How to Measure Blood in the Streets ~ The Risk Averse Alert

Tuesday, December 23, 2008

How to Measure Blood in the Streets

It feels good to be bullish and positioned long, while at the same time having had enough sense to anticipate weakness, so as to remain unshaken at a time when fear is ill-advised. As best as I can tell the stock market is going higher before any challenge of November's low makes for more wild, wild life.

Now, mind you (and if you're a regular reader, you know this already), my bullishness is of a different character than that of "portfolio managers" Cramer rants about tonight. Indeed, my attitude is well-summarized if you look to the left, under "Outlook 2009."

Considering this, then, you can see my sense of "opportunity" here — long the stock market — is not much different than Cramer's.

Yet, contrarily, I see how, "patience pays" right now ... or at least stands to pay handsomely sooner than most imagine. Should you doubt this, it might bring you comfort looking back at last Wednesday's "Different Green Acres, Same Arnold" post, where I indicated the market might trade sideways before exploding higher.

Now, those bullish portfolio managers Cramer sites might play right into my still unchanged, near-term outlook...

Do you suppose a dozen or three might "walk the bullish walk" these last few days of '08, so that come Day 1 of 2010 (i.e. a year and a day from now), they'll be in position to bank anticipated profits at favorable, long-term capital gains tax rates?

We'll see.

Then, too, we'll see what song Cramer is singing when the market is 20-25% higher early next year (2009).

Still, my longer-term outlook remains unchanged. Chances are I will be cashing long ETF positions once the market surges higher over the next couple weeks...

(Long positions are in the following ProShares Ultra ETFs: DDM, SSO, QLD, UWM, MVV, SAA)

OEX 5-min

Having anticipated weakness these past couple days, seeing a price-RSI divergence develop as the S&P 100 grinds in the area of its recent lows is like seeing the sun burning through a summer morning's fog. You know blue skies await.

One element of "price-RSI divergence" I have yet to mention anytime before is seen comparing last Thursday's (12.18.08) deep, sell-side extreme with that registering exactly one week earlier (Thursday, 12.11.08). The most recent instance occurred while the S&P 100 traded at a higher level than where it stood the prior week. (Written red for a reason...)

Now, let's think about this. Selling urgency was more pronounced at a time when the S&P 100 traded higher. Is there not something unnatural — irrational — about this?

When posterity instructs you to "buy when there's blood in the streets" you understand this to be a time when fear is pervasive. Does not this highlighted price-RSI divergence, 12.18.08 versus 12.11.08, objectively demonstrate this?


Now, for the sake of keeping our analytical feet on the ground, we might duly note a couple technical conditions suggesting the market might be at a critical inflection point.

The first is the S&P 100's continuing pullback to the "neckline" of its "inverse head and shoulders" (I detailed this "bottom formation" last week). The "neckline" is holding. Which makes this a great trade entry point.

Pop quiz. Why is this a great trade entry point?

Answer: because you can set a very tight stop and reasonably minimize losses.

It's like I always say. Nothing is set in stone. That neckline could give way tomorrow. (It's not looking like it will, though ... and that's what makes this a great entry point on a long trade ... be it a leveraged, index-tracking ETF, or a near-the-money stock index call option.)

Second, you've also got MACD at a critical inflection point...

Remember back in late-July when I was watching MACD rise to its zero line ... thinking it would likely turn back into the negative ... and fall in sync with the stock market as sellers finally "capitulated" ... this in keeping with my forecast since April-May '08?

Well, that's not at all what I am forecasting here. Instead, we should see MACD shoot strongly into the positive.

Still, right now, MACD rests at a critical inflection point. In as much as this bore watching in July, it does now, too. This time, though, look for a different outcome. Strength, rather than renewed weakness, is the more likely result.

(If I might reminisce further... Too bad I failed to perceive the significance of that subsequent MACD downturn August-September ... occurring much as I had anticipated in July. At the time LEH failed ... 9.15.08 ... I was noting MACD divergence from its July low ... ignoring the volume spike as the market fell to new lows for the year ... and missing a huge [short ETF / long OEX Put] trade opportunity. Sigh. It's been a good year otherwise.)

Earlier I mentioned last Wednesday's post wherein I highlighted the possibility of a sideways trading market (much like we're seeing) prior to its anticipated surge higher. There, I featured a chart of the NASDAQ McClellan Oscillator. If you look at the oscillator now, you see it too is at a critical inflection point (i.e. approaching the 0 line).

What's more, it is leading the NYSE McClellan Oscillator. Thus, just as the NASDAQ Composite has been lagging the NYSE Composite of late (highlighted on Friday) ... its underlying condition (as measured by the McClellan Oscillator) likewise confirms such technical weakness as bears watching. Hence this being a critical inflection point.

Did you hear Cramer's outrage today with Cerberus? In a word ... Wow. (It's open season on character assassination!)

And kudos to Kudlow's tailor. (Love the look, Larry. Buy me some.)

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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