Diary of a Financier

The “Ephemeral Rally” Is Ready

In Capital Markets on Wed 10 Aug 2011 at 15:50

The 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 1024.

Indicators are oversold, with nearly all equities at both extreme lows in their daily trading ranges and rock-bottoms in buyer interest (MFI). Further, SPX seems to have respected its 38.2% Fibonacci support at 1100:

SP daily- 1118 support held on close, 1100 fibonacci support provided trampoline once already, but an air-pocket below otherwise.

SP weekly

SP monthly

As you can see, long-term fractals are still very bearish. I expect that “ephemeral rally” now. It’s time to cover most of my shorts, then sell my longs into the rally when it materializes.

I covered my short in Small Caps (IWM) today just before the close. Representing the Russell 2000, IWM has reached its prime meridian at $65, amidst oversold conditions even deeper than those of SPX.

I’m leaving the short on Italy (EWI) open, since Italy has further to fall both fundamentally & technically:

EWI daily- MFI holding 40 support, which indicates buyer interest hasn't capitulated yet.

I now digress. I keep a note at my desk:

RESIST THE URGE TO DEFER TO SHORT-TERM/INTRADAY FRACTALS, BECAUSE LONG-TERM REFLECT LESS NOISE.

TRUST THE CHARTS’ SIGNALS ABOVE ALL ELSE, including headlines, fundamentals and quants.

I try my best to stick to that dogma, particularly in open positions. Maybe I’ll kick myself later for this, but open short positions feel a bit different. The will of masses is to push stocks higher. For example, political risk discourages me from leaving a short position open overnight. I hear Mr. Obama is holding a meeting with Messrs. Bernanke & Geithner this evening, and even despite substantial gains in my shorts, I’ve now covered most of the short-bias on my book. That’s violating every sin in the passage above. Amateur move? Time will tell.

–Romeo

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  1. The Reformed Broker on-point: Shorting is a bloodsport. If you short, you’re fighting the current, the upward bias that pushes capital markets higher out of habit…
    http://www.thereformedbroker.com/2011/08/15/shorting-is-a-blood-sport/

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