Market Rightly Chokes on Satan Sandwich ~ The Risk Averse Alert

Tuesday, August 02, 2011

Market Rightly Chokes on Satan Sandwich

Today's throttling was nothing. The worst is yet to come. In fact, this reality in the "obviously" category is a close second to an insolvent banking system driving the economy into the ground.

Where to begin? Let's take a look at the shortest of time intervals...

SPX 5-min

Every step of the way lower today RSI at 5-minute intervals confirmed the S&P 500's decline. No divergence whatsoever, no sign of any impending strength. All day, start to finish, relative strength was locked to the sell-side of its range. In this performance nothing suggesting those notable RSI extremes thus far registered during the present iteration of the market's decline over the past eight days mark low thresholds not likely to be matched, if not exceeded.

Keep this in mind as we observe technical conditions displayed on the daily chart...


Right on cue, the neckline to the head and shoulders top forming over the duration of this year's trading has been taken out. Although not necessarily a high volume break, elevated from that registered during formation of the advancing phase of the right shoulder, nevertheless. A fine start. Its bump should be upcoming, and I mean stat.

Oh, but you demur? Oversold you say? Why look at relative strength (top panel). It is as low as it has been all year! And confirming the S&P 500's low for the year, as well. Got it? Not diverging. Confirming. And this following on formation of a well-known technical pattern indicating distribution of shares into weak hands. So, if you are bullish and long here, what does that make your position? In a word, weak.

Just how weak? Look at the bottom panel. Momentum, already fading all year long, now finds the S&P 500 at its low while the measure, itself, finds more than enough space to move lower, coincidentally, as the market unravels.

In other words, look out below.

Let me prove it, oh weak-handed believers in whatever crap Team Fraud is selling that opportunity to be fleeced might be yours...


Hardly a panic today. Hardly a washout. Capitulation? Where?

I'm telling you the worst is yet to come. Those long might not even have tomorrow's open to do anything about it, either. Although that's not certain, it's certainly a strong possibility.

Indeed, there's but one thing sure...


Negative, technical weakness just shoved in front of your eyeballs is going to require a whole lot more long equity hedging before any bottom forms. That's for sure.

Having not spoken of what anticipated hedging is to be expected as the market throttles back to levels last seen in the 1987-1994 period, there's no time like the present to restate my outlook. Now, what do you think should be reasonably expected following the market's 100% gain off March '09 bottom — an advance accompanied by some of the weakest technical underpinnings ever seen in my 25+ years? What measure of long equity hedging likely will be necessary to affect a bounce of any consequence? How does 2-1 puts to calls strike you? That's my outlook. No such extreme as that has registered for years, if not decades. Yet a number of times the reverse has appeared. To everything there is a season.


There was much a-twitter today about the marked disparity the volatility index registered in relation to the cratering market. Let me end the confusion. No joke, the banking system is insolvent. Yet those capital starved pigs whose position is desperate know how to play cows.

Fast Money
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