Friday, February 06, 2009

The technical picture

The S&P 500 index has actually been bouncing around inside of two converging trend lines since late November of last year.

The first trend line to be violated will probably determine the next medium-term trend. Given the phenomenally optimistic sentiment out there, I have a feeling the S&P will break down through the lower trend line first.

If my reading is correct, short-term traders have placed bets on a rally in numbers not seen since just before the March 2007 correction, and it may be related to the congressional vote on the stimulus package next week. If true, it means that these folks will be placing a large number of sell orders after the vote, either to cash in on some short-term gains, or to exit losing positions before the damage gets worse. In the former case the selling will stunt the rally. In the latter case the selling will accelerate the decline. GRRRR! (...ZZX)


John from Colorado said...

I think you are right about active traders taking long positions only to dump them soon. This happened prior to the significant market drop in Oct 2008. The market moved up prior to the TARP approval in the Senate then dropped like a rock right after approval. I have stops set on my current long positions.
Also, I mentioned being invested in DXO (ultra oil ETF). I have recently shifted to UCO another ultra oil ETF. I believe that the current "contango" in oil will narrow and oil will continue to rise. Below is a link to an excellent description of USO and the effect of "contango" and "backwardation" for those that use ETFs to play commodity markets. The concept applies to any commodity market. I'm not sure if it applies to indexed funds like SSO or SDS. If anyone has insight on this, please let me know.

John from Colorado

Jody said...

Thanks John,

I think I finally understand "contango." It's my understanding that a similar oil fund with the ticker USL protects against contango by owning a range of futures from one to twelve months out.