Tuesday, October 11, 2011

A big test for the bulls

Wow! When I wrote about the likelihood of a sideways consolidation yesterday, I never dreamed that the markets would rally to the top of the trading range so quickly. As the chart of SPY below shows, it was a big follow-through day on low volume, which is not a typical sign of the start of a bullish impulse. True, volume was low because of the Columbus Day semi-holiday, but it was nevertheless a low volume follow-through (see my previous comment here about the O'Neill technique for spotting technical confirmations of market bottoms). Moreover, the market appears to be approaching a resistance zone where it has failed in the past.

Looking at the Euro STOXX 50, it too shows a similar pattern of approaching a resistance zone.

Yields on long Treasuries are also nearing a resistance area. In this case, they are nearing a downtrend that began in August, which remains intact.

Similarly, the VIX Index is approaching a support level, indicating that equities may have difficulty advancing from current levels.

Even if this were a genuine upleg, I don't believe that the market is likely to overcome resistance in the near term, largely because of the low volume nature of the move and a stunning reversal in sentiment.

A stunning reversal in sentiment
Further to my post yesterday that indicated no signs of capitulation from sentiment models, I awoke on Monday morning to see the Ticker Sense Sentiment Poll, to which I am a participant*, show that over 50% of bloggers are bullish.

Contrast that with the readings from the previous week showing over 50% bearish:

My inner trader wants to start legging into some short positions at current levels with carefully defined stop losses as he believes that the downside risk from putting on shorts is likely to be limited.

* For the record: My vote, which has been based on the readings of the Asset Inflation-Deflation Timer Model, were bearish for the both weeks in question.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


Michele said...

I'm really glad to see someone else noticed that astonishing reversal in sentiment in the Ticker Sense poll yesterday.

I'll admit I went with the crowd, having voted bearish last week but bullish this week. I did so largely on the basis of my observation of the Dow and SPX monthly charts.

The stochastic there is about to put in a bullish crossover and the RSI is oversold and actually putting in a bottom. And SPX has rfound support at the 200 month MA.

Also, the October candle, though admittedly still only half-baked right now is a hammer. I guess we'll see 30 days from now.

Tiho said...

"Wow! I never dreamed that the markets would rally to the top of the trading range so quickly."

Yeah, that is because you were too bearish like majority. Having a narrow minded view always surprises, when the opposite happens.

I think it is not yet the time to short the market for the second and final leg down. The downtrend lasted from... say mid July (or even early May) to early October. That is about two and half months of selling pressure.

I doubt that the counter trend rally, even if it is a relief rally within a bear market, will just fizzles out in one week right here, just because you have some "resistance" lines on a chart. Obviously, the rally has been powerful already so it could, but I wouldn't bet on it - that is all.

Finally, even though everyone expects it to happen, we are in a period of good seasonality starting in November and December. Even during 2008, November and December gave us a great rally and substantial returns into early 2009, before further sell off occurred.