Paralysis by Analysis

Well.. the US markets finally broke a 7 day losing streak after a 171 point rally which then fizzled into negative territory before closing in the positive (barely) by about 1/2 percent. Asian and European markets seemed to be the impetus for this major pop, but it was clear that people were selling the rally, at the same time it was squeezing the shorts. I had spare cash ready so I did pretty well. However, at the end of the day I closed out my Ultra-Short positions after banking some serious percentage gains over the past several weeks in anticipation that this might be a long overdue relief rally (not a bull market, just a relief rally... ;0)

And Ultra-Short ETFs can lose a LOT OF VALUE during any significant rally, so it was better to end with cash.. Tomorrow is another day. Might even go long some of the 3x Ultra-Bull ETFs, but it won't be anything I hold overnight.

So how far will this rally, assuming it repeats tomorrow, take us? It had a hard time clearing the 1040 SPX level, which is the neckline of the Head & Shoulders formation. It briefly breach that 1040 number, but then fell back with only a 5.5 point gain for the SPX. I personally will be surprised if it exceeds 1100:

SPX chart with 100 week MA

More likely it will try for 1050 to 1065. But look at the "Death Cross" where the 30 and 50 Day MAs are crossing under the 200 Day MA. Those are resistance points that any rally will pound it's head against:

SPX Daily Chart

And if you go back to the previous weekly chart, you'll note that the SPX underwent a WEEKLY "Death Cross" back in 2008 that took the SPX down from 1300 to 666 (NUMBER OF THE BEAST Baby!! Now TELL ME THAT was just a coincidence.. ;0) That's a 50% haircut from the time that ALL THREE WEEKLY MOVING AVERAGES turned downward. That's important to remember, because all three of them have turned downward YET AGAIN!!

Furthermore, this is the FIRST TIME that I can track where the 100 Week MA, once having descended below the 200 Week MA FAILED TO SUBSEQUENTLY PENETRATE IT AGAIN. The rally from 2009 to now has FAILED to see that 100 Week MA rise back above the 200 Week MA.

First time in history that I can discern. Read that as UNPRECEDENTED... HISTORY MAKING.. and SCARY AS HELL...

Don't believe me.. look at the Weekly chart above I posted.. But remove all sharp objects from your immediate presence beforehand.. ;0)

Now.. for you Russell 2000 (RUT) fans, you'll note that CNBS is reporting that the RUT is the first index to hit a 20% decrease (bear market) since the April highs.

RUT enters Bear Market

This should not surprise anyone as small caps ALWAYS get sacrificed and used as a "source of funds" to support the SPX and DOW. That's why I was trading TZA, which is the 3x Ultra-Bear ETF that is the inverse of the RUT.

And from looking at the Monthly chart for the RUT, it's pretty clear where it's eventually going to find support, 510:

RUT Monthly

But the REALITY is that ALL INDICES have been in a CONTINUING BEAR MARKET since 2008. Why CNBS has CHOSEN to ignore the previous year and only counts the rally from the Mar, 2009 lows is beyond me.

The ONE THING favoring the RUT at this moment is that it has YET to see all 3 major Weekly MAs turn downward. However, that seems to be a certainty in coming weeks as the Daily MAs have turned down:

RUT Daily Chart

RUT Weekly Chart

Finally.. I've been reflecting on my market analysis and looking for any missing "clues" or hints that I might have been missing..

First off, the very nature of the 12 year, as well as this more recent Head & Shoulders, has me wondering why the SPX hasn't sold off below 1000 yet. Every market technician willing to recognize that H&S expects the SPX to hit 850 very soon. H&S formations normally resolve themselves to the downside very rapidly as they are widely recognized by Technicians as major sell signals.

But WE DO HAVE some Bullish fundamentals in the form of corporate earnings, as well as how much cash they are amassing on their balance sheets and those facts should not be ignored. The SPX currently has a P/E of about 15, while the DOW has one of about 14. That's, BY NO MEANS, out of line. But the market is a forward predictor of value and it obviously believes that with no new stimulus, it will be difficult to maintain that earnings momentum in future months.

Even some noted bears are calling this a bottom for the year:

Bear going into hibernation?

So what if this is a "Bear Trap"? A carefully laid trap that lulls the bears into thinking this is a "no-brainer" short trade all the way down to 2009 lows. A sinister trap that lets the SPX slip to just above that critical psychological support of 1000, and then comes in with a crushing amount of buying that creates the "mother of all short squeezes" and propels the indices to new highs (thereby negating that 12 year Head & Shoulders formation)??

If they are going to do it, and possess the financial wherewithal to ACTUALLY do it, and if corporate earnings in coming weeks genuinely provide GREAT NEWS to justify it, then they would need to spring their Bear Trap NOW. Do it when all the bears are piling in and no one wants to be long stocks. Such a squeeze, given the requisite rationale, could be truly devastating to the bearish case and provide a ton of buying power from short covering.

I'll only feel TRULY solid about my bearish analysis when the SPX breaks 1000. That will be the final nail in the coffin, IMO.

Scrutinizer