Bond Update

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The TLT ETF which mirrors longer term US bond prices, formed a shooting star candlestick this week. That is a bearish reversal candlestick. This occurred right in a Fibonacci retracement resistance zone between 108.00 and 109.50. Also the upper tail of the star exceeded the March 2009 bond price highs when the bear market bottomed. That may be a significant chart point as far as running stops, and may set up a move down in bond prices now.

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This is a chart of a bond indicator from Sentimentrader.com. It takes several sentiment measures into account, and I don't presume it to be perfect, but it is showing an extreme reading that suggests bond prices may be ahead of themselves. The weekly RSI readings are overbought as well from a technical perspective.

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Now here is one reason why I suggest that bond prices may be at a long-term high. The chart above is the 10 year note yield (falls as price rises) for the last 30+ years. It shows a downward parallel channel for the last 3 decades. However, around the beginning of 2009 yields spiked lower and broke below the lower channel line. The price bar was the biggest % decline in yields on the entire chart. Capitulation??? That's kind of what I think. It's like a "throw over" when the last chips go in the middle.

So my take is that at a minimum bond investments should reduced at this juncture if not cashing out entirely. Now people can argue about bond fundamentals, but my opinion is that the debt and credit contraction will eventually fundamentally pull US bond prices down. It may be the last one to fall after all the others (Greece, Spain, Ireland, etc, etc, etc) but any Domino in the line eventually will take its turn. Maybe that is years off, I don't know.

Timing is everything in investing, but I just can't see now being a "bad" time to lighten on bonds in the long term perspective. Maybe a couple years down the road you could be buying bonds fresh with yields near double digits or higher.

So that is my perspective. Take it or leave it.

General Updates

My opinion based on sentiment and retracement levels is that bonds are overbought on an intermediate to long term level. TLT has now retraced basically 61.8% of the decline off the 2008-2009 high.

The AAII survey today showed a very high level of pessimism toward stocks by individual investors - one of the lowest handful of readings in the last 5 years.

The major equity indexes formed bullish reversal candlesticks yesterday. The IWM and QQQQ made nice bullish engulfing patterns. I definitely expect a rally here, maybe even bigger than I was anticipating.

RIMM and STP look like attractive intermediate to longer term buys today. I have both of those.

Hourly Chart Update

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The hourly chart on SPY is showing a strong bullish divergence on the new lows the last few days. In addition to the break of the support level noted earlier today, I would expect to see a rally attempt very soon from here. That is the main rationale for the UPRO trade. There are other factors like "turn around Tuesday" which would seem to suggest some short-term strength ahead. See Quantifiable Edges blog for a post on that today.

As for the Hindenburg Omen, I view that as an intermediate term negative sign. It has historically predicted market weakness in the weeks/months ahead. But the bullish set-up and clear profit taking levels (gaps and retracements) are so obvious, that I don't want to let that longer term negative take away a nice trade.

That being said, I will likely look to get bearish again on any rally that pushes to short-term overbought levels.

New Short-Term Trade

Buy UPRO today with a market order. Blog entry price is 121.42.

Looking for a bounce this week. Only expect a 2-5 day hold.

QID Trade Exit

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I expect a rally from this point. Probably back to the 109 to 110 area on SPY or maybe a little further. That would fit the pattern of past bear market rallies pretty well and corresponds with some gaps and chart resistance.


Trade Action:

Exit the open QID trade with a market order today. Blog exit price is 18.55.

A Fortunate Option Trade - McAfee

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The last week of July, I bought some Sept 33 strike calls on MFE for 1.10 based on a large scale corrective pattern completing. It happened to be right before earnings, which often is the case on these large scale patterns. MFE moved up about 10% on earnings and made a nice gain on the options, but then the stock fell back after that to the point where the options were pretty worthless.

But with the news this morning that Intel will acquire McAfee, the stock gapped up around 57% to $47 and change. So my limit order to sell at 2.25 got filled at 14.20! So the percentage gain is around 1190%. I have had a 1000% gainer before and some other real big ones that were less than that, but I think this is the biggest.

This isn't the cleanest pattern ever, but the technical analysis looked very strong at the time of purchase.

VIX at 78.6% Retracement

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Back in late 2008 I made this post showing the tendency for VIX spikes to be retraced around 78.6% before spiking again and the market declining. The chart above shows the VIX at a similar retracement right now.

Also there were 17 lower lows in the VIX since the May high. And in the last move down in the VIX (market rally from July 1 to now) there were 11 lower lows. Anything in the 12-15 range can be a good sign of a market reversal. So maybe this is a hint that we will see more market downside soon.

It would not surprise me to see some more upside to test the 1130 S&P level, but my intermediate bias is shifting to down now.