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Why I think the rally over the last 3 days stinks

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45

April 02, 2009 – Comments (29) | RELATED TICKERS: STI , N , K

Peeee-Yeeeewwwwww. That's what I think.

The last couple of days we get some housing and job numbers that don't smell quite as bad, and the G20 is meeting and now everything is sunshine and lollipops? Come on.

I do think we will have a massive rally coming, but it won't be bourne out of the current overbought levels. There is too much euphoria, and really sustainable moves are not bourne out of euphoria.

From March 6, we rally >25%.  That is a HUGE MOVE. And the rally hits its head on some massive resitsance (see the S&P daily chart below). This is competely understandable that it would need to pullback and consolidate and re-attack the resistance from a place of strength. But no, the market hears about jobs, housings, banks, etc. etc. all being not so bad and used this to power through. This news was cotton candy. And after the sugar rush, cotton candy does not provide lasting energy. The market needs to come back down, take nap, eat some pot roast, take a big dump (sorry, this is getting gross) and then feel refreshed to attack that resistance zone.

My position for my short-term / trading account:

I eventually want to go long (mostly in oil, but equities too). I think this is the beginning of a very large multi-months rally (see my case for this in my last post: Technical Investing Themes: Macro Trends...). But I will not buy overbought conditions in the middle of a heavy resistance zone. 

I think the healthiest thing for the market to do is pull back to 770-750, consolidate, burn off overbought and build a strong technical base for re-attacking resistance. 

I am currently 40% short / 60% cash. So of course I want the market to go down so I make money in the very short term. But I really want to be on the long side and be a part of the larger rally up. And that means getting a good entry, and right now this is far from a good entry.

Take all of that above for what it is worth (probably very little). This is just a humble trader / chartists opinion.

So here are technicals of the S&P on 2 timescales, Financials (XLF), Oil (USL).

S&P 500:

You can see that there was no really pullback. Daily stochastics are overbought. and it is right in the middle of heavy resistance. This was also the first real breakthough of the 50day MA. Which is good. But based on how long that was resistance, I am very skeptical that it is "one-and-done". Acutally, if you look back 4-5 days ago, 50 day MA did fail as support (but it bounced off 20day EMA).

Based on the Elliot Wave Count there are two possible scenarios: Either we are still in the middle of a Corrective Wave 2 or we are at the beginning of Wave 3. That is not very comforting and a bit frustrating. But until we get some more price action, both are possibilities. 



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Financials (via XLF):

Hitting the same overhead resistance. Several open gaps on chart. HUGE run up. XLF went from 6 to 9.5 (up 58%) in 2 weeks. I am expecting a pullback.



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Oil (via USL):

Oil hit hit its resistance around $50-$55/bbl ($WTIC). I like the chart, just looking for a more meaningful pullback (around 50 day MA or $45)



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29 Comments – Post Your Own

#1) On April 02, 2009 at 12:22 PM, anchak (99.83) wrote:

Aligned Binve...... I agree with you and GV .....this one is not to chase........

But I do not think this is going to be a DEEP pullback- Sharp but not deep.

My 2 cents

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#2) On April 02, 2009 at 12:34 PM, oversea (< 20) wrote:

And here my own 2 cents.

It looks to me (but I'm just half way through The Book) like the beiginnig of wave 3. I know it's wise to be suspicious, because there are no logical reasons for this, but lets forget logic and let's forget what we feel and think. It's simply going up, charts show it. Stock exchanges in Asia and Europe have done the same. More than a pullback a correction (by friday/monday?) looks more likely to me.

 

 

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#3) On April 02, 2009 at 12:52 PM, PrestonCheek (31.99) wrote:

Great work Binve.

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#4) On April 02, 2009 at 12:52 PM, GoodVibe4Ever (< 20) wrote:

Nothing new here than what we said there, binve! I don't get it! Am I missing something here?

