Overbought Period Ends With Blow-Off Tops And Sell Signals
Dr. Duru | May 23, 2013 08:49AM ET
: 67.2% (ending a 13-day overbought period)
VIX Status: 13.8
General (Short-term) Trading Call: SHORT with tight stop at new all-time highs on S&P 500
Commentary
You aggressive bulls who bought the breakout above 1600 should seriously consider taking profits now. The burden of proof suddenly shifted back to the bulls as the S&P 500 printed a major reversal pattern. Follow-through selling tomorrow or Friday will confirm a topping pattern. I think overall the sell signals are strong enough to warrant getting into SSO puts starting tomorrow even though the index has not yet crossed the bear/bull dividing line (see below). Shorts should feel comfortable initiating positions with a tight stop at new all-time highs (intraday, not closing).
The pattern shown above is essentially NFLX : Confirmation of bearish engulfing pattern from last week at 21-month highs.
SCTY, SODA, and TSLA are down but not necessarily out yet from a technical perspective. Note well that the games may not yet be over, so trying to chase these lower could be fraught with risk. These stocks could easily move independently of the major indices if traders still sense they can squeeze more shorts into covering.
Herbalife (HLF) is in a special category of highly shorted stocks since I have written this one before and chose to stay long to ride what seemed like a tactical and strategic blunder by heavily short hedge fund manager Bill Ackman. It did happen, and I seemed to get out just near the peak of that run (I tweeted my trade). The stock has also printed a classic blow-off top. I will have to write a (final?) post on this experience because it took major patience and conviction.
Finally, currency signals continue to flash red. For example, the dollar index (UUP) has managed to continue pushing higher above its QE2 price.
Perhaps more importantly, the Australian dollar continues to trade even weaker than the Japanese yen (AUD/JPY). The yen itself is finally looking it is ready for an old-fashioned counter-trend correction against all major currencies. I keep my eye on AUD/JPY because my original thesis of traders and investors fleeing from the yen to buy high-yielding currencies has simply not panned out. In fact, AUD/JPY PEAKED four days later. The Reserve Bank of Australia’s mystifying rate cut seems to have sealed the deal for now. AUD/JPY broke down below its 50DMA in what looks like the beginning of a sustained move given the multiple failures over the past week to break that resistance. I am compelled to be bearish if traders and investors are actually moving into zero-yielding yen over the relatively high-yielding Australian dollar, especially as the yen was still weakening against other major currencies. (Note that I have a small long position on AUD/JPY as a partial hedge on long yen positions and other short Aussie positions).
Get The News You Want
(Late breaking update – after posting this piece, I learned that the Nikkei lost 7.3%!!! This is its largest loss in over two years – back to the tsunami. No wonder the yen is gaining so much strength right now. Looks like my entry for SSO puts will be from an uncomfortably lower point. Perhaps the S&P 500 even gaps below the bull/bear dividing line at the open on Thursday!)
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Be careful out there!
Full disclosure: net short Australian dollar, net long Japanese yen, long TSLA call (NEW call – last week’s trade was quite successful!), net long U.S. dollar,
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