Diary of a Financier

From the Trading Desk: Trade Reconciliation (Week of August 1)

In Capital Markets, Trading Desk on Fri 5 Aug 2011 at 15:56
  • Expect SPX slip down to 1150 low early next week, before snapping back in ephemeral rally.
  • Both bearish longer-term fractals and the 2008 v 2011 Head & Shoulders analogue warn of the shakeout I’ve expected in coming weeks-months.
  • Intermediate SPX support @ 1118; for now, I don’t expect SPX to hit the air-pocket down to 1024.

Easily the craziest trading week of the young decade. In aggregate, this was crazier than the May 2010 Flash Crash. Here’s what I know:

Equities closed out the week in very oversold territory for short-term fractals. The S&P 500 (SPX) held its crucial 1200 support, having bounced off a lower 2nd support at 1180 intraday. That is all encouraging, but daily chart indicators haven’t turned north despite their rock-bottom lows:

ES daily (S&P 500 E-mini Futures)

So short-term charts could have room to slide lower, but the oversold condition + verified support suggest a move higher is likely; the daily chart is at odds with itself. In these kinds of inconclusive impasses, longer-term fractals are most critical, since they exhibit far more powerful determinism. If ever the short-term is muddled, I defer to the weekly & [especially] monthly charts.

The weekly chart has made a deterministic move south on all accounts, calling for new lows in a matter of weeks-month:

SP/ weekly

The monthly fractal has also relented. It shows SPX descending from the top of its trading range; momentum shying away from a secular, bearish trendline; and MFI failing resistance, which shows a failure of buyer interest to prolong the recovery rally:

SP/ monthly

To summarize, the aggregate longer-term technicals suggest a move lower in the intermediate-term. That’s the undercurrent to keep in mind when buying/selling next week. Therefore, the next questions are, when & how low?

When you consider the 2008 v 2011 Head & Shoulders analogue, 2008 was more gratuitous given the bearish tilt of its pattern. If you use the same neckline & 1st support for the 2008 H&S in a levelled-off 2011, you arrive at a first support right at 1180, and the indicators even align:

ES/ 2008 v 2011 Head & Shoulders- using the same neckline & 1st support as 2008, we arrive at 1st support for 2011.

Within the coming week, I’m prepared for an early slip as low as 1150 due to daily fractals 2008 v 2011, which show a higher-resolution than longer-term charts. Once we get a snapback up through 1180 (maybe after the Fed press conference on Tuesday?), I’m covering my shorts for an ephemeral rally. That’s the short-term (i.e. days-weeks). Thereafter, SPX should continue the “shakeout”–as I’ve dubbed it–but in a shallower manner than the plunge of 2008-09. A reasonable downside target is 1118.

I am concerned about the air-pocket beneath 1150. Snags exist in the form of weak support, which can catch a falling SPX. Yet stocks could fall quickly to the July 2010 lows around 1024. Again, I do not expect this scenario due to the analogue & fundamentals, but it’s worth mentioning.

Without further ado, I need to settle up from a nutty week…

–Romeo

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  1. […] just makes survival seem all too unlikely, no?  I’ll enter the week having carried short positions through the weekend: short Financials (XLF), short US Small Caps (IWM) & short Italy (EWI).  […]

  2. […] S&P 500 (SPX) sits at a second test of that 1118 support as of the close tonight, the “last snag” before the air pocket down to […]

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