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Wednesday, January 16, 2008


rare scenario

this is really pretty stunning.

the ten-year treasury yield has collapsed 11.68% in the last twelve sessions. that rate of collapse is usually associated with capitulative periods -- i mark only seven in the last 46 years. only one of those -- november 1981 -- was not followed by a large rally.

specifically, the following upswings in the s&p 500 emerged from the week of the signal forward. some occured at market bottoms; others after markets had already jumped off lows.

  • may 2003 -- 25% rally over following nine months
  • october 1998 -- 40% rally over following nine months
  • november 1987 -- 20% rally over following four months
  • october 1982 -- 30% rally over following nine months
  • november 1981 -- 5% rally over two weeks; followed by (-20%) decline into august 1982
  • april 1980 -- 35% rally over following seven months
  • november 1970 -- 25% rally over following five months

i've already marked out the rarity of the s&p new 250-day lows. this is an update. one can see lower levels of new lows made yesterday on the revisitation of these levels -- a sign of improving participation.

two of the three most recent points at which the treasury overbought indication signalled essentially (within a week or two) coincided with a spike in new yearly lows (october 1998 and october 1987); my new low data doesn't reach back before 1984. but eyeballing the index price one might imagine that the 1980 low was just such a point -- while the 1970, 1981 and 1982 signals, like the may 2003 signal, came a few months after the bottom had been put in.

intraday lows in february were 1363 in the s&p and the closing low in the nasdaq 100 in august was 1846. those levels would be down (-1.1%) and (-2.3%) from the intraday lows on august 9. with participation improving since then, this looks like a fine spot for a pretty big rally to take off from.

i made a very basic trading error in not respecting the declining participation signal of december 26, and i've been punished since for disrespecting the power of the market to decline even after the signal has aged. that's one for the books, but i take heart in noting at least that the fault was mine -- the metric i would have watched (rather than vacationing) and should have obeyed (once i got back) was clear enough, as i said january 3:

there had been real improvement in participation building from mid-november, particularly in the nasdaq 100, but that seems to be expiring from late december as seen in new monthly and quarterly hi-lo data. this is troubling. the depth of the plunge in november may not have been enough to bring in sustainable interest.

option market sentiment averages also don't seem to have gone far enough yet to merit a severe pullback. ... but the 5dma has reached up pretty far -- and we don't have data for the 2000 major market top in this indicator, meaning that we're potentially comparing apples to oranges.

on a closing basis to january 15, the s&p is down from december 26 some (-7.8%); from january 3, (-4.6%).

what's important is how to go forward, loss in hand. and so there's a plan to act on:

  1. treat current long holdings as a first-bounce trade with 5-10% upside from s&p 1380 -- a range of 1450 to 1520. watch 20-day highs and lows -- and close the long with extreme prejudice, particularly on any untoward expansion of new lows, even a single suspicious day. accept that each and every 5% move is unobtainable by your methodology.
  2. short any first-bounce reversal anticipated by 20-day new lows with the expectation of a retest.
  3. buy very aggressively on price retests of the intraday lows. often, 20-day hi-lo data will anticipate bounce timing, but downside risk should be quite limited.
  4. be unreasonable about cutting the long trade until either the second test is in, or a very plainly successful first test is in.
  5. be open to the possibility of much higher highs, in spite of whatever you think is happening. trade the charts, not the rationale.

UPDATE: and here it is -- a high-volume hammer up off of s&p 1367 and ndx 1848. volume on the nyse is running 10% hotter than january 10 through 2:30 (market time) and nasdaq volume 34%. looks the real thing to me -- financials leading the way.

UPDATE: a disappointing ending, with the indexes selling off from 2:30 on and ending in the red if well off the lows. still, financials (and housing) rallied strongly and retained their gains.


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