Everyone in Dusselblogonia (TED: a Romanian village where all finance bloggers live) is bullish and many are highlighting the various instances of an oversold market.  This alone can makes one nervous, but many indicators are showing a stretched condition that if not resolved Friday, should result in a bounce soon, especially in the 1025-1035 area, should we test there.  Otherwise, if the low was Friday, I expect another test of 1075-1085 area.   Also don’t forget that Monday’s have been positive ~85% of the time and with the biggest gains, since the March low.

The percent of stocks above/below their 55 day high/lows  is near a bounce zone, but also in a downward channel.  You would want to see this reverse to have more faith in a long move beyond a reflexive bounce.

As you can eyeball, 4 weeks of straight decline typically leads to at least a positive weekly close higher, in a bull market.  You wouldn’t want to use this as your only premise to get long however, it’s just another way to measure overbought/oversold conditions.  In March and July, the market squeezed shorts and moved substantially higher in the weeks following a four week decline.  It’s too soon to know if this will happen yet, and if you count, you will see that of the 10 instances where 4 weeks lower occurred in the chart, 6 led to more downside.

It’s interesting that buying four weeks of consecutive weakness was a poor strategy during the last bear market, but an effective one this time around (those stats on win/loss are from 1965 - present).

The SP:DXY chart is near support which also supports a bounce, however there is the same caveat of being in the downward channel still.

My take is that closing at the bottom of the box, with several days of no bounce, little buy strength, and a new closing low, means that we will probably get more downside.  I’m targeting 1030-1050, on the contingency that we close below 1080.

That said, this will be the third week in a row lower (depends on Friday’s close) and as you can see, most of the time 3/4 weeks in a row lower is a good time to cover shorts.

Yesterday’s poor breadth reading is catching up with stocks, as the S&P revisits the day’s low, additionally, leaders viz., Apple Inc. (AAPL: 195.4851 +0.70%) and Goldman Sachs Group, Inc. (GS: 150.58 -0.34%) (among many other notables) are showing considerable weakness after this mornings surge.

This combined with us still being inside Friday’s big bar is possible consolidation before another leg down. The key is market action near 1085.

Finally, while I don’t have the official tally yet, today’s breadth reading looks bearish, but also very weak.

Last year I did the unthinkable and combined technical analysis with “fundamentals” to back a trade that ended up working out pretty well.  The trade was long bullion.

Here was my methodology, which involved little in the way of “homework” and more in the way of speed mortaring and pestleling on the kitchen table with my balls out, if I may borrow a turn of phrase from Senor.

Platinum is ~30x more rare than Gold, but is used much more in the production of catalytic converters and other nonsense for moribund industries.  Platinum doesn’t provide the same “fiat comfort” as gold, but is a precious metal nonetheless. Logically, regardless of supply/demand bottlenecks, or whatever other metrics you might study to get a broader picture or price/usage trends, platinum should have a premium to gold.  Using fancy software, you can see this dymanic in a ratio chart between the two metals.

The way this ratio works for you effin tards is:

1.) both prices move up - ratio lower [Plat:Gold = 2,000:1,000 = 2 ---> 2500: 1500 = 1.66]

2.) both prices move lower - ratio higher [2,000:1,000 = 2 ---> 1500: 800 = 1.875]

2.) gold up, plat down - ratio lower [2,000:1,000 = 2 ---> 1500: 1200 = 1.25]

3.) plat up, gold down - ratio higher [2,000:1,000 = 2 ---> 2500: 800 = 3.125]

There’s other combos such as up/flat, etc, but hopefully I don’t need to go there.

Long term you can see that is is very unusual for the two to have less than a 1:1 ratio, and that 1.6x is an ideal sell plat/long gold point

source

Back in the early 90s was the last time the ratio was as low as it was at the end of October, so, when the world was ending, I went to my local coin store and bought a pocketful of platinum coins, and a couple goldies, figuring, among other things, hey, either the world ends and these coins will buy me some loaves of bread and a scrap of bison meat in our martial law economy, or we’ll get bailed out via inflation and these metals will have to rise.  Or I’ll go long something since at the time it was short everything.

The ratio analysis can go to shit, however, if you decided to sell short platinum and go long gold in 1979 before both metals super spiked (although since hedged it would be more or a push), moving the ratio to those historic lows (note that is still produced a valid buy in 81/82).  To ameliorate this, I would simply wait for trend confirmation (on the short side only, long appears to work consistently) before playing the ratio.  More recently, there seems to be an arbitrage theme going as people will sell one and buy the other, so them moving is tandem is *less* likely perhaps.

Anyway, I’m stuck with these stupid coins and egregious gains.  Now what?  The whole situation is rather illiquid for my taste.  If I go back to the coin dealer, his vig is spot minus 10-15%, which eats into my gains.

Solution?

Ebay.

To remind you, the current spot is $1,551 (1/25/10)

• Ebay auction $2,110, 11 bids
• Price $1700, 2 bids
• $1575, 11 bids

Yes.  Except now, instead of arbitraging, I am brokering.  People will pay a 0-30% premium for the “honour” of getting their coin right away, instead of dealing with the wait, and they figure, “who cares, I’d have to pay the vig AND wait anyhow.”

The wait?

Yes, there is a dearth of available coins for the ham and eggers who desire them.  If you call kitco, for instance, they will take your money and then attempt to find you a coin.  If they can’t find it in six months, they return your money.  In effect, it was an interest free loan for them, or you’re waiting for a locate.  If someone with more experience than I can tell me this isn’t how it works fine, but to my knowledge this is how those big online coin houses work.

So that’s what I did, and what I’m doing.  I’m selling the coins piecemeal, the trend is still up, but the ratio is close enough to 1.6 that taking partial profits seems prudent.

Today there was sell strength of 352, which indicates strong distribution.  We moved exactly to the end of the box after solidly breaking the prior days lows, and closed exactly on 1115 support (box low).  Tomorrow, I expect a bounce, due to a possible capitulation reading (see next chart).  It also depends on how the market acts around 1115.  If that level fails, then there will be some interest at 1100, and combined with three days lower, will create an interesting setup for Monday. Levels to watch are 1085, 1100, 1115, and 1130.

It should be noted though that there is a considerable deterioration in breadth, as both panes 3/4 have now been essentially negative for 4 days.

The SP:DXY ratio chart is near a support…

And here’s my new 20 day highs and lows chart, using the R2K as my universe.