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Wednesday, February 23, 2011

Relentless Selling

 A second straight day of relentless selling finally gave way to a bounce in the afternoon, but it was pretty weak. We had slightly higher volume than yesterday, giving us another distribution day, although, by my count, those are the only nes in the past month, but coming as close together and on such high volume, they are raising a flag to get out of the market. We may get that chance tomorrow with a little bounce, although I would not count on that. The 20dema has given way, but the 50dema has yet to be tested, and we have the late January low as a support level, so i do expect a bounce back somewhere in that area. How high it goes, and on what kind of volume, will tell us whether this was a dip buyer's dream or a change in trend.

The Nasdaq did go down to the 50dema, broke it, but came back to close just above it. Volume was just ridiculously high, and leading stocks and sectors here got absolutely shellacked.  Theoretically this should bounce off the 50, but it doesn't have to, and does have support at the late January low.

 The Russell 2000is also getting cheesed something fierce, but also apears to have gotten the stronger of the afternoon bounces. This nearly hit the 50dema. A bounce is not out of the question here.The Elder impulse signals have not been reliable for the last 6 months, but it is interesting to note that both the Russell and the Nasdaq flashed blue bars last Friday, before plunging red yesterday, while the SPX went directly from green to red.

In a bull market, bad news doesn't matter, until it does. In 2007 the market climbed in the face of a flurry of bad housing data, in 2008 it rose on the face of rapidly rising commodity prices. in both cases eventually the bad news caught up with the market an the result was an epic collapse. This time might be different, but i doubt it.

I will have the new highs update shortly.


Anonymous said...

Hi David. Its me Eddie from up the 15. I read your post and as always the commentary is direct and to the point. Im kicking myself becuase I wanted so much to buy calls on the USO about the time when egypt was having its problems. I woke up on monday morning to watch the oil spike. Dangit. I knew it. I would love to get long here on the USO betting on problems in Saudi Arabia, but my trading plan says "NO CHASING" allowed.
Ive also finally figured out sector rotation. Essentially, when you see oil and the xle and usually the xlb go parabolic with in price and Relative strength, its the top of cycle. Ive been watching the xly for weeks underform. Any change in the direction to the downside on the spy, you can bet on a nice move to the downside on the xly and technology. The problem is that a strong move to the downside doesnt give much of chance to get on board. If you do get on board, you have make sure your not shorting right into support. Im going to try to get long the xle when the spy hits support and catch a smallounce. Otherwise, im going to wait for the spy to pull back to a downslopping 8ema on the daily, and look to short the weakest stock in the xly or the xlk. Apple is looking like its ready to take a fall and so is amazon.
By the way karl Denniger was right about netflix. THe problem was that I got short 2 weeks ago and got stopped out. I should have waited for the parabolic setup.
Let me know what you think. Any comments on this are always appreciated.
Eddie B.

David said...

Hi Eddie,

You're right not to chase USO right now. Libya is through as an oil exporter, and they produce 2 million barrels a day, but that is already priced in. Any hint of a problem in Saudi Arabia will send it to the moon, but we could get a pullback first. Calls might be a better choice. I don't see this situation getting better any time soon.

I like your sector analysis. I've been working ona sector rotation model based on the RSI indicator, but was too sick this week to do anything with it. I noticed a lot of what we are seeing now in 2008, right about when the market rolled over and headed for the crash. Right now the similarities are so close it's a little spooky.

I think everyone knows that NFLX is overvalued, but as long as the shorts kept jumping on it prematurely, you know it was going to keep getting squeezed. When that hedge fund guy that kept going on CNBC and bagging on NFLX finally covered, I figured it would make NFLX go up one last time, before it made a pretty big collapse. Too bad for me that I was sick when it happened, so I gave back a lot of what I gained.

Great hearing from you again, I hope your family is doing good.

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