Thursday, November 20, 2008

Scans Show Historically Extreme Levels - Could Turn Soon

Trying to figure out when we might turn and found some interesting numbers in my scans.

We closed under the magic "200" number on the main ratio I use which shows extreme levels. Historically, this is a level at which the market will put in a strong counter-trend move. This level was reached on a closing basis one other time this year - October 9. Coincidentally, that was also a Thursday. The following day, we put in a major reversal that, although it didn't last, would have certainly been nice to play on the long side. I looked at that day and today to see how the numbers matched up. The selling today was much heavier in terms of breakdowns which may mean the selling today was more panicky. That's good in terms of getting a bounce. The momentum meter is also more stretched percentage-wise and that is also good. However, there were more individual stocks oversold at that time via my Telechart scan than right now. Overall, it certainly looks like we are stretched far enough that a sharp reflex bounce is a possibility at any moment. I certainly would not be shorting here.

Here are the charts of the indices with October 9 and 10 highlighted to give you an idea of what happened then and what could happen now.

S&P 500 and Nasdaq

I also checked out the VIX then and now and unfortunately, I think the comparison here is somewhat bearish. The VIX back on October 9-10 (below) had put in a huge run-up and definitely looked like it was climaxing. A reversal of this was not unexpected at the time.

VIX - October 9

Here's the VIX from today. We did break above that trendline but I expected a much bigger spike today given the amount of selling we saw. We aren't even at new highs yet for the VIX, and it looks like it just may be starting to rev up. Hopefully, this doesn't mean anything, but it could mean traders are more complacent now than they were back then, which is not good.

VIX Today

Here's the McClellan Oscillator (T2106 in Telechart). Below -200 is usually quite oversold, but it did spike below this level back on October 9. We are getting there right now, but again, aren't as severely oversold on this indicator as we were back then. That is not bullish either.

McClellan Oscillator
All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

So what does all this mean? Well, I wish I knew for sure. Here is my guess. I think we may have one more really bad day tomorrow. I just don't know that people will want to hold stocks over the weekend given all that has happened the past two months. I don't think the sentiment back in October was nearly as negative as it is right now, but I don't know for sure. If we do get more severe selling to wrap up the week, we will probably get down to the same oversold levels we saw back in October, and the VIX will likely spike as well, maybe to new highs. This could set up a very scary weekend, one from which we gap down Monday and maybe then reverse higher. This is just a guess. We could certainly reverse and move higher tomorrow. Options expiration throws a wrench in things because you just don't know what the market will do. There is still the news factor as well - who knows what Washington will do tomorrow or over the weekend and who knows how Wall Street will react to it?

I don't think I will look to buy any move lower tomorrow, but I would probably start looking Monday. I am hoping we do sell off tomorrow, or at least start the day with some more heavy selling. The worst thing that could happen in my opinion is a strong open tomorrow. We need things to get absolutely awful (I know, it seems like we are already there) if we are to get a nice tradeable bounce going. We need a washout. Let's see if it works out that way.

There are absolutely no individual stocks I would play right now, although I am sure some of these solars, commodity, and financial stocks will bounce heavily if we do reverse over the next few days. I would focus on the double ETF's - UYM, UYG, SSO, and QLD would be my favorites in that order. I may even look at the new triple ETF's - ERX (Energy Bull) and FAS(Financial Bull) although I don't know if I will be able to handle the swings. I think we may be approaching a huge opportunity though and these ETF's are likely a solid way to play it.

If we don't rally, then all this analysis would probably be for naught anyway. Historically, the rubber band that is the stock market is certainly getting stretched about as far as it can be stretched. That is, unless it, along with our entire economic system, is about to snap. I really hope that doesn't happen. If it snaps, we're all screwed anyway and the money made in the stock market isn't going to matter that much. I keep praying that we will be able to get out of this crisis OK as a nation and as an economy, but it is certainly scary what is going on.

So overall, I am on the lookout for a possible turning point soon, although I would rather be a little late to the party than a little early so I will probably wait things out tomorrow. I would much rather try going long early next week than tomorrow, but we'll see what the market has in store. Be careful here though - we are in historic times and no one knows for sure how low this can go. I am completely aware that the market does not have to bounce just because we are historically oversold. Mr. Market has written all sorts of history this year and there is no reason to think he isn't willing to write more. If I try any longs, believe me, my stops will be in place. No way would I let losses go in this type of environment.

My Steelers have the Thursday night game this week so I am of to get ready for that. Good luck Friday. If nothing else, it should be interesting. Take care.

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