Trader’s Narrative

I bet that many are looking at that very tempting hammer candlestick pattern which printed last Friday and thinking that it is a bullish omen. Well, not always. But I do think this pullback presents an opportunity for the long side in the energy sector. Here’s why:

Let’s take a look at the AMEX Oil Index (XOI). It is off its recent high by 12.5% and closed last week at 998.28 - just under the psychologically important round number, 1000. As well, the Oil Index has fallen to support because 1000 is a previous resistance level at which the index struggled for about 11 months (from October 2008 to September 2009). The long term moving average (200 day simple) is right around this level and rising. Finally, like many sectors and stocks, there is a beautifully formed hammer candlestick. So we have a confluence of different technical events, making this level a significant one to monitor:

Taking a look under the hood, so to speak, the bullish percent index has fallen to 41% - exactly where it was in December 2009 when the sector bounced +7% to its October 2009 highs. But notice that this was and is a rather shallow pull back. A real washed out level is around 20% or lower as we’ve seen numerous times, especially during the severe bear market in 2008:
Continue reading ‘Energy Sector At Support: Opportunity For Longs’

Opa! Pass the keftedes and try to not get any tzatziki sauce on those Greek sovereign CDS’s. We are all Greek now. The risk of sovereign debt and deficits is coming home to roost in Ireland, Portugal, Spain and Greece. And with that the market is finding excuses to fall lower. Funny how these issues were there during the run up in stock prices. Remember: the news doesn’t make the prices; prices make the news.

With that in mind, here is this weekend’s reading list of economic and market news you may have overlooked. To see it all, go to news.tradersnarrative.com:

• Get a FREE Subscription to SFO Magazine (US residents only)
• Doug Kass: Greed Might Get Good Again
• Top Central Bankers Meet in Australia
• Money Never Sleeps - movie trailer
• Charles Kirk’s Volatility Stop
• PIMPCO’s Bill Gross - Investment Outlook: Ring of Fire
• An Ex–Goldman Partner Lets Loose on Wall Street
• Contrarian analysis of gold sentiment
• Volcker’s Prescription Cures the Wrong Disease
• Nouriel Roubini: The Ticking U.S. Fiscal Bomb
• Why We Keep Getting Poorer
• Free Forex Week at EWI ends February 10th 2010 - so shake a leg
• China Limits IPOs & Secondaries to Control Bubble

The above is a small sample, for the complete list, follow the graphic link below to news.tradersnarrative.com:

And remember to check back often as interesting links are added throughout the week. If you’re on twitter, add the news.tradersnarrative.com twitter stream to get new links in real time.

US Week Ahead:

We’ve had some interesting developments in sentiment this week:

Sentiment Surveys
The American Association of Individual Investors survey results for this Thursday February 4th show only 29.2% in the bullish
camp and an growing bearish camp (43.1%). Fear increased by approximately the same degree as optimists fell and pessimists increased by about 6% points from just a week ago when they were almost at parity. As you’ll recall from the sentiment overview not that long ago, we started the year off with the AAII at “23% bears and a whopping 49% bulls”. So we’ve let a lot of air out of the complacency that was evident then. But we haven’t swung to the other extreme (yet). To see what the other extreme looks like, check out the chart from the March 2009 sentiment overview.

The AAII members changed their asset allocation as well. We took a look at this chart last month showing a shift to equities to a degree that surprisingly approached (but did not reach or surpass) the levels which accompanied the 2007 market top. This most recent data shows a slight backing away from equities - from an average of 64% of total portfolio to 57%:

Source: SentimenTrader

The interesting development is that the money that was freed up from this shift out of equities went into bonds (not cash, the other option). We’ve already looked at several indicators that there is a bubble in fixed income. And this is another data point which points to the same conclusion. Of course, it merely reflects what we’ve already seen in the tsunami of fund flows directed at the bond market.

Investors Intelligence
In a similar way, the Investors Intelligence weekly survey of newsletter editors sentiment has stepped back from the all time lows in bearish sentiment that we saw at the start of the new year. It is hard to believe it was little more than a month ago that there were a miniscule 15.6% Investors Intelligence bears - a new low for the 22 year old sentiment indicator!
Continue reading ‘Sentiment Overview: Week Of February 5th, 2010′

The bears roared back pushing all major indices lower after two back to back positive days on Monday and Tuesday. While feeble and late, the bounce earlier in the week pushed up the percentage of S&P 500 components trading above their 10 day moving average to 63%.

But for all the fireworks, I don’t think it was a 90%-90% down day (as Lowry defines it). The bears did manage to crush the once lofty 52 week new high numbers. The NASDAQ only had 12, the NYSE just 20. If the market was still levitating as it was before I’d be worried that we’re putting in a major top. But the collapse in new highs and increase in new lows is natural in a correction.

A breadth indicator I like is the simple 20 moving average of the daily advance decline numbers. Here’s a chart showing that while we’re down to the July and November levels, there is still a long way to go to reach the harrowing exhaustion points which we saw before:
Continue reading ‘Market Rout Leads To Collapse Of New 52 Week Highs’

I know I tend to compare the current market cycle to the 2003 cyclical bull rally but you have to admit, there are a lot of similarities. It was just earlier this week when I showed the similarity between the recent tape and the 2004 doldrums when an important breadth indicator broke down. With your indulgence here is another.

From the March 2009 lows, the technology sector has had one of the strongest relative strengths. In comparison, for example, the banks and the whole financial sector have been flopping around. And among the wider tech sector, the semiconductors index (SOX) has been one of the strongest during this cyclical bull market. But recently it has fallen about 12% off its high from the start of the new year.

Does that mean that the general market is in trouble? I don’t know. But I can not help in making a comparison to the last time that we lost the leadership of the tech sector. For comparison purposes, I looked at the Bullish Percent Index of the S&P 500 and the NASDAQ Composite. Normally, I use the readings from the BPI as contrarian indicators. So for example, when it gets to 80% or higher, then I start to lighten up on longs and consider shorts. For more details, see: How to Time the Market with Bullish Percent Charts. However, within a very strong momentum market like the one we’ve been having, the Bullish Percent index can remain elevated for quite some time. This is what we’ve been seeing for the past few months as the momentum thrust of this cyclical bull rally has pushed almost all medium-term overbought indicators into the red and kept them there.

A comparison of the breadth, as shown by the Bullish Percent index, between the general market and the technology heavy NASDAQ market shows that the latter has weakened considerably. The last time something similar transpired it was March 2004 just before the market went into a funk that lasted for most of the year and resulted in a scratch for the annual numbers:

For a slightly different take on this same concept, take a look at Michael Kahn’s recent article in Barron’s.

Elliott Wave International have just announced the beginning of their popular FreeWeek event, where they’ve thrown open the doors to some of their most popular paid services to non-subscribers for one week only. You can access EWI’s intraday and end-of-day Forex forecasts right now through next Wednesday, February 10. Take advantage of FreeWeek by signing up here.