Diary of a Financier

Intraday update: Bottom forming

In Capital Markets on Tue 11 Jun 2013 at 10:41

While I fully anticipated this drawdown, I expected a deeper correction, with my base case bottom target for SPY ~$156 (-7.7% drawdown) and a best case ~$160 (-5.4% drawdown). As they do, the charts have morphed, and the roadmap has asserted itself with even greater clarity. To wit, it appears we’re in the midst of a bottom formation today, and were a bottom to materialize, it looks like the low was $160.25 on 6/6.

Markets are weathering high volume selling to start the morning, with $SPY -1% to <$163. The red ink is international today, and you can pick your attribution: Turkish riots, Emerging Market slowdown, German Constitutional Court, Fed tapering, Bank of Japan deferring on more stimulus. Reflexively redoubling everyone’s tapering fears, even Treasuries yields are higher across the curve, with the 10y yield ($TNX) +4bps to 2.255.

I nibbled at a couple new positions yesterday (1% into $DXJ and 60bps into $ARII), because I saw the intraday SPY fractals at a fork in the road, from where a move higher would’ve constituted a breakout above resistance, and a move lower a bottom-forming development of an inverted Head & Shoulders’ right shoulder. SPX closed yesterday -2.5% from its top, so I regard my dipping into our 8% cash for 160bps worth of buying a modest proposal.

Regardless, in the end, we got a move lower from SPY this morning. As I noted in my Squawk Box upon the open, SPY is indeed forming a H&S bottom—as it did in the 2007 analogue—and it appears that right shoulder support has already been met this morning at the intraday low $162.74. Note the H&S bottom with 2x bull divergence to boot in this 15-minute chart, which very well may fill the gap up to $164.50:

SPY 15-min- H&S bottom w 2x bull divergence

SPY 15-min- H&S bottom w 2x bull divergence

An update to the SPY 2007 analogue’s daily comparison shows the H&S bottom precedent:

SPY 2007 v 13 analogue (daily)

SPY 2007 v 13 analogue (daily)

If this were the bottom, the shallowness and the brevity (compared to 2007) would force a terminal departure in the analogue’s weekly comparison–despite the concurrence with its daily precedent. Void of an unexpected recoupling, that means I’ll have to reassess the roadmap going forward.

Suffice to say, I’m putting some more money to work today.

–Romeo

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  1. Thanks Romeo. Could you please share your views on gold, miners…

    • Hi victor,
      I got stopped out of my $GLD & $SLV on 4/12, and I let the stops execute because the chart had broken. I only had ~1% of the portfolio in those precious metals (combine), because the fundamental case for rising real rates was compelling, as well as some other indicators. (https://thebuttonwoodtree.wordpress.com/2013/02/26/gold-evolves-into-a-precarious-bull-pennant/)

      Gold has now setup a short term bear pennant, so I doubt the bleeding is over. Physical also still has some “catching-down” to do before recoupling with miners. (https://twitter.com/romeofayette/status/322740483266838529) I’m sure a long $GDX / short $GLD pair trade is a good way to capture the compression, but I wouldn’t recommend it. Although I’ve looked at them, I’ve never owned $GDX or $GDXJ for a lot of reasons. It’s too much work to track their hedging activity; too much geopolitical risk; etc.

      Only commodity I’m watching now is Oil, but I’m not sure I’d commit capital to $USO/$CL_F, because I already own a bit of $BP & $IEO. (http://twitter.com/RomeoFayette/statuses/342643834292928513)

      What are your thoughts?

    • Victor–
      I haven’t posted any entries regarding Gold on the website here, because it’s of little consequence to my portfolio at this point in time, but I hope you caught my latest tweet, which reiterated the bear flag that we last discussed (and which has now successfully broken-down):

      It’s admittedly a selection bias for me to point out such an accurate note, but I was reviewing my notes over the past few weeks and remembered that you had asked.

  2. Updates…

  3. […] me a little reassurance: I could see the commensurate Head & Shoulders bottom having already materialized this week, which meant that the futures’ overnight lows (and the low open) matched the doji […]

  4. […] American Railcar Industries ($ARII)- bought 6/10 […]

  5. […] barely above water in our $DXJ position, which we built throughout the June pullback.  Sony ($SNE) is one of our largest singlename equity holdings, so […]

  6. […] American Railcar Industries ($ARII)- bought 6/10 […]

  7. […] American Railcar Industries ($ARII)- bought 6/10 […]

  8. […] American Railcar Industries ($ARII)- bought 6/10 […]

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