Feeble Money

CNBC’s “Fast Money” show should be re-titled “Feeble Money”. At the beginning of the video below you can see the “traders” whine that the market is “way too confusing”, “extraordinarily difficult”, and “chopping everybody up.”

Pretty comical, right? If these people can’t trade, then why are they on my TV?

But has it really been that hard? On Monday night, I mentioned that the McClellan Oscillator was way overbought. So, you’re in a ranging market, and it runs up to an extreme overbought reading, and…what could possibly happen next? Could there be a pullback? WHAHH!!! WHAHH!!! IT’S TOO HARD!!! WHERE’S MY TRADING PACIFIER!!! WHAHH!!!

Well shoot. Instead of crying, why not just make a short trade or two? Here are my last two trades (click charts to enlarge):

Note: TLT is a bond fund, so it’s not really a short trade, but it’s usually a good bet when stocks are overbought.

Fundamental investors must endure long periods of bafflement because much of the time, stocks respond to nothing but technicals. But in a ranging market like this, fading overbought/oversold conditions is very easy. Of course, that won’t last forever. Eventually, the market will embark upon a powerful trend where it gets overbought or oversold and stays like that for an extended period.

Nevertheless, last week’s action was very easy for technical traders who have good overbought/oversold indicators.

Note: The Mac-OS is still elevated, though my other indicators have come down into the neutral range. So, short trades are not so easy now.

SPY Downside Targets

SPY’s plunge in the last half-hour of trading on Thursday makes me think that we might be looking at a bear-flag pattern. So, if the market doesn’t like Friday’s economic reports and continues downward, then this 15-minute SPY chart of the past week shows some likely targets (click to enlarge):

A 78.6% Fibonacci extension (red “X”) would have SPY testing its July rally line (red). You can’t see the whole line on this chart, but it is the same one as the lower line on the QQQQ chart below.

A 100% extension (black “X”) gets SPY into the vicinity of its July 22nd gap (black box), the top of which is 108.33.

And a 161.8% extension (blue “X”) would see SPY filling the gap at 107.10, which was SPY’s close on July 21st.

And now for a bullish scenario: At the black arrow on this 60-minute QQQQ chart, you can see that the Q’s successfully tested their July rally line Thursday afternoon:

Is that enough to satisfy Ms. Market? If so, and the market rallies, then the Q’s might head for the top of their rising-wedge pattern at the blue “X” up around 47.00.

IWM Downtrend Channel

The IWM is now in a bearish downtrend channel which is marked with red lines on this 60-minute chart (click to enlarge):

In the lower panel of the chart, I have added a slow-stochastic indicator. So, as you can see, IWM’s stochastic had been in oversold territory for three days and was due to unwind. The beginning of that process was signaled by the exhaustion-gap reversal pattern (blue box) on Tuesday morning.

And now, IWM’s stochastic is oversold. Will it be able to use that oversold condition to pop up and out of the channel? Or will it stay oversold for an extended period just like it stayed overbought on the way up?

A bearish attitude is appropriate until the gamblers come back to the small-cap casino, and the IWM busts out of this channel.

IWM Exhaustion Gap

The IWM did something fairly rare on Tuesday: it printed an exhaustion gap (blue box) up above the daily Bollinger Band (red line) (click chart to enlarge):

The IWM was down a modest 0.39% on the day. However, if you went long at the open like a giddy schoolgirl, your loss, from open to close, was triple that.

The previous such gaps were all the way back on April 30 and May 7, 2009. Both delivered instant pain and delivered a pullback, though the uptrend eventually resumed (see the blue arrows):

Prior to that, we have to go back to August 19, 2008 (blue arrow):

…not exactly a pretty picture there.

By time prices reach the upper Bollinger Band on the daily chart, the market is overbought and it’s not easy to “punch the BB”. So, such a punch usually indicates a euphoric peak – unless the bands are very tight, and in that case, the market has room to run.

IWM also made an NR7 day on Tuesday, while SPY, QQQQ, and DIA made NR7-2 days. In the last episode on July 14th, I asked:

“The IWM printed an NR7 day. So, how will it be resolved? Roll or ramp? TWM or UWM?

And the right answer was TWM. What is the right answer this time? Will the market rock or roll? (Rock on, or roll over).

Tuesday’s Trading – 7/27/2010

Rarefied Air
The McClellan Oscillator closed over 300 on Monday. That’s the highest level since the burst of buying off of the March 2009 low. But even back then, it triggered a pullback. The Mac OS was last over 300 on March 18, 2009, and the SPX dropped 26 points over the next two days. And when you combine that with the narrow-range NR7 days that SPY, QQQQ, and DIA printed on Monday, one would do well to be alert for an elevator ride down sometime soon. And another bearish indication is that TLT made a 9/36/15 cross-up just before the close.

QQQQ Mission Acomplished?

Believe it or not, the QQQQ almost printed a narrow-range NR7 day on Friday. It didn’t expand its range until very late in the day. So, what was the hold up? Why a gap, of course. Here is a 60-minute QQQQ chart going back to June (click to enlarge):

The red box and arrow show the narrow gap that had persisted for over a month. The blue arrow points to the Q’s closing the gap permanently on Friday afternoon after a two-day struggle.

In the process of filling this gap, the market has worked itself into a short-term overbought frenzy. So, is that it? Has the gap-filling mission been completed freeing the market to get back to bearish business? Or has the market gone into bull-mode where it just stampedes right through overbought conditions? Film at 11.

I believe this rally was birthed by the “double-dip recessions are extremely rare” meme. I don’t know who birthed that meme, but I do remember it popping up just before the bottom in late June. Has that meme taken up residence in the brains of large investors? Are they now in dip-buying mode? So far, it certainly looks that way, but we won’t know for sure until we see how the market behaves on the next dip.

Breadth Breakout

The Advance/Decline line broke above its June peak on Thursday. See the red arrow on the chart, which has the A/D line in the lower panel and the SPX in the upper panel (click to enlarge):

The market made a top in January, and then plunged on the first episode of the sovereign-debt crisis. If you look at point “A” on the chart, you will see that the A/D line crossed above its January peak (blue horizontal line) on March 1st (blue vertical line). And that was a solid two weeks before the SPX surpassed its peak (purple horizontal line) at point “B” on March 16th (vertical purple line).

This breadth breakout will likely prove to be a bullish development as it was back in March.

SPX Triangle

Wednesday morning in the comments, I mentioned that a triangle was forming on the SPX 60-minute chart (click chart to enlarge):

And sure enough, the “Bernanke Tightening Talk” plunge in the afternoon bounced right at the lower line. How do you like that?

According to the textbook, there is only a 25% chance that the market can reverse off of this symmetrical triangle.