The Triple Q's and Environs
posted Aug 13, 2004 at 09:58PM
A Look at Price vs Various Indicators
Just considering geo-politics and the price of oil alone, never mind fed tightening, chinese tightening and economic numbers that have softened considerably - the fact that there has been no real fear displayed yet in the market makes it ripe for further ugliness.
The fears expressed in the "Under the Crust" post have come to past. Despite some of the quality names like CSCO getting hit, the indexes still really haven't been showing what is happening. And from the internals what has been happening is that the market has been crashing.
These are approaching levels that have some traders thinking of at least some kind of bounce/short squeeze.
I show the CPC for the sake of trying to be more complete. For me the CPC has stopped being a reliable indicator since last June, when I read it as signalling a major top, only to have to play catch up later.
The standard interpretation is that high readings are bullish because they show an excess of negative bets. Howver it appears that the CPC value in this regard may be comprised by hedge fund activity which is distorting this reading to the point of uselessness.
For more on this subject read the always excellent Steve Saville article, Hedge Fund Economy
Price-Action is the final indicator and the price action has been horrible. Key price supports did not hold and moving averages have moved into bearish alignment.
What makes the environment more perturbing from my view is that this has happened without any real fear entering the markets. The VIX did not get past 20, there were no signs of capitulation like volume and selling was basically "orderly".
Stochastics have bottomed out on the daily and weekly. Others like the RSI are reaching oversold levels but not massively so.
The internals have been horrible and as of yet have not shown any change in direction that may give standard buy signals. They are at levels that have, at the least, produced some short-term relief rallies.
There are two kinds of trades...one where you buy in anticipation of a bounce or turn...or more conservatively you wait for clear signals of a trend change and then react quickly enough to catch some of the momentum.
From a the technical side there is nothing here to indicate that it is time to try catching the falling knife (although individual stocks have to be looked at on a case by case basis)
Take the time to go back and closely follow the path of the VXO (I like old formula) and see how price reacted. You will see that even a spike to 35 can be a fake-out and price can coninue to fall even in the presence of too many bottom pickers.
An absolute level of 40 is better. The best is when you get a double spike. Price action usually corresponds with a plunge, followed by a bounce and then one more downwards push to really flush the market of sellers.
Given the overall environment, you really want to enter only when the chart you are looking at is showing some positive divergences on various indicators and preferably with some blow-off volumes to boot. In other words get downright "anal" about your entry criteria. You want to deploy capital under YOUR terms..not the markets.
Except for a series of junior bio trades at the beginning of the year and some golds in May (all short term trades measured in days) I have spent most of the year in cash...and it has been the place to be. There is nothing out there that is telling me that it is time to get into a "buy and hold" mentality.