Two Rights Do Not Make A Wrong ~ The Risk Averse Alert

Thursday, February 26, 2009

Two Rights Do Not Make A Wrong

Back on January 30th someone anonymous asked...
Does the destruction in the NYSE McClellan Oscillator make you reconsider your melt-up thesis?

Starting to look like mid-September, no?

To which I responded...
I don't see trouble signaled by the McClellan Oscillator, particularly with the Summation Index now in positive ground (although declining as a consequence of January's pressure). This was not the configuration of McClellan measures mid-September. Then, both were falling and squarely locked on the sell-side (below 0).

A further difference now v. then is two-fold. First, there has been no breakdown to new lows in major indexes during the present bout of selling (unlike early-Sept '08), and second, volume of shares exchanged during January's sell-off has been contracting (relative to Nov. '08) rather than expanding like it was in September (relative to June-July '08).

Even with the luxury of hindsight my conclusion is unchanged. Like I said Monday...
[T]echnical conditions — having materially deteriorated in a way virtually impossible to forecast two weeks ago — continue possessing qualities showing improvement over time (October '08 to present) and now display notably "oversold" indications.

And I stand by the difficulty forecasting the market's decline of the past few weeks. Yet look what came of the exchange on January 30th...

NYSE McClellan

Following Monday's sell-off I noted how "the worst week since October 10, 2008 continued." Just look at the similarity in the NYSE McClellan Oscillator's behavior (January '09 to present, versus September-October '08)! Incredible.

Did not see it coming. Forgive me for being repetitive. Yet, too, you see how both comments on January 30th were correct, each in a relevant way to thinking behind their respective messages.

Then, following Tuesday's "Coma-Inducing Bernanke Testimony Driving Bears Into Hibernation" trade higher (recovering most of Monday's losses) I suggested...
Prudence ... advises one expect a retest of [Monday's] intra-day lows coinciding with technical divergences confirming bottom is in.

Well, that's the picture of what I wanted to present tonight. You see this "retest ... coinciding with technical divergence" via green dots marking NYSE McClellan Oscillator sell-side lows followed shortly thereafter by a bottom in the NYSE Composite Index (marked by vertical red lines).

See the technical divergence in the McClellan Oscillator's reading at highlighted bottoms in the NYSE Composite Index? We have yet to see this at present. Somehow ... someway ... a divergence like this should register at bottom. Prudence, indeed, advises one expect this.

Nevertheless, bottom is near, as you can plainly see. Soon, at last, the stage might be set for what could be the mother of all short squeezes. On this count I find Shemp's dire outlook rather encouraging...

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Anonymous said...

Hey Tom,

I'm the ANON you reference.

Thanks for your straight forwardness and honesty, its refreshing and a reason why your blog is the first thing I read in the morning.

I agree that this is a bottom, I am loading up on beaten down stocks like DRYS LVS BX, etc., all stocks that I believe have the potential to double. As well as Ultra ETFs.

Best of Luck.

TC said...

I took a look at your picks...

Per your objective (i.e. double potential), I like DRYS and LVS. BX, however, has never shown this potential in all its short existence. Seems a prospective candidate for some kind of negative surprise. Can't imagine proposed tax increases on hedge funds and private equity will bode well either.

Just my two cents. Thanks for your observations, feedback and kind regards!

Greg said...

You were just early on the call. Apparently Robert Prechter reads your blog and has now jumped on your bandwagon!

Prechter Advises Closing Short Positions on Stocks

TC said...

I believe "too early" essentially is how my melt-up call will work out, Greg. Still, I wish I had stuck with my call on January 2nd and stayed out of Ultra ETF positions. At least I would have missed January's subsequent throttling. (Still, I would have gotten long early February and I'd be nursing a paper loss not much less than the one I am nursing right now.)

Prechter appeared on CNBC this afternoon as well. If he's reading my blog, I'm tweaked he made no mention to CNBC's international audience!

Ditto Cramer. Tuesday's "Off the Charts" segment highlighted some of the same things I wrote about last Friday. And that was by no means the first time it seemed Cramer had lifted material from me. I'll give him a piece of my mind when I call into the Lightning Round for his recommendation on a Bank of America CD...

TC said...

Yikes! BX +23% today! All hail Anon!