.
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Thanks Chess.
What do you think of so many of the averages converging at like this? Intuition tells me maddening range-bound sideways movement for the time being. (Intuition has been known to be wrong, cough cough)
PPT Hybrid and large cap buys % dropping quick here…
At the very least, those m.a.’s should be short term resistance and cause chop. It does not have to do so- as evidence by the parabolic move higher off the July 2009 false breakdown. However, here the technical damage has been plentiful. I am willing to continue to play it safe until we get a more lucid picture.
Heavy cash or market neutral? That’s my dilemma. Decay isn’t our friends with the latter, especially with Vxx, but I keep returning to it, trying to reexperience that first time cherry high brought on by the flash crash. Time to read more Charlie Munger so he can remind me of what a flawed hairless ape I am.
Lunch: One (1) banana sandwich. On whole grain.
Good post,
you stand out from the rest when you incorporate what the lines on the chart actually mean
Thanks, Dr-B. I try to be thorough and clear in my analysis.
Chess – If my memory of July, 2009 is correct, I seem to remember a lot more negativity. I heard about that H&S everywhere I turned. This time it feels a lot more like complacency, rather than outright bearishness.
Of course it’s just my perception. What we really need is an objective sentiment measure… Oh, wait.
Regardless, I not betting on a steep decline. Just enough to get people scared (or me to pull my hedges).
Chess-
The recent longs will have to be punished too, at some point. Their ride up has been swift and easy so far. One thing that jumps out at me is that we have an “extra” week before options expiration this month, and I’m not sure of the significance of that but it is something that hasn’t really been commented on elsewhere – does max pain theory have anything to say about these longer month (longer because of the way the Fridays fall)?. We tested the 200 day MA in June and there was a headfake and swift breakdown, almost as if they ran the stops against the shorts, got them to capitulate and only then the downtrend resumed. I doubt we’d see the exact playbook again this time.
I feel confused, and am writing some strangles through August and banking on a rangebound market, until I see a break one way or the other, and capturing premium in the meantime rather than picking a direction.
Brian