Friday, September 17, 2010

Weekly Squeezes Abound

AAPL has now setup in a weekly squeeze with the Bollinger bands inside of the Keltner channels. A trade signal is not generated until the bands move back outside the channels, so at this point the squeeze could fire off either way - long or short. However, what we also see is that every major US stock index is in a weekly squeeze setup as are gold, silver and oil. Silver has fired off long, but gold and oil have not. The real question is the one we have been asking all summer: which way is this thing going to go when it finally gets going? We are now at the point that the market will not be able to delay answering the question much longer. It can certainly tease us by faking us out either way one or more times, but when it does take off it will probably be a strong trend that lasts several weeks - a trend that exceeds the swings that we have seen this summer.

It is hard to know what the catalyst will be, but it is hard for me to see how the breakout will be to the upside when we have low volume, the VIX wedging down, a potential reversal to the upside in the Dollar and oil breaking down. There are also major inter-market divergences with the small caps and the NYSE composite failing to take out the August 9 high so far.

The 8 period RSI of the Qs hit 100 today. In a downtrend this is a sell signal. In an uptrend this would indicate a strong trend. Since, in my opinion, the recent rally is wave [c] or [y] of B or X, I think it is a sell signal. The Qs also tagged the upper parallel channel line today.

One thing that is of serious concern for the cyclical bull case is the possibility of a seasonal cycle inversion. This occured in 2008 and was a big clue that the market was headed for a crash instead of recovering to new highs as would have normally been expected in the presidential election year cycle. That year the market rallied into May/June when usually it would have made a low.

This year is a midterm year in the presidential cycle. We would normally expect a fall selloff into late September to mid-October followed by a rally into year end. However, this has not happened. Instead we have rallied into late September. A reversal to the downside here could mean that the cycle is inverting which could mean that we will be headed down the rest of the year. The typical pattern would then likely resume after a January/March low, however, that is not a guarantee and the cyclical bull case could be derailed if it didn't revert to the typical pattern after an inversion. If the market sells off for the rest of the year, this would certainly be signalling major concerns about the economy for 2011.

I will be looking to re-enter a short position in the Qs early next week and will add to that position on additional sell signals. I am now long and short this market. Some of my longs are doing well, others are languishing. Most of my shorts are either doing well (i.e. have gone down) or have not rallied with the broader market, so I am feeling pretty good right now about the rest of the year.

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