GoodVibe

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#5) On April 02, 2009 at 12:58 PM, binve (< 20) wrote:

anchak, Thanks man. I really appreciated you putting your thoughts down on GVs blog yesterday. And I respect you so much (more than you know). So the fact that you closed your shorts really gave me pause. So I took a step back, really thought about the charts and the rally so far and trying to take my own emotions / position out of it. And I have come to the conclusion that the odds favor a correction at this resistance level (essentially that we are in Wave 2 not 3).

So from my perspective, that is the preferred count. So I have not sold any of my shorts yet, but you can see I am only partially committed with my money. 

As far as being deep vs. sharp. I don't know. The longer it flirts with this resistance and not breaking though, I think the odds favor a deeper correction. It is hard to say.

But eventually I will sell all my shorts and go naked long. And it will probably be as close to 100% as I can stomach :)

Thanks for all of your thoughts man, I really appreciate them!

oversea, I hear what you are saying. It is certainly a possibility and I am not ignoring it. Thanks!

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#6) On April 02, 2009 at 1:01 PM, InverseAbitETF (93.96) wrote:

Has anyone seen my a$$?  I lost it shorting the market over the past 3 weeks?  One note of optimism: 700 charts saying the market is overbought and due to drop and $1 will still get me a nice refreshing coke from the vending machine.

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#7) On April 02, 2009 at 1:02 PM, binve (< 20) wrote:

PrestonCheek, Thanks man!

GoodVibe4Ever, No, not missing anything :)

Basically if you read my response to anchak, his statements yesterday made me really think critically and re-evaluate my postion. I am sitting on losses in my shorts too, and I could feel myself getting emotional.

So I took a break, can back with a fresh perspective, look at all of the charts, thought about the progress of the rally so far, looked at the EW counts, and decided that the highest probability count was that we are still in Wave 2.

This is not anything different, but basically this post just documented my thought-processes and my position. And for other nervous shorts, I wanted to give them the full technical picture for why I am still in mine.

Thanks man!

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#8) On April 02, 2009 at 1:04 PM, binve (< 20) wrote:

InverseAbitETF, LOL!!. I hear you man. I could be very wrong. And if I am, I am. Just saying what I see, that's all. But I appreciate your viewpoint. And I can't say I don't understand it :)

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#9) On April 02, 2009 at 1:08 PM, InverseAbitETF (93.96) wrote:

Nothing personal.  Just tears in my beer.

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#10) On April 02, 2009 at 1:10 PM, binve (< 20) wrote:

InverseAbitETF, No worries, man. Not taken personally :)

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#11) On April 02, 2009 at 1:12 PM, awallejr (85.54) wrote:

I'd be careful shorting stocks right now.  I've said this elsewhere, April tends to be an up month.  Also oil tends to go up during this time period too (peaking by July).

I also wouldn't underestimate the FASB accounting rules changes too.  I suspect the strength in financials today is more off that than anything.  While you could argue pro or con on the changes, nevertheless the impact quite possibly would make it so financials don't have to keep writing down assets. 

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#12) On April 02, 2009 at 1:28 PM, innerflame (< 20) wrote:

Thanks for the charts Binve- nice to see GV just popping in and out. I also am waiting to go long- but just doesn't seem like the time- I know there is more room for up but how can it be sustainable with no underlying economic support and overbought conditions. Guess it's just time to watch and learn.

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#13) On April 02, 2009 at 1:38 PM, binve (< 20) wrote:

awallejr, I hear you man. I thought a lot about my position and I wrote down what I think. But I can certainly understand your viewpoint. And after a decent pullback, I will be going long. Especially in oil (I have written several posts about that).

innerflame, Hey flame! Yeah, I am short but I would really just much rather be long. Like you, watching and waiting for a good entry :)

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#14) On April 02, 2009 at 1:53 PM, Tastylunch (29.20) wrote:

Here's my two cents FWIW binve

This is the danger of trying to anticipate moves in my opinion and why I tend to trade trends instead od reversals. Extreme Overbought conditions can persist much longer than one thinks and the biggest moves usually come out of those, and the same is true for oversold conditions.

The annoying thing is usually do reverse right awaybut when they don't  it can be pretty powerful.

