Down 100, up 100, down 100. I’m starting to get a bit of whiplash watching the ASX 200 move around these days.
Last week I said that the current rally was nothing more than a short squeeze which will end up stalling and eventually turning back to the downside.
I said that the S+P 500 would probably top out between 1,620-1,640 with an outside chance of hitting 1,660 before rolling over again. This week the high in the S+P 500 has been 1,626 and we have seen a couple of rejections from that level over the last couple of nights.
Whether or not that level proves to be the top in this move remains to be seen of course, but it does feel like we are getting close to seeing a resumption of the downtrend…
The chart below is a 60 minute intra-day chart of the emini S+P 500 futures contract.
S+P 500 Futures Intraday Chart
Source: CQG Trader
You can see that prices have struggled to get above the point of control of the current distribution at 1,617. We’ve already seen prices move to the level 0.618 below the current range down at 1,559 so we know the market is weak.
You will often see a retest of the point of control before prices turn back down again and fail completely outside of the distribution. So the intraday charts are stacking up nicely, which suggests we may be getting close to a top in this short squeeze.
Another thing I like to look at is whether or not past short squeezes can give us any hints.
I went back over the past four years of data and looked at how long the short squeezes usually last during an intermediate downtrend. My definition of an intermediate downtrend is when the 10 day moving average is below the 35 day moving average.
I was quite surprised by my findings.
Over that time there were 17 short squeezes during an intermediate downtrend that ended up falling over and leading to lower prices.
The average length of time for all of the short squeezes was 5.7 days and the most surprising thing of all was that of the 17 rallies 12 of them lasted between 5-7 days. So 70% of short squeezes will last between five to seven days in an intermediate downtrend. Amazing.
The other thing of note was that none of them lasted longer than 10 days. So if the rally lasts longer than 10 days we could start to become more suspicious of the intermediate downtrend.
The rally from the lows at 1,560 in the S+P 500 has lasted seven days, so it’s now starting to get pretty long in the tooth if this current intermediate downtrend is going to be maintained.
European Unrest Back in the News
News out of Portugal last night has reignited fears over Europe, so perhaps that will be the catalyst to get things moving on the downside again.
Portuguese bond yields spiked to 8% after two ministers quit, signalling that the government will struggle to implement further budget cuts as its bailout program enters its final 12 months.
The Financial Times reported that the Prime Minister of Portugal ‘has pledged to stay in office and seek to establish a stable government despite the resignation of two key ministers and the threatened break-up of his ruling coalition.‘
Spanish and Italian bonds sold off in sympathy with Portuguese debt and their respective stock markets also took a beating.
One of the interesting things I noted last night was that as the smelly stuff was hitting the fan, gold and silver caught a very strong bid. It felt like a return of the good old days when people turned to the precious metals as a safe haven.
We may still see some downside volatility in gold but we’re getting close to a bottom as far as I’m concerned. The 50% retracement of the whole bull market rally sits at about US$1,100, so I wouldn’t be surprised if we did end up testing that level, but you would be backing the truck up there.
The most interesting chart of them all though is the weekly chart of the S+P 500:
S+P 500 Weekly Chart
There will only be once in my lifetime where I will see a multi-decade triple top form.
You saw what happened the last time the S+P 500 had a false break of its all-time high back in 2007. That was the beginning of the crash. This time around the stock market has been pumped back up to all-time highs with funny money from the US Federal Reserve, and Bernanke has just hinted that he’s waking up to the fact that his actions are creating more harm than good.
It doesn’t take a rocket scientist to figure out that the false break of the highs from 2007 could lead to a similar fate for the S+P 500.
My current targets on the S+P 500 are to the 35 week-50 week moving average zone (around 1,500 points), but when I look at that weekly chart I can see things going a lot lower than that if the music stops.
Editor, Slipstream Trader
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