Bill L.'s  Instablog

Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Tuesday, July 24, 2012 - Short Term Update - Stocks Breakdown  4 comments
    Jul 24, 2012 6:47 PM | about stocks: SPY, QQQ, AAPL, TLT, FXE, JJC, DIA, SPXS, SPXL

    Bottom Line:

    The indicators I follow are beginning to become oversold, leading to a very similar situation as the previous two bounces. That said, 1) there's still some room to run on the downside 2) if this is the beginning of a longer term downtrend "mild oversold" readings should provide no support.


    In previous updates entitled with "bulls need to make a stand," I noted that prices were approaching support with certain indicators reading oversold. Those instances turned out to be continuations of the rally. We are once again in a similar situation. However, if the long-term trend is transitioning from up to down, I would expect the indicators to plunge much further into oversold territory before they would provide support. For example, in a bull market a RSI reading of 30 is considered oversold, however in a bear market the RSI can drop below 20 and even into the teens before any meaningful bounce begins.

    S&P 500:

    (click to enlarge)

    Today the SPX broke down through the rising trend channel originating from the June 4 lows. If this is the break I've been looking for, we should reach the first target promptly. Also notice how horizontal support matches up nicely with Fibonacci levels, so progressive breaks of these levels will be big wins for the bears.

    My stop is 1361.50 in the SPX, which a 61.8% retracement of the current decline, and matches up quite nicely with the small intraday base built before the decline accelerated. If the SPX reaches that level, I would guess the market would continue to rally to the decelerating trendline.

    In previous updates I wrote that both tens and thirties had broken down out of sideways moves that had lasted weeks, based on the size and duration of this pattern, it was very likely that we would see new record low yields in both.

    10 Year Treasury Yields:

    (click to enlarge)

    10 year yields have since hit new all time lows, previous support now becomes resistance. A move in yields back above the previous double bottom breakdown level would be a red flag for the bearish equities thesis. If equities had followed yields (as is quite normal) the market would have completely retraced the entire June 4th rally... As I've said before, bonds tend to tell the truth.

    Dr. Copper, commonly referred to on the street as the best real time economic barometer, has had a far less impressive rally off its lows, and has since broken down from its rising trend channel.

    JJC - Copper:

    (click to enlarge)

    Peak C failed to rally above peak B, producing a non-confirmation with the major equity indexes. A complete retracement, and a break of the June 25 lows would be a good sign for the bearish prices, while stabilization or a rally back into the trend channel a detriment.


    In my opinion the most bullish interpretation of the aggregate message of the indicators I follow is that the decline is 70% complete. If however the market is indeed reversing into a longer term downtrend, the current readings are far too mildly oversold to suggest any sort of significant bottom. While I held this view during the previous bounce, and it did not work out, I continue to believe this is the correct interpretation. Further supporting evidence can be found in the VIX and Put/Call ratio, which even with today's spike (in the VIX), is nowhere near levels suggesting there's enough fear for meaningful bottom.

    NYSE McClellan Oscillator:

    (click to enlarge)

    NASDAQ McClellan Oscillator:

    (click to enlarge)

    Percentage Of Stocks Above Their 20 Day Moving Average:

    (click to enlarge)

    NYSE Advancers vs. Decliners:

    (click to enlarge)

    NASDAQ Advancers vs. Decliners:

    (click to enlarge)

    AMEX Advancers vs. Decliners:

    (click to enlarge)

    NYSE Up Down Volume:

    (click to enlarge)

    NASDAQ Up Down Volume:

    (click to enlarge)

    AMEX Up Down Volume:

    (click to enlarge)


    (click to enlarge)


    (click to enlarge)


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    (click to enlarge)

    Random Thoughts:

    "Fast Money" was playing in the background while I was writing this, I couldn't help but notice that tweets they read all clamoring for Fed action because of Apple's miss... Really?


    There have been so many long running divergences and non confirmations in bonds, currencies, other equity indexes, sectors, and commodities that the S&P could quickly play catch up to the downside.

    That said, some indicators are near oversold, and the Fed is hinting that more easing, with that in mind remember to honor stops. You know what they say about the best laid plans...

    One day to time,

    Bill L.

    Disclosure: I am long SPXS.

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Comments (4)
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  • birdmaestro
    , contributor
    Comments (128) | Send Message
    Good analysis - thank you.
    24 Jul 2012, 08:52 PM Reply Like
  • mikeycblue
    , contributor
    Comments (21) | Send Message
    24 Jul 2012, 10:57 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9903) | Send Message
    Yes, good overview and summary.
    25 Jul 2012, 12:40 AM Reply Like
  • sundate36
    , contributor
    Comments (291) | Send Message
    Nice market action -- hello Bear Market! Another overbought reading around the corner, Bill?
    26 Jul 2012, 10:12 AM Reply Like
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