So I agree most indicators are absolutely saying it should go down and the current rally is based on bogus reasons. But that doesn't necessarily means that it will end/correct meaningfully, it just means the probabilities heavily favor that outcome.

Food for thought:The market was hugely oversold virtually everyday last fall during the collapse

I got suckered into shorting financials too early too.I should have cashed in my FAZ on options expiry friday but I got greedy :)

But it's interesting to note which trades we agreed upon are working and which ones aren't. Namely the Oil trade has worked but we waitied for confirmation there, the financials we tried to fight the trend.

The nice thing about trend trading is that there is empirical evidence to suggets it works. Last I looked most of the"original turtles" had positive returns last year. Interestingly their method only has a something like a 30-40% accuracy but when it's right it's really right and they cut and run very quick when wrong. 

So  don't I know what to tell you if you are still holding shorts.

My guess is Anchak is right there will evnetually be a pullback but it won't be a big one. When the market interprets anything as positive it usually is good sign for bulls...

 

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#15) On April 02, 2009 at 1:55 PM, synergize (29.93) wrote:

it's crazy out there if you read the headlines. i did some query of data for the last month and i was even more surprise about the industry that was trending up for the last 1 to 6 months.

Apparel Stores was trending up lately and some since late November like HOTT, ARO, ANF, DBRN, etc.

Click for the complete listing.

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#16) On April 02, 2009 at 1:58 PM, Alex1963 (28.34) wrote:

Hey Binve,

I'm in a similar boat but of 50%+ cash with no shorts. I have been following GV's blog daily and have appreciated your contributions. Between that and The Elliot Wave Practitioner videos and charts (thanks Columbia1) I took abunch of gains off the table and was pretty set for the pullback. I'm still basically biding my time. I'm still pretty comforatable with a pullback coming at some point soon. How deep or sharp will remain to be seen.

But the financials are a house of cards to me. I expect another nose dive and think it'll likely be off of further credit card revelations and more info on the global scope of the problem. We all know it's out there but too me it has not really been reflected yet in pricing or in these weird finacials rallies. I'm overall bullish but not on what I see as fantasy. I'll miss some run ups to be sure I miss the fall back, thank you very much.

I'm still finding what I think are good longs though. I guess I'm shifting to a mix of short timed plays after starting as a purely long buy & holder. Thanks to what I've learned from you, among others.

Thanks for sharing your thoughts. You guys have literally helped me to make, & save, thousands.

rec #23 from me :) 

Alex 

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#17) On April 02, 2009 at 2:34 PM, tahoestock (29.98) wrote:

binve…(“take a big dump?”...lol) Hopefully not a sign of frustration.  As usual, a well thought out post.  Just my two cents:  I think your chance to dump your shorts is coming sooner than later.  Like I said yesterday, my count was already wave 3 of 3 of A.  I’m lightening up on some of my longs in anticipation of wave B pushing down to the 775 level.  Hopefully this will put you in the green (if we’re right).

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#18) On April 02, 2009 at 2:43 PM, amassafortune (29.41) wrote:

Yes, it's early, but if you are a buy-and-hold investor who got scared into cash six months ago, now is not a bad time to jump back in. EW last week showed a retest to maybe 749 before a motive move toward 900. The big chart shows 900-1000 possibly this quarter. Even if you only think 950 will be reached by the end of 2009, that's still 17.2% up from the recent 810. That sure beats 3% in a CD.

It does seem odd that UCO can jump 15% after two weeks of higher-than-expected inventories, but I agree there will only be a quick pull-back before the upward trend continues.

The slightly positive ISM manufacturing numbers were confirmed by factory order stats - that six-month slide has ended. This recession is not like the dot com bubble that wiped out unneeded companies. This recession affected houses, autos, etc. that people want to get back to buying.  

This rally is early, but not unjustified or illogical. 

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#19) On April 02, 2009 at 2:45 PM, binve (< 20) wrote:

Tastylunch,

Hey man, I know what you mean. I would much rather trade the trend too. But I am in my shorts right now (which was arguably a good/bad call at the time) and the point of this post was not to convince people to open new shorts, but rather for me to evaluate whether it still made sense to be in them.

