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.