Monday, 8 August 2011

Are We There Yet?

Good Evening All,

Another trading day has closed in Asia, and we have just seen another pretty horrible session across the board. Tonight will probably be another difficult one in Europe/US especially with rumours circling of a run on Socgen and Unicredit. It all feels a lot like the initial panic in August 2007 when the interbank market froze and Northern Rock went belly up. Technically, the 2007 parallel scenario I showed back in June continues to play out perfectly: If my take on the market is right and this parallel continues to play out, we are now in the final stages of a short term capitulation low. 1145/1150 and then 1105 are the key levels for any low. Of course this is a wide range, but we are dealing with extreme volatility.

As day traders, we thrive on this volatility. These are the times when you should be (and have to be) making your year. We saw a 100 point intraday swing on the SPI today as we traded around the big 4400 level. Many chances to get long and short intraday all with tight risk.

As swing traders, I restate that now is not the time to be short for the bigger swing. As we are witnessing, there will be government interventions and changes to the rules in the game that will cause violent short squeezes. These can be very painful. It really is best to keep it nimble and NOT be wedded to any one position. The real money now will no doubt be made from buying this market once we have found the short term low. Easier said than done. However, like in 07 and many other market tops, price is now reaching a climatic extreme coupled with climatic selling volume. When there is this much fear, you have to be willing to buy when it lines up.

S&P500 Daily:
Here are simple vanilla targets for this move lower. Should we see a break of Fridays lows in tonight's trading, 1145/1150 is the first major target. This is the 61.8 retrace off the 2010 lows.

S&P500 Daily 2009-Current
And if we see real panic, 1105 is the big 38.2 retrace off the 2009 low. I don't think we will see this level on this leg down, but later in this bear trend this level should prove to be an intermediate low and major turning point. Note the Jan 2008 low bottomed at the 38.2 retrace.

S&P500 2007:
This is the parallel and topping pattern I have been following. Note the panic move lower on the break of the upward sloping trendline. This move bottomed when price was clearly overextended out of the bollinger bands. The entry signal was a wide ranging bullish closing bar back into the bands. A 100point+ rally followed suit.

S&P500 Current:
In similar fashion, price is clearly overextended and treading out of the bollinger bands. I am looking for a bullish wide ranging closing candle to get long for a significant rally.

The 61.8 retrace comes in at 3850. Today we tried to put in a low but the rally failed in the afternoon. I think any move lower into this level will set up a great buying opportunity.