If I were 100% cash right now: I would not open any new short positions, or any long ones either.

But since I am short, after I look at the technicals, I am staying short until we get a meaningful pullback.

And that is the exact perfect point about possibilities, and what we Wave count chart shows. You should always think about what is possible and probable, weigh risk/reward and deploy money accordingly. Right now I think there will be a turning point, but I am only willing to keep 40% of my money on that call. I will deploy a large portion when I am more sure of the call.

I agree whole-heartedly with you philosophy on trend trading and when the trend establishes itself convincingly for this rally, I will be much more committed.

Thanks for your opinions man, especially when they are contrary to mine. We always have more agreement than not. But I certainly get a lot out of our disagreements. :) Thanks man!

synergize,

Yeah I agree, I think crazy is an understatement :)

Alex1963

Thanks man! I really appreciate that! Yeah, I don't mind sharing my thoughts. Especially if they turn out to be wrong, so that people know what not to do :) But, seriously, I appreciate the compliments, thanks!

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#20) On April 02, 2009 at 2:51 PM, binve (< 20) wrote:

tahoestock,

I was wondering if someone was going to catch that :). Yeah, I would be happy to break even on my shorts and scale out of them in an orderly fashion. I guess we will see :) Thanks man.

amassafortune,

Thanks. Yeah, I agree on the basic call 100%. I think the larger rally will happen. The question (and point of this post) is to see if the technicals suggest a more meanigful pullback from the current overbought conditions before the rally continues. The way I see it, the answer is: yes.

But like you, when the good entry presents itself, I am going long oil big time and long equities to a smaller degree, in my trading account. (I have been long oil and gold in my long term portfolio for awhile). Thanks!

 

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#21) On April 02, 2009 at 3:57 PM, Robynbird (< 20) wrote:

Binve,

I'm afraid I have nothing of any value to add - just an enormous THANK YOU! I haven't had time to post lately, but I've been lurking and learning and have intended to let you know how incredibly helpful you have been.

I'm learning TA also, and was trying to figure out where it fit into my investing/trading style, timeline, etc. Your posts, both here and around GV's community, have been more helpful to me than words can impart. By making your own thoughts, research, and emotions available, you have helped me to understand things I otherwise would not have. When I come across a Binve post, I know it will undoubtedly add value to my thinking!

Sorry this got long. Many, many, many thanks, Binve!

Peace and Prosperity,

Robynbird

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#22) On April 02, 2009 at 4:06 PM, binve (< 20) wrote:

Robynbird , Wow, what a nice compliment! Thanks! Yeah, that is basically my style, just to write down my thoughts. I certainly make no claims about being an expert, nor will I be right all (hey, maybe even most) of the time. But I try to be honest with myself and the situation as I see it. And that is very gratifying to me that you find it useful. Thanks!

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#23) On April 02, 2009 at 7:58 PM, nuf2bdangrus (< 20) wrote:

I personally think that I would not short SERIOUSLY unless we ran to 900.  The market is on a roll.  I carry small positions in SRS basis 50 as a hedge, but have been selling into the rally.  I did initiate a short on AMZN today at 76, and another on PNRA at 56.  The leash is short. 

 

I would LOVE to see a base at 750-770 to accumulate, but bear ralies often don't give you a leg in easily.  Anything long I remain holding I will continue to hold.

 

As for shorting, I have nibbled around as a hedge since the beginning of this rally, but learned my lesson from the BSC countertrend rally last year to to hold short and be stubborn.

 

The Feds are throwing EVEYRHING at this, at the expense of our children, in the hopes of spurning consumotion which will mitigage unemployment.  But recessions have a way of cleansing out inefficiencies, and there is more to be cleansed.  I am in the banking business and am still seeing more clients who were in good shape burn through assetts, but the debt is still there.

 

Risk is high.  Keep your positions small and have cash, or Australian dollars, which I keep reminding myself to buy

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#24) On April 02, 2009 at 8:32 PM, binve (< 20) wrote:

nuf2bdangrus, Thanks for the comments man! You have actually been a favorite of mine for a long time (I have been around awhile as binv271828). I always appreciate your thoughts and comments.

