Tuesday’s Action
USO (the oil ETF) has a descending-triangle pattern on its chart. Here is a 15-minute chart of Monday and Tuesday’s trading (click to enlarge):
USO has bounced off of support in the $91 area twice. However, notice that the second bounce was much weaker than the first. This is a bearish pattern, and USO will likely fall through $91 soon.
I am looking to short any low-volume approach up to the black downtrend line, or failing that, am ready to pile on short if the blue line looks like it is giving way. After a breakdown out of the pattern, USO should free-fall for $3-$4 before it finds the next support level around $87.
SPY
SPY has closed above its breakout level of $129 for three days in a row now. Normally, the shorts stop pressing their bets when they see that. The S&P 500 is now oversold on a short-term basis, so while SPY can decline further from here, it will almost certainly be back above this level at some point within the next few days.
SPY can also fall farther without being technically broken, or even challenged. Tomorrow, SPY could fall to $127 and still be at its uptrend line (black). Buying at that point has been money-in-the-bank three times in a row:
XLF
Unfortunately for SPY, it is being held down by the XLF boat anchor. XLF’s ascending-triangle pattern off of the July low has degenerated into a rectangle pattern trading between $21-$23. See the blue lines bounding the rectangle on the chart:
Rectangles are bullish patterns, so XLF is not on the critical list yet. However, during the last four days, XLF has been up two days, and down two days, with the volume being a bit heavier on the down days. So, XLF has to be watched very closely. If it falls out of the rectangle, then it is in trouble.
Tuesday afternoon, XLF bounced off of the $21 level with very strong volume, so unless there is some very bad news on Wednesday, it should be OK for a while. However, on this bounce, it is important for XLF to rally up to the top line of the rectangle. If it can’t manage that, then the next trip back down to the lower line will have a good chance of breaking through.
QQQQ
The Q’s need to rally quickly. They have a potential double-top on their intra-day chart from Monday and Tuesday. See it here on this 15-minute chart:
The bounce on strong volume at the end of the day Tuesday shows that the Q’s probably intend to rally, at least initially, on Wednesday - assuming at least a neutral news flow.
Apple has broken above its recent downtrend line, and seems intent on dragging the Q’s up; so Apple is an important stock to watch.
According to the short-term model that I use, the NASDAQ-100 hasn’t been this oversold since August 1st, so a bounce in the near future seems likely.
IWM
The IWM has blown right through its primary downtrend line that stretches from the October high down through the June peak. There should be at least some resistance around $76, but who knows with this thing? Everybody seems to think the small-caps will outperform in a stronger-dollar environment, so maybe we need to watch the dollar to know what the IWM will do.
August 12th, 2008 at 11:08 pm
I’m very interested to see how your USO trading pattern goes, but it’s too volatile for me. If I did trade it, I would have went long yesterday based on the high-volume bounce and the Georgia news - which would have been a loser.
Based on the chart, are you saying that not only has the XLF have to avoid a loss (breaching down past the rectangle), but that it actually has to break-out upward on naked-short-Wednesday? A upward breakout tomorrow would really surprise me.
On a related note, how would a downward breakout of XLF affect SPY, technically speaking. I don’t see SPY getting past 135 max withouth XLF. As a chart technician, would you would wait to spot this weakness in the SPY chart, rather than act on it from a fundamental basis?
August 12th, 2008 at 11:19 pm
Concerning IWM, I agree that it should outperform big cap (DOW, SP500) in a strong-dollar environment. The corollary is it should also underperform in a weak dollar environment, right? It hasn’t. We have been in a weak dollar environment for a few years, but it looks like it has only underperformed in the first half of 2008.
The small caps with low debt will do well, but the ones that rely on bankrolling will have problems because of the credit crunch.
August 12th, 2008 at 11:48 pm
Hi Paul,
XLF has to reach the top of the rectangle during this wave upward, no matter how long it takes. It could be three days of small gains. It doesn’t have to breakout; all it has to do is continue to oscillate between the lower and upper bounds. If it can only make it halfway up before turning back down, then that is an indication that it may breakdown through the lower bound. So, what I’m doing is looking at the oscillations and judging how strong they are to try to predict which way the pattern will break.
SPY can’t get far without XLF, so an XLF breakdown would make me skeptical of SPY’s chances.
Matt
August 13th, 2008 at 10:53 am
Matt-
One of the indicators that I use is the SPX
3 DMA. I move the number forward 3 days.
If the SPX closes above, the ST trend is up.
If it closes below, the ST trend is down. I
do not know where the SPX will close today, but
the ST trend is currently down.
I got this indicator from Joe DiNapoli.
MEB
August 13th, 2008 at 11:38 am
Larry-
The DOW had two H&S patterns. The target
for the first H&S was 10,800. The target for
the second H&S was 9300. Do we go there
now???
MEB
August 13th, 2008 at 11:51 am
Hi Meb, I am the last person you should ask for trading advice. I am just short. I only trade a few times per year, simply because I am so bad at it.
Having said that, I would start to go short now, even with the risk that this bear-rally lasts 5 more weeks. The turnaround might have started. VIX up to 22 now.
What’s your guess?
August 13th, 2008 at 12:02 pm
Larry-
The SPX ST trend is currently down, but
will it lead to the IT trend turning down???
I don’t know…we will have to wait and
see. We have to see the SPX 20 DMA
turn down first.
MEB
August 13th, 2008 at 12:54 pm
Larry-
I have a friend who trades like you do. He
sleeps well and I’m sure you do too. I
only trade the SPX and am a swing trader.
When I see an outside week (up or down), I
mortgage the house. So far I’ve been lucky
and have not had to tell my wife that we
have to move out.
The NYA pattern has shown the big boys
selling on any rally…hard to tell what they
will do on a drop…might try to bring the
lambs in again.
MEB
August 13th, 2008 at 1:31 pm
Matt/Larry-
LBR’s comprssion meter (www.lbrgroup.com)
shows the potential for a big move. The
summation tick is about mid-range.
MEB
August 20th, 2008 at 4:16 pm
Energy stocks bounced hard today despite another rise in the buck. XNG jumped 3.5%.
This does not augur well for the longevity of the rally.