What looked like a sure-fire blow-out of our new Rydex positions on Friday's jobs report morphed into a "hmmmm....not so fast" during the last few hours of trading. The SPX pulled back sharply from the highs over 1039 to close at 1029.85.
So the jury is still out on this position. I saw some reports that credited the sell-off in the late afternoon to a Reuter's article that came out around 2:45pm -- right around when the selling started -- which highlighted how the employment statistics will require a downward revision of 145,000 jobs for the March 2003 reference month. Bullish economists were actually expecting this revision to be positive by as much as 300,000.
But anyway, the headline number is all that matters. All those assumptions -- and revisions to the assumptions -- are just "details". Who reads the fine print?
I still think Thursday was a critical balance point for the markets, and a bigger pullback should be in store this week. I still would like to see the SPX close over 1030 -- as per my initial instructions -- before bailing out of these bearish Rydex positions with a small loss. If that happens, whether or not you want to keep the SPY or QQQ long hedge I'll leave up to you, as I'm just not real keen to speculate on an upside blow-off right here. When the VIX is under 20 and the markets are already stretched to the upside, that is a high-risk, low-odds play.
As I chatted with people this weekend at our 21st Century Futures seminar, it was clear there is a lot of interest in my fractal dimension indicator. This indicator sounds "fancier" than it really is, as it's really just measuring whether a chart is more like a 2-dimensional plane or a 1-dimensional line.
A chart that is heavily trending has a low fractal dimension -- down towards 1 -- as it more closely resembles a line. A congesting chart has a fractal dimension rising towards 2, making it more like a plane.
The really interesting thing about quantifying and measuring the fractal dimension of a chart is that it becomes easy to tune in to the fact that prices move quite predictably between trend and congestion. And finding anything in the markets that is predictable can be a valuable thing.
On this 60-minute chart of the SPX, the blistering upside run has stretched the fractal dimension down to its lowest reaches. From my years of watching this, most trends turn around -- or at least pause -- when their fractal dimension hits 1.30 (on the chart, the numerical value represents the reading between 1 and 2; i.e., between a 1-dimensional line and a 2-dimensional plane.) Charts are congested and ready for a streaky move when the fractal dimension is up over 1.55.
So that quick overshoot to the upside on Friday was an outlier, pushing the fractal dimension of the hourly chart down into rarified territory. It's not surprising at all that prices came back down quickly into the close, as the trend was just stretching too far.
Now this chart needs to store up some more energy, which is usually accomplished by the markets waffling around for a bit, or retracing the recent trendy move. The "waffling around" would be the more bullish way to store up energy now.
So here's the bottom line: On a close over SPX 1030 -- a convincing close, not just a few tenths of a point -- take the quick loss on these Rydex positions. The market will be saying that my meager analysis is wrong, and a major bifurcation point has not been reached. And even if I end up ultimately being right, the set-up is not "clean enough" above that level to have our money at risk.
Conversely, if the SPX powers back down through 1024 -- again, convincingly -- take off the long SPY and QQQ hedges, and hold onto the Rydex positions for more downside.
Any such move down should be accompanied by a move up in the VIX. Our sentiment tank drained a whopping 17 points on Friday (see below), so the market is once again running on bullish vapors.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT DASHBOARD
%IMG%
SENTIMENT TANK: Drained 17 points to 4% full of negative sentiment.
SHORT-TERM: Remains in a strong advance phase.
MID-TERM: Unchanged at 76/24, and looks like it wants to roll into an advance phase with Confidence at a Bullish 2. However the absolute level of the tank (4%) means there's not a whole lot of room to run to the upside.
LONG-TERM: Progressed 5 points last week to 25% in a developing weekly decline phase but Confidence is still on the wrong side of 0 at a bullish 1.
BOTTOM LINE: The market is making a run at its late September peak (SPX 1040). While it's possible we could have a new nominal high his coming week, with the tank down at 4% full of negative sentiment a sustained break above 1040 should be tough to come by. If the runup that began last week fails that level, then the window of opportunity opens wide for the weekly decline phase to gain momentum. A bullish configuration in the tank would require a dip down to 0% and for the tank to hold in the 0-10% range for a protracted period. That CAN happen, but it's terribly unusual.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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