On Wednesday, I wrote:

“SPY’s RSI(2) on the daily chart closed at 15.37 on Tuesday. The last time it dropped that low was on February 4th, and a swing low formed the next day. The bears may not be done mauling the market yet, but the odds have begun to shift back toward the bulls.”

And that’s pretty much what happened. The bears gave the market a vicious mauling on Friday morning, but the over-sold market bounced back. Take a look at this daily SPX chart which has an RSI(2) plot at the bottom (click to enlarge):

The two purple arrows point to the RSI(2)’s plunges in February, and the two blue arrows point to the dramatic reversals that occurred shortly afterward. Those two hammer candles are almost identical. Not bad, huh?

No indicator is a sure thing, but when the RSI(2) gets streched, it pays to be alert for a reversal. Especially in a range-bound market where indicators like this one shine.

Hat-tip to George for telling us about the RSI(2) way back when.

Wednesday’s Trading – 2/24/10

As UNG continues its never-ending, Wile E. Coyote style plunge off the cliff, you natural-gas bulls can take solace in the fact that part of the internet is now fueled by natty. Google was Bloom Energy’s first customer and is powering one of it’s data centers with Bloom’s magic cubes.

SPY’s RSI(2) on the daily chart closed at 15.37 on Tuesday. The last time it dropped that low was on February 4th, and a swing low formed the next day. The bears may not be done mauling the market yet, but the odds have begun to shift back toward the bulls.

R2K Breadth Triangle

Russell 2000 breadth has tightened into a coil. Take a look at this 60-minute chart that goes back to the beginning of the year (click to enlarge):

A similar triangle to the current one formed in early January, and had a bearish resolution. The market had a sharp drop before recovering enough for a breadth megaphone to form. And the market plunged the very next day after I posted that megaphone chart. Not bad, huh?

The R2K is poised for a big move, and the rest of the market will likely go with it. Since we are short-term overbought by many measures, I would expect a pullback. Monday morning’s gap-up was very close to being an exhaustion gap, and may yet prove to be one. However, the XLF and the IYT did not fall back into their gaps, and their leadership held the market up. But if you see those two gaps being filled, then the odds will move even more in favor of the bears.

Monday’s Trading – 2/22/10

Is it Possible to be Cooler than Apple?
Miami Beach High School kids love to hang out at the Lincoln Road Mall Apple store after school. It’s the new Disneyland. But a mall in Philadelphia has something a million times cooler, though you can’t buy the stock like you can AAPL. At this place, instead of playing video games with wimpy little plastic controllers, you play with realistic replicas of US Army weapons, including Blackhawk and Apache choppers. PBS’s FrontLine did a story here.

Uncle Sam Wants You to Fly his Warbots
At least somebody is hiring… The Los Angeles Times has a story on the real remote-control warfare going on in Iraq and Afghanistan. I knew that we had drones operated by pilots here in the states, but I didn’t realize the scale: over 7,000 drones. I was also surprised that a former F-16 fighter pilot believes that the drones are far more effective weapons than jet fighters. But it’s easy to see because the drone pilots have so much more information.

Vix up to Trix – Part 3

Here is a daily chart showing the VIX in the upper panel and the SPX in the lower panel, with Bollinger Bands (click to enlarge):

The purple arrow pointing to Friday’s candle shows that the VIX almost gave a sell signal. The bulls weren’t quite carried-away enough to push it below the lower Bollinger Band, but it was very close.

In the last episode on January 11th (blue arrows), the VIX opened and closed beneath its lower BB. That was an extreme burst of bullish complacency. We don’t quite have that at the moment, and while the market could push higher from here, the odds do indeed favor the bears.

If you want to short the market here, look at the blue arrows again. It took the market over a week to roll over after a very strong sell-signal from the VIX. Back then, you had plenty of time to wait for an ideal entry point, though it is possible that traders are more skittish now.

Friday’s Trading – 2/19/10

The VIX approached its lower Bollinger Band yesterday, but didn’t hit it. However, the NASDAQ 100’s Vixen pierced its BB before bouncing back a bit to close above it. So, the market was very close to giving the same overbought signal that it did back at the top in January.

