Sunday, July 06, 2008

No fear, no bottom?

The relentless advance of oil price and un-abating negative headlines about the economy around the world squashed bulls hope to stop the nose-diving as the US stock market posted yet another losing week, the fifth in a roll. Despite of the precipitous and mounting losses, the bottom searching market may be teetering on the edge of a collapse as the herd is far from panicking.

On Weekly Charts:

The momentum of ALL major indices not only flipped to the negative side but on the early stage of acceleration; MACD in solid down trend formation for all major indices; both candle formation and volume pattern remain bearish; RSI2 in oversold for all major indices but stochastic yet to become oversold except for DOW; technical indicators overwhelmingly favor further weakness in next week or two.

On Daily Charts:

The negative momentum unabating for all major indices as they accelerated to the downside; DOW is now 350 points south of its Jan’08 intra-day low, while SP500 broke its March’08 intra-day low and closed at new multi-year low, and NASDAQ now only about 90 points above its March’08 low; all major indices continue lingering in deeply oversold territory; candle formations remain bearish across the board.

On VIX Charts:
VIX finally broke its 4-week trading range last week; on its weekly chart, the momentum finally flipped to the positive side for the first time since the end of March, this along with the crossed and turning up MACD formation strongly suggest an overall uptrend for the coming weeks; daily chart also shows a clear short-term uptrend in the making.

Thoughts and observations about the current market conditions and near-term outlook:

1. Technically speaking, while the market has been deeply oversold for a while now and a technical rebound is overdue, there are virtually NO bullish divergences on any charts of the major indices. On the contrary, the weekly charts strongly favor more near-term downside movement, and major indices might need another week or two of declining to reach the kind of oversold levels that were seen in the previous bottoms.

2. While fears started to grow last week, VIX is still way below the levels associated with the previous bottoms. The VIX charts clearly favor more upside on VIX, which in turns suggest lower market.

3. The global market is turning very gloomy now:
** The current 5-weeks long losing streak, the longest since September 2002.
** The Japanese stock market is on a 12-day losing streak, the second longest ever on the record.
** The China stock market is on a 7-week losing streak as it continues to break down.
** Check out the charts on EWZ and FXI and you know the leaders of the emerging economy are in deep trouble.

4. Fundamentally speaking, the evidences and signs of a full-blown global recession are growing. I am not quite sure if the US stock market has now even fully priced in a prolonged and severe US recession, let along a serious global recession.

5. Despite of the continuously advancing oil price, the energy and related sectors (such as the coal sector) showed clear signs of the ending of their parabolic movement this past week. Other commodity sectors are also cracking up. All these may reflect the view that the tremendous growth and current high levels of many commodities cannot be sustained/support in the face of a global recession.

6. With the market entrenched in deeply oversold territory, a violent technical rebound could come anytime, but if you look around, as the Fed now practically irrelevant, there are NOT many potential catalysts out there, well, except the oil. As long as oil keeps advancing (I suspect it will touch 150 in coming days before a big pullback), I doubt bulls can muster any meaningful rally. With that said, overall speaking, aggressively open new short positions could be extremely dangerous at this conjuncture.

7. Cash is the king.

The overall trading strategy for the upcoming week:

1. Sit tight on the sideline and be prepared for all scenarios. The all-time high spread between the Lowrys selling and buying pressure is just one of the signs that a market crash is becoming a real possibility. I will be watching the market intensively to see if the major indices would be able to reach a tradable bottom around the key support zones: DOW 10750-11000, SP500 1170-1220, NASDAQ 2150-2200. I will start nibbling from the long side (swing) if the market crashes or spikes down to those key zones.

2. Only DT long with small position size for any non oil driven technical rebound.

3. Consider full position-sized, multi-day holding long plays IF oil pulls back significantly.

4. Actively seek short setups in the coal, steel, and other energy related sectors.


Kris said...

It might be hard to find a short position as a techincal rebound could happen anytime now..

fortune8 said...

Buy good companies and hold.

Now I just have to figure out the good companies.

obm said...

Sorry fortune8 but I think the buy and hold days are over for a long time to come. Better to find good companies and day trade them.

Doug said...

meant to post as Doug not OBM

fortune8 said...

I guess that is true. Better to trade for now.