I agree, right now I am not seriously short. And I certainly don't advocate anybody taking on new short positions now. I have been short for the past several days and am sitting on paper losses. And so this post was an exercise in determining whether I sit on my shorts or cut my losses. I am sitting for now.

As for the rest of your comments, you and I are very aligned in thinking (which is why I added you as a favorite in binv271828 so long ago). If you have not already, please check out my Technical Investing Themes: MacroTrends.... post. I think you will agree with many of my forecasts and conclusions.

Thanks!

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#25) On April 02, 2009 at 11:55 PM, herztical (27.91) wrote:

bvine

I hear ya...a week ago 80% short: 600 AAPL @ 102 wasn't the best trade (stopped out @105) along w/ GS BUT that's when I said don't fight this thing, and went the opposite 80% long w/ some MRO and NE and RIG (boy was I happy to read that Barrons article).  Kind of in that zone now where things look overbought on a short term scale but nuetral on a larger one. I will be buying pullbacks though and I still think short financials is yesterdays trade (even though stuck w/ SKF after closing my put today...don't like this at all but had to take the % put gains). The mark to market "waiver" just gave free reign for banks to beat estimates by .01 every q.

 

The Feds are throwing EVEYRHING at this, at the expense of our children

Looking at TBT for this reason; I like under 45 and it doesn't really trade w/ the market so not "overbought"...may take position in it tommorow on weakness. 

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#26) On April 03, 2009 at 2:55 AM, awallejr (85.54) wrote:

People really shouldn't underestimate the impact of the FASB rule change.  While people shouting for more "transparancy" (man I want to slap people now who use that worn-out word) might be upset, it really will stop the paper bleeding of alot of financials.  The decline in writedowns has been a key event to forming a bottom. Yeah you can argue that it is "puffery" on the books, nevertheless it will have a direct bottom line positive earnings impact.

I still can't help but feel that the final bottom will hit in October (simply because crashes love to happen during this month it seems. It is quite possible that March's lows was it.  I don't think we are going to see 14k on the DOW any time soon, but perhaps we won't now see DOW 5k either.

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#27) On April 03, 2009 at 8:41 AM, binve (< 20) wrote:

herztical, Thanks for the comments man! Yeah, my thinking goes like this: If the multi-month rally coming up is wave i, then I believe we just completed wave 1 of i, and are in the middle of wave 2 of i. I think we are overbought and headed down. I think wave 3 is going to be extremly powerful and explosive and surprise a lot of people. But it will not (in my opinion) be bourne of the overbought conditions where there are so many people expecting the market to go higher now. The correction needs to finish. This, of course, is just my take and my opinion.

Looking at TBT for this reason; I like under 45 and it doesn't really trade w/ the market so not "overbought"...may take position in it tommorow on weakness.

I would caution with TBT right now. I don't know if you read my last blog (the link is above in comment #24). The first two sections of that post I talk about monetary policy and Treasuries. I agree, we are in a bond bubble. But the Fed put a floor under bond prices. So I think the bubble is going to stay inflated longer than most suspect. If you are thinking of TBT as a short term trade, I would consider that one carefully. Just my $0.02 :)

Thanks for the comments man!

awallejr, I hear you. And I agree. I think this is a correction in the midst of a larger rally. Read my original response to you in comment #13 and the response to herz above.

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#28) On April 03, 2009 at 2:18 PM, kstarich (30.61) wrote:

Binve

Great post.  I am finally catching up here on posts.  Oil has corrected to over $52.  Do you still see more of a correction?  I have always used UCO.  You did not mention UCO and was wondering your thoughts on that one.

I am waiting for longs.  STP still doing well but I have raised stops for a probable pullback.

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#29) On April 03, 2009 at 3:01 PM, binve (< 20) wrote:

kstarich, Thanks kstar!

Here is the way I am going to answer that: I think there should be more of a correction. But it is totally possible we won't get one. Oil just like the market is too overbought and there is too much euphoria (around G20, etc.) and I never buy overbought. So I am waiting and watching. :)

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