Diary of a Financier

SPX Weekend Update: Ambiguous, after Breakout Thwarted by Painted Tape

In Capital Markets on Fri 31 Aug 2012 at 20:28

This week was another odd one. Everything was quiet, given the combination of summer vacations ending and everyone waiting for Ben Bernanke’s Jackson Hole address on Friday. Thus, the market predictably consolidated, which began to threaten this rally with a loose Head & Shoulders top forming (most visible in the 30-min SPY chart):

SPY 30-min- consolidation threatens the rally with a loose H&S top.

That put the onus on Mr. Bernanke to provide a catalyst today. Expectations seemed to wane throughout the last two weeks–the main culprit for the recent pullback from highs–but it still feels like consensus was hoping for QE3 details. What Mr. Bernanke did deliver was pretty unspectacular in my opinion–at least in terms of “hopium” for the bulls. As I noted this afternoon, all he did was re-remind everyone of the “Bernanke Put,” nothing more:

  • Bernanke said nothing new or material @ Jackson Hole today: he reaffirmed QE3 threat, nothing more. $$ huffingtonpost.com/mobileweb/2012…
    12:29p Aug 31
  • What’d you expect? Bernanke wouldn’t nix QE3 unless $CL_F >$120 or Core CPI/5y5y inflation rally.
    12:30p Aug 31
  • $SPY will have to compel Bernanke to implement QE3, call his bluff. Jawboning is credibility trap; he can only bluff mkt once in his career.
    12:34p Aug 31

The market reacted schizophrenically at first, shaving ~80bps off the day’s gains, but it eventually rallied ~50bps into the black to end the morning session. (MSM attributed that rally to people “reading” the speech transcript, which imparted a “dovish” tone.) Into the afternoon, that rally faded, and I noted a symmetrical wedge developing in SPY’s 1-min chart. Right away, I mentioned that it’s important that SPY not break-down beneath that wedge, where I’m afraid the aforementioned H&S top might assert itself. In fact, SPY briefly peeked up above resistance, attempting a breakout. Then, literally in the last minute of trading, someone painted-the-tape, ripping 33bps off SPY into the close. The wedge is still standing for the weekend, serving as a blasting cap at the end of the almost 2-week long consolidation:

SPY 1-min- traded perfectly according to symmetrical wedge, broke-out, then crashed in last minute of trading.

This happened to be the last trading-day of the month, so someone was shuffling their holdings for window-dressing. Traders might have already been gone for the Labor Day weekend, but algos don’t take vacations, hence this mini flash crash rippled throughout every asset class.

~~~~

In that closing minute, I was working an order in the Consumer Discretionary ETF (XLY). I opened a small position today ~1.5%. If all goes according to plan, I’ll build a larger stake in XLY next week. XLY has a PEG ratio ~1.1, second cheapest of all the sector SPDRs. Plus, I see a neat analogue to January 2012 developing, which I’ll discuss here at some point next week.

My position sizes for ETFs are usually larger than my singlenames, due to indices’ natural diversification. So, the 1.5% I’ve started with in XLY is pretty small. Our core portfolio is down to a 62/38 allocation with embedded Beta ~0.88. Unless the technicals give me something really convincing, I won’t likely stray too far from those metrics until the German Constitutional Court’s September 12 ruling on ESM.

Why didn’t I buy more today? I didn’t trust this rally because I don’t think Mr. Bernanke gave the sheeples anything they didn’t already know. Technically, I do think SPX is going higher, but there’s serious ambiguity in short-term fractals (i.e. H&S top and symmetrical wedge) that I want to watch develop.

~~~~

SPY charts:

SPY daily/weekly/monthly- daily chart seems determined to rally up to $145 before bear divergence in daily & weekly forces a correction; monthly still threatening the upper limits of this secular bear.

Week-end closing prices (4:00 est):

SPX= 1406.58
ES/= 1405.00

–Romeo

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