Wednesday, October 28, 2009

Is the Rally from March Finally Over?

For the first time since I went long back in March, I am shopping for short ETFs.

The major indices dumped big time today, after a tepid attempt to reverse the trend yesterday. Since last Friday, Dow has lost 347 points, or 3.4%, S&P 500 lost 54 points or 4.9%, and Nasdaq lost 131 points or 6%.

September had a similar mini-crash that brought the indices to their 50-DMA. June was worse, to be sure, and the indices dipped below 50-DMA and 200-DMA (crossover was happening then, so it didn't take much to go below 200-DMA).

What I don't like about it this time is the behavior at the top, from October 19 to 23. The daily movement was loose and wide. 100 point reversals, big down day followed by big up day. What does that remind me of? The market top in October-November 2007, and September 2008 right before the crash.

This is a 7-month daily chart of Dow. Negative divergence between RSI, price, and money flow are more prominent and consistent. It decidedly broke the trend line from March low today, and can go down to the trend line from August. That trend line forms a rising, expanding wedge, which is bearish and indicating the topping action. Using the slow stochastics with (5,3) for short-term trend, the index is short-term oversold, which is about the only good thing about the chart for market bulls.

Goldman Sachs lowered their estimate on the 3rd quarter GDP today, one day before the announcement. Market reaction to economic/financial news (ever since the new moon, come to think about it) has been negative: good news is perceived as not good enough, and bad news is perceived as worse. If this trend continues, the reaction to GDP number may be negative, no matter what the actual number will be. If that happens, it may finally be the "batten down the hatches" time, and time to make money on the short side.

Still, stochastics is short-term oversold, and the put/call ratio (a contra-indicator) has spiked up to 1.11. A bounce may happen soon. Another contra-indicator is that too many traders and pundits are now very bearish, calling the top for the year (even Jim Cramer).

Well, the proverbial broken clock is right twice a day...

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