Friday, March 06, 2009

An orderly retreat

The past month's decline in the S&P 500 index has formed a narrow channel pattern, with a well-defined lower trend line and a not-so-well defined upper trend line.

This is a helpful development, because these close trend lines are like trip wires that will give an early warning signal when the overall market trend changes. Sentiment is neutral right now and not much help, so this formation showed up at just the right time.

6 comments:

Anonymous said...

Hi Jody,

It strikes me as inconsistent that you state that the market could cross the "trip wires" in either the up or down direction yet you are still strikingly bearish in your portfolio. Have you fallen in love with your GRZZX bear?

Respectfully, Jeff

Jody said...

Jeff,

Love has nothing to do with it. For lack of a better word, it's "momentum."

When sentiment is at an extreme, like it was a couple of months ago, then it can dominate the market's behavior, and will trump other factors in my forecast.

Now that sentiment is neutral and of no use, other factors like trends and support and resistance lines take on more significance. The current trend is downwards, and it is conveniently bounded by two trend lines, so my short-term forecast is bearish unless and until the upper trend line is crossed.

Of course, if sentiment ever becomes highly pessimistic, then you can be sure I'll cash out of GRZZX regardless of what the trend lines tell me.

Anonymous said...

Hi Jody,

Does the below link highlight the sentiment of the market?

http://bespokeinvest.typepad.com/bespoke/2009/03/the-running-of-the-bears.html

How does this compare to your indicators on market sentiment?

Cheers,
Alan

Jody said...

Alan,

My problem with surveys is that people don't necessarily put their money where their mouths are. The only sentiment indicators I look at are the ones that measure the actual up and down bets made with real money, and those are neutral right now.

Anonymous said...

Jody...

Can you say a little more about your reservations concerning the etf SDS?

I know that one risk has to do with underlying derivatives (a concept I don't pretend to understand). I am trying to get your sense of how dangerous a play this is. What would the disaster scenario look like?

Thanks...... JM

vv said...

Hey Jody,

Looks like today's rally will break through the upper trend line. Is that a sell signal or do you intend to wait a day to see if it's a head-fake like Feb 24 and Mar 4?

Vin