Monday, March 16, 2009
pullback behavior will be critical
So what would we need to see to conclude that this is more than a violent short-covering rally? That's where the Cumulative Demand/Supply Index (top chart) enters the picture. If you click on that chart, you'll see that we've soared to an overbought point that has been typical of recent market peaks.
In a sustained bull move, pullbacks in the Cumulative DSI toward zero tend to be shallow in price terms and are followed by subsequent rises in Demand and spikes in the Cumulative DSI indicator, with price making new highs. In a bear market, peaks in the Cumulative DSI invite strong selling, a significant excess of Supply over Demand, and near-term topping out.
In other words, we'll have a good handle on the sustainability of this rally when we see if we can sustain days in which significant upside momentum (Demand) stays ahead of significant downside momentum (Supply).
flat price action over the next few days as short-term overbought conditions are worked off would be indicative of underlying strength, or at least a lack of selling pressure.
for the record, i sold short in some size using SDS this morning around s&p 765-770 (depending on the account) with a 7% trailing stop (around s&p 790) which would allow for overbought to become moreso. i might be early, and could potentialy add to the position around 780 if the stars aligned. defined success would be mild price appreciation as DSL returns to neutral, then scalping. defined risk would be 1) stop-loss or 2) selling as DSL goes neutral at a smaller loss, indicative of a lack of supply as outlined above. outsized success would be a collapse in prices and retest of s&p 670 -- not to be hoped for, frankly.