Friday, February 12, 2010

Bearish Wedge?

If you feel like you need some Prozac, here is why –

This is the one minute chart of the S&P 500, going back to last Friday. It has been a rumor-driven rollercoaster ride of a week, that has gotten prices literally nowhere (Black Dashed Line is Monday’s opening price)

The price moves have been impressive, but they have all been the result of whether or not the European Union (EU) will bail out Greece, by guaranteeing Greece’s Treasury debt.

The EU keep leaking rumors that they will do something to back Greece (Blue Arrows) and Germany keeps saying that they are not Europe’s piggy back and will not underwrite the plan (Red Arrows).

If I had waited 2 hours, then I could have shown the rally today on the rumor that they are going to freeze the trading on CDS (Credit Default Swaps), so that investors cannot bet against the worthless debt of Europe and Dubai. Sounds like when Chris Cox tried to ban short selling…

The point to this is that the markets are an absolute farce. The intra-day volatility shows how few true investors there are in the markets and how gamed the numbers are by all of the prop trading and hedge funds. The idea that you are investing by buying stocks and not speculating has long gone by the wayside.


Here is what I see. I am going to use Crude Oil (Symbol OIL) to describe what has happened since last week –

Last week there was a breakdown in Crude Oil that led to a selling panic on Friday morning. In the charting method use, the more volume traded, the bigger the bar. Remember, these are 1-minute bars, so there were 3 minutes of panic selling last Friday!

That was probably some hedge fund getting hit with a margin call and being forced to sell. Normally, once the panic is over and the forced selling is done, there can be a relief rally. This week has been a relief rally. But all OIL did was rally back up to touch the 200-day and it failed hard again this morning.


The markets have to make a big decision in the next week or two – whether to fail and start another leg down, or retest the low and mount a meaningful rally.

The S&P 500 has been hugging the 150-day (Blue Line) for the past five sessions. All of the violence and noise on the 1-minute chart, is simply a bearish wedge along a key moving average on the daily chart. The 200-day EMA (Orange Line) was tagged on last Friday’s selling panic, but this bounce has been pathetic and looks vulnerable for a test of the 1,040 – 1,020 range. The big boys will probably try and squeeze Germany into submission on the Greece Bailout, so I would not be surprised by further weakness to scare the heck out of people.


Financials are The key sector to any market. Remember how they topped out long before the market did in 2007? Well, Financials are now under a 5-month trading range, and on the brink of breaking their 200-day (Purple Line). See how support for the trading range (Green Line and Arrows) held for months and then failed last week? In my opinion, if that support breaks, then the markets are hosed for the short term at least. The flip side is that if price gets back above the green line, then you get one massive short squeeze.

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