i just want to reiterate that i still maintain my longer-term bearish bias, regardless of yesterday’s ECB induced market ramp. although i use technical analysis as my primary road map for navigating the markets, i also factor in the fundamental backdrop as well. for months now, an unmistakable new trend of deteriorating fundamentals in the US has been developing and that trend continues to be reinforced with the latest economic reports (see highlights from today’s employment situation report below). as i’ve been stating, this deterioration in the US economic could soon prove to be a temporary aberration if the impending mean reversion manifests via improving fundamentals vs. my primary scenario of falling stock prices… only time will tell.
it is widely acknowledged that the market has been in a “good news is good news” and “bad news is good news” mode lately as the latter increases the odds of more fed action. i know that there are a lot of smart people out there, many smarter than myself so maybe they know something that i don’t, such as the fact that a sharp pick-up in the economy is right around the corner or that the fed has finally come up with the ultimate stimulus for the economy (or maybe they’re going to out-print the rest of the world in the race to the bottom, thereby further inflating stock prices via dollar debasement in lieu of deteriorating fundamentals). however, rising stock prices against a backdrop of deteriorating macro-fundamentals almost always ends in very sharp stock price corrections. to think that it will be different this time around because of more fed stimulus (for an economy that has been flood with money for years now) is a dangerous proposition IMO.
keep in mind that from a technical perspective, the basis for my bearish bias has largely been based on my interpretation of the longer term charts (monthly, weekly and to a lesser extend, the daily time frames). yesterday, i posted nine global index charts which showed that regardless of yesterday’s move, basically all global stock indices are right at or just below key resistance levels on those time frames & many are overbought to boot, which would likely put a damper on any immediate upside if those indices were to make solid breakouts. until the longer-term technical picture as well as the near-term trend in US economic fundamentals change, i’ll continue to favor a downside bias towards equities. i will not, however, continue to generically short the market on additional strength. the market can & will go higher if it wants but it will do so without my money (other than select trades with superior chart patterns). i believe that it will take quite a bit of technical work to make the R/R of being aggressively long favorable and as such, i’d rather go to a large cash position and wait for a more attractive opportunity to start getting aggressive again on the long-side.
on the flip side, yesterday’s price action was bullish from a near-term technical perspective as prices gapped above the shorter-term downtrend lines that were highlighted yesterday on the 60 minute chart. we also saw the first signs of the “change of character” that i was looking for as yesterday was indeed a trend-day, with prices gapping up and moving higher throughout the day to close near the highs. to add to the bullish case, today we have a solid breakdown (and breakout) in the $USD (and EUR/USD) below (above) those key trendlines recently posted. as i like to say though, one day does not make a trend. how the equity and currency markets follow thru over the next week or so will be paramount. the hard part about using weekly charts to determine your portfolio positioning (long or short) is that by the time the technical picture has clearly changed to prove your analysis wrong, the losses on you swing positions can be quite substantial. in other words, daily charts can give clear buy or sell signals due to the price action on a single day while weekly charts only “officially” change at the end of each trading week. therefore, one must always define the time frame for each trade (based off intraday, daily or weekly charts?) and set position size and stops according to your own risk tolerance and comfort level.
one more thing to add regarding to the longer-term charts. just because a stock or an index is approaching a resistance level in & of itself is not a reason to short or expect prices to reverse. in fact, just about all of the long-side trade ideas posted here are stocks approaching a resistance level (trendline or horizontal resistance). there are many factors that determine whether a stock or an index is likely to breakout and move higher, or turn down and move lower, when running into resistance. as fundamentals can be easily manipulated (e.g.- pushing losses forward on the books, marking assets to fictional values vs. market) and are almost always dated by the time they are reported, a trader relies largely on technicals to determine whether to expect prices to turn down or breakout above resistance. as covered extensively over the last few weeks, nearly all indicators and oscillators on the longer-term charts are lagging considerably, thereby indicating that stock prices are likely to reverse soon, even if the markets break out to new highs (translation: the odds of a bull-trap are elevated at this time). sometimes negative divergences are burned through as the oscillators move to new highs along with prices, thereby eliminating the divergences and changing the technical outlook and that is certainly something that would help me move towards a more bullish bias. until then, i maintain that the risk/reward of being aggressively long here as global stock indexes remain at or near key resistance is unfavorable at this time.
i suggest that you read the highlights of today’s US employment situation report if you have not already done so (click here to read).