Dangerous Times, Indeed

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We know that Wednesday went out on a high note for the bears, with many bulls who were positioned for a seemingly inevitable breakout from the ubiquitous symmetrical triangle forced to hit the exits into the closing bell. Thus, the pertinent issue is just how dangerous the situation currently is. Earlier in the trading session, the oil service plays and the semiconductors were acting brilliantly, especially in the face of the widely-watched, high momentum “leaders” flashing red. Despite that relative and absolute strength for a decent chunk of the session, you can see the magnitude of those intraday downside reversals below on the daily charts of the OIH and SMH, respectively. Indeed, there were very few sacred cows spared from the fast and furious sell-off on Wednesday afternoon.

Putting Wednesday’s action into context of the overall picture, the broad market remains in consolidation mode just above the summer trading range. We have backtested the upper end of that range several times in recent weeks, and a basic tenet of technical analysis is that the more times you probe a key reference point, the more likely it is to eventually give way. So, there are only so many times the bulls can hope to save the day at around the 1220-1230 level on the S&P 500. Moreover, if you have been watching my daily video market recaps, then you know I emphasize the idea that no matter how pretty a consolidation or triangle appears, if buyers of size do not commit at least somewhat you will be hard-pressed to enjoy that elusive breakout.

While we are on the topic of tenets, you know that I always harp on the notion that individual candlestick analysis needs to account for placement. As an example, you can see what bears would call “shooting star” candlesticks on the charts below for Wednesday’s session. However, the shooting star is most valid at the end of prior uptrend, signaling the potential change in trend. This time, we are seeing this candle within the context of a broader consolidation. So, I would assign much less significance to that line of thinking. Beyond that, because we remain within bounds of the playing field in the consolidation, you have to be even more vigilant against potential traps. Wednesday could easily represent one of those traps for eager bears to have fallen into, again because of the placement of these reversal candles. To be sure, it was a nasty reversal after a potential breakout from the triangle, but it could just as easily mean these charts need even more time to base.

The nature of a consolidation is that getting too bullish at the top of the range is as perilous as becoming bearish at the bottom of it. At this point, the symmetrical triangles on the S&P and many other charts are so widely-watched that the consensus is that resolution is coming sooner than later. I am ready for anything, but another scenario I think is a distinct possibility is that the triangle morphs into another pattern as the choppy price action continues. Either way, inside 12631 we have a sound strategy regardless of the outcome, and we are notably outperforming even this dangerous market.

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I have profiled the divergence between the senior and junior gold miners several times in recent posts, and it continues to intrigue me. The GDX, ETF for the larger miners, is consolidating in a rather orderly manner above all of its daily moving averages. This looks to be a fairly textbook bull flag. On the other hand, the GDXJ, ETF for the junior miners, is below all of its declining daily moving averages and could easily be on the verge of breaking lower from a bearish rising wedge.

This divergence could be a function less risk appetite on the part of gold mining investors. Either way, I am curious to see in which direction the divergence is ultimately resolved. Of course, there is the possibility that the seniors and junior simply detach from each other for an extended period of time. For now, though, the action is in the larger cap gold miners until further notice.

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(Sorry, this post is not about GMCR)

Despite high momentum names that are susceptible to late-stage breakdowns lagging today, such as CMG DECK LULU, there are plenty of individual issues and areas of the market that have been hanging tough in the face of this morning’s gap down. In recent weeks, and essentially since the October 4th broad market low, the bears have had a difficult time of extending losses beyond a morning, or perhaps a day or two at most. The bulls, on the other hand, have been showing more and more resilience in buying these assorted dips. Unfortunately for them, though, it has amounted to taking mere baby steps as we are overall still muddling along and a sustained uptrend has yet to materialize.

With the aforementioned “leaders” displaying chinks in the amor, energy stocks appear to be leading the charge higher. My FIRE and SNDK continue to act very well. In addition, the oil service plays are extremely strong today in both absolute and relative terms. From a more intermediate-term perspective, you can see the OIH is breaking out from consolidation and has potential to test its 200-day moving average above. NOV looks to be one of the better prospects in that sector. I also detailed a certain other area of the market that is exceptionally strong today earlier for members inside 12631.

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The $87.70-$87.75 area on the 30-minute chart of the IYT (ETF for transportation stocks) is giving you an important reference point here. Below it, and you can see that a potential swift gap-fill looms. Thus far today, the bulls once again defended that level on the opening move lower. That said, if the afternoon selling picks up this could get real ugly, real fast. Watch this area closely as a tell.

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Another morning gap lower is currently being sorted through, as the bulls are trying to stabilize things. With all of the consolidations taking place on many indices, sectors, and individual charts, there are a few ways to interpret this action. On the one hand, you can argue that the bulls simply have insufficient conviction to break us up and out of this range and into a trending market. Alternatively, you might say that we are shaking out the “weak hands” before eventually screaming higher into the seasonally strong holiday season. The VIX remains stubbornly high above 30, although we do have options expiration this Friday which traditionally adds to the shenanigans in stock fluctuations. Despite the uncertainty, it is encouraging to see some areas of the market acting constructively. As a result, I have been running a long/short strategy, albeit net long, with good success inside the 12631 Trading Service.

In particular, I went long SNDK last week, timestamped inside our streaming, Twitter-like chat room with email alerts to boot. Currently, the stock is exceedingly strong in this tape. I am looking to add to this position should these morning gains hold, with the presumption of a breakout from consolidation looking to be a strong one.

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