The market was in a precarious position before Bernanke sprung a surprise rate hike on it after the bell yesterday. And when you combine those two things with today’s options expiration, the market is set up for a Triple Lindy with no water in the pool.

While the bulls pray to the inflation gods that the CPI number at 8:30am doesn’t signal an urgent need for more rate hikes, they can take solace in the fact that the Fed doesn’t normally begin to raise rates until it is confident that the business cycle has turned up. And I think that there is a good chance that they have timed it just right. So, in the longer view, this jolt to the market may not be significant.

Bernanke’s Bombshell

After the bell, Fed Chairman Ben Bernanke surprised the market with the first interest-rate hike since the recession began. The market is not reacting well to the discount-rate hike so far: Here is a 15-minute chart of the futures from 9:00am to 9:00pm (click to enlarge):

The timing of this is very curious. The rate hike itself is inconsequential, so there was no need to spring it on the market like this. Why not just wait until the next FOMC meeting when the market would have girded its loins for such a surprise?

Of course, if you knew this was coming, you could have loaded the boat with out-of-the-money February puts which will have absurd gains tomorrow. It is options-expiration day after all, right? And that makes the timing even more curious. If I were Bernanke, I would have opex marked on my calendar, and I would not make any sudden moves right before then. Especially after the market was closed and the only choice left to bulls was to meekly accept their pole-axing after an egregious gap-down in the morning.

Note to bulls: Take a look at the space between your eyes. If you see a red dot there, it might be from an agent dispatched from Washington to take you out.

The Commodities Jester

The video below is from the February 8, 2010 episode of CNBC’s “Fast Money” show. At 5:45 into the show, the so-called “Commodities King”, Dennis Gartman comes on. He is very bearish and says: “Everything gets hit hard”. See for yourself:

The SPX was at 1056.74 at that moment, and went straight up over the next six trading days. Here is an hourly chart of the SPX (click to enlarge):

By contrast, on that day, I was pointing out the bullish hammer candle from the previous trading day. Take that Gartman!

Note to Gartman: you have been demoted from “King” to “Jester”. Please turn in your crown and scepter. Security is on their way to escort you from the palace. Enjoy your new belled cap.

The Earnings Curse

Since the market peaked at 1150, we have seen classic “sell the news” reactions to the earnings reports of Intel, Apple, and Cisco. Take a look at this hourly SPX chart (click to enlarge):

The proper course of action all three times was to sell, sell, sell into the euphoria. On Wednesday, the market rallied into the bell in anticipation of Hewlett-Packard’s earnings. If you bought into the euphoria, you didn’t pass the IQ test. In fact, you just might be a clueless newbie who is about to be clubbed like a baby seal.

On the other hand, if the market is able to advance on Thursday, then that might be an indication that we have a change of character where good news is good news again. And that would be a strong hint that we are back in bull mode.

Wednesday’s Trading – 2/17/10

On Friday morning, I wrote:

“Short-term breadth is stretched to the upside and will very likely decline today. In this situation, a flat day would be a win for the bulls.”

And that’s exactly what happened. Breadth unwound on Friday, but the bears weren’t able to score any points, and the bulls took the ball on Tuesday. But now breadth is stretched again. NYSE breadth closed at +2,000 yesterday, and the NASDAQ is similarly extended. So, the same deal applies: breadth will almost certainly decline, but if the bulls can keep the market at least flat, they will win. If the bears haven’t been stuffed and mounted, this is a spot where they need to make their move.

Tuesday’s Trading – 2/16/10

Twenty years ago, an un-patriotic, socialist co-worker triumphantly threw the Maastricht Treaty in my face. “Ha!”, he gleefully exclaimed, “The European Union’s economy will be bigger than the USA’s!”

I scoffed, and said: “The EU is just a bunch of socialists merging their bureaucracies.”

If only I could remember his name so that I could look him up and put a little of the old Grecian smack down on him. What a spectacle those socialists Greeks are; going on strike with their thumbs firmly stuck in their mouths, demanding that the hard-working, thrifty Germans bail out their pathetic socialist-splat of a nation.

