Diary of a Financier

Outlook Update: Major Market Developments

In Capital Markets on Wed 2 Mar 2011 at 08:10
  • SPX target still 1425, downside support at Fibonnaci level 1225.
  •  LQD has flash short-term bullish signals, while HYG is starting to wane.  A break in the HYG price trend would force my liquidation.
  • VIX is testing that historic resistance at 23.10 again.  It will fill its gap down to 20 before returning to resistance with renewed strength.
With everything swirling about the markets, this is a terrific checkpoint for the development of our outlook (January/February) for major markets.  In the interest of brevity, I’ll keep the discussion to the following: S&P 500, Investment Grade/High Yield Bonds, and the VIX.
 
1. S&P 500 (SPX): At the beginning of January, I had my eye on the S&P ETF (SPY) tilted head & shoulders pattern developing on the monthly chart.  I thought I’d update that herein.

SPY monthly- Watch that Head & Shoulders resistance. As the price-action approaches it, MACD & MFI are even closer to breaching key levels.

I can’t foresee the Head & Shoulders posing a threat, because indicators look like they’ll overrule the pattern with momentum.  This is something I’m watching closely.

I recently expressed some optimism for S&P 500 (SPX) proper headed to the 1400s, and after some soul searching last week, I’m still fully expecting it.  This is such an interesting chart we’re watching play out:

SPY daily- I worry about the rounded MACD top, which shows waning upside momentum, as echoed by MFI's lower tops. The trend is still positive with support held, and indicators are pointing north again. I'll be watching for a bullish breach of those indicators' resistance levels.

For the SPX , my target is still 1425.   My expectation is a result of indicators (SStochastic & MFI) having turned up recently, with MACD holding on resiliently.  These indicators should break their resistance and lay waste to their troublesome rounded/declining tops.  My downside support is the last (61.8%) Fibonacci threshold at 1225, which has been substantiated as a bumper on three occasions in the past.  We decided not to take broad SPY exposure because of the wide bandwidth for this risk/reward makes it an unattractive bet.

2. Investment Grade/High Yield Bonds: I’m currently holding an open pair trade for these two: long HYG v. short LQD.  I made an important post back on February 2 about an amazing coincidence in the pair, since LQD closed on support and HYG on resistance.  As both those levels held up, the subsequent price action has eaten away at our big paper profit.
 
I’m still ready to shut this pair down, perhaps even today if HYG can’t get back up over $92 after it’s ex-dividend took it down at the open yesterday.  The confirmation I was awaiting, LQD’s MACD bullishly breaking above zero, occurred yesterday… 

LQD daily- an MACD & MFI breach of resistance would confirm a reversal of the slide since September 2010.

The biggest driver to my closing the pair is less LQD turning bullish than HYG losing momentum, but I can’t act until the price action–still in a bull trend–actually reacts unfavorably:

HYG daily- momentum waning in price & indicators. I await a break in the bullish price trend before wrapping up my long position.

That being said, I still don’t see LQD as a fruitful investment vehicle throughout 1q11.  That’s mostly due to its longer-term charts.

 3. VIX: Interesting workings in the VIX charts too.

VIX daily- we have confirmation of a new uptrend as trend resistance is broken & indicator resistence too.

 

VIX Fibonacci- the 23.10 level has historically been a bumper since the 2009 peak. With the 100% retracement to 2007's lows having been achieved, this test of that 23.10 resistance is different...

That’s a shooting star on the weekly chart, with momentum overreached.  Hence, I expect a bounce down off it, a subsequent filling of the gap below 20, then a renewed test up through 23.10.

Side note- It’s also hard to ignore the compelling news of hedge fund NYSE margin debt reaching 2008 heights again last week. Just something to keep in mind:

NYSE Margin Debt & Investor Net Worth

–Romeo

Advertisements
  1. […] me that the market was flashing false sell signals.  That was absolutely correct, along with my read on the VIX dipping below 20 before turning up again to retest its […]

  2. […] grew uncertain as the trend gained steam, and as a result, the uncertainty led us to keep plenty of capital on the […]

  3. […] I’m happy to be out, per my recent notes. […]

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s