Trading the Triangle - Day 6
SPY was able to run up to the top line (blue) of its ascending-triangle pattern for the third time, but there is a problem. Take a look at the volume (click chart to enlarge):
Notice that the last high-volume rally day was Wednesday of last week, and volume has been declining ever since. What has happened since then? On Thursday July 31st, we got that nasty unemployment-claims number. So, it looks like the jobs situation has dampened enthusiasm for the rally.
Nevertheless, the pattern is still intact and must be respected.
The QQQQ broke above its top line, and the IWM sort-of has a breakout also. However, both ETF’s had light volume just like SPY. So, the potential for false breakouts is high.
Short-term, the market has gotten itself overbought. A lasting breakout could come after SPY makes another trip down to its black uptrend line to rewind the spring. Thursday morning’s unemployment-claims number could trigger that. The key is to watch the volume of the sell-off. If it is relatively light, buying at the uptrend line will be feasible once again.
But if the unemployment-claims number causes the market to sell-off, why would buying be feasible? Because the market will forget about the claims number as soon as a shiny object is dangled in front of its face. Maybe a takeover, good earnings report, government bailout of some deadbeat bank, etc.
According to the textbook, the third approach to the top line usually breaks through. However, last Wednesday, SPY fell short of $129, so I’m not sure if today should be counted as the third time up.
If the claims number is “good” tomorrow, the market can run higher. However, I don’t think it will be a good idea to chase. The overbought condition, in addition to the declining volume, almost guarantees that a good deal of this week’s rally will be given back in the next few days. At a minimum the market should come back down to the top of the triangle (blue line) to test the breakout.
I may add to this later today if I have time. If I do so, the new text will appear beneath this paragraph.
August 6th, 2008 at 6:32 pm
Good input, Matt. You really called that $129 well.
I also like this: “the market will forget about the claims number as soon as a shiny object is dangled in front of its face.” That’s the biggest problem with short-term trading: it is usually the big boys (analysts) dangling these items from out pf the blue, and the lemmings line up to follow pushing smart investors over the cliff.
Speaking of analysts, Goldman is usually regarded as gold, and they have so far come out much better than their peers (big brokerages and big banks). However, in the last week or two:
1) Goldman has said oil will continue back to $150, which the oil market ignored.
2) Goldman has said there will be no second-half recovery, which the equity markets has ignored.
3) Merrill cut Goldman’s earnings
Obviously Merrill would have a much better idea of what trades GS is putting up than most people (they are probably a counterparty to some of Merrills own trades). I am beginning to suspect that Goldman never got the note that said “long commodities, short equities is over,” since they are the ones that usually send the note. I wouldn’t be surprised if their trading division shows “surprising” weakness this quarter. Maybe short GS, long MER as a contrarian play?
August 6th, 2008 at 7:39 pm
Matt I believe you are right on,I see a pullback the rest of this week and next week will be the last gasp to 1300-1320-spx.I believe next Monday will not be a huge down day like some are expecting.Probably a repeat of this week.Anyone out there do you guys have any good put candidates for the fall.Oct ,Nov expiration.I have an idea I what I will get just wondering what the other thoughts are.TIA
August 6th, 2008 at 7:40 pm
AIG missed badly,not good for tomorrow
August 6th, 2008 at 9:12 pm
Pooch, think you’re right. The problem i have is that all the bears are thinking alike. See other thread for put recommendations. Nb! I’m a terrible trader.
August 6th, 2008 at 11:57 pm
Thanks Paul. Funny you should mention Goldman. I just drew a second fan line onto their daily chart, drawing from the July bottom. If financials roll over again, GS might lead the way.
Matt
August 7th, 2008 at 12:07 am
Larry,
I’m thinking of shorting the XLB tomorrow. It’s a classic bear flag pattern at the moment. It had an uptrend going since it bottomed on July 8th, then fell out of it on high volume. On Wednesday, it tried to climb back above the trendline, but was rejected.
Matt
August 7th, 2008 at 12:13 am
Pooch,
The futures dropped right after the AIG report, and are down 6 points at the moment. So, Wednesday’s rally is wiped out so far.
Matt
August 7th, 2008 at 8:29 am
BDI down 4.4% to 7,521. Down 20 weekdays in a row. This is getting real ugly folks.
August 7th, 2008 at 8:40 am
i’m trying to buy some qid at yesterday’s close. Do I have any hope of a fill ? lol !