But who knows? Maybe something good will come out of this after all. Maybe socialism will finally be discredited just like communism went “poof” when the Berlin Wall came down.

It’s curious that the Germans are once again at the center of this potential ideological sea-change. But will they save Europe? Here is what STRATFOR thinks:

“The only way for Germany to matter is if Europe as a whole matters. If Germany does the economically prudent (and emotionally satisfying) thing and lets Greece fail, it could force some of the rest of the eurozone to shape up and maybe even make the eurozone better off economically in the long run. But this would come at a cost: It would scuttle the euro as a global currency and the European Union as a global player.”

So it seems to boil down to whether or not the Germans want to remain a global player via their EU vehicle, or step down to regional-power status. What will they decide?

Friday’s Trading – 2/12/10

The “bear boat” that I mentioned yesterday morning did indeed get dunked on Thursday. So, it is likely that much of yesterday’s action was short-squeeze buying by dumb-money traders like the ones on Fast Money. We had the same type of action on February 1st and 2nd: sharp rallies on declining volume, which are the tell-tale signs of a bear flag.

Was SPY’s declining volume on Wednesday and Thursday the result of the blizzard, and the approaching holiday weekend? I don’t know, but I’m not terribly impressed by this bounce. A large, unfilled, emphatic gap-up this morning might win me over though.

Nevertheless, if the SPX, DIA, and IWM can stay at least flat today, they will print bullish-engulfing candles on their weekly charts. Also, the XME closed above its February 4th down-gap. It is the only major ETF to close above the “Feb 4” gap, but the IYT is close. If the IYT, or any other major ETF, can close that gap, I will be suitably impressed.

Short-term breadth is stretched to the upside and will very likely decline today. In this situation, a flat day would be a win for the bulls.

XLF Gaps

I’m thinking that the correction might be over, but just in case it isn’t here is a chart of un-filled XLF gaps. Since this is a financial crisis, the XLF’s gaps might be the most important downside targets. (click chart to enlarge):

Gaps are targets, and also potential reversal zones. So, if you were bearish, you would stay short until the XLF hit the next gap. Then you would take profits. If you were bullish, you would wait for the XLF to drop to a gap and then go long.

The tiny one-cent gap from August 5th at $13.61 has already been weakened. So, it may not be able to provide much support if the XLF makes another trip down.

Tuesday’s Trading – 2/9/10

On Monday, the XLF closed right on its 200-day moving average, and right at its August 5th gap. And it’s a good thing too, because if you go back and look at the July 2009 chart, you will see that the XLF has no less than four more un-filled gaps all the way down to the $11.08 gap on July 10th. The XLF was on the precipice of a very slippery slope. If things turn ugly again, keep an eye on the next gap down, which is the $12.99 gap from July 31st.

Super Bowl Commercials
You can see all the Super Bowl commercials on this page. Set aside a couple of hours.

On CNBC last night, Fast Money criticized the Google commercial. Say what you will, but at least it didn’t contain any pants-less men.

Monday’s Trading – 2/8/10

On Thursday, I wrote:

“We have the big jobs report tomorrow morning, which often establishes swing highs and lows on the daily chart.”

And we did indeed have a dramatic reversal on Friday, did we not? The SPX printed an impressive-looking bullish hammer candle, which often marks the end of a sell-off. However, that hammer reminds me of October 10, 2008. We had a dramatic reversal off of 899 on that day, and the market didn’t violate that low until a month later – but 899 was a long way from the ultimate low of 666, right?

So, perhaps the market has printed an intermediate swing low, with more fun to come for the bears in the weeks ahead. The primary difference between now and then is that in October 2008, the economy was collapsing, and today it has completed its collapse.

The economy is probably more likely to turn up from here than it is to turn down, but the market has not been reacting to the economy. It has been reacting to financial and political events: The Democratic loss in Massachusetts which has caused the Obama Administration to turn hostile toward business, tightening of bank lending in China, and of course, the spectacle of the European financial crises.

So, take a look at the chart in the weeks following October 10, 2008. Maybe we will enjoy another period of highly-volatile range-trading before the market decides upon its next trend. After all, there is quite a lot of crazy stuff going on.