Short Interest at Multi-Year Lows

After peaking last fall at multi-year highs, NYSE short interest has collapsed to multi-year lows. The only time it has been this low over the past coupla yrs was, yep, the deja vu period last spring.

You can see from the chart that low short interest is not a good predictor of near term trend reversals. But it is a data point in support that this rally is in its late stage and that there's a fade trade on the horizon.

position in SPX

Bullish Patterns

Am noticing lots of cup-and-handle patterns in many large cap equity charts. Some of the patterns span a few days while others are multi-month in nature.

Moreover, the action 'feels' bullish. The tape is consistently bid. Weakness is being bought regardless of news.

Feels too risky to be net short here. As such, I've been adding some long side exposure to balance things out. I've been buying some of my fave blue chip names (CSCO, JNJ, PG). Today I added a little commodity exposure via DBC.

To be clear, I'm in 'rent' rather than 'own' mode here. But I want to reposition my near term stance in this bullish tape. I'm now a coupla percent net long.

position in CSCO, DBC, JNJ, PG, SH

Suppot and Resistance Tutorial

Defining support and resistance is perhaps the most useful of all technical analysis skills. Here is a nice little tutorial on various approaches for finding support and resistance.

Low Fed Rates till 2014 Sparks Gold

In today's FOMC announcement, the Fed signaled that they will be keeping rates ultra low thru most of 2014. That even raised my eyebrow...

This news put some giddy-up into gold, which vaulted about $50 this afternoon on the FOMC news.

I used this leap to sell my GLD position. It's up about 10% from its lows, price is now filling the gap, and stochastics are getting twisty in the overbought zone.

Am also concerned about the re-hypothecation issues surrounding these metal ETFs on the back of the MF Global situation last fall.

Selling this position puts me just about 0% net long (long metal and ag commodities against short equity index). Feels about right given the current field position of various asset classes.

position in commodities, SPX

Silver Gaining Strength

The technical picture for silver continues to improve.

With today's +5% jump, white lightning knifed thru its 50 day moving average and left little doubt that it has officially left behind its multi-month downtrend line.

One would think that further upside progress from here will be more difficult--given the damage done on the way down late last year. Using SLV as a proxy, 34ish should serve as significant resistance.

That said, silver is quietly up about 20% from its late December lows.

position in SLV

Bullish Pattern Resolution

The bullish reverse head and shoulders pattern forming recently in the equity indexes has indeed resolved to the upside.

The action hasn't been voracious out of the set up, but the tape has a persistent 'buy the dip' tone. Now that SPX 1280 has been cleared, this move technically 'works' to 1360.

I remain slightly net long (long commodity ETFs against short equity index). Should commodities continue to lift with stocks, I'll look to piece out of long exposure and add to my index short.

position in commodities, SPX

More on AAII Sentiment

More on the AAII sentiment data, this time showing some historical perspective. Note the general behavior in the SPX as this series hits extremes.

As noted yesterday, just one piece of the puzzle, but a piece worth noting...

position in SPX

Strong Out of the Gate

The first trading day of the year saw some upside resolution to the reverse head and shoulders pattern forming over the holidays--although a late day pullback drained a bit of glory from the gains.

Would think technicians are eyeing the late October highs of 1285ish as a more definitive indicator that a new leg higher is underway.

By early afternoon, pundits predictably started trotting out the old saws about how the first few trading days of the year often 'forecast' the tape's annual performance. One tidbit I've picked up over the years: Don't succumb to early year urban legends designed to whip the masses into a bullish frenzy.

position in SPX

More Gold Weakness

Action in precious metals continues ugly. New lows for the move today. Peering thru a longer time horizon lens, however, finds the yellow metal just now touching its multi-year uptrend line--a defined risk set-up for bullish traders.

One apparent takeaway from a macro perspective is that gold is not buying the thesis that the financial system is reliquifying--particularly w.r.t. the EU. Instead it is behaving like a wave of deleveraging, deflation in in the cards.

position in GLD

Inverse Head and Shoulders Pattern

Back in early November technicians were eyeing the pennant patterns forming in the major indexes, and largely opining that the resolution of that pattern was likely to be higher. As we now know, the bulls were fooled as prices moved lower.

Now, technicians are eyeing a forming inverse head and shoulders pattern with similar optimism.

Will Hoofy's heros bring home the bacon this time? That seems to be the growing consensus.

Personally, I'm not playing it that way. There is far too much macro overhang for my tastes, not to mention overvaluation at the micro level, to merit holding a bunch of long equity risk.

Am currently about 10% net long, but that long exposure is in commodities. It is offset not quite one for one with an index equity short. This hedged position has not proven to be as effective this time around because of recent weak commodity performance relative to stocks.

Currently, however, my MO remains the same. Use price to my advantage to a) add exposure at lower prices and b) unload exposure at higher prices. All the while, I want to maintain sizeable dry power (read: cash and short term fixed income).

position in commodities, SPX

USD Trade Closed

Sold my small UUP call position this am into this morning's spike higher in the dollar.

Resistance is approaching dead ahead. Plus possible double top.

Just tradin' 'em...

no positions

Lightly Buying

Buying some gold and silver this am into the continued smeltage. Support is coming up fast. Stochastics getting there as well. Stated differently, risk/reward is getting more attractive.

Nothing crazy, just some incremental adds. Truth be told, would welcome lower prices for more substantial buying.

position in GLD, SLV, CEF

Gold Moving Lower

Never got off a comment last week on the head-and-shoulders (bearish) pattern setting up in gold. This morning gold is down nearly $50, which essentially validates the 'dandruff.'

