Click on Charts to EnlargeI started this post yesterday and then part of it got deleted accidentally and then I got predisposed and didn't finish.
Well, the BGZ posted stop was hit yesterday for possibly the world's worst trade. The posted exit will be the opening price of 27.63 yesterday. If you were clever enough to set your own stop at better prices, then that's good. I wasn't so clever, however, I may just be clever (or dumb?) enough to get back in today with a stop a penny below today's low in BGZ due to the pretty nice, high volume shooting star right at major resistance that formed yesterday coupled with a bunch of intermediate overbought indications.
The evidence is starting to mount that the market is reaching an intermediate term overbought condition. I will try to cover a bunch of data in a video this weekend, but as funny as it seems, the market has gone from modestly oversold to significantly overbought without barely a breather in the space of just over 2 weeks. The S&P 500 approached the 1000 mark yesterday which based on some Elliott wave pattern interpretations would be an idealized ending topping point for this rally. Also as shown above, as the market move into the 1000-1040 range there is major horizontal resistance, the type which has led to pullbacks so far on this rally.
Other factors of note.....The top picture above is the most recent Newsweek cover. Thanks for letting us know. I'm sure the call will be timely as you and other fine mass media publications have such a good track record at early identification of economic and investment trends. (Hopefully you caught the sarcasm). For anyone who has not heard of the "Magazine Cover Indicator" you probably should google it when you have 5 minutes that you aren't going to use productively. While this is not as provactive maybe as some past notables, the magazines sell what people want to hear and believe. It is obviously yet to be seen if this will be added to the list of obviously stupid and dead wrong timing covers from the past, but it is interesting none the less.
Also shown above the AAII (individual investor) survey took a huge jump in bullishness this week and is now almost 2 standard deviations from its 1 year mean. Bearish opinion made a corresponding large drop putting the bull ratio at its highest level since last spring just prior to the May 08 market peak. The current level is not too extreme in the history of bull markets, but it is still enough to worry about a rally's legs for someone with a shorter term time frame.
The bottom chart shows a 60 min chart of SPY. I am just noting that yesteday was the 2nd biggest gap up in the recent 2-3 week rally. Seeing as there was lack of follow through during the day, a close below the open, approach of major resistance, and extreme short-term overbought conditions, this may be an exhaustion gap. They typically occur at the end of an advance and occur in conjunction with a "news" item (in this case unemployment data). IF it is, then prices will probably close below that gap in the next day or two. I'm not necessarily saying this will be a major top, but it sure seems like some significant consolidation or give back will have to happen to refresh interest from the smart money.
I'm still awaiting a legitimate oversold signal on the SDS trade to post an exit there.
Pete,
ReplyDeleteI've been considering PALM for a possible short and perhaps even some out of the money puts, say Nov 08s.
Any thoughts?
cdude
ReplyDeleteI looked at PALM from a number of different angles. I can't see how going that far OTM on an option will be a long-term win. I would have to have a real good reason to believe the general market was going to tank big time in that time frame to go far OTM. Also, it would be conceivable to go far OTM before earnings, but I think this is much too far in this case, plus it is a gamble due to needing a huge move to make up for the implied volatility in the option prior to earnings.
As far as shorting, the most important thing will be timing the short sale with the general market. So right now the market is still in an uptrend and since the break above the June highs, I really don't have a great handle on how far it can/will go before a large move down.
The stock is in a tight uptrend being supported by the 50 day MA now. So it may be best to wait for a close below that average before considering a short trade.
Also some type of failed breakout where price tries to move to a new rally high, but lacks volume, or quickly reverses back into the prior consolidation may offer a time to short with a stop above the high of the breakout attempt.
On thing of interest is that there is a huge amount of open interest at the Sept 18 strike calls. There is virtually no put open interest at that strike in Sept. Huge call open interest above prices can theoretically act as a ceiling or forced selling area if price gets up to that level. So maybe be patient and see if price works up toward that area and then re-evaluate.
Pete
As a side note.....the reasons that the heavy open call open interest call be resistance
ReplyDelete-psychological point of optimistic extreme in the form of OTM call buying
-if the open interest is from call selling, then those same sellers may have purchased shares so that they don't have a naked position. As their options move OTM or expire, there may be huge amounts of shares to be sold from those call sellers trying to force the price down by selling, etc.
-also if institutions sold a bunch of those calls but have naked positions, they may attempt to sell the stock in order to pressure prices below the strike to maintain some premium value to their calls
the key is whether there is a big imbalance of puts or calls, because the opposing forces will be in force if there is comparable open interest from the other side.