A great test of the market should be coming this morning off Intel's good quarterly report. We'll get a first-hand glimpse whether there are buyers left for good news, or whether the good news is fully priced in. Actually, to be more specific, we're going to get a look at how hard shorts were pressing into this report, as the most natural buyers to chase prices up on good news are those who are short and feeling the squeeze.
A sell-the-news reaction seems, perversely, to be the "easy call" here. Anybody who has ever looked at a chart can tell you this market is overextended to the upside.
Interestingly, my hourly fractal dimension indicator is showing plenty of juice stored up for another run -- even another streaky move up. This indicator is completely agnostic when it comes to direction. It just tells you when a market is trending, and conversely when it's congesting and storing up energy for the next trendy move. Objectively speaking, there's absolutely nothing bearish about this chart, as a chart that congests sideways-to- up is bullish.
Of course the big problem is the VIX and VXO, and the fact that our Sentiment Tank remains pegged at zero for the 3rd straight day. There just aren't many bears and shorts left at this point, and those that are around are certainly chastened to the point where they aren't pressing their bets too heavily. So who's left to buy?
The S&P 500 (SPX) is coming into an important zone once again, and the remaining shorts may now kick it over 1050. Keep in mind that 1060 is the important 38.2% retracement level of the entire bear market. (As a sidenote, it's pretty amazing that the SPX could climb all the way up to 1150 -- a full 100 handles from here -- and still only have managed to retrace 50% of the bear market.)
Not only is 1060 important, but 1054 is the last remaining weekly "breakdown point" from last year's disastrous March to July market slide. Bear market rallies have a strong tendency to go back and touch major breakdown points and fall away quickly from there. If the SPX convincingly moves over 1060 now, then an important bear market pattern will be broken, and it's hard to justify holding onto a short in that case.
So my plan is to watch this next hourly fractal trend very closely. If it's another hourly uptrend, a good place to short will be down where these trends flame out, when the fractal dimension hits the low 30s. That will be the point where the chaotic energy has dissipated, and there's little immediate upside risk left if you want to try a short.
If the chaotic energy gets released to the downside right away, triggering an hourly downtrend, then that should be a juicy shorting opportunity, as the VIX will also be cycling into a short-term decline phase from a major momentum low. That's a great set-up, and I'll keep you posted on this, even intraday to subscribers if needed.
Obviously you're noticing that my time horizon is shrinking down here, as we have to be a bit more quick and opportunistic right now in this extended, complacent market. It's just not a good market for my brand of contrary position trading, although of course it can suddenly turn into a great market for such positions, literally any minute now. Particularly with the Tank at zero.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Remained at 0% for the 3rd straight day. The tank has been completely drained of negative sentiment and yet the market continues to rise. SHORT-TERM: Hourly gauge remains in an advance phase.
MID-TERM: Progressed 8 points to 81% on the advance side with Confidence dropping back 1 point to a bullish 2. While confidence isn't a strong as one might like the gauge's ability to break above 75% is represents stronger bullish momentum of sentiment than we have seen in some time. If we're into a new leg of the market advance then this gauge will stay on the green side.
LONG-TERM: Dropped back a point to 80% on the advance side but Confidence popped up a point to a bullish 3. This gauge will remain green at the weekly close on any close above 74%.
BOTTOM LINE: An overbought market that can stay overbought has to be considered bullish at least until it gives a signal to the contrary. So, why aren't we more bullish in the short-term? We're in the middle of the 3rd week of October. In the 4th week of October the SPX closes lower 60% of the time (as studied over the past 40 years), by an average of -0.535%. Only the 4th week of September is worse this time of year, closing down 63% of the time by an average of -0.585%. This year the 4th week of September was lower by -3.8%.
The 4th week of October is when many large institutions do their fiscal year-end profit-taking and tax-loss selling. So this seasonal tendency is not an anomaly but has a very cogent set of rationales underpinning it.
Maybe I'm a worry-wart. But going head-first into this period of seasonal weakness with the new VIX at 17.37 (old VIX or VXO at 19.39) and with the Tank on empty strikes me as a perfect recipe for a soufflé that falls. YHOO has a PE of 124x its CY03 consensus estimate and 85x its CY04 estimate. (Mutliply the CY04 estimate by 4 and the PE will still be higher than the S&P 500's.) The stock is up 160% YTD. Maybe it will go higher, but that soufflé has a pompadour and everyone better tip-toe around the kitchen.
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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