Why the thrust downward in the yellow metal? Not sure, cookie, as there is no 'obvious' gold-related news on the tape. Over the weekend, however, there were some rumblings that last week's EU summit outcomes 'did not go far enough' in resolving the debt crisis. Swap spreads are generally widening today, with Greek spreads crossing the 10,000 bps mark--implying a 100% chance of default.

Am starting to sense that gold may be a leading indicator of another round of 'risk off' in the markets. Added to my short equity position this am, and may do more in the upcoming sessions depending on how things unfold.

position in GLD, SPX

Durable Rally, or Short Term Relief?

If we were to assign news-related causes to today' 2-3% stock market rally, it would probably be a blend of better than expected Black Friday sales plus the spectre of (another) Euro bailout. Of course, we learned today that a) the IMF had no Italian bailout program in motion, and b) last week's retail sales numbers may be greatly exaggerated.

So perhaps today's move is just one more rally to blow off some near term selling pressure.

Technically, an upside move 'works' to SPX 1220.

Other technical evidence, however, is not in synch with a sustained upside move. After an early move lower, Treasuries recovered most of the day's losses. Bank stocks gave up a big chunk of their early gains. The dollar also closed near even after early selling. Oil closed near its lows.

Hard not to view these 'divergences' with some skepticism about the prospects for big upside from here. Time will tell, of course.

Personally, I did a whole lot of nuttin' today. Will likely put back on some of the incremental short exposure ditched last week should prices continue higher toward 1220. Other than that, I continue to be active in the physical metals market, buying both gold and silver.

position in SPX, gold, silver

Reducing Short Exposure

Tossed about 20% of my SPX short to the trading gods in respect of the move lower that we've seen. Technically, we're approaching what might be thought of as a 'minor' support level at 1160ish.

More substantial support rests at about 1120ish.

Will look to piece out more short exposure on extended weakness. Will also look to add to my metals exposure should they continue weak as well.

position in SPX

Flag Pattern Resolved

Last week's question about which way the pennant pattern in major market indexes would break has been answered. The pattern has resolved to the downside.

The reason being assigned to the rhyme this morning is the budget supercommittee's (gotta like that term) failure to come to an agreement over $1.2 trillion in spending cuts. No deal inked by Wed means across-the-board cuts of like amount commencing in 2013.

This sets up the 2012 elections as a referendum on Big Govt.

Of course, other issues are weighing markets as well. Europe is still on fire, and fallout from the meltdown of MF global is wreaking havoc in commodity markets.

Personally, am leaning slightly net long--about 5-7% of liquid assets. In other words, the value of long positions (primarily commodities) outweights the value of short positions (SPX index short) by a small amount.

Should stock slippage continue another 30 SPX handles or so, I'll start looking to cover some of my short position (support resides in SPX 1120-1140 range). With precious metals getting slapped around today (gold and silver both off 3-4%), am itching to add to those positions as well.

positions in SPX, gold, silver

Flag Pattern in SPX

The eyes of many traders are glued to the 'flag' or pennant' pattern forming in the SPX. Among the traders that I follow, it seems that most anticipate an upside resolution to the pattern.

Classic technical analysis says that chance favors resolution the direction of the previously prevailing trend. Yes, we've rallied off the early October lows, suggesting that the prevailing trend is up.

A counter view is that we've been experiencing only a bear market rally since October. A broader time horizon suggests a series of 'lower highs' since spring--in which case the primary trend could be interpreted as down.

In any event, we should get an answer pretty soon...

position in SPX

Bullish Silver Pattern

Silver appears to be tracing out a cup and handle-ish pattern. Added to my SLV position this am and may add a bit more around here.

Should SLV start to 'fill the gap' precipitated by the mid Sept meltdown, then a trade 'works' to 38ish.

position in SLV

Greece Balks on Deal

In a move said to have 'blindsided' many, the Greek government has called for a referendum (a.k.a. a vote of confidence) on the bailout plan recently hatched by EU officials.

The word is that the 'voluntary' 50% writedowns on Greek debt may have been palatable to many external holders of Greek debt, but those inside Greece holding their own country's bonds, including Greek banks, don't want to take the haircut. For one, it would render some Greek banks insolvent.

The theme from Wall Street types in my personal circle is that, while they were largely skeptical that the plan put together last week would hold up, they are surprised by how fast it is unraveling.

That surprise is being reflected in markets worldwide. Sovereign debt of many Euro countries like Greece and Italy is getting crushed today. Stock markets are listening to chin music as well. The SPX is down about 2.5% in early trading.

Seems to me that domestic stock markets are in a precarious situation currently. Shorts have been squeezed out, hedgies have been buyin' 'em after feeling 'underinvested, and there has been a general movement toward more 'risk on' out of euphoria that the EU didn't collapse in early Oct.

Perhaps the collapse was merely postponed by a month or so.

From where I sit, if the SPX can't hold 1220 support, then it looks pretty vulnerable for a downside whoosh.

position in SPX

Ags Look Interesting

Have been adding to my agricultural commodity position (RJA) over the past few days. From a technical standpoint, looks like a multi-month reverse head-and-shoulders to me w/ a gap directly above (gaps tend to be magnets for price).

From a fundamental/macro standpoint, we've waxed about the bullish set-up in commodities before (dollar heading to dust, capacity not keeping up w/ demand, gov't policies that favor famine).

As such, I'm digging this for the long side of my hedge book.

position in RJA